BOLIVARIAN REPUBLIC OF VENEZUELA

POLYTECHNIC UNIVERSITY INSTITUTE

SANTIAGO MARIÑO
BARCELONA HEADQUARTERS

INTEREST RATES

Author:
Jonathan J. Villarroel Suniaga
C.I: 26.256.106

February 2019
 TABLE OF CONTENTS

Introduction
Interest rates and yield rates.
Calculations of simple and compound interest.
Equivalences
Flow diagrams of cash flow, their estimation and graphic representation.
Examples of each one.
Conclusions
Bibliography
 INTRODUCTION

In the world of investments and finance, interest rates play a

a very important role, since it is through these that the investor measures and
compare the profitability of different investment projects, in order to
choose the best alternative.

This research contains concepts that are presented in a clear manner and
simple, in such a way that it allows the reader to learn quickly, even without having
knowledge about finance, so that I understand basic concepts
about:
Interest rates and rates of return.
Simple and compound interest calculations.
Equivalences
Flow diagrams of cash flow, their estimation and graphical representation.
 INTEREST RATE

The interest rate or type of interest, ineconomyit is the amount that is

subscribe in one unit of time for each unit ofcapitalinverted.
It is a percentage that translates into an amount of money, through which
one pays for the use of money.
It can also be said that it is the interest of a unit ofcoinin
a unit of time or the performance of the unit of capital in the unit of
time.
The interest rate, expressed as a percentage, represents a balance
between the risk and the possible gain (opportunity) of the use of a
sum of money in a specific situation and time. In this sense, the
interest rate is the price of money, which must be paid/charged for
borrow it/lend it in a given situation.
It is an amount of money that usually corresponds to a percentage of
the money operation that is being carried out.
If it is a deposit, the interest rate expresses the payment received by the
person or company that deposits the money for putting that amount to
disposition of the other. If it is a loan, the interest rate is the amount
that the debtor must pay to the lender for the use of that money.
The interest rate can be fixed (it remains stable
while the investment lasts or the loan is repaid) or variable (it
updates, generally, on a monthly basis, to adjust to inflation,
the variation ofthe exchange rateand other variables).
It is worth noting that the interest rate considered as preferential
it consists of a lower percentage compared to the general one that is usually charged

for the loans granted for carrying out certain activities

specific.
YIELD RATE

It is a percentage that is applied to the amount of investment we have already made.

be it as an investor or as a lender, and that shows the profit that

we obtained from that investment. In the calculation of the rate of return, they act
various factors.

SIMPLE INTEREST
It refers to the interests generated by an initial capital over a period of time.
time, which does not accumulate to the capital to produce the interests of
next period; concluding that the simple interest generated or paid
for the invested or loaned capital will be the same in all periods of the
investment or loan as long as the interest rate and term do not change.

COMPOUND INTEREST
It occurs when the interests obtained at the end of the period
investment or loan is not withdrawn or paid but is reinvested and
they added to the principal capital.

CALCULATION OF SIMPLE AND COMPOUND INTEREST

The concept of interest has to do with the price of money. If someone asks for
a loan must pay a certain interest for that money. And if someone
deposit money in a bank, the bank must pay a certain interest on that
money.

Components of the loan or interest deposit

In a loan or interest deposit business, there appear:

The capital, which is the amount of initial money, lent or deposited.

Latasa, which is the amount of money that is paid or charged for every 100
in terms of interest; also called percentage.
The time during which the money is borrowed or deposited and
generate interests.

The interest, which is the amount of money charged or paid for the use of the
capital throughout all time.

Interest, as the price for the use of money, can be presented as

simple interest likecompound interest.

Simple interest

Simple interest is calculated and paid on an initial capital that

remains unchanged. The interest earned in each unit interval of
the interest is the same. This interest is not reinvested and is calculated every time.
on the same basis.

