2. Unit 1 – Interest & Credit
Paying Interest Charges and Earning
Interest Income
Financial institutions borrow and lend
money. When you deposit money in a
financial institution, you are lending the
financial institution money for a period of
time. The financial institution pays
interest to you for borrowing your
money.
In turn, the financial institution lends
your money to individuals who need it.
These individuals are charged interest
for the money they borrow.
3. Unit 1 – Interest & Credit
Paying Interest Charges and Earning
Interest Income
The interest rate investors receive
when they deposit their money with a
financial institution is less than the
interest rate they must pay when they
borrow from the same financial. In this
way, the financial institution makes a
profit on these transactions.
5. Unit 1 – Interest & Credit
Simple Interest
What is interest?
A fee paid for borrowing money or
earned for lending money.
What is simple interest?
The amount of money paid or earned
as calculated as a percentage of the
principal using the formula
I = Prt
6. Unit 1 – Interest & Credit
Simple Interest I = Prt
I amount of interest earned or payed
P amount of principal or loan or deposit
r rate per year – expressed as a decimal
t time in years
What affect will there be on the interest if . . . .
. . . the amount of time is increased?
. . . the principal was doubled?
. . . the interest rate was halved?
7. Unit 1 – Interest & Credit
Simple Interest Triangle
I = Prt
P=I
rt
R=I
Pt
t=I
Pr
8. Unit 1 – Interest & Credit
Example Problem:
Ross deposited
$400, earning
simple interest
of %4 per year.
Calculate the
simple interest
at the end of
one year and at
the end of 5
months.
9. Unit 1 – Interest & Credit
Example Problem:
What interest
rate does
Phoebe have to
get from a bank
if she has $5000
to invest and
she wants to get
$5500 back
after five years?
10. Unit 1 – Interest & Credit
Simple Interest
Online mental math activity
http://www.aaamath.com/B/g84_six1.htm
14. Unit 1 – Interest & Credit
Compound Interest
An investment earns compound interest
when the interest from each time period is
added to the principal and earns interest in
subsequent time periods.
Because the principal grows, the interest
earned grows as well. Compounding makes
a significant difference in the final amount an
investment is worth. Although compounding
interest earns you more money when you
are investing, compounding interest costs
you more when you borrow.
16. Unit 1 – Interest & Credit
Compound Interest
What is compound interest?
Interest which is calculated not only on
the initial principal but also the
accumulated interest of prior periods.
A = P(1 + r ) nt
n
17. Unit 1 – Interest & Credit
Compound Interest r nt
A = P(1 + n )
A total amount, including principal and interest
P the amount of principal, loan, or deposit
r rate expressed as a decimal
n the number of compounding periods per
year
t time in years
What affect will there be on the total amount (A)
if . . .
. . . the amount of time is increased?
. . . the number of compounding periods
doubled?
18. Unit 1 – Income & Debt
Example Problem:
Monica wants to invest $1000 at 7½% for 3
years compounded quarterly. What will be the
total value of her investment at the end.
19. Unit 1 – Interest & Credit
Rule of 72
The rule of 72 states that to find the
approximate time that an amount of money
will take to double, divide 72 by the rate (r).
To find the rate needed for money to
double in a specific time frame, you divide 72
by the number of years.
For example, $100 invested at 6%
compounded annually would double to $200
in approximately 12 years
(72 ÷ 6 = 12).
20. Unit 1 – Interest & Credit
Example Problem:
How long does it take for an investment to
double if the rate is 12%?
21. Unit 1 – Interest & Credit
Compound Interest Activity
Step 1 Each student roles a die 4
times and records the
numbers rolled.
Step 2 Repeat Step 1 three more
times to have a total of 4
trials.
Step 3 Determine the compound
interest formula for each trial
as outlined below.
22. Unit 1 – Interest & Credit
Compound Interest Activity - continued
Step 4 Write down your 4 formulas on the
board.
Step 5 Look at all formulas and predict
which one will result in the most
amount of money (A).
Step 6 Determine the total amount A for
your own 4 formulas.
29. Unit 1 – Interest & Credit
Credit Cards
A credit card is a system of
payment named after the small
plastic card issued to users of the
system. In the case of credit cards,
the issuer lends money to the
consumer (or the user). A credit
card allows the consumer to 'revolve'
their balance, at the cost of having
interest charged.
