Calculation of Interest and Annuities-Basics of Business Mathematics For JAIIB

Calculation of Interest and Annuities: The Calculation of Interest and Annuities for the JAIIB Exam is one of the most important topics for JAIIB. JAIIB exam is conducted twice a year. So, here we are providing the Calculation of Interest and Annuities (Unit-1) – Basics of Business Mathematics notes for JAIIB.

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Table of Content
Meaning of Interest
Reasons for Charging Interest
Types of Interest
Types of Interest for Bank Deposits:
Daily Product Method
Equated Monthly Installment
Front-End and Back-End Interest Rates
Fixed and Floating Interest rates
Comparison between Fixed and Floating Interest Rate
Annuities

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Calculation of Interest and Annuities: Unit-1

Apart from earning money for their livelihood, people also need money to meet additional expenses like marriage in the family, buying a car, house or starting a business. Most people have to borrow money to pay for such things, although some will manage with their own money.

What is the meaning of Interest:

Interest can be defined as the price paid by a borrower for the use of a lender’s money.

  • It is excess of money paid or received on deposits or borrowings. 
  • Interest is the price paid by a borrower for the use of a lender’s money. If you borrow (or lend) some money from (or to) a person for a particular period you would pay (or receive) more money than your initial borrowing (or lending).
  • It is compensation paid to the depositor.

Reasons for Charging Interest:

There are a variety of reasons for charging the interest, they are

Opportunity Cost:

  • The lender has a choice between using his money in different investments. If he chooses one, he forgoes the return from all others.
  • In other words, lending incurs an opportunity cost due to the possible alternative uses of the lent money.

Liquidity Preference:

  • People prefer to have their resources available in a form that can immediately be converted into cash rather than a form that takes time or involves expenditure to realize

Time value of money:

  • Time value of money means that the value of unity of money is different in different time periods. The sum of money received in the future is less valuable than it is today.
  • Since a rupee received today has more value, rational investors would prefer current receipts to future receipts. If they postpone their receipts, they will certainly charge some money i.e. interest.
  • In other words, the worth of rupees received after some time will be less than a rupee received today.

Inflation:

  • Most economies generally exhibit inflation. Inflation is a fall in the purchasing power of money.
  • Due to inflation, a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.

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