ch 8 simple interest section 3
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Ch 8 Simple Interest
Simple Discount Notes
Objective 1
Define the basic terms used with simple discount notes.
Simple Interest Notes
Simple interest note for $2000.
Borrower receives the face value = $2000
Interest is $125.
Borrower must pay back $2125 on the maturity date of the loan.
Simple Discount Notes
Simple discount note for $2000.
Face Value = $2000
Borrower receives $1875.
Interest is $125.
Borrower must pay back $2000 on the maturity date of the loan.
Using the Terminology 1 of 2
Simple discount note of $4300. Interest is $285
Face Value = __________
Proceeds = __________
Discount = __________
Maturity Value = __________
$4,300
$4,300 - $285$4,015
$285
$4,300
Using the Terminology 2 of 2
Simple discount note of $12,500. Interest is $750
Face Value = __________
Proceeds = __________
Discount = __________
Maturity Value = __________
$12,500
$12,500 - $750$11,750
$750
$12,500
Objective 2
Find the bank discount and the proceeds.
Bank Discount
Bank Discount = Maturity Value x Discount Rate x Time
B = MDT
Maturity Value
Discount Rate
Time (years)
Simple Discount Note
$2000
6% discount rate90 days
$30 discount
$1970 proceeds
B = $2000 x .06 x 90/360
B = $30
Sample
Determine the bank discount:
Simple Discount Note
$800
4.5% discount rate
120 days
$______ discount
B = MDT
B = $800 x .045 x 120/360
B = $12
12
Proceeds
Proceeds = Maturity Value - Bank Discount
P = M - BSimple Discount Note
$2000
6% discount rate90 days
$30 discount
$1970 proceeds
P = $2000 - $30
P = $1970
Sample
Determine the proceeds:
Simple Discount Note
$800
4.5% discount rate
120 days
$12 discount
$_____ proceeds
P = M - B
P = $800 - $12
P = $788 788
Compute Discount and Proceeds 1 of 2 Simple discount note with a face value of $14,250.
The banker discounts the 8 month note at 8%. Discount = _______ Proceeds = _______
B = MDT
P = M - B
B = 14,250 x 0.08 x 8/12 = $760
P = 14,250 – 760 = $13,490
Compute Discount and Proceeds 2 of 2 #4, page 333
Face Value: $1250 Discount Rate: 11% Time: 150 days
Discount = _______ Proceeds = _______
B = MDT
P = M - B
B = 1,250 x 0.11 x 150/360 = 57.29
P = 1,250 – 57.29 = $1,192.71
Objective 3
Finding the face value
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?
Simple Discount Note
$5800
5.75% discount rate180 days
$166.75 discount
$5633.25 proceeds
Computing Face Value to Achieve Desired Proceeds
DT
PM
1
Proceeds received by the borrower.
Discount rate used by the bank (%)Time of the loan (years)
Simple Discount Note
$5800
5.75% discount rate180 days
$________ discount
$________ proceeds
360180
0575.1
5800M 69.971,5$M
$5,971.69
171.69
5800
Computing Face Value 1 of 2
#20, page 335 Benson automotive needs $120,000 to
upgrade shop tools. The simple discount note has a 9.5% rate and matures in 80 days.
Find the face value of the loan.
DT
PM
1
36080
095.01
000,120
M
021111.01
000,120
9788888.0
000,120 97.587,122$
Computing Face Value 2 of 2
#26 part (a), page 335 Japanese electric company requires
proceeds of $720,000 and borrows from a bank in Thailand at 12% discount for 45 days.
Find the face value of the loan.
DT
PM
1
36045
12.01
000,720
M
015.01
000,720
985.0
000,720 47.964,730$
Objective 4
Find the effective rate.
Comparing Interest Rates Simple
Interest Notes vs Simple Discount Notes
Which loan “costs” more to the borrower?
Simple interest note
$3,000 @ 7% for 10 months.
Simple discount note
$3,000 @ 7% for 10 months.
I = PRT
I = 3000 x .07 x 10/12
I = $175
B = MDT
B = 3000 x .07 x 10/12
B = $175
Borrower gets $__________. Borrower gets $__________.3000 2825
Effective Interest Rate
Allows us to compare simple interest rates with simple discount rates.
Effective Rate (APR) is the interest rate that is calculated based on the actual amount of money received by the borrower.
Simple interest note
$3,000 @ 7% for 10 months.
Simple discount note
$3,000 @ 7% for 10 months.
$3,000 $2,825
Compute Effective Interest Rate Derived from: I = PRT
PT
IR
Simple interest note
$3,000 @ 7% for 10 months.
Simple discount note
$3,000 @ 7% for 10 months.
$3,000
$2,825
1210
2825
175
R
0743.0R
%4.7R
Sample Simple Interest Note
$3000 5.8% 75 days
Simple Discount Note $3000 5.8% 75 days
PT
IR
36075
75.2963
25.36
R
%87.5RB = 3000 x .058 x 75/360
B = 36.25
PTR
25.36
TR
75.2963
25.36
Effective Rate of Interest
Compute Effective Interest Rate 1 of 1
#26 part (b), page 335 Japanese electric company requires proceeds of
$720,000 and borrows from a bank in Thailand at 12% discount for 45 days.
The interest paid on the loan is $10,964.47 Find the effective interest rate.
PT
IR
36045
000,720
47.964,10
R 1218.0R %2.12R
Practice
MathXL: Ch 8 Section 3 Homework