Chapter Four Lecture

Business Math
Chapter 4
Loans and Credit
Chapter 4: Loans and Credit
Cards
Section 4.1: Promissory Notes
Section 4.2: Discounted Promissory Notes
Section 4.3: Interest Tables
Section 4.4: Installment Loans
Section 4.5: Early Loan Repayments
Section 4.6: Annual Percentage Rates
Section 4.7: Credit Card Costs
Section 4.8: Credit Card Finance Charges
Section 4.1
Promissory Notes
Section Goals
Students will be able to calculate interest on
interest-bearing promissory notes.
Students will be able to calculate interest
using the exact interest method.
using the ordinary interest method.
Students will be able to calculate the rate of
interest.
Vocabulary
Promissory Note
Interest
Principal
Time
Rate of Interest
Exact Interest Method
Vocabulary
Interest-bearing Note
Collateral
Home Equity (loans)
Maturity Date
Maturity Value
Interest-Bearing Promissory
Notes
Written promise to pay back (IOU) with interest
within a specific period of time.
May require collateral.
Interest rates are stated as per year.
Notes
On May 8, 2004, J awad Sharon borrowed
$6,500 from his bank to buy a boat, which
he used as collateral for the loan. J awad
signed a 2-year promissory note at a 10%
interest rate. Find the amount of interest
J awad must pay. Then find the amount he
must repay when the note is due.
Check Your Understanding A
Notes
On May 8, 2004, Leslie Regis borrowed
$2,500 from her bank to pay for a cruise.
Leslie signed a 6-month promissory note at
11% interest. Find the amount of interest
Leslie must pay. Then find the total amount
she must repay to her bank when the note is
due.
Check Your Understanding B
Notes
Raanan Beilin borrowed $3,500 for 18 months
from his bank to have his house repainted.
Raanan signed a promissory note that
carried 12% interest. Find the amount of
interest Raanan must pay. Then find the
total amount he must repay to his bank on
the due date.
Usually used when the time of a note is
shown in days.
Uses a 365-day year.
Used by the United States Government,
many banks, and other businesses.
Show time as a fraction with 365 as the
denominator.
Rosa Chavez borrows $1,000 at 6% exact
interest for 85 days.
Check Your Understanding C
Ana Lopez borrows $5,000 for 75 days at 8%
exact interest. Find how much interest she
must pay on the loan and how much will be
due at maturity.
Check Your Understanding D
Albert OMalley signs a promissory note for
$3,500 for 150 days at 9% exact interest.
Find the interest he must pay and the total
amount due on the due date.
Ordinary Interest Method
Also known as the Bankers Interest
Method
Similar to exact interest method.
Uses the bankers year
360 days
12 months of 30 days
Used because it is easier to calculate than a
365-day year.
Rosa Chavez borrows $1,000 at 6% ordinary
interest for 85 days.
Check Your Understanding E
Ikuko Kimura signed a promissory note for
$5,900 at 12% ordinary interest for 180
days. Find the interest and amount due she
will pay when the note is due.
Check Your Understanding F
On May 6, Solomon Kaufman borrowed
$4,000 signing a promissory note at his
bank. The note carries 9% ordinary interest
and is due in 4 months. Find the interest and
amount due that Solomon must pay at
maturity.
Rate of Interest
Rate of Interest =
Interest for One Year Principal
Rate of Interest
Ella Stein paid $30 interest on a loan of
$1,000 for 3 months. Find the rate of
interest she paid.
Check Your Understanding G
Rate of Interest
Trish Newcomb must pay $320 in interest on
a promissory note for $8,000 due 4 months
from the date of the note. Find the rate of
interest she will pay.
Check Your Understanding H
Rate of Interest
Susilo Wahyudi paid $450 in interest on a 3-
month note for $12,000. Find the rate of
interest he paid.
Assignment
Workbook pages 46-48
Section 4.2
Discounted Promissory Notes
Section Goals
Students will be able to calculate the
interest and proceeds for discounted
promissory notes.
Students will be able to calculate the true
rate of interest on a discounted promissory
note.
Vocabulary
Bank Discount
Noninterest-Bearing Note
Rate of Discount
Proceeds
Short term loan
Usually 30, 60, or 90 days
Borrower pays interest when loan is made
Interest is deducted from the principal (face
of note)
Principal x Rate of Discount = Bank Discount
Principal Bank Discount = Proceeds
A lender discounted a $3,500 note for Risa
DeWitt at 15% interest for 3 months. Find
the proceeds of note that Risa receives.
