Copyright © 2008 Pearson Education Canada 8-1 Chapter 8 Simple Interest Applications Contemporary Business Mathematics With Canadian Applications Eighth Edition S. A. Hummelbrunner/K. Suzanne Coombs PowerPoint: D. Johnston

Copyright © 2008 Pearson Education Canada 8-2 Objectives After completing chapter eight, the student will be able to: Identify and define promissory notes and their related terms. Compute the maturity value of interest- bearing promissory notes. Compute the present value of promissory notes. Compute the present value of treasury bills. (continued)

Copyright © 2008 Pearson Education Canada 8-3 Objectives (continued) Compute interest and balance for demand loans. Compute interest and balances for lines of credit and credit card loans. Construct repayment schedules for loans using blended payments.

Copyright © 2008 Pearson Education Canada 8-4 Promissory Note

Copyright © 2008 Pearson Education Canada 8-5 Interest-bearing Promissory Note

Copyright © 2008 Pearson Education Canada 8-6 Terminology of Promissory Notes maker - party making promise to pay payee - party to whom the promise to pay is made face value - sum of money (principal) specified rate of interest - stated as a simple annual rate based on the face value (continued)

Copyright © 2008 Pearson Education Canada 8-7 Terminology of Promissory Notes (continued) issue date - date on which the note was made term of the note - length of time before the note matures (becomes payable) due date or date of maturity - date on which the note is paid interest period - time period from the date of issue to the legal due date

Copyright © 2008 Pearson Education Canada 8-8 Promissory Notes The amount of interest is payable together with the face value on the legal due date. The maturity value is the amount payable on the due date (face value plus interest).

Copyright © 2008 Pearson Education Canada 8-9 Legal Due Date Canadian law adds three days of grace to the term of the note to obtain the legal due date (Bills of Exchange Act, Section 41)

Copyright © 2008 Pearson Education Canada 8-10 Legal Due Date Interest is paid for the three days of grace. No late payment penalty. Credit rating remains good. Write “No Grace Days” on the note if you decide not to include the three days of grace. The legal due date allows for cases in which repayment date falls on a statutory holiday.

Copyright © 2008 Pearson Education Canada 8-11 Maturity Value of Interest- bearing Promissory Note

Copyright © 2008 Pearson Education Canada 8-12 Finding the Maturity Value of an Interest-bearing Promissory Note

Copyright © 2008 Pearson Education Canada 8-13 Present Value of Promissory Note

Copyright © 2008 Pearson Education Canada 8-14 Finding the Present Value of a Note

Copyright © 2008 Pearson Education Canada 8-15 Present Value of a Promissory Note The present value is the value of the note any time before the due date. The present value depends on the rate money is worth, the time between the present date and date of maturity, and the maturity value.

Copyright © 2008 Pearson Education Canada 8-16 Finding the Present Value of an Interest-bearing Note Step 1 -- Find the maturity value of the note using the stated interest rate. Step 2 -- Calculate the present value of the note using the rate money is worth.

Copyright © 2008 Pearson Education Canada 8-17 Finding the Present Value of an Interest-bearing Note

Copyright © 2008 Pearson Education Canada 8-18 Finding Present Value (continued)

Copyright © 2008 Pearson Education Canada 8-19 Canadian Treasury Bills Promissory notes issued by the federal government and most provincial governments to meet short-term financing needs. Terms of 91, 182, and 364 days. Do not carry an interest rate. No days of grace.

Copyright © 2008 Pearson Education Canada 8-20 Purchasing a T-bill The T-bill is purchased at a discounted price reflecting a rate of return determined by current market conditions. The discounted price is determined by finding the present value (P) of the T-bill. The issuing government guarantees the payment of face value at maturity.

Copyright © 2008 Pearson Education Canada 8-21 Calculating the Purchase Price of a T-bill

Copyright © 2008 Pearson Education Canada 8-22 Demand Loans The lender may demand payment of the loan in full or in part at any time. The borrower may repay all of the loan or any part at any time without penalty. Interest, based on the unpaid balance, is usually payable monthly. Interest rate is not fixed.

Copyright © 2008 Pearson Education Canada 8-23 Demand Loan

Copyright © 2008 Pearson Education Canada 8-24 Paying Off a Demand Loan (continued)

Copyright © 2008 Pearson Education Canada 8-25 Declining Balance Method A demand loan may be paid off by a series of partial payments. Each partial payment is first applied to the accumulated interest. Any remainder is used to reduce the outstanding principal. Interest is always calculated on the unpaid balance.

Copyright © 2008 Pearson Education Canada 8-26 Pointers and Pitfalls The date on which there is a change in the interest rate is counted as the first day at the new interest rate. The date on which a partial payment is made is counted as the first day at the new outstanding principal balance.

Copyright © 2008 Pearson Education Canada 8-27 Blended Payments The periodic payment is constant. The payment is first applied to the accumulated interest. The remainder of the payment after the interest has been paid is used to reduce the unpaid principal. The last payment may be different.

Copyright © 2008 Pearson Education Canada 8-28 Lines of Credit A line of credit is a pre-approved loan agreement between a financial institution and a borrower. The borrower may withdraw money, up to an agreed maximum, at any time. A minimum repayment may be required each month. (continued)

Copyright © 2008 Pearson Education Canada 8-29 Lines of Credit (continued) The borrower may repay any additional amount at any time without further penalty. The interest rate can change over time.

Copyright © 2008 Pearson Education Canada 8-30 Secured Line of Credit Assets are promised to the lender to cover non-payment of the loan. A homeowner might pledge the value of their home equity. In general, the limit is higher than the limit of an unsecured line of credit. The interest rate is lower than for an unsecured line of credit.

Copyright © 2008 Pearson Education Canada 8-31 Unsecured Line of Credit An unsecured line of credit is a line of credit with no assets promised to the lender to cover non-payment of the loan. The limit depends on the individual’s credit rating and past relationship with the lender.

Copyright © 2008 Pearson Education Canada 8-32 Credit Card Loans A credit card entitles the bearer to a revolving line of credit with a pre- established credit limit. Interest rates charged on credit cards are higher than rates charged on loans made by financial institutions. A cash advance fee may apply. Interest on a cash advance starts on the day money is withdrawn.

Copyright © 2008 Pearson Education Canada 8-33 Summary Promissory notes, treasury bills, demand loans,and lines of credit are important applications of simple interest.