Simple Interest Chapter 16 1st Edition Exam Prep

Chapter 16

Simple Interest

True/False Questions
 

1. The interest is the amount of money borrowed. 
True    False

2. The time of a loan could be expressed in months, years, or days. 
True    False

3. The amount a bank charges for the use of money is called interest. 
True    False

4. Simple interest loans are usually more than one year. 
True    False

5. Interest = principal × rate. 
True    False

6. 18 months is the same as 1.5 years. 
True    False

7. The exact interest method represents time as the exact number of days divided by 365. 
True    False

8. The federal government likes to use ordinary interest. 
True    False

9. July 10 to March 15 is 119 days. 
True    False

10. Ordinary interest is never used by banks. 
True    False

11.  Ordinary interest results in a slightly higher rate of interest than exact interest. 
True    False

12. The U.S. Rule is seldom used in today's workplace. 
True    False

13. Principal is equal to rate divided by interest times time. 
True    False

14. Rate is equal to interest divided by the principal times time. 
True    False

15. To convert time in days, it is necessary to multiply the time in years times 360 or 365. 
True    False

16. The U.S. Rule is a method that allows the borrower to receive proper interest credit when a debt is paid off in more than one payment before the maturity date. 
True    False

17. In the U.S. Rule the first step is to calculate interest on the total life of the loan. 
True    False

18. In the U.S. Rule, the partial payment first covers the interest and the remainder reduces the principal. 
True    False

19. Ordinary interest is required by all banks. 
True    False

20. Interest is the cost of borrowing. 
True    False

21. In calculating interest in the U.S. Rule from the last partial payment, the interest is subtracted from the adjusted balance. 
True    False

Multiple Choice Questions
 

22. Interest is equal to: 
A. Principal × rate divided by time
B. Principal divided by rate × time
C. Principal × time
D. Principal × rate × time
E. None of these

23. The amount charged for the use of a bank's money is called: 
A. Principal
B. Interest
C. Rate
D. Time
E. None of these

24. Simple interest usually represents a loan of: 
A. One month or less
B. One year or less
C. Two years or less
D. Six months or less
E. None of these

25. Federal Reserve banks as well as the federal government like to calculate simple interest based on: 
A. Exact interest, ordinary interest
B. Using 30 days in each month
C. Using 31 days in each month
D. Exact interest
E. None of these

26. A note dated August 18 and due on March 9 runs for exactly: 
A. 230 days
B. 227 days
C. 272 days
D. 203 days
E. None of these

27. A $40,000 loan at 4% dated June 10 is due to be paid on October 11. The amount of interest is (assume ordinary interest): 
A. $503.00
B. $2,500.00
C. $546.67
D. $105.33
E. None of these

28. Interest on $5,255 at 12% for 30 days (use ordinary interest) is: 
A. $52.55
B. $55.25
C. $5.26
D. $5.25
E. None of these

29. Given interest of $11,900 at 6% for 50 days (ordinary interest), one can calculate the principal as: 
A. $1,428,005.70
B. $4,128,005.70
C. $1,428,05.70
D. $1,420.70
E. None of these

30.  Interest of $1,632 with principal of $16,000 for 306 days (ordinary interest) results in a rate of: 
A. 10%
B. 12%
C. 12 1/2%
D. 13%
E. None of these

31. Which of the following is not true of the U.S. Rule? 
A. Calculate interest on principal from date of loan to date of first payment
B. Allows borrower to receive proper interest credits
C. Can use 360 days in its calculations
D. Can involve more than one payment before maturity date
E. None of these

32. The U.S. Rule: 
A. Is used only by banks.
B. Is never used by banks
C. Allows borrowers to receive interest credit
D. Is hardly used today
E. None of these

33. At maturity, using the U.S. Rule, the interest calculated from the last partial payment is: 
A. Subtracted from adjusted balance
B. Added to beginning balance
C. Subtracted from beginning balance
D. Added to adjusted balance
E. None of these

34. The number of days between Aug. 9 and Jan. 3 is: 
A. 145
B. 144
C. 147
D. 148
E. None of these

35. Jill Ley took out a loan for $60,000 to pay for her child's education. The loan would be repaid at the end of eight years in one payment with interest of 6%. The total amount Jill has to pay back at the end of the loan is: 
A. $88,008
B. $80,800
C. $88,800
D. $28,800
E. None of these

36. A note dated Dec. 13 and due July 5 runs for exactly: 
A. 11 days
B. 161 days
C. 204 days
D. 347 days
E. None of these

37. Janet Home went to Citizen Bank. She borrowed $7,000 at a rate of 8%. The date of the loan was September 20. Janet hoped to repay the loan on January 20. Assuming the loan is based on ordinary interest, Janet will pay back how much interest on January 20? 
A. $188.22
B. $187.18
C. $189.78
D. $187.17
E. None of these

