Calculating Interest on Promissory Notes, Lecture notes of Business Ethics

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Business Math^ Promissory Notes

Section 4-

Promissory Notes-Goals

Calculate interest on interest-bearingpromissory notes Calculate interest using the exact interestmethod Calculate interest using the ordinary interestmethod Calculate the rate of interest

Usually you also have to pay for using thelender’s money. That cost is called interest. A note that requires you to pay interest iscalled an interest-bearing note

Lenders may require a borrower to depositor pledge property as security for a loan. This property is called collateral

Types of collateral that are often used tosecure loans are cars, stocks, bonds, and lifeinsurance.

The amount borrowed is the face , or principal. The date the note was signed is called the date of the note . The time for which the money is borrowed is calledthe time. The date on which the money must be repaid is the due date , or maturity date . The rate of interest to be paid is the rate of interest. The money that must be paid on the due date is the maturity value or the amount due.

On October 26, 2012, Adam borrowed$2,500 from his bank to pay for a cruise.Adam signed a 6 month promissory note at11% interest. (a) Find the amount ofinterest Adam must pay. (b) Find the totalamount he must repay to his bank when thenote is due. [Hint: Use I=PRT]

When the time of a note is shown in days,interest may be calculated by the exactinterest method. Exact interest uses a 365-day year. To find exact interest, you show the time asa fraction with 365 as the denominator. For example, you would show 74 days as74/365.

The ordinary interest method, or banker’s interestmethod is used in place of the exact interestmethod by some businesses. With this method of finding interest, a year hasonly 360 days. The 360-day year has 12 months of 30 days eachand is known as the banker’s year. It is used because it is easier to calculate with thana 365-day year.

Spencer signed a promissory note for$5,900 at 12% ordinary interest for 180days. Find the interest and the amount duehe will pay when the note is due.

Wendy must pay $320 in interest on apromissory note for $8,000 due 4 monthsfrom the date of the note. Find the rate ofinterest she will pay.

HomeworkPg 137 / 7-27odds