What I knew about finance, and after learning the finance unit.

• Simple Interest:

I had zero knowledge of finance and especially how interest works. One thing I remember about interest was when my parents talked about how we need to choose banks that suggest lower interest.

During this unit, I have learned that simple interest is one type of interest that is usually applied to short-term investments of one year or less, or to long-term investments where the annual interest is paid to the investor and not reinvested. Also, I have learned that the formula to calculate simple interest is I=Prt when I represents the amount of interest, P represents the principal (the initial investment), r represents the annual rate of interest – expressed as a decimal, and t represents the time in years for which the money is invested.

 

• Compound Interest:

All I knew about compound interest was that it has a different method of paying from simple interest and the amount paid every term is different.

During this unit, I have learned that compound interest is another type of interest that in compound interest, the interest earned during the first year is added to the original principal to form a new principal amount. Also, the formula where interest is compounded annually is A=P(1+i)^n where A represents the final amount, P represents the principal (or initial investment), I represents the annual interest rate, and n represents the number of years. Finally, we learned how to use a TVM solver to solve annual compound interest problems.

 

• Investments:

Investment is a topic that I thought I knew a lot about. I have been told that I should not invest my money most likely because it’s the fastest way to save money. Also, with a narrow view, I believed the term “investing”, only existed in stock markets.

During this lesson, I have learned how to solve different cases of investments by using the TVM solver. The formulas we needed to use were different in every case. For example, the formulas I have mentioned from simple and compound interest are also good examples. Additionally, the compound interest formula where interest is not compounded annually is the same formula as to how to solve the reversed version (mentioned above, A=P(1+i)^n), but I and n are defined in terms of the compounding period. Finally, I have learned how to solve non-annual compound interest problems using the TVM solver, and how to use the TVM solver for basic annuity investment applications.

 

• Loans:

I always thought having a loan is dangerous because it’s an easy way to earn money right on the spot, but when it comes to paying back the money, you’re actually paying more money after all.

During this lesson, I have learned different forms of annuity payment methods such as a regular savings plan, paying off a loan or a mortgage with regular payments, and retirement income. I have also learned how to solve different loan problems using the TVM solver.

 

• Leases:

Before I learned the finance unit, I had a glimpse of the similarities of loans and leases, but I                   never got to know the differences. One fact I knew about leases is: after I have finished the payment term, I have to pay an additional fee which is the remaining value of the product after the payment was over, for the product to be mine/owned.

During this lesson, I have learned the difference between a loan and a lease which leasing is an alternative way to purchase an expensive item. For example, when an item, such as a vehicle, is leased, the monthly payments are made to the leasing company to cover depreciation, taxes, and interest. The difference I have learned was the one fact I knew about leasing which now I have advanced knowledge of. The additional payment option, which is the remaining value of the expensive product after the leasing agreement, is called a “buyout” option.

 

• Credit Cards:

Everything I knew about credit cards was that it is different from a debit card and that among those cards, Mastercard, Visa, American Express, etc, exists. Additionally, I also knew that you gain credit by using credit cards and that the credits benefit you when it comes to loan approval or negotiation.

During this lesson, I have learned that credit cards allow people to access consumer credit and in effect, using a credit card to pay for purchases is similar to borrowing money with major differences existing between loans and mortgages. One of the many things I have learned about credit cards is that if you choose to pay off the balance on the card by an agreed date, then there is no interest charge. Additionally, credit card charges vary from credit card company to credit card company. Moreover, I have learned the common policies of the way they apply credit card charges. Finally, I have learned how to view a credit card statement.

 

• Mortgages:

I have only heard that mortgages are a type of loan and I haven’t had a chance to seriously learn what it is and when it is used.

During this lesson, I have learned that a mortgage is a special type of loan that is used to purchase a property and that the property itself is used as collateral – which the lending institution uses to recover its loan in the event that the borrower does not pay back the loan. Additionally, I have learned what amortization is. To amortize a mortgage is to repay a mortgage in equal periodic payments over a given period of time and that it is common to have amortization periods of 15, 20, or 25 years. Moreover, at the end of the term, a new mortgage agreement is negotiated with the lending institution and a new amortization period may result, with a different interest rate. Finally, I have learned that by Canadian law, mortgage interest must be calculated at most semi-annually.