P8 Consumer Math
P8 Consumer Math
P8 Consumer Math
Percent of Change
Simple Interest
Compound Interest
Consumer Loans
PERCENT
• Future value:
A = P(1 + rt)
A – future value, P – principal,
r – annual interest rate, t – time in years
SOLVE.
1. If you deposit $200 in a savings account
paying 6% annual interest, how much
interest will be earned if you leave it there
for 5 years?
2. How much must you deposit in an account paying 8% annual interest computed using the
simple interest formula if you earn $800 in 2 years?
3. You plan to take a trip to the Grand Canyon
in 2 years. You wish to buy a certificate of
deposit for $1,200 that you will cash in for
your trip. What annual interest rate must
you obtain on the certificate if you need
$1,500 for your trip?
COMPOUND INTEREST
A = 250(1.06)15 = $599.14
A P 1
n
Compounded quarterly for 3 years:
4 3
.06
A 250 1 $298.90
4
Compounded quarterly for 15 years:
4 15
.06
A 250 1 $610.80
4
SELECTING THE BEST CHOICE:
• Your rich Auntie Clause has passed away and
bequeathed you $20,000. Because you are cautious with
your investments, you decide to buy a 5-yr Certificate of
Time Deposit to save for the future. Prudent Savings &
Loan has a CD with a yearly interest rate of 5%
compounded quarterly, whereas First Friendly National
Bank has a CD with a rate of 4.8% compounded monthly.
Which institution gives you the best return on your
money?
SAVING FOR COLLEGE
• Jack and Jill just gave birth to Jackill, their son. They decide to make a deposit into a taxfree
account to use later for Jackill’s college education. The account has an annual interest rate
of 8% compounded quarterly. How much must they invest now so that Jackill will have
$50,000 at age eighteen?
WARM-UP
1. Cameron finds herself in a bind and is willing to make a deal. She found the perfect prom
dress but it costs $550!!! Mr. Ike is willing to loan her the money with the condition that
she pay it back in 6 months at payments of $100. What interest rate would Mr. Ike be
earning on his money?
18.2%
2. Decide which is the better investment:
a) 7% compounded yearly or
b) 6.8% compounded monthly
B
• If you invested $500 earning 4.5% interest compounded quarterly, how much money would
you have after 20 years?
$1,223.64
USING THE LOG FUNCTION TO SOLVE FOR T
• Exponent Property of the Log Function:
log y x log y
x
10
log
9 nt
log log(1.0075)
log(1.0075) nt
9
14.1 nt
William will have the money he needs at the
end of the 15th month.
FINDING THE INTEREST RATE
• A foundation wants to create a scholarship for a
deserving student in which the scholarship amount
of $500 would come from the interest earned on a
scholarship fund. The foundation has $1,200 in
the fund and want to find an annual interest rate
that is compounded monthly. What rate of interest
would they need in order to have the $500 for the
scholarship in 4 years?
12 4
r
1700 1200 1
12
48
17 r
1
12 12
1 1
17 48 r
48 48
1
12 12
r The foundation will
1.007282781 1
12 need to get an 8.74%
interest rate.
0.0874 r
11.3 CONSUMER LOANS
• Closed-ended credit/ installment loans – loans having a fixed number of equal payments.
(furniture, appliances)
• Open-ended credit – loans where even though you are making payments you may also be
increasing the loan by making further purchases. No set number of payments. (Department
Store charge accounts, Credit cards)
INSTALLMENT LOAN
• Often called the add-on interest method
PI P(1 rt )
monthly payment or
n n
1. Ben buys $2800 worth of furniture. He pays $400 down and agrees to pay the balance at
6% add-on interest for 2 years. Find
a) the total amount to be repaid and
b) the monthly payment.
Solution
Amount to be repaid = P(1 + rt)
= $2400(1 + (.06)2)
= $2688
b) Monthly payment = $2688/24 24 payments
= $112
• Even though the simple interest is easy to compute with the add-on interest method, the
actual interest you are paying on the outstanding balance is higher than the stated interest
rate. Think about it.
WARM-UP/CLASSWORK
CREDIT CARDS & OPEN-ENDED CREDIT
• The unpaid balance method computes finance charges (interest) on the balance at the end
of the previous month.
• This method also uses the simple interest formula I=Prt, however,
P=previous month’s balance + finance charge + purchases made – returns – payments
R is the annual interest rate and t = 1/12
EXAMPLE: UNPAID BALANCE METHOD
The table shows a VISA account activity for a 2-month
period. If the bank charges an apr of 18% annually with
the interest calculated on the unpaid balance each month,
find the missing quantities in the table.
2 $877.50 $1000
• Solution
Month Unpaid Finance Purchases Payment Unpaid
Balance Charge Balance
at Start at End