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BASIC CONCEPTS Interest is a fee that is charged for the use of someone else’s money. The size of the fee will depend upon the total amount of money borrowed and the length of time over which it is borrowed. Simple Interest Simple interest is defined as a fixed percentage of the principal (the amount of money borrowed), multiplied by the life of the loan. Thus, 1 = Pin Compound Interest When interest is compounded, the total time period is subdivided into several interest periods (e.g., one year, three months, one month). Interest is credited at the end of each interest period, and is allowed to accumulate from one interest period to the next. F=P(+i" Inflation National economies frequently experience inflation, in which the cost of goods and services increases from one year to the next. Re P (+f) If interest is being compounded at the same time that inflation is occurring, then Pe P(1 +i)” ~ a+fy Composite Interest Rate, ath ~1t+f Problem 1. What is the annual rate of simple interest if $265 is earned in four months on an investment of $15000? Problem 2. How many years will be required for an investment of $3000 to increase to $4081.47 at an interest rate of 8% per year, compounded annually? Problem 3. Compare the interest earned from an investment of $1000 for 15 years at 10% per annum simple interest, with the amount of interest that could be earned if these funds were invested for 15 years at 10% per year, compounded annually. Problem 4, Suppose that a person invests $3000 at 10% per year, compounded annually, for 8 years. Will this effectively protect the purchasing power of the original principal, given an annual inflation rate of 8%? If so, by how much? 
