Unit 18

Interest and Discounts

Basic Principles of Interest

• Interest and discounts are methods of using percent and percentage.

• Interest is usually charged when money is borrowed. – The amount of money borrowed is called the

principal.

– The charge for borrowing the money or principal is the interest.

Basic Principles of Interest

• The rate of interest is the percent used to calculate the interest due and is usually given for a 1-year period of time.

• The term is the length of time for the loan, usually based on years.

• The amount is the total amount of money that must be repaid. It includes the principal plus the interest.

Calculating Simple Interest

• Simple interest means that the rate of interest is calculated for the entire time period. The amount of interest is then added to the principal to find the amount owed.

• A formula for calculating simple interest is:

interest = principal x rate (decimal fraction) x time

Calculating Compound Interest

• Compound interest is interest based on the principal plus previously earned interest.

• Most car loans, home loans, and charge cards use compound interest instead of simple interest and in most cases, the interest is compounded daily.

Basic Principles of Discounts

• A discount is an amount of money that is deducted from the cost.

• The discount rate is the percent by which the price is reduced.

• List price is the original cost of an item.

• Net price is the price of an item after the discount has been subtracted.

Basic Principles of Discounts

• Two basic formulas are used to calculate discounts:

discount = list price x discount rate

net price = list price − discount

• Example: The list price for a stethoscope is $32 with a 12% discount for cash payments.– What is the net price for a cash payment?

Basic Principles of Discounts

discount = list price x discount rate

discount = $32 x 12%

= $32 x .12

= $3.84

net price = list price − discount

= $32 - $3.84

= $28.16

Practical Problem

• A sterile supply technician orders supplies totaling $1,234.56. She receives a 12% discount for payment within 30 days.

• If she pays within 30 days, how much of a discount will she receive?

Practical Problem

• Set up the problem and solve:

discount = list price x discount

= $1,234.56 x .12

= $148.1472

• The technician will receive a discount of$148.15.