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Chapter 5, Section 1

Chapter 5, Section 1. Promissory Notes. 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.” . What’s included in a promissory note?.

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Chapter 5, Section 1

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  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. 175-176, 7-29 (omit 27)

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