A bank discounted a $9,600 noninterest-
bearing note for J ason Williams at 10%
interest for 9 months. Find the proceeds of
the note that J ason receives.
Yang Sun discounted her $12,800, 3-month,
noninterest-bearing note at 13% at her bank.
Find the proceeds of the note.
True Rate of Interest
If interest is paid for less than one year, you
have to find interest for one year first.
True Rate of Interest =
Interest (Bank Discount)
Actual Amount Borrowed (Proceeds)
Find the true rate of interest, rounded to the
nearest tenth of a percent, on a discounted
$3,500 note at 15% interest for 3 months.
J ulius Amani signed a $25,000 noninterest-
bearing note on March 22. He discounted
the note at 14% and paid the principal back
6 months later. He received $23,250 as
proceeds. What true rate of interest, to the
nearest tenth percent, did J ulius pay on the
note?
Your bank discounted your 4-month, $2,600,
noninterest-bearing note. The discount rate
was 12%. You received $2,496 as proceeds.
What true rate of interest, to the nearest
tenth percent, did you pay on the note?
Assignment
Workbook page 49
Section 4.3
Interest Tables
Section Goals
using simple interest tables.
Students will find the due date of a note.
Students will find the number of days
between dates.
Vocabulary
None for this section!
Simple Interest Tables
Most banks use computers of specially
programmed calculators to find
Interest
Payment amounts on loans
Use the table on page 145 of your text book.
Steps to find interest using the simple interest
tables:
1. Divide the principal by $100 to find how many
hundreds are in it.
QUICK TIP: J ust move the decimal to the left two places!
2. Find the number in the chartMatch your interest
rate and time.
3. Multiply the number from the chart by the number of
hundreds in the principal.
Use the chart on page 145 of your textbook.
Find the interest on $850 for 20 days at 12%.
Find the interest on $1,320 for 40 days at
10%.
Due Dates
If the time is shown in months, you can count the
number of months ahead to find the due date.
The due date is the same day in the month you
stop with.
If it is the last day of the month, it will be the last
day of the month in which the note is due.
If the time is shown in days, then you count
forward from the date of the note.
Due Dates
Thirty days has September, April, J une and
November.
All the rest have thirty-one.
Except for February, which has 28, unless its
leap year, then it has 29.
Due Dates
Find the maturity date of a 90-day note dated
J une 28.
Due Dates
Find the due date of a 3-month note dated
March 6.
Due Dates
Find the due date of a 2-month note dated
March 31.
Due Dates
Find the due date of a 60-day note dated
J anuary 15.
Days Between Dates
Find the number of days from J une 14 to
August 23.
Check Your Understanding I
Days Between Dates
Find the number of days from J anuary 28 to
March 29.
Check Your Understanding J
Days Between Dates
Find the number of days from J uly 3 to
September 1.
Assignment
Section 4.4
Installment Loans
Section Goals
installment price and finance charge on an
installment plan purchase.
number and amount of monthly payments.
interest, principal payment, and new
balance on an installment loan.
Vocabulary
Installment Plan
Down Payment
Finance Charge
Level Payment Plan
Installment Price and Finance
Charge
You are borrowing money and paying it
back in part payments.
Might have to make a down payment.
You might have to sign a contract for the
remaining balance.
Installment price is higher than cash price
because a finance charge is added.
Charge
A desktop computer system has a cash price
of $1,200. To buy it on an installment plan,
you pay $100 down and $38 a month for 36
months. Find the finance charge. By what
percent is the installment price greater than
the cash price?
Charge
You can buy a watch for $125 cash or pay $25
down and the balance in 12 monthly
payments of $9. What is the installment
price? By what percent would your
installment price be greater than the cash
price?
Charge
A digital audio player that sells for $169.95
can be bought for $20 down and $26.17 a
month for 6 months. What is the installment
price? By what percent, to the nearest tenth,
does the installment price exceed the cash
price?
Monthly Installment Payments
Sometimes you know the installment price
and down payment, but need to find the
amount of the monthly payment or the
number of months to pay.
The installment price of a set of water skis is
$190. You must pay $50 down and make
payments for 16 months. What will be your
monthly payments?
