Chapter 3 - 5090(1)

# Chapter 3 - 5090(1) - WHAT DO INTEREST RATES MEAN Chapter 3...

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WHAT DO INTEREST RATES MEAN?

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1. Simple Loan 2. Fixed Payment Loan 3. Coupon Bond 4. Discount Bond

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SIMPLE LOAN
Simple Loan A simple loan is when the lender provides the borrower with an amount of funds, which must be repaid to the lender at the maturity date along with an additional payment(s) for the interest.

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Simple Loan Loan Principal The Amount of funds the lender provides to the borrower Maturity Date The date the loan must be repaid Interest Payment The amount that the borrower must pay the lender for the use of the loan principal (generally paid throughout the loan period) Simple Interest Rate The interest payment divided by the loan principal The percentage of principal that must be paid as interest Generally expressed as an annual rate
If you desire a \$100 loan and the interest rate will be 10%, how much will you pay if the loan is 1, 2, 3, n years? 1 st Year 100*10% = \$10 +\$100 = \$110 2 nd Year 110*10% = \$11 +\$110 = \$121 3 rd Year \$121*10% = \$12 + \$121 = \$133 n th \$100 x (1+i) n This shows \$133 three years from today is worth \$100 today This is the concept of present value Simple Loan

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Simple Loan What is the present value of \$250 to be paid in two years if the interest rate is 15%?
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