Money is Not Free to Borrow!

Transcription

1 Money is Not Free to Borrow! People can always find a use for money, so it costs to borrow money How Much does it Cost to Borrow Money? Different places charge different amounts at different times! But they usually charge this way: As a percent (per year) of the amount borrowed It is called Interest

2 Example: Borrow $1,000 from the Bank Alex wants to borrow $1,000. The local bank says "10% Interest". So to borrow the $1,000 for 1 year will cost: $1,000 10% = $100 In this case the "Interest" is $100, and the "Interest Rate" is 10% (but people often say "10% Interest" without saying "Rate") Of course, Alex will have to pay back the original $1,000 after one year, so this is what happens: Note: This is showing a full year loan, but banks often want you to pay back the loan in small monthly amounts, and they also charge extra fees too! This is the idea of Interest... paying for the use of the money.

3 VOCABULARY TO KNOW There are special words used when borrowing money, as shown here: PRINCIPAL BORROWER LENDER INTEREST REPAYMENT INTEREST RATE Alex is the Borrower, the Bank is the Lender The Principal of the Loan is $1,000 The Interest is $100 AND the interest rate is 10% The important part of the word "Interest" is Intermeaning between (you see inter- in words like interior and interval), because the interest happens between the start and end of the loan.

4 More Than One Year... What if Alex wanted to borrow the money for 2 Years? Simple Interest If the bank charges "Simple Interest" then Alex just pays another 10% for the extra year. Simple interest means just what it says simple. Equation for Simple Interest: Alex pays Interest of ($1,000 10%) x 2 Years = $200

5 Example: Alex borrows $1,000 for 5 Years, at 10% simple interest: Interest = $1,000 10% x 5 Years = $500 Plus the Principal of $1,000 means Alex needs to pay $1,500 after 5 Years There is a formula for simple interest I = Prt I = interest P = amount borrowed (called "Principal") r = interest rate t = time Don t borrow too much it might become a heavy burden! Like this: Example: Jan borrowed $3,000 for 4 Years at 5% interest rate, how much interest is that? I = Prt I = $3,000 5% 4 years I = I = $600

6 So. In review.. Simple Interest (I) amount of money paid or earned for the use of money Principal (p) the amount of money borrowed or invested Rate (r) the annual interest rate written as a decimal Time (t) the amount of time in years (If time is given in months, it must be written as a fraction. For example, 6 months would be 6/12 years or 0.5 years.) On the next slide you have some problems. Here are a couple of samples. Show all of your work! Joe deposits $200 in an account at his bank. The interest rate is 6%. How much interest will he earn in three (3) years if he doesn t take any money out? I = prt I = (200)(.06)(3) I = $ Joe will earn $36 in interest. So, when Joe takes out his money at the end of 3 years, he will actually have $ Jill needs to borrow $500 for only nine months. The bank charges 5½% interest. How much will Jill owe the bank? (remember it time is in month, you must put in the fraction of a YEAR! I = prt I = (500)(.055)(.75) I = $ (Money must always be rounded to the hundredth place) I = $20.63 Now add the $20.63 to the $500 borrowed. The amount Jill owes to the bank is $

7 1. Ryan deposited $2000 in a savings account at the interest rate of 4% per year. How much simple interest will he earn in 5 years? 2. Mr. Garcia borrowed $4000 from his cousin Susan at the rate of 8% per annum. He repaid the amount after two years. How much did he repay? 3. Tracy put $2,500 into an investment yielding 4.5% annual interest. She left eh money in for 8 years. How much interest does she get in those 8 years? 4. Anna invested $2,500 at an annual rate of 5%. How long will it take until Anna earns $1,125 in interest? 5. Jerry invested $1500 in an account that paid him 8.25% simple interest. What will the balance of his account be after 6 years? 6. Mr. Peterson wrote a check of $7,820 to pay off a loan. This loan was given to him at a rate of 5% simple interest for 3 years. How much money did he borrow originally? 7. If $3,840 is invested in an account at 5% annual simple interest, how long will it take the account balance to grow to $4,800? 8. Principal (p) = Rate = 7%. Time (t) = 8 years. Calculate the interest. 9. Jack deposited $1400 in his bank account. After 3 years, the account is worth $1,694. Find the simple interest rate the account earned. 10. Principal = 360, Interest = $17.55, Time = 9 months. Calculate the Interest Rate.