Ch 9 Simple Interest Basics of Simple Interest

Simple Interest Used for: Billing purposes Short-term (< 1 year) or Informal loans Amortization Schedules (Interest Owed each month) Invoice Balances unpaid after 30 days are subject to a 12% (1% monthly) finance charge. Loan Bill loans his sister $500 at 4% interest for 8 months. Amortization Schedule $85,000 borrowed at 6.35% for 30 years. Monthly Payment = $ st Month’s Interest = $449.79

Simple Interest Formula I = PRT I is the _______________________________  P is the _______________________________  R is the _______________________________  T is the _______________________________ Principle (amt invested or borrowed) Rate (interest rate - %) Time (years) Interest ($) amt. earned or owed

Ch 9 Simple Interest Computing Interest with I = PRT The Basics…

Using the Simple Interest Formula What is the interest owed on a $580 loan at 3% simple interest for 4 years? I = $580(0.03)(4) I = $69.60 I = PRT I = $580(3%)(4)

Ch 9 Simple Interest Computing Interest with I = PRT Dealing with time other than years.

I = PRT I = $4,600(0.041)( ) I = $ Using the Formula Time What is the interest owed on a $4,600 loan at 4.1% simple interest for 5 months? 5 Maturity Value is principle and interest combined: M = Principle + Interest M = $4,600 + $78.58 M = $4,678.58

I = PRT I = $1,200(0.037)( ) I = $ Using the Formula Time What is the interest earned if $1,200 is invested at 3.7% simple interest for 13 weeks? Maturity Value is principle and interest combined: M = Principle + Interest M = $1,200 + $11.10 M = $1,211.10

Application: Compute Penalty Charges Acme Repair Inc. Invoice Date: Dec. 05, 2010 Parts$36.95 Labor4.5 hr x $32.50/hr = $ Trip Charge$25.00 Total$208.20* *Payment is due within 30 days of receipt of this invoice. Payments made after 30 days of receipt are assessed a penalty of 22% annual interest rate. I = PRT 23 days late I = $208.20(0.22)( ) I = $2.89

Amount Borrowed:$ Length of Loan:7.00years Interest Rate:6.00% Interest >0 Monthly Payment: $ Payment Number Beginning BalanceInterestPrincipalEnding Balance Application: Amortization Schedule I = 35,000 x 6% x 1 12 I = 175

Practice Ch 9, Section 1 – Basics of Simple Interest Textbook Exercise 9.1 (pages 353 – 355) _____ #2 – 4

Ch 9 Simple Interest Exact and Ordinary Interest

What is the interest owed on a $2,400 loan at 4.5% simple interest for 120 days? I = PRT I = $2,400(0.045)( ) I = $ Simple Interest Exact Interest & Ordinary Interest Exact Interest Ordinary Interest I = $36.00 Ordinary Interest

Referring to the middle of page 351 “Use ordinary or banker’s interest throughout the remainder of this book unless stated otherwise.”

Practice Ch 8, Section 1 – Basics of Simple Interest Textbook Exercise 9.1 (pages 353 – 355) _____ #10 – 12 _____ # 22 – 24 (maturity value portion only, skip the “Date Loan is Due” for now.)

Ch 9 Simple Interest Calculate Maturity Value

Maturity Value The amount that must be repaid when the loan is due. Maturity Value M = P + I = Principle + Interest (Amount Borrowed)

Compute Maturity Value 1 of 2 Borrow: $12,800 Rate: 5.9% Time 18 months Maturity Value = __________ M = P + I M = $12,800 + $12,800   T M = $12,800 + $1, M = $13, $13, P I M = P + PRT

Compute Maturity Value 2 of 2 Borrow: $44,000 Rate: 7.15% Time 3 ½ years Maturity Value = __________ M = P + I M = $44,000 + $44,000   3.5 M = $44,000 + $11,011 M = $55,011 $55,011

Practice Ch 8, Section 1 – Basics of Simple Interest Textbook Exercise 8.1 (pages 333 – 336) _____ # 22 – 24 Compute only the maturity value only for now. We’ll cover the date loan is due next…

Ch 9 Section 1 Compute the number of days…

Determine the number of days How much interest is due on a $2,500 loan at 3.0% simple interest that began on March 10 and is due on August 20? Reference: Textbook, page 349 I = PRT I = $2,500(0.03)

Number of Days 1 of 3 Aug. 20 – Mar – 69 = How long is a loan that goes from Mar. 10 to Aug. 20? 163 days

