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CH 8 Simple Interest Section 3

This document discusses simple discount notes and how to calculate key terms related to them such as face value, proceeds, discount, and effective interest rate. It defines simple discount notes as loans where the borrower receives less than the face value of the note upfront and must repay the full face value at maturity. The document provides examples of calculating discount as a percentage of face value times the discount rate times the time period, and calculating proceeds as face value minus discount. It also discusses how to find the effective interest rate to compare simple interest notes to simple discount notes.

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Wee Yong Kee
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Download as PPT, PDF, TXT or read online on Scribd
76 views

CH 8 Simple Interest Section 3

This document discusses simple discount notes and how to calculate key terms related to them such as face value, proceeds, discount, and effective interest rate. It defines simple discount notes as loans where the borrower receives less than the face value of the note upfront and must repay the full face value at maturity. The document provides examples of calculating discount as a percentage of face value times the discount rate times the time period, and calculating proceeds as face value minus discount. It also discusses how to find the effective interest rate to compare simple interest notes to simple discount notes.

Uploaded by

Wee Yong Kee
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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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

Face Value = __________
Proceeds = __________
Discount = __________
Maturity Value = __________
$4,300
$4,300 - $285 $4,015
$285
$4,300
Using the Terminology 2 of 2
Simple discount note of $12,500.
Interest is $750

Face Value = __________
Proceeds = __________
Discount = __________
Maturity Value = __________
$12,500
$12,500 - $750 $11,750
$750
$12,500
Objective 2
Find the bank discount and the
proceeds.
Bank Discount
Bank Discount = Maturity Value x Discount Rate x Time

B = MDT
Maturity Value
Discount Rate
Time (years)
Simple Discount Note
$2000
6% discount rate
90 days
$30 discount
$1970 proceeds
B = $2000 x .06 x 90/360
B = $30
Sample
Determine the bank discount:
Simple Discount Note
$800
4.5% discount rate
120 days
$______ discount
B = MDT
B = $800 x .045 x 120/360
B = $12
12
Proceeds
Proceeds = Maturity Value - Bank Discount

P = M - B
Simple Discount Note
$2000
6% discount rate
90 days
$30 discount
$1970 proceeds
P = $2000 - $30
P = $1970
Sample
Determine the proceeds:
Simple Discount Note
$800
4.5% discount rate
120 days
$12 discount
$_____ proceeds
P = M - B
P = $800 - $12
P = $788
788
Compute Discount and Proceeds 1 of 2
Simple discount note with a face value of
$14,250.
The banker discounts the 8 month note at
8%.
Discount = _______
Proceeds = _______
B = MDT
P = M - B
B = 14,250 x 0.08 x 8/12 = $760
P = 14,250 760 = $13,490
Compute Discount and Proceeds 2 of 2
#4, page 333
Face Value: $1250
Discount Rate: 11%
Time: 150 days
Discount = _______
Proceeds = _______
B = MDT
P = M - B
B = 1,250 x 0.11 x 150/360 = 57.29
P = 1,250 57.29 = $1,192.71
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
DT
P
M

=
1
Proceeds received by
the borrower.

Discount rate used by the bank (%)

Time of the loan (years)

Simple Discount Note
$5800
5.75% discount rate
180 days
$________ discount
$________ proceeds
( )
|
.
|

\
|

=
360
180
0575 . 1
5800
M 69 . 971 , 5 $ = M
$5,971.69
171.69
5800
Computing Face Value 1 of 2
#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.
DT
P
M

=
1
360
80
095 . 0 1
000 , 120

= M
021111 . 0 1
000 , 120

=
9788888 . 0
000 , 120
= 97 . 587 , 122 $ =
Computing Face Value 2 of 2
#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.
DT
P
M

=
1
360
45
12 . 0 1
000 , 720

= M
015 . 0 1
000 , 720

=
985 . 0
000 , 720
= 47 . 964 , 730 $ =
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
$3,000 @ 7% for 10 months.
Simple discount note
$3,000 @ 7% for 10 months.
I = PRT
I = 3000 x .07 x 10/12
I = $175
B = MDT
B = 3000 x .07 x 10/12
B = $175
Borrower gets $__________. Borrower gets $__________. 3000 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
$3,000 @ 7% for 10 months.
Simple discount note
$3,000 @ 7% for 10 months.
$3,000 $2,825
Compute Effective Interest Rate
Derived from: I = PRT
PT
I
R =
Simple interest note
$3,000 @ 7% for 10 months.
Simple discount note
$3,000 @ 7% for 10 months.
$3,000
$2,825
12
10
2825
175

= R
0743 . 0 = R
% 4 . 7 = R
Sample
Simple Interest Note
$3000
5.8%
75 days

Simple Discount Note
$3000
5.8%
75 days


PT
I
R =
360
75
75 . 2963
25 . 36

= R
% 87 . 5 = R
B = 3000 x .058 x 75/360
B = 36.25
PT
R
25 . 36
=
T
R

=
75 . 2963
25 . 36
Effective Rate
of Interest
Compute Effective Interest Rate 1 of 1
#26 part (b), page 335
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.

PT
I
R =
360
45
000 , 720
47 . 964 , 10

= R
1218 . 0 = R % 2 . 12 = R
Practice
MathXL: Ch 8 Section 3 Homework

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