1 / 22

COMPUTING INTEREST

COMPUTING INTEREST. INTEREST COST. IS A MAJOR EXPENSE VARIES WITH INTEREST RATE VARIES WITH THE METHOD USED TO CALCULATE INTEREST. METHODS OF CALCULATING INTEREST. SIMPLE INTEREST REMAINING BALANCE ADD ON METHOD. Computing Interest. Simple interest. Very Simple

laith-bates
Download Presentation

COMPUTING INTEREST

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. COMPUTING INTEREST

  2. INTEREST COST • IS A MAJOR EXPENSE • VARIES WITH INTEREST RATE • VARIES WITH THE METHOD USED TO CALCULATE INTEREST

  3. METHODS OF CALCULATING INTEREST • SIMPLE INTEREST • REMAINING BALANCE • ADD ON METHOD

  4. Computing Interest

  5. Simple interest • Very Simple • Used Primarily on Short Term Loans

  6. Simple Interest Example $1000 borrowed for 1 year at 5% interest $1000 x .05 = $50 interest charge $1050 to be paid back at the end of the loan

  7. Remaining Balance Method • Used when several payments are to be made • Interest is charged only on the remaining principal balance

  8. Remaining Balance Method Example • $1000 borrowed for 4 years at 8% interest. • The $1000 will be paid back in yearly principal installments of $250.

  9. Remaining Balance Method YEAR 1: $1000 X .08(interest rate) = $80interest cost + $250 Principal Payment $330 Annual Payment

  10. Remaining Balance Method YEAR 2: $750 X .08(interest rate) = $60interest cost + $250 Principal Payment $310 Annual Payment

  11. Remaining Balance Method YEAR 3: $500 X .08(interest rate) = $40interest cost + $250 Principal Payment $290 Annual Payment

  12. Remaining Balance Method YEAR 4: $250 X .08(interest rate) = $20interest cost + $250 Principal Payment $270 Annual Payment

  13. Remaining Balance Method Total Interest Paid • $200 • Over a Four-Year Period

  14. ADD ON METHOD • Interest charged on full principal amount for the entire life of the loan. • Total interest amount is added to principal and divided into even payments

  15. Add On Interest Example Example $1000 borrowed for 4 years at 8% interest.

  16. Add On Interest Example • Step 1: Calculate the total interest paid over the lifespan of the loan $1000 (principal amount) X .08 (interest rate) x 4 (years) $320 Interest Charge • This $320 is the Interest Charge (or the total amount of interest paid over the lifespan of the loan)

  17. Add On Interest Example • Step 2: Add the interest charge to the principal amount $1000 (principal amount) + $320 (Interest Charge) $1320 (Total amount paid)

  18. Add On Interest Example • Step 3: Divide total amount paid by the total number of payments $1320 (total amount paid) / 4 (years) $330 Yearly Payment • Notice that the total Interest Charge is $120 higher using the Add-On method than with the Simple Interest Method.

  19. Calculating APR (using Add-On Method) R = 2C X 100 L (P + A) Formula Key: R = Annual Percentage Rate C = Total Interest Cost L = Length of Loan in Years P = Principal Amount Borrowed A = Payment Amount Each Period

  20. Add On Interest Example Actual APR R = 2($320) X 100 4 (1000 + 330)

  21. Add On Interest Example Actual APR R = 12.03% • This APR is MUCH higher than the original 8% interest originally charged • (4.03% more)

  22. Jeopardy Moment

More Related