Ch 9 Simple Interest Simple Discount Notes Notes

Ch 9 Simple Interest Simple Discount Notes

Notes n Notes are short term loans. q Simple Interest Notes n q Section 1 Simple Discount Notes n This section…

Simple Interest Notes n One year simple interest note @ 6. 25% for $2000. Borrower receives the face value = $2000 Interest is computed to be $125. $2000 00 $2, 0 Borrower must pay back $2125 on the maturity date of the loan. $ 25 $2, 1

Simple Discount Notes n One year simple discount note @ 6. 25% for $2000. Interest is computed and immediately deducted (discounted) from the face value: $125 Borrower walks out with: $1, 875 75 $1, 8 Borrower must pay back $2, 000 on the maturity date of the loan. $ 00 $2, 0

Comparison 1 -year loan of $2, 000 loan at 6. 25%. Simple Interest Note Face Value Cost Amount Borrowed Maturity Value $2, 000 Interest: $125 I = PRT $2, 000 Principle $2, 125 Simple Discount Note $2, 000 Bank Discount: $125 B = MDT $1, 875 Proceeds $2, 000

Using the Terminology 1 of 2 n n 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 = _____

Using the Terminology 2 of 2 n n 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 = _____

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

Bank Discount Sample Problem 1 n Bank Discount = Maturity Value x Discount Rate x Time n B = MDT Maturity Value Discount Rate Time (years) B = $2000 x. 06 x 90 360 B = $30

Proceeds Sample Problem 1 Continued n Proceeds = Maturity Value - Bank Discount n P=M-B P = $2000 - $30 _____ proceeds $1970 P = $1970

Bank Discount n Practice Problem Determine the bank discount: Simple Discount Note B = MDT B = $800 x. 045 x B = $12 $800 4. 5% discount rate 120 360 120 days 12 $______ discount $______ proceeds

Sample n Practice Problem Determine the proceeds: P=M-B P = $800 - $12 P = $788 Simple Discount Note $800 4. 5% discount rate 120 days $12 discount 788 proceeds $_____

Compute Discount and Proceeds 1 of 1 n n Simple discount note with a face value of $14, 250. It is an 8 month note at 8%. q q Discount = _______ Proceeds = _______ B = MDT P=M-B B = 14, 250 x 0. 08 x 8 = 12 P = 14, 250 – 760 = $760 $13, 490

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

Ch 9 Simple Discount Notes Computing the face value

Finding Face Value n n 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 rate 180 days $166. 75 discount $5633. 25 proceeds

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

Computing Face Value to Achieve Desired Proceeds received by the borrower. Discount rate used by the bank (%) Simple Discount Note $5800 $5, 971. 69 5. 75% discount rate 180 days $____ 171. 69 discount $____ proceeds 5800 Time of the loan (years)

Computing Face Value 1 of 2 n n n #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.

Computing Face Value 2 of 2 n n n #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.

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