1,Chapter 7 Applications of Simple Interest,7.4 Demand Loans,2,Common Terms And Conditions,A demand loan is a loan for which repayment, in full or in part, may be required at any time, or made at any time.The financial instrument representing a demand loan is called a demand note.,3,The interest rate on demand loan is normally not fixed for the duration of the loan but fluctuates with market conditions.,4,The method of counting days is to count the first day but not the last.Interest on a demand loan is normally paid on the same day each month -statement date. It is calculated using the simple-interest method based on the daily closing loan balance and on the interest rate in effect each day.,5,The two most common demand loan arrangements are:,A revolving or operating loanA fix-payment (blended-payment) loan.,6,Revolving Loans (Operating Loan),Revolving loan: A loan whose outstanding balance can fluctuate within a maximum credit limit.The revolving loan gives borrowers the flexibility to borrow additional funds at their discretion and to reduce their debt whenever extra funds are available.,7,Interest is calculated using the simple-interest method based on the daily closing loan balance and on the interest rate in effect each day.,8,Example 7.4 A Calculation Of Interest On A Revolving Loan,On March 20 Hanks Cycle Shop received an initial advance of $10,000 on its revolving demand loan. On the 15th of each month, interest is calculated (up to but not including the 15th) and deducted from Hanks current account. The floating rate of interest started at 9.75% and dropped to 9.5% on April 5. On April 19, another $10,000 was drawn on the line of credit. What interest was charged to the current account on April 15 and May 15?,9,Interval Principal RateMarch 20- April 5 $10.000 9.75%April 5-April 15 $10.000 9.5%April 15-April 19 $10.000 9.5%April 19-May 15 $20.000 9.5%,Solution:,10,March 20- April 5the exact number of days is (31-20+1)+(5-1)=16 days r=9.75% p=$10,000 I=prt,11,April 5-April 15the exact number of days is 10 days. R=9.5% p=$10,000 I=prt $42.74+$26.03=$68.77,The interest charged to the current account was $68.77 on April 15.,12,April 15-April 19the exact number of days is 4 days r=9.5% p=$10,000 I=prt,13,April 19-May 15the exact number of days is 30-19+1+15-1=26 days R=9.5% p=$20,000 I=prt $10.41+$135.34=$145.75,the interest charged to the current account was $145.75 on May 15.,14,Revolving Loan Repayment Schedule,A loan repayment schedule is a table presenting a record of interest charges, loan payments, and outstanding balances.,15,Figure 7.1 Revolving Loan Repayment Schedule,date,number,of,days,interest,rate,interest,interest,accrued,payment,(advance),principal,portion,balance,(1),(2),(3),(4),(5),(6),(7),(8),16,A row is entered in the schedule when any of the following three events takes place:,A principal amount is advanced or repaid;The interest rate changes;Interest (and possible principal) is paid on a statement date.,17,Column (1) Record the date on which payments are made, the interest rate changes, and principal amounts are advanced to the borrower.Column (2) Enter the number of days in the interval ending on the date in column (1).Count the starting date but not the last .,18,Column (3) Enter the interest rate that applies to the interval in column (2). On the date of a change in the interest rate, the entry will be the old rate since the days in column (2) refer to the period up to but not including the date in column (1).,19,Column (4) Enter the interest charges (I=prt) for the number of days in column (2) at the interest rate in column (3) on the balance in column (8) of the preceding line.,20,Column (5) Enter the cumulative total of unpaid or accrued interest as of the current date. Accrued interest is interests due, but not yet paid or received. This amount is the interest just calculated in column (4) plus any previously accrued but unpaid interest from the preceding line.,21,Column (6) Entered the amount of of any payment.A loan advance is enclosed in brackets to distinguish it from a loan payment.,22,Column (7)Principal portion=payment-accrued interest.Put a single stroke through the accrued interest in column (5) as a reminder that it has been paid and should not be carried forward to the next period.,23,Column (8) The new loan balance is the previous lines balance reduced by any principal repaid or increased by any principal advanced per the column (7) entry.,24,Example 7.4 B Repayment Schedule: Revolving Loan,The bank of Montreal approved a $50,000 line of credit on a demand basis to Tanyas Wardrobes to finance the stores inventory. Interest at the rate of prime plus 3% was calculated and charged to Tanyas current account at the bank on day 23 of each month. The initial advance was $25,000 on,