Financial Analysis I
Financial Analysis I ABM 121
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This 1 page Class Notes was uploaded by Don Langworth DVM on Thursday October 15, 2015. The Class Notes belongs to ABM 121 at Morgan Community College taught by Staff in Fall. Since its upload, it has received 13 views. For similar materials see /class/223567/abm-121-morgan-community-college in General at Morgan Community College.
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Date Created: 10/15/15
Review Calculating Interest Terminology Simple Interest The method of calculating an interest expense based on the principal balance the annual interest rate and the length of time that interest accrues Most loans are calculated on simple interest even if the loan is an amortized loan Example Borrow 1000 for 6 months at an annual percentage rate of 60 1000 X 06 2 interest charged for one year 1000 X 06 60 accrued in one year But the term for this loan is on only 6 months So we would determine the interest for 6 months by dividing it by the length of time we actually used it Six months is 12 of a year so we could multiply the 60 for a year by 12 to get 30 Also we could have said that 6 months is 612 of a year and evaluate that fraction to get 12 We can even say that 6 months is 1825365 days evaluate that fraction by dividing 1825 by 365 to get 12 and multiply the 60 by 12 In practical terms for estimating interest for balance sheets and cash ow projections it is probably good enough to estimate the length of the loan in months and calculate it from there If you want to as fine as the number of days that is okay as well The important thing is to first calculate the interest for a year then only charge the amount of interest that would accrue for the length of time for the loan Compounding Interest Compounding interest is typically found in savings accounts The period of compounding may be daily weekly monthly quarterly yearly or some other period In compounding interest the interest that accrues is calculated as it is in a simple interest situation but then the interest earned in that compounding period is added to the principal before the accrued interest for the next period is calculated Example a person has 1000 in a savings account that earns 50 annually Interest is compounded monthly For the first month the interest earned is 417 which adds to the principal to get 100417 which is then used to calculate the next month s interest earned 418 which gets added to the principal balance for the month
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