CHAPTER 13 REVIEW SECTION 13.1 – The Time Value of Money Simple Interest Formula: For a principle amount P, annual interest rate r, and time t in years, the simple interest is I=Prt Future Value for Simple Interest: For a principle amount P, annual interest rate r, and time t in years, the future value, A, is A=P1+rt Future Value for Compound Interest: For a principle amount P, annual interest rate r, m compounding periods per year, and interest compounded a total of n times, the future value A is A=P1+rmn Interest Earned by Compounding Interest:
I=P1+rmn-P

Effective Annual Yield: A nominal rate, r, compounded m times per year, is equivalent to the following effective annual yield: Y=1+rmm-1

Future Value for Continuously Compounded Interest: For a principle amount P, annual interest rate r, and continuous compounding, the future value A after t years is I=Pert Interest Earned by Compounding Interest Continuously: A=Pert-P SECTION 13.2 – Consumer Credit Installment Loans * based on add-on interest. * Interest is calculated using the simple interest formula: I=Prt

Revolving Loans – payments and/or purchases change the balance throughout the billing period * Finance charges – charges beyond the price of items purchased. May include interest, an annual fee, credit insurance, and other charges. * Most revolving credit plans calculate finance charges by the average daily balance method. The interest is determined based on the average daily balance of the account, a weighted average (review Section 12.2 if necessary) of the balance on each day of the month.

SECTION 13.3 – Truth in Lending

Annual Percentage Rate (APR) – true annual interest rate – USE TABLE h= finance charge per $100 of amount financed h=finance chargeamount financed∙$100