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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
$4,300
Face Value = __________
$4,015
$4,300 - $285
Proceeds = __________
$285
Discount = __________
$4,300
Maturity Value = __________

Using the Terminology

Simple discount note of $12,500.


Interest is $750
$12,500
Face Value = __________
$11,750
$12,500 - $750
Proceeds = __________
$750
Discount = __________
$12,500
Maturity Value = __________

2 of 2

Objective 2

Find the bank discount and the


proceeds.

Bank Discount

Bank Discount = Maturity Value x Discount Rate x Time


Simple Discount Note

B = MDT
Maturity Value

$2000
6% discount rate
90 days

Discount Rate

$30 discount

Time (years)

$1970 proceeds

B = $2000 x .06 x 90/360


B = $30

Sample

Determine the bank discount:


Simple Discount Note

B = MDT
B = $800 x .045 x 120/360
B = $12

$800
4.5% discount rate
120 days
12
$______
discount

Proceeds

Proceeds = Maturity Value - Bank Discount


Simple Discount Note

P=M-B
P = $2000 - $30
P = $1970

$2000
6% discount rate
90 days
$30 discount
$1970 proceeds

Sample

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 ofnote
2
Simple discount
with a face value of

$14,250.
The banker discounts the 8 month note at
8%.

Discount = _______
Proceeds = _______
B = 14,250 x 0.08 x 8/12 =
P = 14,250 760 =

B = MDT
P=M-B
$760

$13,490

Compute Discount and


Proceeds
#4, page 333 2 of 2

Face Value: $1250


Discount Rate: 11%
Time: 150 days

Discount = _______
Proceeds = _______
B = 1,250 x 0.11 x 150/360 = 57.29
P = 1,250 57.29 = $1,192.71

B = MDT
P=M-B

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 rate
180 days
$166.75 discount
$5633.25 proceeds

Computing Face Value to


Achieve Desired Proceeds

Proceeds received by
the borrower.

P
M
1 DT
Time of the loan (years)

Discount rate used by the bank (%)

Simple Discount Note


$5800
$5,971.69
5.75% discount rate
180 days
$________
171.69 discount
$________
proceeds
5800

5800
180
1 .0575

360

M $5,971.69

Computing Face Value

P
M
1 of 2
1 DT

#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.
M

120,000
80
1 0.095
360

120,000

1 0.021111

120,000
$122,587.97
0.9788888

Computing Face Value

P
M
2 of 2
1 DT

#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.
720,000
M
45
1 0.12
360

720,000

1 0.015

720,000
$730,964.47
0.985

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

Simple discount note

$3,000 @ 7% for 10 months.

$3,000 @ 7% for 10 months.

I = PRT

B = MDT

I = 3000 x .07 x 10/12

B = 3000 x .07 x 10/12

I = $175

B = $175

Borrower gets $__________.


3000

Borrower gets $__________.


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

Simple discount note

$3,000 @ 7% for 10 months.

$3,000 @ 7% for 10 months.

$3,000

$2,825

Compute Effective Interest


Rate
Simple interest note

Derived from: I = PRT

I
R
PT
R

$3,000 @ 7% for 10 months.


$3,000
Simple discount note
$3,000 @ 7% for 10 months.
$2,825

175
10
2825
12
R 0.0743
R 7.4%

Sample

Simple Interest Note

$3000
5.8%
75 days

Simple Discount Note

$3000
5.8%
75 days

B = 3000 x .058 x 75/360


B = 36.25

I
R
PT
36
.25
36.36
25
.25
R
75
2963
PT
.
75

T
2963.75
360
R 5.87%
Effective Rate
of Interest

Compute Effective Interest


#26 part (b), page 335
Rate 1 of 1
R

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.

10,964.47
R
45
720,000
360

R 0.1218

I
PT

R 12.2%

Practice

MathXL: Ch 8 Section 3 Homework