A scuba divers wetsuit costs $175 on the
installment plan. You must make a down
payment of $25 and make payments for 15
months. What will be your monthly
payments?
A refrigerator sells for $1,044 on the
installment plan. After making a down
payment of $100, you pay $59 a month.
How many months will it take to pay for the
refrigerator?
Installment Loans
Each payment is usually the same amount.
Interest due is deducted from each payment.
Remainder of payment goes toward
principal.
See page 152 of your textbook for an
example.
Installment Loans
The Winstons borrowed $500 on a one-year
simple interest installment loan at 18%
interest. The monthly payments were
$45.84. Find the amount of interest, amount
applied to the principal, and the new
balance for the first monthly payment.
Check Your Understanidng E
Installment Loans
Benito Diaz borrowed $1,000 on a one-year
simple interest installment loan at 15%
interest. The monthly payments were
$90.26. Find the amount of interest, amount
applied to the principal, and the new
balance for the first monthly payment.
Installment Loans
Lillian Dish signed a $2,500, 6-month simple
interest installment loan at 18% interest.
The monthly payments were $438.81. Find
the amount of interest, amount applied to
the principal, and the new balance for the
first two monthly payments.
Assignment
Section 4.5
Early Loan Payments
Section Goals
Students will be able to calculate finance
charges on Rule of 78 loans.
Students will be able to calculate early loan
repayment amounts on Rule of 78 loans.
Vocabulary
Rule of 78
Unearned Finance Charges
Earned Finance Charges
Finance Charge Refund
Difference in Repayment
Amounts
Rule of 78 gets it name from the fact that the sum
of numbers 1-12 (number of months in a one-year
loan) is 78.
Rule of 78 loans allocate 12/78 of the total finance
charge to the first month, 11/78 to the second, etc.
If you pay the loan off early, you will be charged
more in finance charges in the early months.
Earned and Unearned
Finance Charges
However long you have been paying on the
loan, that finance charge is earned.
If you pay the loan off early, the rest of the
finance charge is unearned.
When you pay the loan early, they consider
that the unearned interest is lost and treat it
as a refund.
Earned and Unearned
Finance Charges
Vera Goode had a $500, 12-month Rule of 78
loan. The total finance charge was $80.
Vera repaid the loan on the day the third
monthly payment was due. Find the amount
of finance charge the lender earned and the
amount that was unearned.
Earned and Unearned
Finance Charges
Mario Mineto bought a large TV and paid for it with
a 6-month Rule of 78 installment loan. The total
finance charge for the loan was $130. He decided
to repay the loan at the end of the third month.
What was the amount of his earned and unearned
finance charges?
Earned and Unearned
Finance Charges
Emily Polinski repaid a 9-month, $2,000 Rule
of 78 installment loan at the end of 6
months. The total finance charge for the
loan was $225. How much were the
lenders earned and unearned finance
charges?
Early Loan Repayments
Sy Bauer has a 12-month, $3,600 Rule of 78
installment loan. The total finance charge for the
loan is $420. The monthly installment payments
are $335. Sy has made 5 monthly installment
payments and wants to repay the balance when the
sixth payment is due. How much will Sy owe?
Lee Ivor repays a 9-month, $5,300 Rule of 78
installment loan on the day that the 6
th
monthly payment is due. The total finance
charge for the loan is $336.70. The monthly
installment payments are $626.30. How
much will Lee owe?
Rob J ewel has a 12-month, $8,400 Rule of 78
installment loan with a total finance charge
of $841.32. The monthly installment
payments are $770.11. He repays the loan
on the day that the 6
th
monthly payment is
due. How much will Rob pay to the bank?
Assignment
Workbook page 55
Section 4.6
Annual Percentage Rates
Section Goals
Students will be able to calculate the APR
on a loan.
Vocabulary
Truth in Lending Act
Annual Percentage Rate (APR)
Amount Financed
Annual Percentage Rate
(APR)
APR is usually higher than the interest rate
of your loan
Easiest way to find APR is to use the tables
like the ones on page 162 of your textbook.
To use the tables:
You need to know the number of monthly
payments
Finance charge per $100 of amount financed
Finance Charge per $100 of Amount
Financed =
Finance Charge Amount Financed
x $100
The finance charge for a 6-month, $1,200
installment loan is $72. Find the annual
percentage rate on the loan.