33. Unit 1 – Interest & Credit
Credit Cards
Interest Rates
• per annum
• daily rate, yearly rate
What is the daily What is the yearly
interest rate if the rate if the daily
annual interest rate is interest rate is
19%? 0.049315%?
34. Unit 1 – Interest & Credit
Credit Cards
Calculating Interest Charges
If a credit card statement is not paid in full
by the date given, the customer will be
charged interest. The interest charge is
determined by calculating the number of
days since the purchase and multiplying it
by the daily interest rate.
On Jan. 5, Monica made $400 in purchases on
her credit card. Her monthly statement issued
Jan 20 was received and Monica did not pay it.
Her next monthly statement issued on Feb. 20
was received. What will be her interest charges?
35. Unit 1 – Interest & Credit
Credit Cards
Calculating Minimum Payments
When a statement is received, a minimum
payment will be shown on the statement.
Generally it is 5% of the closing balance or
$10, whichever is greater.
Alex’s monthly statement Calculate Alex’s
shows a previous balance of minimum payment for
$963.45. During the month his new balance.
Alex made a payment of $500
and purchases goods totaling
$626.95. Assume the interest
charges for the month are
$17.50. Calculate his new
balance.
37. Unit 1 – Interest & Credit
Video Credit Cards: Living With Plastic
38. Unit 1 – Interest & Credit
Credit Cards Newscast Assignment
Many actual news stories in recent years have
described the growth in credit card use among
young people. They have noted that there have
been large increases in:
• The number of credit cards the typical young
person has.
• The dollar balance carried on these cards.
• The interest paid on these cards.
• The number of credit problems (e.g.
bankruptcies) young people experience.
Your task is to develop and videotape a mock
newscast on the subject. Each group must submit a
script before any newscasts are video taped.
40. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Loans
41. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Loans
There are many different types of loans;
car loans, personal loans, mortgages to
name a few. Loans allow a consumer
to borrow money from a financial
institution with the understanding that
the money will have to be paid back
over time with interest.
42. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Terms:
•Principal: the amount of money
borrowed
•Term: the amount of time during which
the conditions of the loan are in effect
•Amortization Period: the length of time
required to pay the loan in full
•Finance Charges: the interest charged
by the lender
•APR: the annual percent rate interest
charge by the lender
43. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Loan Terminology
44. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Loans
The cost of borrowing (finance charges) from a
financial institution depends on many factors:
•the interest rate
•the term
•the conditions (the way the loan is to be
repaid)
45. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Loans
The interest rate charged also depends on many
factors:
•the amount of money you borrow (generally,
the greater the amount of money borrowed,
the lower the interest rate)
•the borrower’s past financial record, present
financial situation, and the amount of security
they can offer
46. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Loans
A financial institution usually requires that the
product purchased by the loan be used as
collateral or security. In the event that the loan is
not repaid, the lending institution can seize the
product and resell it to recoup the borrowed
money.
Shopping for a loan is no different from shopping
for other products. A consumer should approach
more than one lending institution. One institution
may offer a better rate and/or better terms than the
other.
47. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Calculating Loan Payments
In order to calculate your monthly payment, a
loan payment calculator or set of tables is used.
Your text, on page 59 includes such a table
(amortization table). Knowing the rate and the
term, you can calculate how much has to be
repaid each month per $1000 borrowed.
48. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Jesse requires a personal
loan of $10 000 for home
renovations. He takes a
three year loan at a fixed
rate of 10.25%. How much
must Jesse pay each
month? How much will he
pay for the loan? How
much interest will Jesse
have paid at the end of
three years?
49. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Amy, from Hamiota, want a
new computer which costs
$2400 plus taxes. She
decides to take a personal
loan for a term of 2 years at
a fixed rate of 11.75%. How
much must Amy pay each
month? How much will she
pay for the loan? How
much interest will Amy have
paid at the end of two
years?
50. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
51. Unit 1 – Income & Debt
Outcome 1-4: Solve problems involving personal loans.
Textbook Assignment:
Page 62 - 63
Questions 1 - 5
