Investors all over the world expect returns on their investments. Even though, some investments may not seem to give a clear picture on the returns on their capitals, it is of paramount importance that the investor realizes returns on their investments. The introduction of modern technologies and ideas in the business world has revolutionized the way people do their trading activities. These profits occur in the form of interest accrued on capital invested. Simple interest and simple discount notes are two key ways through which people calculate the rate of returns on their investments.
However, before discussing the differences and similarities these two forms of interest have, it is prudent to give an insight into some underlying factors. The principal is the money an investor puts in business investment while the rate is the ratio at which businessmen calculate profits on their investments. Interest is the additional value on capital invested as a result of trading activities within a given time. The amount is the principal and interest accrued over a given period.
It is necessary to note that, in both cases, there must be the principal value that a businessman invests in any activity. This forms the basis through which people make all other calculations since it is the face value of the investment. Secondly, there must be profit generated in the process of doing various business transactions. Interest refers to these profits, and the value varies depending on the amount of principal invested and the time within which the transaction takes place.
Even though, these two forms of interest share a lot in common they are different from each other. First, it is vital to establish the rate at which these interests yield returns. While simple interest involves direct calculations of profits accrued in a transaction over a given time in a single face, simple discount notes give their interest rates and values depending on the outstanding balance. Therefore, while simple interest notes show a constant value of interest generated over a given period, a simple discount note gives the debtor and creditor a glimpse of the amount due as a result of previous payments. Therefore, simple discount notes offer rates that correspond to the present value of the amount to be paid while simple interest notes show the amount of interest to be paid irrespective of the value remaining.
However, the above discussion does not give the absolute advantage of one form of interest note over another. Therefore, it is prudent to note that factors such as time, amount of principal, and other banking policies determine the rate at which businessmen calculate interest on their investments. However, if a person wishes to borrow money for a short time it is wise to consider simple interest. Similarly, people who wish to borrow large sums of money should go for simple discounts in order to take advantage of the interest rate charged on a reducing balance basis.
Even though creditors wish to make money by lending and take advantage of debtors’ situations, it is wise to consider the choices available before making any move. This will ensure debtors do not incur heavy expenses while there are other better and easier options for them. The choice of simple interest or simple discount depends on the above factors that determine the amount of interest charged on the principal value.