9.1 - Basics of simple interest
What is simple interest?
Simple interest applies only to the principal (the original amount borrowed) and it is used for loans lasting less than 1 year
What is the formula for finding principal?
Principal = Interest / Rate x Time (in years)
What is the difference between simple interest and simple discount?
A basic difference between the two types of notes is that simple interest is calculated based on principal, whereas simple discount is calculated based on maturity value.
What is a note?
A note is a legal responsibility for one individual or firm to pay a specific amount on a specific date to another individual or firm.
What does cosigning a loan mean?
Cosigning on a loan means that the person who cosigned on the loan will have to pay it back if the person who borrowed the money fails to pay the loan back.
Find simple interest & maturity value to the nearest hundredth.
$4200 at 10% for 6 months
Interest: $210
Maturity Value: $4,410
Find the principal and round to the nearest hundredth.
Rate = 6.25%
Time = 90 days
Interest = $245
Principal = $15,680
Find the discount to the nearest hundredth and then find the proceeds to the nearest hundredth if necessary.
Face value = $7,800
Discount rate = 9%
Time (days) = 120 days
Discount = $234
Proceeds = $7,566
Find the proceeds to the nearest hundredth when the following is discounted.
Maturity value = $9,800
Discount rate = 7.75%
Discount period = 90 days
Proceeds = $9,610.12
The discount rate used by a bank depends on several things, one of which is?
The risk that the borrower will not repay the bank.
Find the exact interest and ordinary interest for the following to the nearest hundredth.
$74,000 at 7.25% for 180 days
Exact interest: $2,645.75
Ordinary interest: $2,682.50
Find the rate and round to the nearest tenth of a percent.
Principal = $8,200
Time = 200 days
Interest = $375.15
Rate = 8.2%
Nick Miller signed a note with a face value of $35,000 at an 7.5% discount rate for funds to plant Christmas trees. Find the length of the loan in days if the discount is $1,545.89. Round to the nearest day.
212 days
First Bank loaned $360,000 for 180 days to a company purchasing a rock-crushing machine. The bank sold the 7% simple interest note 120 days later at an 8% discount rate. Find (a) the bank discount and (b) the proceeds.
a) $4,968
b) $367,632
Fill in the blank.
Higher interest rates make it more expensive to borrow and _______ economic growth.
slow
Schmidt Automotive borrows $3,000,000 at 8.5% from a bank to buy land to build a building for a new dealership. Given that the loan is for 9 months, find the interest.
Interest: $191,250
Find time and round to the nearest day.
Principal = $36,000
Rate = 8.75%
Interest = $615
Time = 70 days
A regional manager at Trugreen, Inc. authorizes the borrowing of $98,300 for trucks and sprayers needed to spray yards with fertilizers and pesticides. The simple discount note has a 9.25% rate and matures in 150 days. Find the face value of the loan needed.
M = $102,240.52
Hanson’s Jewelry signed a 180-day simple discount note with a face value of $250,000 and a rate of 9% on March 19. The lender sells the note at an 8% discount rate on June 14. March 19th to June 14th is 87 days. Find (a) the proceeds of the original note, (b) the discount period, (c) the discount, and (d) the proceeds at the sale of the note on June 14.
a) $238,750
b) 93 days
c) $5,166.67
d) $244,833.33
What is compound interest?
Compound interest requires interest to be paid on the principle and also on previously earned interest.
Schmidt Automotive borrows $3,000,000 at 8.5% from a bank to buy land to build a building for a new dealership. Given that the loan is for 9 months, find the maturity value.
Maturity value: $3,191,250
Patterson Plumbing had an account that earned $214.67 interest in 280 days. If the interest rate was 4%, find (a) the principal at the beginning of the 280 days and (b) the amount in the account at the end of the 280 days.
a) $6,900.11
b) $7,114.78
To remodel a restaurant, Olive Garden signs a 300-day note with proceeds of $62,155.72 and a maturity value of $70,000. Find (a) the discount and (b) the APR.
a) $7,844.28
b) 15.1%
To build a new warehouse, Alco Fence Co. signed a $300,000 simple interest note at 9% for 150 days with National Bank on November 20. On February 6, National Bank sold all of its notes to Bank One. Find (a) the maturity value of the note and (b) the proceeds to National Bank given a discount rate of 10.5%.
a) $311,250
b) $304,713.75
Fill in the blank.
The amount that must be repaid when the loan is due is the ________ _______ of the loan.
Maturity value