Determine the number of days How much interest is due on a $2,500 loan at 3.0% simple interest that began on March 10 and is due on August 20? I = PRT I = $2,500(0.03) 163 I = $33.96

Number of Days 2 of 3 July 23 – Jan – 5 = How long is a loan that goes from Jan. 5 to July 23? 199 days

Number of Days 3 of 3 Number of days from Sept. 15 to Feb. 20 of the following year. Number of days until the end of the year: 365 – 258 = 107 days 107 days + 51 days = 158 days

Review Problem Loan Amount: $45,000 8% simple interest rate Borrowed on July 15 and due on December 20. Determine the amount due under  Exact Interest  Ordinary Interest 354 – 196 = 158 days I = PRT I = $45,000  0.08  = $1, I = $45,000  0.08  = $1,

Practice Ch 9, Section 1 – Basics of Simple Interest Textbook Exercise 9.1 (pages 353 – 355) _____ #6 – 8 _____ # (Date Loan is Due portion)

Objective 4 Use the actual number of days in a month to find the number of days from one date to another.

Knuckle Method Jan. Mar. May July Feb. Apr. June Aug. Oct. Dec. Sept Nov. 31 days 30 days 28 in Feb. * Determine the number of days from May 10 to August May 10 May June July Aug = 97 days

Ch 9 Section 1 Define the basic terms used with notes.

Terminology – Promissory Note Promissory Note Charlotte, North Carolina ___________ ____________ after date, ________ promise to pay to the order of ______________________________________________________ _________________________ Dollars with interest at __________ ______________, payable at ______________________________ Due _____________ ____________________ March 6 Ninety days I Charles D. Miller / $2, Two thousand, five hundred and 00/100 12% per year Wells Fargo Bank Country Club Center Office June 4 Madeline Sullivan Promissory Note: a legal document in which one person or firm agrees to pay a certain amount of money, on a specific day in the future, to another person or firm.

Terminology – Promissory Note Promissory Note Charlotte, North Carolina ___________ ____________ after date, ________ promise to pay to the order of ______________________________________________________ _________________________ Dollars with interest at __________ ______________, payable at ______________________________ Due _____________ ____________________ March 6 Ninety days I Charles D. Miller / $2, Two thousand, five hundred and 00/100 12% per year Wells Fargo Bank Country Club Center Office June 4 Madeline Sullivan Maker or payer: The person borrowing the money. Payee: The person who loaned the money and who will receive the payment. Term: The length of time until the note is due. Face value or principle: The amount being borrowed.

Terminology – Promissory Note Promissory Note Charlotte, North Carolina ___________ ____________ after date, ________ promise to pay to the order of ______________________________________________________ _________________________ Dollars with interest at __________ ______________, payable at ______________________________ Due _____________ ____________________ March 6 Ninety days I Charles D. Miller / $2, Two thousand, five hundred and 00/100 12% per year Wells Fargo Bank Country Club Center Office June 4 Madeline Sullivan Maturity Value: the face value plus interest. Maturity Value = Face Value + Interest Maturity Value = $2,500 + $2,500 x 0.12 x 90/360 Maturity Value = $2,500 + $75 = $2575

Terminology – Promissory Note Promissory Note Charlotte, North Carolina ___________ ____________ after date, ________ promise to pay to the order of ______________________________________________________ _________________________ Dollars with interest at __________ ______________, payable at ______________________________ Due _____________ ____________________ March 6 Ninety days I Charles D. Miller / $2, Two thousand, five hundred and 00/100 12% per year Wells Fargo Bank Country Club Center Office June 4 Madeline Sullivan Maturity Date or due date: The date the loan must be paid off with interest.

Terminology Collateral

Terminology Foreclosure

Practice Ch 9, Section 1 – Basics of Simple Interest Textbook Exercise 9.1 (pages 353 – 355) _____ #13 – 20 _____ #30, 33, 35 (application problems)

Ch 8 Section 1 Determine the due date of a note

Due Date Months The term of a promissory note is sometimes expressed in months. When is the note due? Date MadeLength of LoanDue Date Feb. 103 monthsMay 10 April 207 monthsNov. 20 Oct. 189 monthsJuly 18 January 313 monthsApril 30

Practice Ch 9, Section 1 – Basics of Simple Interest Textbook Exercise 9.1 (pages 353 – 355) _____ #2 – 4, 6 – 8, 10 – 12, 13 – 20, 22 – 24, 30, 33, 35