Consumer Mathematics: Financial Management, terms

Start with principal and simple interest, since these are the building blocks for every calculation in this chapter. Once you can calculate simple interest confidently, move on to compound interest and maturity value, and finish with cash flow, which brings several transactions together over time.

Simple interest and compound interest are the classic mix-up: simple interest is calculated on the principal only each time, while compound interest is calculated on the growing total, including interest already earned. Maturity value is also sometimes confused with principal, though maturity value is the principal plus all interest earned.

Questions typically give a principal amount, an interest rate and a time period, then ask you to calculate the simple or compound interest earned, or the maturity value of a savings or loan. Word problems about paying off a loan or planning cash flow over several months are also common.