Learning Objectives

*After studying this appendix, you should be able to:*

**[1]** Distinguish between simple and compound interest.

**[2]** Identify the variables fundamental to solving present value problems.

**[3]** Solve for present value of a single amount.

**[4]** Solve for present value of an annuity.

**[5]** Compute the present value of notes and bonds.

## Nature of Interest

Would you rather receive $1,000 today or a year from now? You should prefer to receive the $1,000 today because you can invest the $1,000 and earn interest on it. As a result, you will have more than $1,000 a year from now. What this example illustrates is the concept of the **time value of money**. Everyone prefers to receive money today rather than in the future because of the interest factor.

LEARNING OBJECTIVE 1

**Distinguish between simple and compound interest.**

**Interest** is payment for the use of another person's money. It is the difference between the amount borrowed or invested (called the **principal**) and the amount repaid or collected. The amount of interest to be paid or collected is usually stated as a rate over a specific period of time. The rate of interest is generally stated as an **annual rate**.

The amount of interest involved in any financing transaction is based on three elements:

**1. Principal ( p):** The original amount borrowed or invested.

**2. Interest Rate ( i):** An annual percentage of the principal.

**3. Time ( n):** The ...

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