1. Chapter 5, Section 1
Promissory Notes

2. 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.”

3. 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.

4. 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

5. 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

6. 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

7. 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.

8. Let’s Practice!
P , 7-29 (omit 27)