 # Chapter 5, Section 1 Promissory Notes.

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Chapter 5, Section 1 Promissory Notes

What’s a promissory note?
A written promise, or IOU, that you will repay the money to the lender on a certain date. You will also have to pay interest. Sometimes you will have to put up “collateral.”

What’s included in a promissory note?
Principal: Amount of money borrowed Date of note: Date the note was signed. Maturity date: Date the note is due. Interest rate: rate of interest to be paid. Maturity value: the total amount due on the maturity date, including interest.

How do you calculate interest on a note?
The same way we did before… I = P x R x T Time is expressed in years 3 months= 3/12=1/4 So to find the total amount due on the maturity date you just add the interest back the principal. Example 1, p. 172 Check your understanding A

What if the time of the note is shown in days, not years?
You use the “exact interest method.” Exact interest uses a 365-day year. To find exact interest, you show time as a fraction with 365 as the denominator. For example, 79 days = 79/365 Example 2, p. 173 Check your understanding C

What other ways is interest calculated?
Using the “ordinary interest” method or bankers interest method. With this method of finding interest, a year has only 360 days (12, 30 day months). This is known as a banker year. It’s used because it’s easier to calculate than a 365 day year. Example 3, p. 173. Check your understanding E

What if I need to know what interest rate I paid?
Use this simple formula: Interest paid for 1 year/principal If the time isn’t expressed as a year you must figure out how much interest they would have paid in a year. 12 months/ # of months= time Time x amount of interest=interest paid in 1 year. Example 4, p. 174. Check your understanding G.

Let’s Practice! P , 7-29 (omit 27)