1. Contemporary Mathematics for Business and Consumers
Third Edition
By: Robert A. Brechner
COPYRIGHT © 2003 by South-Western, a division of Thomson Learning. Thomson LearningTM is a trademark used herein under license. ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means–graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems–without the written permission of the publisher. For permission to use material from this text or product, contact us by Tel (800) Fax (800)

2. Simple Interest and Promissory Notes
Chapter 10
Simple Interest and Promissory Notes
Copyright © 2003 by South-Western

3. Chapter 10, Simple Interest and Promissory Notes
Outline
Section I Understanding and Computing Simple Interest
10-1 Computing simple interest for loans with terms of years or months.
10-2 Calculating simple interest for loans with terms of days by using the exact interest and ordinary interest methods.
10-3 Calculating the maturity value of a loan.
10-4 Calculating the number of days of a loan.
10-5 Determining the maturity date of a loan.

4. Chapter 10, Simple Interest and Promissory Notes (Cont.)
Outline
Section II Using the Simple Interest Formula
10-6 Solving for the principal.
10-7 Solving for the rate.
10-8 Solving for the time.
10-9 Calculating loans involving partial payments before maturity.

5. Chapter 10, Simple Interest and Promissory Notes (Cont.)
Outline
Section III Understanding Promissory Notes and Notes and Discounting
10-10 Calculating bank discount and proceeds for simple discount notes.
Calculating true or effective rate of interest for a simple discount note.
Discounting notes before maturity.

6. Section I, Understanding and Computing Simple Interest
10-1 Computing Simple Interest for Loans with Terms of Years or Months
Interest = Principal x Rate X Time
I = PRT

7. Time = Number of days of a loan Time = Number of days of a loan
10-2, Calculating Simple Interest for Loans with Terms of Days by Using the Exact Interest and Ordinary Interest methods
Simple Interest Formula – Days
Ordinary Interest
Time = Number of days of a loan
365
Time = Number of days of a loan
360

8. 10-3, Calculating Maturity Value of a Loan
Maturity value = Principal + Interest
Maturity value =Principal (1 + Rate X Time)
MV + P(1+RT)

9. Everybody’s Business
Learning Tip
When using the maturity value formula, MV = P (1+RT), the order of the operation is
Multiply rate times time
Add the 1
Multiply by the principal

10. 10-4 Calculating the Number of Days of a Loan
Steps for Determining the Number of Days of a Loan:
Step 1. Determine the number of days remaining in the first month by subtracting the loan date from the number of days in that month.
Step 2. List the number of days for each succeeding whole month.
Step 3. List the number of loan days in the last month.
Step 4. Add the days from Steps 1, 2, and 3.

11. 10-5 Determining the Maturity Date of a Loan
Steps for Determining the Maturity date of a Loan
Step 1. Find the number od days remaining in the first month by subtracting the loan date from the number of days in that month.
Step 2. Subtract the days remaining in the first month (Step 1) from the number of days the loan.
Step 3. Continue subtracting the number of days in each succeeding whole month, until you reach a month in which the difference is less than the total days in that month. At that point, the maturity date will be the day of that month that corresponds to the difference.

12. Everybody’s Business
Real World Connection
In business, due dates that fall on weekends or holidays are commonly advanced to the next business day.

13. Section II, Using the Simple Interest Formula
10-6 Solving for the Principal
Principal = Interest____
Rate x Time or
P = ___I_____ RT

14. Section II, Using the Simple Interest Formula
10-7 Solving for the Rate
10-8 Solving for Time
Rate = Interest
Principal x Time
R = _____I_______ PT
Time = Interest____
Principal x Rate
T = ___I_____ PR

15. 10-4 Calculating Loans Involving Partial Payments Before Maturity
Steps for Calculating Maturity value of a loan After One or More Partial Payments
Step 1. Using the simple interest formula, with ordinary interest, compute the amount of interest due from the date of the loan to the date of the partial payment.
Step 2. Subtract the interest form Step 1 from the partial payment. This pays the interest to date.
Step 3. Subtract the balance of the partial payment, after Step 2, from the original principal on the loan. This gives the new adjusted principal.
Step 4. After all partial payments have been credited to the loan, the maturity value is computed by adding the interest since the last partial payment to the adjusted principal.

16. Section III, Understanding Promissory Notes and Discounting
10-10 Calculating Bank Discounts and Proceeds for Simple Discount Notes
Bank Discount:
Proceeds:
Bank discount = Face value x Discount rate x Time
Proceeds = Face value – Bank discount

17. 10-12 Discounting Notes Before Maturity
Steps for Discounting A Note Before Maturity:
Step 1. Calculate the maturity value of the note. If the original note was non-interest bearing, the maturity value will be the same as the face value. If the original note was interest bearing, the maturity value should be calculated as usual.
Step 2. Determine the number of days or months of the discount period. The discount period is used as the numerator of the time in Step 3.
Maturity value = Principal (1 + Rate x Time)

18. 10-12 Discounting Notes Before Maturity (Cont.)
Steps for Discounting A Note Before Maturity:
Step 3. Calculate the amount of the bank discount by using the following formula. Note: Use ordinary interest, 360 days, for discounting a note before maturity, when the terms are stated in days.
Step 4. Calculate the proceeds of the note by using the formula:
Bank discount = Maturity value x Discount rate x Time
Proceeds = Maturity rate – Bank discount

19. Everybody’s Business
Real World Connection
Many companies are forced to extend credit to their business customers due to “competitive pressures,” not because they want to be in the loan business. Discounting the note at their bank is a way of getting their money sooner.

20. Chapter 10, Simple Interest and Promissory Notes
Key Terms
Interest Principal
Rate Time
Simple Interest Compound Interest
Exact Interest Ordinary interest
Loan date Due date or Maturity date
U. S. Rule Promissory note
Simple discount note Bank discount
Proceeds True interest rate
Discount a note discount period

21. Chapter 10 Interest = Principal x Rate x Time
Maturity value = Principal + Interest
Maturity value = Principal (1 + Rate x Time)
Copyright © 2003 by South-Western

22. Chapter 10 Bank discount = Face value x Discount rate x Time
Proceeds = Face value - Bank discount
Copyright © 2003 by South-Western