Scribd Logo
Upload

Welcome to Scribd!

  • 23 views

    Simple Interest Dalesandro

    Uploaded by

    Frince Dela Gente Salas
    This document discusses simple interest, add-on interest, and finance charges on credit cards. It defines simple interest using the formula I=PRT, where I is interest, P is principal, R is interest rate, and T is time. Add-on interest calculates simple interest and adds it to the loan amount, spreading payments evenly over the term. Finance charges use an average daily balance method, calculating interest daily based on the actual balance each day over the billing period.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Simple Interest Dalesandro

    Uploaded by

    Frince Dela Gente Salas
    23 views9 pages
    This document discusses simple interest, add-on interest, and finance charges on credit cards. It defines simple interest using the formula I=PRT, where I is interest, P is principal, R is interest rate, and T is time. Add-on interest calculates simple interest and adds it to the loan amount, spreading payments evenly over the term. Finance charges use an average daily balance method, calculating interest daily based on the actual balance each day over the billing period.

    Original Title

    simple_interest_dalesandro.ppt

    Copyright

    © © All Rights Reserved

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document discusses simple interest, add-on interest, and finance charges on credit cards. It defines simple interest using the formula I=PRT, where I is interest, P is principal, R is interest rate, and T is time. Add-on interest calculates simple interest and adds it to the loan amount, spreading payments evenly over the term. Finance charges use an average daily balance method, calculating interest daily based on the actual balance each day over the billing period.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    23 views9 pages

    Simple Interest Dalesandro

    Uploaded by

    Frince Dela Gente Salas
    This document discusses simple interest, add-on interest, and finance charges on credit cards. It defines simple interest using the formula I=PRT, where I is interest, P is principal, R is interest rate, and T is time. Add-on interest calculates simple interest and adds it to the loan amount, spreading payments evenly over the term. Finance charges use an average daily balance method, calculating interest daily based on the actual balance each day over the billing period.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 9

    Simple Interest

    Section 5.1
    Introduction
    • When you deposit money into a savings at
    a bank you expect the bank to pay you for
    the privilege of saving your money with
    them. This is extra money is called
    interest.
    • Interest is also paid by a borrower to a
    lender for the privilege of using money.
    • In this chapter we study the methods of
    computing interest.
    Simple Interest Formula
    • The simple interest I on a principal (present
    value) P at an annual interest rate r for t years is
    I = Prt.
    • The balance or future value F is given by
    F = P + I = P + Prt = P(1 + rt).
    • Example: calculate the simple interest on $1000
    deposit at an annual interest rate of 5% for 2
    years.
    • ANSWER: I = ($1000)(.05)(2)=$100.
    • Also the future value of the investment is
    F = P + I = $1000 + $100 = $1100.
    Add – on interest
    • Add – on interest is a way of calculating
    interest used by car dealerships, appliance
    stores, furniture stores etc.
    • The lender computes the simple interest
    on the loan amount and adds that on to
    the loan amount so that the interest is
    distributed equally over each payment.
    Add – on interest example
    • A $1200 flat-screen TV is financed over a 2 year
    period with 12% add-on interest. Find the
    monthly payment.
    • First calculate the simple interest on the loan:
    $1200 x 0.12 x 2 = $288.
    • The future value of the loan is
    $1200 + $288 = $1488.
    • Since the loan is for 2 years, there will be 24
    monthly payments. Thus the monthly payment is
    $1488/24=$62
    Finance Charges
    • Everyone who has a credit card knows
    that if they do not pay-off their balance
    each month they will be assessed a
    monthly finance charge. How is this
    computed???
    • Credit card companies use the average
    daily balance. The lender charges
    interest for the actual number of days an
    amount was owed on the bill.
    Example of average daily balance
    • Let’s look at George W. Bush’s credit card
    statement. The APR is 21%.
    • He’s carrying a balance of $287.84.
    • On June 12 he got an oil change and for
    his car. This cost $45.60.
    • He made a payment of $150 on June 18.
    • He then got gasoline for $20 on June 22.
    • Then he got some PS-2 games for $78.50
    on July 3.
    Table summarizing the credit card
    history

    Time period Day Daily Balance


    s
    June 10 – June 11 2 $287.84 $287.84
    June 12 – June 17 6 $287.84 + $45.60 $333.44
    June 18 – June 21 4 $333.44 – $150.00 $183.44
    June 22 – July 2 11 $183.44 + $20.00 $203.44
    July 3 – July 9 7 $203.44 + $78.50 $281.94
    Doing the calculations
    • Avg. Daily Balance =
    [2(287.84)+6(333.44)+4(183.44)+11(203.44)+7(281.94)]/
    (2 + 6 + 4 + 11 + 7)
    ADB = 7521.50/30 = $250.72
    • Instead of using the annual percentage rate (APR), we
    use the daily percentage rate for this account which is
    .21/365. Also the time will be measured in days hence
    t = 30. Use the simple interest formula to compute the
    finance charge.
    • Finance charge = 250.72 x (.21/365) x 30 = $4.33
    • The new balance on W’s credit card will be $281.94 +
    $4.33 = $286.27

    You might also like