Certain terms are used so often in business transactions that it is better to define them explicitly.

Definitions: Capital is a stock of accumulated wealth – money or its equivalent.

Consideration is a fee.

Interest is consideration for the use of invested or loaned capital.

The principal is the capital originally invested.

The time is the number of years or fraction of a year for which the principal is borrowed or loaned.

The rate of interest is the amount charged for the use of the principal for a given length of time, usually on a yearly or per annum basis.

Rtes of interest are usually expressed as percentages: 5% per annum; 10% per annum and so on. However, when using rates of interest in calculations, we use the decimal equivalent: 0.05 for 5%; 0.10 for 10% and so on.

There are two kinds of interest. If interest is computed on the original principal, it is called simple interest. Thus, in transactions involving simple interest, the principal on which interest is computed remains unchanged throughout the term of the loan and the interest becomes due either the term of the loan. However, when the principal is increased by interest at the end of each period and interest is thus computed on a principal which grows periodically, we are dealing with compound interest.

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