In relation to a loan or a deposit maintained for a period at a

same simple interest rate, the calculations of any of those elements are
are carried out through asimple rule of three. That is to say, if we know three of
we can calculate the fourth of these four elements:

The interest (I) generated by a capital is directly proportional to the

initial capital (C), over time (t), and at the interest rate (i):

this is presented under the formula:

I = C ·i ·t

where it is expressed in percentage and is expressed in years, months

Good days.

So much for one is the same as .

Then, the formula for calculating simple interest is:

 if the annual rate is applied per year.

if the annual rate is applied monthly

if the annual rate is applied daily

When talking about a rate of 6 percent (or any percentage), without

more data, it is implied that it is annual.

Now, if the rate or percentage is expressed per month or per day, it should
to express oneself in the same unit of time.

Exercise No. 1

Calculate how much the simple interest generated by a capital of

25,000 pesos invested for 4 years at an annual rate of 6%.

Resolution:

We apply the formula

Well, the rate is applied annually.

What is equal to I = C • i • t

In which 6% is to be expressed as a fraction, and it is obtained as 0.06

I = 25.000 • 0,06 • 4 = 6.000

Response
At a simple interest rate of 6% per year, after 4 years, the $25,000
They have earned $6,000 in interest.

Exercise No. 2

Calculate the simple interest produced by 30,000 pesos over 90 days at

an annual interest rate of 5 %.

Resolution:

We apply the formula

Well, the rate is applied per day.

What is equal to I = C • i • t

In which 5% is to be expressed as a fraction, and it is obtained as 0.05

Answer

The simple interest generated after 90 days is 369.86 pesos.

Exercise No. 3

After a year, a bank has deposited in a savings account,

concept of interest, 970 pesos. The interest rate of an account of
the savings is 2%. What is the average balance (capital) of that account in that.
year?

Resolution:

We apply the formula

 Well, the rate is applied annually.

What is equal to I = C • i • t

In which the 2% is to be expressed as a fraction, and it results in 0.02

Note that here we know the interest and do not know the capital.

We replace the values:

We solve for C:

Response

The average annual balance (capital) of that account was 48,500 pesos.

Exercise No. 4

For a loan of 20,000 pesos, 22,400 pesos is paid after one year.
What is the interest rate charged?

Resolution:

As we know the initial capital and the final capital (including the interest)
we can calculate the amount of interest by doing the subtraction.

22.400 - 20.000 = 2.400 pesos are the charged interests

We apply the formula

Well, the rate is applied annually.

What is equal to I = C • i • t
We clear ourselves:

Let us remember what the rate expressed as a fraction is. , for which
we must multiply by one hundred to obtain the rate in percentage:

0,12 • 100 = 12

Response

The annual interest rate is 12%.

Exercise No. 5

A capital of 300,000 pesos invested at an interest rate of 8% for

a certain time, has resulted in interest of 12,000 pesos. How much
has time been invested?

Resolution:

It is understood that the rate is 8% per year, but we do not know the time.
during which the capital has been invested.

We can use the formula

assuming that the rate (annual) has

applied per year:

We replace the values:

We calculate
Answer

The time during which the capital has been invested is 0.5 year (half
year); that is, 6 months.

We could also calculate assuming that the annual rate of 8% was applied.
for several months:

We replace the values:

We calculate

Now we clear up

Response

The time during which the capital has been invested is 6 months.
Simple Interest
Examples:
The amount earned by a loaned capital at a rate and time
determined, without the performance being capitalized." It is normally used
for operations a short term y there are no capitalizations

Formula:
I=P*i*n

Where:
I = simple interest
P = is capital
i = interest rate
n = es el plazo que se maneja

Example:
Let's suppose that a person needs to request a small loan to
to be able to pay an order to the supplier because he does not have enough with what he has.

at that moment, so he asks a popular box for a loan of $50,000.00 to

pay in three months with an annual rate of 18%. So, applying the
the formula is as follows:
I = (50,000) (.18) (3/12)
I = (50,000) (.18) (.25)
I = $2,250.00

Which means that a person who takes out a loan in the

recreated conditions in the example, you will be paying an interest of
$2,250.00 at the end of the three months and in the end the person will pay $52,250.00

to settle your loan with the popular fund.