38. Joan Roe borrowed $85,000 at a rate of 11 3/4%. The date of the loan was July 8. Joan is to repay the loan on Sept. 14. Assuming the loan is based on exact interest, the interest Joan will pay on Sept. 14 is: 
A. $86,860.68
B. $1,860.68
C. $1,886.53
D. $86,886.53
E. None of these

39. Joe Flynn visits his local bank to see how long it will take for $1,200 to amount to $2,100 at a simple interest rate of 7%. The time is (round time in years to nearest tenth):
A. 9.2 years
B. 11.1 years
C. 10.7 years
D. 17.1 years
E. None of these

40. Matty Kaminsky owns a new Volvo. His June monthly interest is $400. The rate is 8 ½%. Matty's principal balance at the beginning of June is (use 360 days): 
A. $65,740.85
B. $64,470.85
C. $65,704.85
D. $56,470.85
E. None of these

41. Joyce took out a loan for $21,900 at 12% on March 18, 2013, which will be due on January 9, 2012. Using ordinary interest, Joyce will pay back on Jan. 9 a total amount of: 
A. $2,167.10
B. $24,068.10
C. $24,038.40
D. $2,138.40
E. None of these

42. Janet took out a loan of $50,000 from Bank of America at 8% on March 19, 2012, which is due on July 8, 2012. Using exact interest, the amount of Janet's interest cost is: 
A. $5,018.44
B. $2,561.44
C. $5,261.44
D. $5,216.44
E. None of these

43. Jim Murphy borrowed $30,000 on a 120-day 14% note. Jim paid $5,000 toward the note on day 95. On day 105 he paid an additional $6,000. Using the U.S. Rule, Jim's adjusted balance after the first payment is: 
A. $25,000
B. $28,891.67
C. $1,108.33
D. $26,108.33
E. None of these

44. Christina Hercher borrowed $50,000 on a 90-day 8% note. Christina paid $3,000 toward the note on day 40. On day 60 she paid an additional $4,000. Using the U.S. Rule, Christina's adjusted balance after the first payment is: 
A. $1,008.89
B. $48,008.89
C. $47,444.44
D. $44,744.44
E. None of these

45. Sandra Gloy borrowed $5,000 on a 120-day 5% note. Sandra paid $500 toward the note on day 40. On day 90 she paid an additional $500. Using the U.S. Rule, her adjusted balance after the first payment is: 
A. $4,527.87
B. $4,725.87
C. $4,725.70
D. $4,527.78
E. None of these

46. Banks and other financial institutions sometimes calculate simple interest based on:

A. Exact interest method

B. Using 30 days for each month

C. Using 366 days in the year

D. Bankers rule, ordinary interest

E. None of these

47. With interest of $1,832.00 and a principal of $16,000 for 206 days, using the ordinary interest method, the rate is:

A. 20%

B. 12%

C. 2%

D. 10%

E. None of these

48. The number of days between May 20 and November 22 is:

A. 197

B. 206

C. 186

D. 183

E. None of these

49. Sue Gastineau borrowed $17,000 from Regions Bank at a rate of 5.5% to open her lingerie shop. The date of the loan was March 5. Sue hoped to repay the loan on September 19. Assuming the loan is based on ordinary interest, Sue will pay back how much in interest expense?

A. $467.50

B. $541.25

C. $514.25

D. $506.46

E. None of these

50. On May 17, Jane took out a loan for $33,000 at 6% to open her law practice office. The loan will mature the following year on January 16. Using the ordinary interest method, what is the maturity value due on January 16?

A. $34,342

B. $34,320

C. $34,323.62

D. $34,254

E. None of these

Short Answer Questions
 

51. 1. Adjusted balance
2. Banker's rule
3. Exact interest
4. Ordinary interest
5. Interest
6. Maturity value
7. Principal and interest
8. Principal
9. Simple interest formula
10. U.S. Rule
A. Consumer groups against it
B. Amount due on due date
C. Principal times rate times time
D. 365 days
E. Maturity value
G. Result of applying the U.S. Rule
H. Partial payment must be applied to interest first
I. Amount of money borrowed
J. 360 days
K. Cost of borrowing

52. Round to nearest cent:
  
A. _____________
B. _____________ 

53. Round to nearest cent:
  
A. _____________
B. _____________ 

54. Use ordinary interest:
  
A. ____________
B. ____________
C. ____________ 

55. Use exact interest. Round to nearest cent:
  
A. ____________
B. ____________
C. ____________ 

56.   
Find the adjusted balance (principal) using the U.S. Rule (360 day) after the first payment. 

57. Round to nearest cent or hundredth percent as needed:
   

58. Round to nearest cent or hundredth percent as needed:
   

59. On May 19, Bette Santoro borrowed $3,000 from Resse Bank at a rate of 12½%. The loan is to be repaid on October 8. Assuming the loan is based on exact interest, what is the total interest cost to Bette? 