Melina Cavaletti borrowed $800 on a loan
with a finance charge of $78. Find the
finance charge per $100 of the amount
financed.
Chris Mathers borrowed $250 on a 12-month
loan that had a finance charge of $20. Find
the finance charge per $100 of the amount
financed and the annual percentage rate.
Assignment
Section 4.7
Credit Card Costs
Section Goals
Students will be able to identify important
information found on credit card statements.
Students will be able to verify transactions
on credit card statements.
Students will be able to calculate the cost of
using a credit card.
Vocabulary
Transactions
Credits
Previous Balance
Late Fee
Over-the-Limit Fee
More Vocabulary
Credit Limit
Cash Advance
Statement Closing Date
Grace Period
Unauthorized Purchases
Information on a Credit Card
Statement
Transactions include
Purchases
Payments made
Any fees charged
Shows the previous balance from the last
statement
Can borrow money from the company.
Statement
Midori Masami received the statement shown
on page 166 of your textbook. What is her
new balance? How much of the new
balance must she repay by the due date?
What is the highest balance Midori is
permitted to have?
Statement
Look at Midoris statement on page 166.
What is the due date for paying the balance?
What was the amount of her last payment?
Statement
Look at Midoris statement shown on page
166. What is the periodic interest rate she
will pay on any unpaid balance? What is the
total amount of her new purchases and fees
for the month?
Verify Transactions
Compare sales slips with credit card
statement.
Look for purchases that were not made by
you.
Double check amounts with sales slips
Double check payments made and fees.
If you find errors, contact your company
immediately, before you send payment.
Verify Transactions
Midori compared her sales slips with the statement
transactions. She found sales slips for 2/1, 2/5,
2/10, and 2/15 and noted that the amounts were
correct. She didnt find a sales slip for the 2/17
transaction and knew she did not buy anything in
Springfield during February. The 2/28 payment
listed agreed with her checkbook register and she
knew her check was sent late. She also verified
that her membership fee was due. What is
Midoris correct new balance? (Use the statement
on page 166.)
Verify Transactions
When Vondel Bradshaw checked his credit
card statement, he found that a sales slip
dated 3/2 for $12.49 was posted as $12.99.
He also found that a purchase for $56.29
dated 3/19 was unauthorized. If the new
balance on the statement was $491.23, what
is the correct new balance?
Verify Transactions
Sonja Erickson checked her credit card
statement and found a sales slip for $48.99
that was unauthorized. She also found that a
sales slip for $17.89 had been listed as
$18.79. If the new balance shown on her
statement was $208.66, what is her correct
new balance?
Cost of Credit Card Use
Calculate the total cost of your credit card
(fees and finance charges)
Compare to other cards to get the best value
for your money.
Danny OHare switched from the Clarion credit card
to the First Bank credit card in April. When he
did, he paid an annual membership fee of $50. He
also paid a balance transfer fee of 2% of his old
cards $420 balance. During the next 12 months,
he paid an average monthly finance charge of
$33.80 on his unpaid balance. What was Dannys
total cost for using his credit card for the year?
Lili Farve opened a SkyMall credit card in
J anuary. She paid a membership fee of $45
and a balance transfer fee of $29 when she
moved the balance of her old card to her
SkyMail card. During the year, she paid
these finance charges: J an., $2.68; Feb.,
$7.28; J une, $9.22; Oct. $3.98. What was
the total annual cost of the card to Lili?
Derwood Kants credit card statement for
May showed a membership fee of $25, a
late fee of $29, a finance charge of $3.15,
and an over-the-limit fee of $16. What was
the total cost of the card to Derwood in
May?
Assignment
Section 4.8
Credit Card Finance Charges
Section Goals
Students will be able to calculate finance charges
using the previous balance method.
using the adjusted balance method.
using the average daily balance method.
Students will be able to calculate the finance
charge on cash advances.
Vocabulary
Periodic Rate
Previous Balance Method
Adjusted Balance Method
Average Daily Balance Method
Cash Advances
Interest is charged on the balance in the account
on the last billing date of the previous month.
Any payments, credits or new purchases in the
current month are not included
Finance Charge = Previous Balance x Periodic Rate
New Balance = Previous Balance +
(Finance Charge + New Purchases + Fees)
(Payments + Credits)
Laura Solons card company uses the previous
balance method to find the balance and to
figure the finance charge. Find the finance
charge for the month and the new balance.