Simple interest is used in operations for short-term loans or
investments where the terms are not longer than one year. This type of
calculation is used to determine how much interest we will pay or
we will receive at the end of a specific period.

Monto:
How to determine how much we will pay or receive in total at the end of a
fixed period of time. We will now refer to this final total as
forward I will mount it and we will identify it with the letter (S) for handling and

substitution in the corresponding formulas.

Formula: S=P (1+in)
It is divided by the days that make up the ordinary interest (annual) that it
We will operate based on 360 days.

Example:
Let's assume you buy $30,000.00 in merchandise from your supplier for your
grocery store, paying $12,000.00 in cash upon delivery of the order and
the remaining amount to be paid in 4 months with an annual interest of 13.5%. How much should it be?

pay your supplier to settle your debt?

Applying the formula we have that:
S = $18,000.00 (1 + ((0.135)(4/12)))
S = $18,000.00 (1 + ((.135)(.333333)))
S = $18,000.00 (1 + .045)
S = $18,000.00 (1.045)
S = $18,810
Analyzing the previous scenario, we have that, for the $18,000.00 that he
we owe the supplier, after 4 months with an interest rate
of 13.5%, we will need to pay the amount of $18,809.99 to settle our
debt.
 Compound interest
The amount accrued from a loaned capital at a rate and time
determined, where the performance is capitalized.” Normally it is used
for long-term operations.
Formula:

S = $136,341.07
S = P(1 + i)^n
Where:
S = is the compound amount
P = is capital
i = is the interest rate for the capitalization period
n = capitalization periods

Example:
Let's suppose that a person deposits 100,000.00 in an investment that gives them

generates a nominal interest of 15.6%, which is compounded monthly.

How much do you get at the end of the two years?

S = P(1 + i)^n
S = 100,000(1 + 0.013) ^ 24

S= 100,000(1.013))24
S = 100,000(1.363410671)
S = $136,341.07
Same case with the formula: S = $136,341.07
EQUIVALENCE RATE
The Annual Equivalent Rate (AER) is a guiding reference
of the annual effective cost or yield of a financial product
regardless of its term. Its calculation includes the nominal interest rate,
the expenses, commissions, payments, and income and allows for comparison in a way
homogeneous the performance of different financial products.

CASH FLOW DIAGRAM

An effective flowchart is simply the graphical representation of the
cash flows drawn on a timeline. The diagram must
represent the statement of a problem and include the data and the results
find. That is, after drawing the cash flow diagram, a
a person outside the problem must be able to solve it by means of the
diagram.

THE CASH FLOW DIAGRAM USES SEVERAL

CONVENTIONS
The horizontal line is a timeline, with the passage of time from
left to right. The signs of the period (year, quarter, month) can
apply to intervals of time instead of to the points on the scale of
time. For example, note that period 2 coincides with the beginning of
Period 3. When the end-of-period convention for cash flows is used.
effectively, the numbers of the periods are placed at the end of each interval of
time.
The arrows represent cash flows and are placed at the end of the period. If it were
It is necessary to make a distinction, they represent expense (negative cash flows or
cash outflows) and the upward arrows represent income (cash inflows)
positive cash flows or cash inflows.
 CONCLUSIONS

In economic terms,the interest ratethe interest rate is the

amount paid per unit of time for each unit of capital
inverted. That is to say, it is the price of our money.
For anyone in the business world, therefore, it is a
data of great importance for the financing of your venture.
From the standpoint of the state's monetary policy, a rate
high interest encourages saving and low interest encourages
the consumption.
 BIBLIOGRAPHY

TARQUIN, [Link]ía Económica. 6ª edMexico:McGraw-Hill

Interamerican, 2006.

Baca Urbina, Gabriel. Fundamentals of Economic Engineering. 2nd ed.

Mexico: Macgraw Hill, 2001