As we will soon see, over the years, certain methods which involve shortcuts for calculating the amount of interest have evolved, which work to the benefit of the lenders. These methods increase the amount of interest, although they are based upon the same rate of nominal interest (this will be explained by the following slide). Each of these calculation methods has a two-word name with the second word being “interest”.
We will later review the four accepted calculation methods, which are as follows:
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Nominal interest
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Compound interest
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Adjusted interest
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Effective interest
The above may sound a little unclear to some of you, and with some degree of justification. Do not worry, however, since it will all become simpler when we describe each of the types of interest.