Use the statement on page 173.
J ohn Oldens credit card statement for April
showed a previous balance of $309.20, new
purchases and fees of $128.45, and
payments and credits of $75. The cards
annual percentage rate is 24%. What is
J ohns finance charge for April and new
balance using the previous balance method?
Sandra Minoros credit card company uses the
previous balance method to calculate
finance charges. Its APR is 21%. Sandras
credit card statement for J une showed a
previous balance of $488.32, new purchases
and fees of $264.89, and payments and
credits of $300. What is Sandras finance
charge for J une and her new balance?
Subtracts payments and credits during the month
form the balance at the end of the previous month.
Purchases and fees made during the current month
are not included in the adjusted balance.
Adjusted Balance = Previous Balance (Payments
+ Credits)
Finance Charge = Adjusted Balance x Periodic Rate
New Balance = Adjusted Balance + Finance Charge
+ New Purchases + Fees
Suppose that Lauras card company uses the
adjusted balance method to find the balance
and figure the finance charge. Find the
finance charge for the month and the new
balance.
Yossi Hussein uses a credit card that carries
an 18% APR and uses the adjusted balance
method for calculating finance charges.
Yossis statement listed these facts:
previous balance, $310.33; purchases,
$219.67; fees, $75; payments, $150; credits,
$62.69. What is Yossis finance charge and
new balance?
Ricky Lucianos credit card statement showed
a previous balance of $166.98, purchases
and fees of $201.88, and payments and
credits of $75. If his card carried an APR of
21% and used the adjusted balance method
to calculate finance charges, what is Rickys
finance charge and new balance?
Average Daily Balance
Method
Most common method used for calculating
the finance charge.
The dates used are the post dates.
Subtracts payments and credits of that day
from the beginning balance.
New purchases and fees are added to the
beginning balance.
Method
Daily Balance = Beginning Balance (Payments +
Credits) + (Purchases + Fees)
Average Daily Balance = Sum of Daily Balances
Number of days in billing period
Finance charge = Average Daily Balance x Monthly
Periodic Rate
New Balance = Beginning Balance (Payments +
Credits) + (Finance Charges + New Purchases +
Fees)
Method
Suppose that Lauras card company uses the
average daily balance method to figure the
finance charge. Find the finance charge for
the month and the new balance.
Post Date Transaction
Balance at
End of Day
Number of
Days
Sum of
Daily
Balances
10/1 (Bal.) 0.00 225.60 1 225.60
Method
J ade Hameeds credit card statement for
August showed these items: 8/1, previous
balance, $108.15; 8/5, purchase, $56.89;
8/10, purchase, $61.88; 8/14, purchase,
$190.23; 8/25, payment, $150. J ades card
company uses a 1.6% monthly periodic rate
and the average daily balance method. What
is J ades finance charge for August and the
new balance?
Method
The credit card company statement of Gloria
Herrera for J anuary listed these items: 1/1,
previous balance, $89.27; 1/5, purchase,
$159.34; 1/9, purchase, $108.45; 1/24,
payment, $150; 1/28, fee, $25. The card
company uses the average daily balance
method and a daily periodic rate of
0.000575. What is Glorias finance charge
for J anuary and what is her new balance?
Cash Advances
Borrowing money from credit card company.
Charged a finance charge sometimes costs more
than on purchases and usually has a one-time
fee.
No grace period allowed.
Interest = Cash Advance x Daily Periodic Rate x
Term of Advance in Days
Finance Charge = Interest + Fees
Payoff Amount = Cash Advance + Finance Charge
Cash Advances
Benito Moya borrowed $500 for 20 days on
his credit card using a cash advance. His
card company charged a cash advance fee
of $29 and a daily periodic interest rate of
0.0573%. What was the total finance charge
on the cash advance?
Cash Advances
Vera Millay used her credit card in an ATM
to borrow $200 on a cash advance. Her card
company charged a cash advance fee of $5
and a daily periodic interest rate of
0.0487%. If Vera paid the loan back at the
end of 25 days, what was the total finance
charge on the cash advance?
Cash Advances
Akbar Assam borrowed $150 on a cash
advance from his credit card company. The
card company charged a cash advance fee
of $20 and a daily periodic interest rate of
0.058% for the 35 days the loan ran. What
total amount did Akbar need to pay off the
loan?
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