60. Ron Tagney owns his own truck. His June interest is $210. The current rate of interest is 11%. Assuming a 360-day year, what was Ron's principal balance at the beginning of June? (Round to nearest cent.) 

61. Jones of Boston borrowed $40,000 on a 90-day 10% note. After 60 days, Jones made an initial payment of $6,000. On day 80, Jones made an additional payment of $7,000. Assuming the U.S. Rule, what is the adjusted balance of the first payment? Use 360 days. 

62. Round all answers to the nearest cent. Woody's Café’s real estate tax of $1,110.85 was due on November 1, 2014. Due to financial problems, Woody was unable to pay his café’s real estate tax bill until January 15, 2015. The penalty for late payment is 8 1/4% ordinary interest. (A) What is the penalty Woody will have to pay and (B) what will Woody pay on January 15? 

63. Round all answers to the nearest cent. Angel Hall borrowed $82,000 for her granddaughter's college education. She must repay the loan at the end of nine years with 9¼% interest. What is the maturity value Angel must repay? 

64. Round all answers to the nearest cent. Amy Koy met Pat Quin on Sept. 8 at Queen Bank. After talking with Pat, Amy decided she would like to consider a $9,000 loan at 10 1/2% to be repaid on Feb. 17 of the next year on exact interest. Calculate the amount Amy would pay at maturity under this assumption. 

65. Round all answers to the nearest cent. Lou Valdez is buying a truck. His monthly interest is $155 at 10 1/4%. What is Lou's principal balance after the beginning of November? Use 360 days. DO NOT round the denominator in your calculation. 

66.    

67.    

68.    

69.    

70. Use ordinary interest:
   

71. Use ordinary interest:
   

72. Use exact interest:
   

73. Use exact interest:
   

74. Given: a 12% 90-day $4,000 note. Find the adjusted balance (principal) using the U.S. rule (360 days) after the first $800 payment on the 40th day. 

75. Given: 11% 120-day $9,000 note. Find the adjusted balance (principal) using the U.S. Rule (360 days) after the first payment on the 65th day of $1,000. 

76. Solve:
   

77. Solve:
   

78. Solve:
   

79. Solve:
   

80. Jane Smith took out a loan for $40,000 to pay for her child's education. The loan would be repaid at the end of eight years in one payment with interest of 12%. What is the total amount Jane has to pay back at the end of the loan? 

81. Abby borrowed $3,000 at 12 3/4% on Sept. 10. The loan is due on Jan. 29. Assuming the loan is based on ordinary interest, how much will Abby pay on Jan. 29? 

82 Bill Roe visits his local bank to see how long it will take for $1,000 to amount to $1,900 at a simple interest rate of 12 1/2%. Can you provide Bill with the solution to his problem in years? 

83. Molly Joy owns her own car. Her June monthly interest was $205. The rate is 13 1/2%. Find out what Joy's principal balance is at the beginning of June. Use 360 days. (Do not round denominator in calculation.) 

84. Alice took out a loan for $19,500 at 13 1/2% on March 4, 2013, which will be due on
January 14, 2014. Using ordinary interest, what will be the interest cost and what amount will Alice pay back on January 14, 2014? 

85. Bruce Seem took out the same loan as Alice, but his terms were exact interest. What is the difference in interest, and what will Bruce pay back on January 14, 2014? 

86.  Ben Young borrowed $5,000 on April 19 from Reliance Bank at a rate of 6.75%. Ben must repay the loan on December 16 of the same year. Assuming the loan is based on exact interest, what is the total interest cost?

87. Rochelle Destin bought a new Buick Lucerne. Her monthly January interest was $194.00. The current rate of interest is 9%. Assuming a 360-day year, what was Rochelle’s balance at the beginning of January?

88. Joe and Kathy Graczak borrowed $132,000 for their son’s four-year college education. They must repay the loan at the end of 10 years. With 4.25% on their parent’s PLUS loan, what is the maturity value Joe and Kathy must repay?

89. Tom borrowed $150,000 for his son Jeff’s law school tuition at the University of Mississippi. Tom received a rate of 3.75% for 5 years. Using 360 days in a year, what is the maturity value of the loan?

90. Calculate the following:

Principal: Rate: Time: Simple Interest:

$55,000 6.25% ??? $5,156.25