1. Created By :
Name of Student : Ashish Anil Sadavarti
Name of Course: - Economics and Finance for Engineers
Name of Course In-Charge: Dr. Farha Hussain
S. B. Jain Institute of Technology, Management & Research,
Near Jain International School, Kalmeshwar Road, Nagpur-441501. Mob. 9823218380
Visit : www.sbjit.edu.in
Topic : Meaning and Types of Interest
2. Content
Meaning and Types of Interest
• What is interest ?
• Meaning of Interest
• Types of Interest
• Explain The Types of Interest
3. What is interest ?
• Interest is the price paid for using someone else's
money. It is thus the fee for the privilege of
borrowing money.
• The fee represents the price a person pays for the
ability to spend /consume in the present instead of
having to wait for the future to do so.
• You pay for the opportunity to use money today
that would otherwise take time to accumulate.
4. Meaning of Interest
• In simple meaning interest is a payment made
by a borrower to the lender for the money
borrowed and is expressed as a rate percent per
year.
• It is usually expressed as an annual rate in terms
of money and is calculated on the principal of
the loan. It is the price paid for the use of other’s
capital fund for a certain period of time.
5. Understanding Interest
• Interest is the concept of compensating one party for incurring risk and sacrificing the
opportunity to use funds while penalizing an other party for the use of someone else’s
funds. The person temporarily parting ways with their money is entitled to
compensation and the person temporarily using those funds is often required to pay
this compensation.
7. Explain The Types of Interest
• Fixed interest type
A fixed interest type remains the same
through out the fixed rate term, often 2-5
years An example of a fixed interest type
would be a mortgage. With a mortgage,
you (the borrower)agree to make regular
payments to the lender over a set period
of time, known as the mortgage term. The
interest rate is "fixed" for a set period,
meaning it will not go up or down. Take a
30-year interest only mortgage for
£100,000at an interest rate of four
percent. This means your annual interest
would be £4,000.
• Variable interest type
Whereas the prior type of interest is a set
rate, so you know exactly what you're
paying, a variable interest type, as the
name suggests, changes over time. For
example, if the agreed interest rate is
3.95%, a bank could set its variable
interest rate at 3.30%.However, the next
month, the base rate could change to
4.1%, and the variable rate
could rise to3.45%.
8. Explain The Types of Interest
• Annual Percentage Rate
An annual percentage rate (or APR) is the
total cost of a loan, including both the
interest rate and any other associated fees.
This is usually displayed as a percentage
and will be charged annually.
For example, if you take out a loan for
£5,000 with an APR of 20%, you will be
charged £1,000 in total interest and fees
over the course of the year.
APR is a standardized measure that is
used to make it easy for borrowers to
compare the cost of borrowing easy, even
where interest and fees vary wildly.
• Prime interest type
This is the rate of interest set by banks for
their best customers. Typically, it would be
the rate at which a commercial bank
would charge to their most financially
strong customers, such as large, profitable
corporations
It's not just a single rate, but rather a
range that banks will offer their best
customers. The prime interest type can
change over time and is influenced
by the base rate.
9. Explain The Types of Interest
• Discounted interest type
A discounted interest rate is lower than
the a lenders standard variable rate, and
it's what a bank will offer its customers for
a specific period of time as a promotional
deal. This can be used as an incentive to
encourage customers to borrow money or
take out a loan with the bank.
For example, if a lenders standard variable
rate is3%, a bank may offer its new
customers a discounted interest rate of
two percent for 2 years.
• Simple interest type
Simple interest is a type of interest that's
only charged on the principal or the initial
amount of money borrowed. lt's not
compounded, which means that interest is
not charged on interest that has already
been applied to the loan.
For example, if you borrow £100 at a
simple interest rate of five percent, you
will be charged £5 in interest over the
course of a year.
10. Explain The Types of Interest
• Compound interest type
Compound interest is a type of interest that’s charged on the principal amount, as well as any
accumulated interest. This means that the interest is added to the principal amount and then
charged again.
For example, let's say you took out a loan for £100with a 5% interest rate, your payments
would look a little like this;
Month - (Starting Balance) £100 + (Interest) £105You make a payment of £10, so you're
remaining balance to pay is £95
Month 2 - (Starting Balance) £95 + (Interest) = £99.75You make a payment of £10, so your
remaining balance to pay is £89.75
Month 3 - (Starting Balance) £89.75 + (Interest) =£94.23
