UNIT 3 To 5
UNIT 3 To 5
UNIT 3 To 5
Interest rate
Interest rate is rate a lender charges you to borrow money. It's typically expressed as an annual
percentage rate (APR), which refers to the yearly cost of interest on borrowed credit.
For example, if you borrow $3,000 over a 12-month contract with a 10% APR, you would pay
$300 in interest.
However, if you borrowed the same amount over the same period with a 15% APR, your cost of
interest would be $450. Your interest rate is calculated by the lender based on your individual
circumstances, including your credit rating and affordability. If you have an excellent credit
rating, you will likely be offered a much lower APR compared to someone with a poor or bad
credit rating. This is because a low credit score implies the individual is a greater risk to lend to.
To illustrate this, a business received a 3-month note with face value of Br 20,000. The notes
earn annual interest rate of 5%. Then the interest is computed as;
Interest = Br 20, 000 x 5% x 3/12= Br250
Had the note be a 90 days note, the interest is computed as;
Interest = Br 20, 000 x 90/360 x 5% = Br250
Loan amount
The amount you borrow can have a significant impact on your cost of credit. In most cases, the
more you borrow the greater cost of interest. Let's say you borrowed $10,000 over a 12-month
contract with a 10% APR. Your total cost of interest would $1,000. But if you were to borrow
$5,000 over the same period with the same APR, you would only pay $500 in interest, reducing
the cost of your loan by half.
Term length
Spreading your repayments over a longer period can be an effective way to reduce your monthly
cost. However, borrowing money over an extended term is usually more expensive in the long
run, as the cost of interest increases over time. So, while a shorter term length may mean your
monthly payments are a little higher, the overall cost of your loan could be considerably less.
Fees
These vary from lender to lender and can include anything from late payment charges to settlement fees.
Fees are a charge or payment for professional services a sum paid or charged for a privilege:
Fees and costs associated with different credit options may include:
Account servicing fees: the receipt of company due to render of service by business or
individual. For example: individual is deposit of money in bank
Credit purchase fees; is the amount fee that receive by individual for purchase when early
payment of product.
Late payment fees: is the type of receive fee that receive by individual due to penalize of
payment.
Loan establishment fees: - Also called 'application', 'up-front', 'start-up' or 'set-up' fees. An
establishment fee is a one-off payment when you start your loan. If you are not charged an
establishment fee, you may pay higher on going fees.
Withdrawing from a foreign Automatic Teller Machine (i.e. the ATM of a lending
institution other than your owns. These types of payment that receive by company due to
receive of service charge of the bank.
Cost
A cost is an expenditure required to produce or sell a product or get an asset ready for normal use.
In other words, it’s the amount paid to manufacture a product, purchase inventory, sell
merchandise, or get equipment ready to use in a business process.
Profit is defined as the amount gained by selling a product, which should be more than the cost
price of the product. It is the gain amount from any kind of business activity. In short, if the
selling price (SP) of the product is more than the cost price (CP) of a product, then it is considered
as a gain or profit. It describes the financial benefit obtained if the revenue from the business
activity exceeds the taxes, expenses, and so on, which are involved in sustaining Profit Formula
if the selling price of the commodity is more than the cost price, then the business has gained its
profit. Therefore formula to calculate the profit is;
Profit = Selling Price – Cost Price
When the selling price lesser than the cost price, it is termed as loss business activities.
If a non interest bearing note is a bond, the issuer is selling the bond at a deep discount and
committing to pay back the face value of the bond on its maturity date. This approach allows the
issuer to avoid making periodic interest payments on the bond. Instead, all cash payment
obligations by the issuer are concentrated at the maturity date of the bond.
This is the difference between the face value of the note and its discounted present value.
Calculate the present value of the note, discounted based on the market rate of interest. The
same approach is used by the issuer of the note, except that interest expense is recorded, and the
value of a note payable liability account is gradually increased until such time as the debt is paid
off at its face value.
After you have collected the information about your debts, you should take a look at your
monthly budget. Write down your monthly income after taxes and subtract your rent/ mortgage
payment from this amount and other monthly expenses such as childcare, student loan payments,
insurance, utilities, and groceries. Once you have subtracted all of your expenses, calculate how
much you have left to pay off your debts.