At the end of this session you should be able to:
- calculate simple interest
- apply the discount formula
- understand compound interest
- understand the broad concepts in bond pricing
- apply and use the RBA bond formula
This session begins with the relatively straightforward simple interest calculation then builds toward the more complex bond pricing formula by examining the concepts that lie behind it.
Simple Interest
Simple interest is generally used for investments that have a term less than 12 months. It is an easy calculation where interest is calculated as the Amount Invested * Rate * Term.
Mathematically the formula for calculating Simple Interest is as follows:
- i Interest rate per annum
- PV Present Value, or the Amount Invested
- FV Future Value
- t Term in years. If you have whole years then this would be 1, 2, 3 etc. If you have half a year this would be 0.5 or 6/12 (6 months out of 12). If you are investing for 5 months then this would be 5/12 and so on. This can also be expressed as n/365, where n is the number of days