# True or false

PUBLISHED : Monday, 07 January, 2008, 12:00am
UPDATED : Monday, 07 January, 2008, 12:00am

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1 Per cent comes from a French word meaning for every one hundred.

2 LIBOR means low interest bank offered rate.

3 Credit history is the history of interest rate in a country.

4 Default is the word used when a borrower does not pay his loan back.

5 Principal is the amount of money borrowed initially.

6 Interest was/is banned in some religions.

The different types of interest

Simple interest: the interest is calculated on the amount you have borrowed, or principal. If you borrow \$1,000, and the interest rate is 5%, the interest you have to pay after one year is \$1,000 x 5% = \$50.

Compound interest: is interest on the interest. Let's say, in the above example, you have not paid the interest of the first year, as required: the bank will charge you interest on the due interest on the second year. In year two, you will have to pay the interest on the principal for year one (\$50), the interest for year two (\$5) and the interest on the interest of year one (5% x \$50 = \$2.50). Why? Because if you pay interest too late, it becomes a debt and bears interest too.

Variable interest: interest can either be fixed for the whole length of the loan or it can vary according to a reference rate.

Real interest: is the interest rate minus the impact of inflation. If your saving account serves you 3% but inflation is 2%, in reality, you only get 1% (3% - 2%).

Here are a few activities you can research on this week's topic:

Go and visit a few banks and ask for the rates they could give you on:

1 A saving account

2 A credit card

3 A mortgage (loan to buy a house)

4 Read the newspaper and find out market interest rate.

Do research on the Hong Kong inflation rate and calculate the real interest rate on the types of loans/saving you have