Ch. 8 Finance

Example Fixed Interest Commercial Loan, fixed interest.

"This shows us an example of how the principal payment stays consistent each month at $2000. The interest, however, is highest at the beginning of the loan repayment period and declines throughout the term, or the time it is to be paid back. Since we are consistently paying down the principal each month, the amount on which the interest is calculated decreases, as shown in the decreasing monthly interest payments."

Bridge Loans

A temporary loan provided to an individual or business when one property is for sale and another property has already been purchased. › Example: Moving from a two-bedroom to a four-bedroom home as a family has more children. Often a home has been purchased, but the original home has not been sold. The bridge loan provides temporary monies until the original home is sold.

Hy Potenuse bought a $10,000 Treasury bill at 0.115% discount for 13 weeks. A.How much does Hy pay for the bill? ● B.What is the effective rate of interest? ● C.Who is the borrower?

A. D = Sdt = ($10,000) (0.00115)(91/265) = $2.87 Proceeds = $10,000 - $2.87 = $9997.13 A.What is the effective rate of interest? ER = $2.87 $9,997.13 (91/265) x 100 = $2.87 x 100 = $9,997.13(0.2493150685) $2.87 x100 = 2492.43 (0.001151)(100) = 0.1151%

Jill Kramer borrowed $25,000 to pay for a startup business. Jill must repay the load at the end of 5 months in 1 payment with a 6% simple interest rate. A. How much interest does Jill repay? B. What is the total amount that Jill must repay in 5 months?

B. Payback = ($25,000) principal + $625 interest = $25,625 A. Interest = principal, rate, time = ($25,000)(0.06)(5/12) = $625

Bank Discount

Bank discount is an amount of interest that is deducted from the amount you wish to borrow. D= Sdt

Effective Rate example

Bank quotes 8 percent annual rate. Bank wants monthly payments. So it compounds monthly. Where i= interest rate per period (found by dividing the quoted rate by the number of compounding periods) and n= Number of corresponding periods per year.

Manipulating Simple Interest

If we know any three of the four variables, we can find the fourth. Solving for principal

Example: 3-Month Treasury Bill

In this example, we are looking at a 3 month T-bill. We invest $10,000. The book uses an example from 3/16/2012, when the interest rate was .095%, or .00095 shown above. What we see here is the US treasury has use of $9997.63 of your $10,000 for 91 days, then returns your entire $10,000. Or working backwards, shows an effective annual interest rate of .0951%.

Simple Interest (Examples)

Interest on $1,000 borrowed for one year at 8%. Interest on $1,000 borrowed for six months at 8%

Simple interest & Principal amount stated

Is the amount of interest earned on the principal amount stated. Is the base amount that we borrow or save. Where I=Prt

Compound interest

Is the interest that is earned or charged on both the principal amount and on the accrued interest that has been previously earned or charged. ›What is your bank balance on a $1,000 deposit earning 4% per year after three years?

Bank Discount cont.

Proceeds are amount bank actually provides to the borrower after deducting the discount from the amount intended to be borrowed.

Federal Treasury Bills

There are situations where the entrepreneur can actually perform the function of a bank. What better source of investing than to lend the Government of the United States money for a short period of time. The Government issues discounted treasury bills in denominations of $10,000 for three months, six months, and one year.

BD 4

To continue this discussion, using the calculation above, we know that the amount borrowed when you take into account the bank discount is $1086.96. We get this by using the 1-.08 or 8% x 1 to get .92. We actually pay $86.96 in interest on this $1000 loan. To calculate the effective annual interest rate, we work back from the .0896 x 100 to arrive at 8.7%. Look through these same calculations for the 2nd example of borrowing $2000 at a rate of 8% for 90 days. We arrive at $2040.25 total amount borrowed, then working backwards, we can determine an effective annual interest rate of 8.16%.

CI Cont.

We can bypass the multiple individual steps in computing compound interest by using the following compound interest formula to determine future value: Where FV= Future Value PV= Present value, or current principal amount, i= Interest rate earned per period of compounding, n= Number of compounding periods that the money will be invested. FVF= Future value factor = (1 + i)^n

Fixed Principal Commercial Loans

› A loan where the principal payment remains the same for the life of the loan. › Interest rates are normally prime plus a percentage based on the risk of a particular business enterprise.

CI : EFFECTIVE RATE:

› The stated or quoted rate is the rate of interest that is listed, normally on an annual basis, and it disregards compounding. › The effective annual rate is the actual rate that is paid by the borrower or earned by the investor after compounding is taken into consideration.

Simple Interest Cont. Total Due on Simple Interest Loans:

›The total amount due (maturity amount) is equal to principal plus interest. Where S= Total amount due (maturity amount)