WARM - UP

1. What is 15% of 60?

2. 18 is 24% percent of what number?
3. 96 is what percent of 320?
CONSUMER MATHEMATICS

Percent of Change
Simple Interest
Compound Interest
Consumer Loans
PERCENT

The school district receives funds from

several sources. The 2008 – 2009 budget
is $442,300,000. The federal government
contributes $33,500,000 of that amount.
What percent does the federal government
contribute to the school district’s budget?
 PERCENT OF CHANGE

new amount  base amount

percent of change =
base amount

• A+ University has decided to raise tuition

from $7,965 to $8,435 for next year. What is
the percent of increase in the tuition?
HONEST ABE’S AUTO

Abe’s auto is having a blow-out sell. Abe

advertises that all cars are sold at 5%
markup over the dealer’s cost. Abe has a
new pinto for sale for $18,970. On the
internet you find out that the dealer cost on
this model is $17,500. Is Abe being honest
in his advertising?
MUSIC SALES

Jamin’ Jude Records reported that music

downloads increased 28.24% from 2005 to
2006. If the number of downloads for 2006
were 524,785 how many downloads were
there in 2005?
INTEREST
• Simple Interest:
I = Prt
I – interest earned, P – principal,
r – interest rate, t – time (years)

• 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. If you deposit $500 paying 4.5% annual

interest, how much money will you have
in 3 months?
SOLVE.
3. Assume that you plan to save $1000 over 2
years to put down on a car. Your bank offers a
certificate of deposit (CD) that pays 3% annual
interest computed using simple interest. How
much must you put in this CD now in order to
have the desired $1000 in 2 years?
WARM-UP
1. Due to a slump in the economy, Anna’s mutual fund has dropped by 12% from last quarter
to this quarter. If her fund is now worth $11,264, how much was her fund worth last
quarter?

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

• Let’s say you get $250 for your birthday and

you decide to deposit the money in a savings
account that earns 6% interest compounded
monthly. How much money would you have
in 3 years?
End of year 1: 250(1 + .06(1)) = $265
End of year 2: 265(1.06) = $280.90
End of year 3: 280.90(1.06) = $297.75
 WHAT IF YOU LEFT THE MONEY IN FOR
15 YEARS?

Short  cut : A  P(1  r ) t

A = 250(1.06)15 = $599.14

• So what if the bank compounded the interest quarterly instead of annually?

COMPOUND INTEREST FORMULA
nt
 r
n – n time periods per year

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

William wants to buy his partners’ half of their

game business, Pawnisher’s. Laney and Erica
have agreed to sell for $3,000. William
presently has $2,700 and found an investment
that will pay him 9% annual interest
compounded monthly. In how many months
will William be able to buy his partners out?
 nt
 .09 
3000  2700 1  
 12 
 10 
10 log    nt log(1.0075)
 1.0075 nt 9
9
 10 

 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

PI 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.

Month Unpaid Finance Purchases Payment Unpaid

Balance Charge Balance
at Start at End
1 $432.56 $325.22 $200

2 $877.50 $1000
• Solution
Month Unpaid Finance Purchases Payment Unpaid
Balance Charge Balance
at Start at End

1 $432.56 $6.49 $325.22 $200 $564.27

2 $564.27 $8.46 $877.50 $1000 $450.23

Unpaid balance times (.18)(1/12) or .015

FINANCE CHARGE/UNPAID BALANCE
METHOD
• Most open-end lenders use a method of calculating finance charges called the average
daily balance method. It considers balances on all days of the billing period and comes
closer to charging card holders for credit they actually utilize.
THE AVERAGE DAILY BALANCE METHOD
1. Add the outstanding balance for your account for each day of the previous month.
2. Divide the total in step 1 by the number of days in the previous month to find the average
daily balance.
3. To find the finance charge, use I = Prt, where P is the avg. daily balance, r is the annual
interest rate, and t is the number of days in the previous month divided by 365.
EXAMPLE: AVERAGE DAILY BALANCE
The activity on a credit card account for one billing period is given on the next slide. If the
previous balance was $320.75, and the bank charges 16.8% annually, find the average
daily balance for the next billing (April 3) and the finance charge for the April 3 billing
using the average daily balance method.
EXAMPLE: AVERAGE DAILY BALANCE
• March 3 Billing date
• March 12 Payment $250.00
• March 17 Car repairs $422.85
• March 20 Food $124.80
• April 1 Clothes $64.32
 SOLUTION
 First we make a table of the running balance

Date Running Balance

March 3 $320.75
March 12 $320.75 – $250.00 = $70.75
March 17 $70.75 + $422.85 = $493.60
March 20 $493.60 + $124.80 = $618.40
April 1 $618.40 + $64.32 = $682.72
Take the number of days of the balance times the balance.

Date Balance Days Product

March 3 $320.75 9 $2886.75
March 12 $70.75 5 $353.75
March 17 $493.60 3 $1480.80
March 20 $618.40 12 $7420.80
April 1 $682.72 2 $1365.44
Find the sum of the daily balances by adding the last column = $13507.54.

Sum of daily balances

Average daily balance =
Days in billing period
$13507.54

31
 $435.73.
Finance charge = ($435.73)(.168)(31/365) = $6.22.