Simple Interest Section 5.1 Short term loans or investments use simple interest computed at percentperyear of the principal. I = Prt Future Value is Principal and Interest combined. FV = P + I = P + Prt = P(1 + rt) Businesses use this type of loan for seasonal or inventory equipment, operating costs or tax payments. Exercise1: Borrow
$120,000 for 6 months @ 7.9% interest rate.
What is owed at the end of 6 months? (Hint:
convert to years) P = $120,000 r = .079 t = .5year Total owed = FV = $120,000 + $4740 = $124,740 Note: Variables that represent money are: P, FV, I Variables that are not money: r, t. This book uses 365 days/ year. Exercise2: How much must be invested now @ 6.2% so that we will have $5000 in 4 years? FV = $5000 r = .062 t= 4years Find P $5000 = P[1 + (.062)(4)]
$5000 Addon Interest: Simple interest charge that is equally distributed over each payment. Used at car dealerships, furniture stores and types of financing with equal payments. Exercise3: Buy a car for $14,000. Down Payment of $3000. Finance the balance @11% for 4 years. How much are the monthly payments? $14,000  $3000 = $11,000 Loan amount FV = $11,000[1 + (.11)(4)] = $15,840 Total owed at the end of 4 years. $15,840 _{ } 48 Payments = $330/month Average daily balance (ADB): amount owed for each day averaged by intervals. Average Daily Balance = S (Daily Balance)(# of days in each interval)/ Total # of Days Credit cards use ADB to process their Finance charges: Exercise 4: #33. From March 1 through March 31 (31 days). Pervious balance = $157.14, annual rate = 21% Given: Mar. 5 Payment $25 Mar. 17 Tools $36.12
ADB = 4($157.14) + 12($132.14) + 15(168.26)
= $152.8432258 Finance charge is simple interest on ADB I = ($152.8432258) (.21)(31/365) = $2.73 Finance charge for the 31 day statement with the described transactions = $2.73 Back to Finance, Geometry and Logic Main Page Back to the Survey of Math Ideas Home Page Back to the Math Department Home Page email Questions and Suggestions
