Ch 9 Simple Interest

1. Ch 9 Simple Interest Simple Discount Notes

2. Notes • Notes are short term loans. • Simple Interest Notes • Section 1 • Simple Discount Notes • This section…

3. Simple Interest Notes • One year simple interest note @ 6.25% for $2000. Borrower receives the face value = $2000 Interest is computed to be $125. Borrower must pay back $2125 on the maturity date of the loan. $2000 $ $2,125 $2,000

4. Simple Discount Notes • One year simple discount note @ 6.25% for $2000. Interest is computed and immediately deducted (discounted) from the face value: $125 Bankdiscount Borrower walks out with: $1,875 proceeds Borrower must pay back $2,000 on the maturity date of the loan. $ $2,000 $1,875

5. Comparison 1-year loan of $2,000 loan at 6.25%. $2,000 $2,000 Interest: $125 Bank Discount: $125 I = PRT B = MDT $2,000 $1,875 Principle Proceeds $2,125 $2,000

6. Using the Terminology 1 of 2 • Simple discount note of $4300. • Bank Discount is $285 $4,300 Face Value = __________ $285 Bank Discount = __________ $4,015 $4,300 - $285 Proceeds = __________ $4,300 Maturity Value = __________

7. Using the Terminology 2 of 2 • Simple discount note of $12,500. • Bank discount is $750 $12,500 Face Value = __________ $750 Bank Discount = __________ $11,750 $12,500 - $750 Proceeds = __________ $12,500 Maturity Value = __________

8. Ch 9 Simple Discount Notes Determine the bank discount and the proceeds.

9. Simple Discount Note $2000 6% discount rate 90 days Bank Discount Sample Problem 1 • Bank Discount = Maturity Value x Discount Rate x Time • B = MDT Maturity Value _____ discount $30 Discount Rate _____ proceeds Time (years) 90 360 B = $2000 x .06 x B = $30

10. Simple Discount Note $2000 6% discount rate 90 days $30 discount Proceeds Sample Problem 1 Continued • Proceeds = Maturity Value - Bank Discount • P = M - B P = $2000 - $30 _____ proceeds $1970 P = $1970

11. Simple Discount Note $800 4.5% discount rate 120 days $______ discount Bank Discount Practice Problem • Determine the bank discount: B = MDT 120 360 B = $800 x .045 x 12 $______ proceeds B = $12

12. Sample Practice Problem • Determine the proceeds: Simple Discount Note P = M - B $800 4.5% discount rate P = $800 - $12 120 days $12 discount P = $788 788 $_____ proceeds

13. Compute Discount and Proceeds 1 of 1 • Simple discount note with a face value of $14,250. • It is an 8 month note at 8%. • Discount = _______ • Proceeds = _______ B = MDT P = M - B 8 12 B = 14,250 x 0.08 x = $760 P = 14,250 – 760= $13,490

14. Practice • Ch 9, Section 3 – Simple Discount Notes Textbook Exercise 9.3 (pages 371 – 374) _____ #3 – 6, 8 – 12, 14

15. Ch 9 Simple Discount Notes Computing the face value

16. Simple Discount Note $5800 5.75% discount rate 180 days $166.75 discount $5633.25 proceeds Finding Face Value • A person needs to borrow $5800 to pay for home improvements. • Would a simple discount note with a face value of $5800 meet their needs?

17. Deriving the Formula for M B = MDT P = M – P = M – MDT B P = M(1 – DT) 1 – DT 1 – DT P = M 1 – DT

18. Simple Discount Note $5800 5.75% discount rate 180 days $________ discount $________ proceeds Computing Face Value to Achieve Desired Proceeds Proceeds received by the borrower. Time of the loan (years) Discount rate used by the bank (%) $5,971.69 171.69 5800

19. Computing Face Value 1 of 2 • #20, page 372 • Lane Engineering needs $120,000 to install computers and network. The simple discount note has a 9.5% rate and matures in 80 days. • Find the face value of the loan.

20. Computing Face Value 2 of 2 • #26 part (a), page 373 • A Malaysian electric company requires proceeds of $720,000 and borrows from a bank in Thailand at 12% discount for 45 days. • Find the face value of the loan.

21. Practice • Ch 9, Section 3 – Simple Discount Notes Textbook Exercise 9.3 (pages 371 – 374) _____ #20, 25, 26