BUS250 Seminar 6

Key Terms Interest: an amount paid or earned for the use of money. Simple interest: interest earned when a loan or investment is repaid in a lump sum. Principal: the amount of money borrowed or invested. Rate: the percent of the principal paid as interest per time period. Time: the number of days, months or years that the money is borrowed or invested.

11.1.1 The Simple Interest Formula The interest formula shows how interest, rate, and time are related and gives us a way of finding one of these values if the other three values are known. I = P x R x T

Try these examples Find the interest on a 2-year loan of $4,000 at a 6% rate. $480 Find the interest earned on a 3-year investment of $5,000 at 4.5% interest. $675

Look at this example (See next slide) Marcus Logan can purchase furniture on a 2-year simple interest loan at 9% interest per year. What is the maturity value for a $2,500 loan? MV = P (1 + RT) Substitute known values. MV = $2,500 ( 1 + 0.09 x 2) (See next slide)

What is the maturity value? MV = $2,500 ( 1 + 0.09 x 2) MV = $2,500 (1 + 0.18) MV = $2,500 (1.18) MV = $2,950 Marcus will pay $2,950 at the end of two years.

Try these examples Terry Williams is going to borrow $4,000 at 7.5% interest. What is the maturity value of the loan after three years? $4,900 Jim Sherman will invest $3,000 at 8% for 5 years. What is the maturity value of the investment? $4,200

Look at this example To save money, Stan Wright invested $2,500 for 42 months at 4 ½ % simple interest. How much interest did he earn? 42 months = 42/12 = 3.5 I = P x R x T I = $2,500 x 0.045 x 3.5 I = $393.75 Stan will earn $393.75

Try these examples Akiko is saving a little extra money to pay for her car insurance next year. If she invests $1,000 for 18 months at 4%, how much interest can she earn? $60 Habib is going to borrow $2,000 for 42 months at 7% . What will the amount of interest owed be? $490

Find the principal using the simple interest formula P = I / RT Judy paid $108 in interest on a loan that she had for 6 months. The interest rate was 12%. How much was the principal? Substitute the known values and solve. P = 108/ 0.12 x 0.5 P = $1,800

Find the rate using the simple interest formula R = I / PT Sam wants to borrow $1,500 for 15 months and will have to pay $225 in interest. What is the rate he is being charged? Substitute the known values and solve. R = 225/ $1,500 x 1.25 R = .12 or 12% The rate Sam will pay is 12%.

11.2.1 Find Exact Time Ordinary time: time that is based on counting 30 days in each month. Exact time: time that is based on counting the exact number of days in a time period.

11.2.3 Find the Ordinary Interest and the Exact Interest Ordinary interest: a rate per day that assumes 360 days per year. Exact interest: a rate per day that assumes 365 days per year. Banker’s rule: calculating interest on a loan based on ordinary interest and exact time which yields a slightly higher amount of interest.

Try this example What is the effective interest rate of a $5,000 simple discount note, at an ordinary bank discount rate of 12%, for 90 days? I = PRT; I = $5,000(.12)(90/360) I = $150 (Bank discount) Proceeds = $5,000 - $150 = $4,850 R = I/PT; R = $150/$4,850(90/360) R = .1237113402 R or the effective interest rate = 12.4%

Key Terms Consumer credit: a type of credit or loan that is available to individuals or businesses. The loan is repaid in regular payments. Installment loan: a loan that is repaid in regular payments. Closed-end credit: a type of installment loan in which the amount borrowed and the interest is repaid in a specific number of equal payments.

Key Terms Open-end credit: a type of installment loan in which there is no fixed amount borrowed or number of payments. Regular payments are made until the loan is paid off. Finance charges or carrying charges: the interest and any fee associated with an installment loan.

Try this example Karen purchased a copier on the installment plan with a down payment of $50 and 6 monthly payments of $29.95. Find the installment price. $229.70

Look at this example The installment price of a pool table was $1,220 for a 12-month loan. If a $320 down payment was made, find the installment payment. Installment Price = $1,220 $1,220 - $320 = $900 [$320 is the down payment.] $900 ÷ 12 = $75 The installment payment is $75

12.1.3 Find the Estimated APR Using a Table Annual percentage rate (APR): the true rate of an installment loan that is equivalent to an annual simple interest rate. Truth in Lending Act: passed in 1969 by the federal government, it requires a lending institution to tell the borrower in writing what the APR actually is.

Annual Simple Interest Rate Equivalent Example: If you borrowed $1,500 for one year and were charged $165 in interest, you would be paying an interest rate of 11% annually. $165 ÷ $1,500 = 0.11 = 11% If you paid the money back in 12 monthly installments of $138.75, you would not have use of the entire $1,500 for a full year. In effect you would be paying more than the 11% annually.

Percentage rate tables The APR can be determined using a government-issued table. APR rates are within ¼ % which is the federal standard. A portion of one of these tables based on the number of monthly payments is shown in your text in Table 12-1.

Look at this example Lewis Strang bought a motorcycle for $3,000, which was financed at $142 per month for 24 months. There was no down payment. Find the APR. Installment price = $142 x 24 = $3,408 Finance charge = $3,408 - $3,000 = $408