maths > commercial-arithmetics

Story of "Interest"

what you'll learn...

overview

the following terminology is introduced
loan,
investment,
deposit,
lender,
borrower,
principal,
interest,
interest rate,
loan duration, and
loan maturity value.

The story connecting these are made very easy to remember.

shopkeepers story

Consider: One customer buys a pen for $20$$20$ coins from a shopkeeper. Note that the shopkeeper does not manufacture the pen herself.

A shopkeeper buys a pen for a low value from a manufacturer and sells for a higher value, and makes a profit. For example, shopkeeper bought a pen for $12$$12$ coins and sells for $20$$20$ coins. The $8$$8$ coins is the profit for his work.

A shopkeeper has some thousands of items for sale. Each of these items are bought from manufacturers. That means, the shopkeeper has put-in the money required to buy the goods.

Money can be invested and it will provide profit. The shopkeepers put their own money and make a profit.

For example: A shopkeeper has put in $1,00,000$$1 , 00 , 000$ coins in buying goods and makes $20,000$$20 , 000$ coins per month in profits.

This is true for other professions as well, not just for shops. Like hotels, sports venues, mobile phones, furniture, etc.

lender's story

A person does a job or business that occupies her entire time. She has excess of 3 lakh coins. A shop keeper has only 20 thousand coins and require additional 1 lakh coins to run the business. The working person can give part of the excess money to the shopkeeper so that shopkeeper can run his business.

A person agrees to give $1,00,000$$1 , 00 , 000$ coins to the shopkeeper. The shopkeeper uses the money to develop the business and starts to earn profit of $30,000$$30 , 000$ coins per month.

It is logical that, the shopkeeper should share the profits with the person who gave the money. A formal arrangement of this is a loan given to a business person or deposit made in a bank.

terms

The word "loan" means: something borrowed that should be paid back".

When a person takes money from another person or a bank, he or she has taken loan.

The word "investment" means: money given to someone or a bank to earn more.

The word "deposit" means: money given for safe-keeping and that, in turn, earns more money.

The word "lender" means: the person who gives a loan.

A lender can be a bank too.

The word "borrower" means: the person who takes a loan.

The word "principal" means: the money initially given on which earnings are calculated.

The word "interest" means: the earnings paid on the principal.

The word "interest rate" means: the interest amount calculated per unit time is the interest rate.

The phrases "loan duration" "deposit time period" mean: the time period or duration for which loan or deposit is effective.

The phrase "maturity value" means: the total value of money at the end of the loan or deposit duration.

summary

loan : Money borrowed, which should be paid back at a later time.

investment : Money given, which should earn more money.

deposit : Money given for safe-keeping, which in turn, earns more money.

lender : A person or company giving a loan.
investor and depositor for investment and deposit respectively

borrower : A person or company receiving a loan.

principal : The amount of money given in a loan.
capital and deposit amount for investment and deposit respectively

interest : The amount of money returned in addition to the principal.

interest rate : The amount of interest per unit time per 100 of the principal.

loan time period / loan duration / deposit time period / deposit duration :     The time duration for which loan or deposit is effective, and at the end of which, the principal and any interest is returned.

maturity value : The principal and interest received at the end of loan or deposit duration.

Outline