Introduction to Basic Financial Concepts
- erin2678
- 6 days ago
- 3 min read
Understanding financial calculations can be very intimidating. Rest assured that even the most complex financial equation is derived from very simple calculations at its core. To understand how mortgages work, how to make the best decision about trading in your car and starting a new car loan, or you simply want to build your skillset in financial math, you need to understand some basics.
In this financial math series we will begin with the most basic calculations, Interest Calculations. We will show you how they work, and let you solve them yourself with embedded moment.of.math scratchpads. Each future post will dive into more complex topics, building off of concepts learned and practiced previously.
See below example showing how to use the moment.of.math scratchpad.
What do I need to understand before reading this blog?
Arithmetic: Adding, multiplying and dividing
Pre-Algebra: Appling Exponents
Algebra: Applying values to variables
Click here if you need help with these prerequisites
Click here for help with Pre-Algebra and Algebra.
Check out moment.of.math for Algebra practice.
Simple Interest
Simple interest happens when you borrow money from someone for a short period of time, and they get paid back later with a little profit (or interest) for them.
Calculate the Future Value (F) of a Simple Interest Loan using the Present Value (P) and Interest Rate (R):
F = P * (1+R)
To learn more about Simple Interest and how this formula is derived, please visit the blog post: Simple Interest: A Deeper Dive
Simple Interest: Worked Example Problem
Below is a sample Simple Interest problem with a worked solution using the moment.of.math scratchpad.
Problem: Bob needs to pay an unexpected vet bill. The bank offers to loan him the $250 that he needs for a month at 5% interest. Using the equation "F=P*(1+R)", determine how much Bob owes next month.
Note above how the green dots track your progress and shows you are on the right track. The double check mark confirms that your answer and all your math is correct.
Compound Interest
Compound interest happens when timelines are longer. Interest is applied at predetermined periods and allows money to grow increasingly fast. When broken down, Compound Interest is simply a bunch of Simple Interest formulae combined together.
Compound interest is applied using an Annual Percentage Rate (APR) or Annual Percentage Yield (APY).
Calculate the Future Value (F) of a Compound Interest Loan using the Present Value (P) and APR or APY (r), the Number of Periods in a year (n) at which interest is calculated, and the amount of Time in years (t):
F=P*(1+r/n)^(n*t)
To learn more about Compound Interest, please visit the blog post:
Compound Interest: Worked Example Problem
Below is a sample Compound Interest problem with a worked solution using the moment.of.math scratchpad.
Problem: Fred has $5,000 and he wants to invest it in a CD. His Bank is offering 3.5% APY on their new 5 year CD compounded monthly. Using the Compound Interest formula
"F=P*(1+r/n)^(n*t)", determine how much total Interest Fred would earn after 6 months.
Note above how the green dots track your progress and shows you are on the right track. The double check mark confirms that your answer and all your math is correct.
Catch your algebra mistakes before they cost you
The scratchpad in this guide runs on moment.of.math — a free Chrome extension that checks your algebra line by line, on any problem. It can generate new variations problems, so you can get as much practice as you need. On many homework sites, it automatically detects the math on the page, so you don't have to copy anything over. Try it on tonight's homework.
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