Finance

Principal and Interest - Background

Any sum of money provided as a loan, or deposited in an account, is called “principal” or “the amount of the principal”. All the explanations and examples in this ebooks concern loans, but they are also valid for deposits.

What is Interest Rate?

The word rate is used in the services sectors.

Rate is the synonym for the price of an accepted measurement unit.

Examples:


  1. In auto repair businesses, an accepted measurement unit is one work-hour. Instead of saying that the cost of one work-hour is $100, we say that the rate is $100 per work-hour. If work in a garage continues for two and a half hours, the price will be $250.

  2. At Vodafone, the accepted measurement unit is a call-minute (or one tick of the meter). Instead of saying that the price of a call -minute is $0.20, we say that the rate is $0.20 per call-minute. If we have spoken for 10 minutes, the price will be $2. The word rate is used in the services sectors. Rate is the synonym for the price of an accepted measurement unit. In terms of loans, the accepted measurement unit is a year. Instead of saying that the price of a one-year loan is 8% interest, we say that the loan rate is 8% per year, or simply that the loan rate is 8%. Everyone understands that the rate relates to a one - year loan, and that 8% refers to 8% interest. If we have received a half-year loan, we will pay only half of 8%.

Principal and Interest - Background566Principal and Interest - Background