Question 3: Suppose you need to borrow $100. Which is the lower amount to pay back: $105 or $100 plus three percent?
Answer: $100 plus tree percent
I have to be honest, I simply couldn’t believe, so many adult people would have problems to give the correct answer to that question.
And it’s even harder to understand in Romania, where the term ‘xy-la-suta’ is giving a memoric aid, other countries don’t have. In german the term is ‘xy Prozent’ and its much harder to figure out, that any percentage-calculation is based on 100.
And my confusion goes on. One day I see people in Romania using the mobile-calculator for very basic additions, the next day I read about romanians winning gold medals at international mathematic-competitions.
But obviously, dealing with percent is a problem for many. I can only advise people with this problems at least to check an online loan-calculator (bankrate.com for instance), before they apply and sign for a loan.
This is particularly important when in case of a long term debt the compound interest (see chapter 16) comes into effect. That brings us to:
Question 4: Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?
A basic capital of 1000 EUR with 15% interest per annum increases after 1 year to (1000:100×115) 1150 EUR.
In the year 2, the interest of 15% is added to this new balance of 1150 EUR and the capital increases to (1150:100×115) 1322.50 EUR.
So, the same interest of 15% pays 150 EUR in year 1 and 172.50 EUR in year 2.
Question 5: Suppose you had $100 in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account?
As you now know, the paid interest is added to the principal amount. Thereby the base for the interest/ calculation increases each year – and this results in higher interest payments each year. And this increase is not regularly but exponentially. This is the principle of compound interest, that lead over a longer period of time to incredible high returns (see chapter 16).
I hope these explanations will help to achieve a better ranking for Romania in the next survey about financial concepts. Next stop here: A closer look to a pretty precise indicator who tells you, when to buy or sell stocks. http://www.theleader.ro/perfect-timing/