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=PxRxT
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
• 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=PxRxT
• 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