ORIE 3150 class notes Sept 30 2010

ORIE 3150 class notes Sept 30 2010 - ORIE 3150 Sept 30 2010...

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ORIE 3150 Sept. 30, 2010 1. Cash = Currency + Checks. A check is cash. A $20 bill is also cash. 2. Cash payments do not always equal expenses. My water bill comes in the mail. It says that my water expense last quarter was $120. I can pay the full amount by mailing in a check for $120, then: Sept. 30, 2010 Water Expense 120 Cash 120 Or, I might not have enough cash on hand, so I only pay $60 now: Sept. 30, 2010 Water Expense 120 Water Payable 60 Cash 60 3. Please learn the material as we go in a timely manner. We cannot cram a month’s worth of instruction into the day before the next prelim. 4. Please use the procedures shown in class to solve problems. Time Value of Money Interest is the cost of borrowing money or the return from lending money. If you lend someone $5 today and you receive $6 one year from now, the difference of $1 represents the interest paid on the account borrowed. Interest rates are usually stated as annual percentage rates. If you borrow $100 from the bank at 6% per annum (per year), you must pay the bank $100 + $6 (with the $6 coming from the calculation $6 = 0.06 × $100) or a total of $106 at the end of the year. The interest rate applicable in an economic transaction is affected by the perceived risk or probability of non-payment in the transaction. A bank may lend money to a low risk customer at 7.5%, but a high risk person may have to borrow money at the pawn shop at 36% or more. Simple Interest . Simple interest is interest earned only on the original principal. The formula for calculating simple interest is n i P I Where I = simple interest P = principal (amount borrowed or lent) i = interest rate per year n = number of years or fraction thereof Simple interest is not used too often in business. It is used for short term notes and for a few bank loans. Most of the time, compound interest is used.
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Compound Interest Compound interest is interest that is earned on both principal and interest. When interest is compounded, interest is earned on the original principal and on the interest accumulated for the preceding periods.
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