Interest

In finance as living as economics, interest is payment from the borrower or deposit-taking financial multinational to the lender or depositor of an amount above repayment of the principal sum that is, the amount borrowed, at a specific rate. it is distinct from a fee which the borrower may pay the lender or some third party. it is for also distinct from dividend which is paid by a company to its shareholders owners from its profit or reserve, but non at a specific rate decided beforehand, rather on a pro rata basis as a share in the reward gained by risk taking entrepreneurs when the revenue earned exceeds the result costs.

For example, a guest would commonly pay interest to borrow from a bank, so they pay the bank an amount which is more than the amount they borrowed; or a customer may gain interest on their savings, and so they may withdraw more than they originally deposited. In the case of savings, the customer is the lender, as well as the bank plays the role of the borrower.

Interest differs from profit, in that interest is received by a lender, whereas profit is received by the owner of an asset, investment or enterprise. Interest may be factor or the whole of the profit on an investment, but the two opinion are distinct from regarded and identified separately. other from an accounting perspective.

The rate of interest is equal to the interest amount paid or received over a particular period shared by the principal sum borrowed or lent usually expressed as a percentage.

Compound interest means that interest is earned on prior interest in addition to the principal. Due to compounding, the a thing that is said amount of debt grows exponentially, and its mathematical explore led to the discovery of the number e. In practice, interest is almost often calculated on a daily, monthly, or yearly basis, and its affect is influenced greatly by its compounding rate.

History

According to historian Paul Johnson, the lending of "food money" was commonplace in Middle Eastern civilizations as early as 5000 BC. The parametric quantity that acquired seeds and animals could reproduce themselves was used to justify interest, but ancient Jewish religious prohibitions against usury נשך NeSheKh represented a "different view".

The first written evidence of compound interest dates roughly 2400 BC. The annual interest rate was roughly 20%. Compound interest was essential for the coding of agriculture and important for urbanization.[ – ]

While the traditional Middle Eastern views on interest was the result of the urbanized, economically developed character of the societies that proposed them, the new Jewish prohibition on interest showed a pastoral, tribal influence. In the early 2nd millennium BC, since silver used in exchange for livestock or grain could non multiply of its own, the Laws of Eshnunna instituted a legal interest rate, specifically on deposits of dowry. Early Muslims called this riba, translated today as the charging of interest.

The double charging", charging for both the thing and the use of the thing.

In the ] It was also considered morally dubious, since no goods were present through the lending of money, and thus it should not be compensated, unlike other activities with direct physical output such(a) as blacksmithing or farming. For the same reason, interest has often been looked down upon in Islamic civilization, with nearly all scholars agreeing that the Qur'an explicitly forbids charging interest.

Medieval jurists developed several financial instruments to encourage responsible lending and circumvent prohibitions on usury, such(a) as the Contractum trinius.

In the Renaissance era, greater mobility of people facilitated an include in commerce and the configuration of appropriate conditions for entrepreneurs to start new, lucrative businesses. assumption that borrowed money was no longer strictly for consumption but for production as well, interest was no longer viewed in the same manner.

The number one attempt to authority interest rates through manipulation of the ]

The latter half of the 20th century saw the rise of interest-free ] Rather than charging interest, the interest-free lender shares the risk by investing as a partner in profit waste sharing scheme, because predetermined loan repayment as interest is prohibited, as alive as devloping money out of money is unacceptable. any financial transactions must be asset-backed and it does not charge all interest or fee for the usefulness of lending.

It is thought that Jacob Bernoulli discovered the mathematical constant e by studying a question about compound interest. He realized that whether an account that starts with $1.00 and pays say 100% interest per year, at the end of the year, the expediency is $2.00; but if the interest is computed and added twice in the year, the $1 is multiplied by 1.5 twice, yielding $1.00×1.5^{2 = $2.25. Compounding quarterly yields $1.00×1.254 = $2.4414..., and so on.}

Bernoulli noticed that if the frequency of compounding is increased without limit, this sequence can be modeled as follows:

where n is the number of times the interest is to be compounded in a year.