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CH 10] Calculating Business 10-1

CHAPTER 10 NOTE TO INSTRUCTOR: Solutions

to Homework are in that section.

Avg. time for Students to read & 10
complete homework: 4.5 hrs.

Credit

Objectives

Mastering the material in this chapter and you will be able to:
 Calculate the interest on open-end credit and installment loans.
 Calculate the monthly payment and prepare a loan payment schedule for any term
loan.
 Use Annual Percentage Rate (APR) tables and the APR equation to determine a
loans annual percentage rate.

Credit is a tool used by both the borrower and the lender to facilitate exchanges. Credit
facilitates increases in standards of living. Without credit, or when burdensome credit
restrictions are imposed, standards of living remain low. Capitalist economies utilize credit to
increase the number of sales and the value of sales and thus facilitate the increase in standards
of living. In socialist economies, where credit is restricted with burdensome regulations,
standards of living remain stagnate or decline. For the consumer, credit is the power to obtain
goods or services by giving a promise to pay (money or goods) on demand or at a specified date
in the future. From the viewpoint of the seller, credit offers the opportunity to increase total
sales and the value of the sales transactions made. For the lender, credit offers the opportunity
to put their product (money) in the market place to facilitate transactions. The lender loans
money and the borrower pays the loan back with interest. It is the interest earned that is the
profit for the lender, thus money is a product just as oranges are a product. Money has a
supply and demand, and the cost of money is the interest paid by the borrower. The higher the
interest on borrowed money the less it is borrowed. The lower the interest on borrowed money
the more it is borrowed.
With credit comes a responsibility to learn how to use credit wisely and not overextend.
Credit can be used advantageously and it can also be used to ruin. William Shakespeare, in his
play Hamlet, has the character Polonious offering advice to his son Laertes just prior to his
departure to Paris for his education, he tells him:

“Neither a borrower nor a lender be,
For loan oft losses both itself and friend,
And borrowing dulls the edge of husbandry.”

What Shakespeare is telling us through Polonious is to not lend or borrow money with
friends, because when you do, you will likely lose both your friend and your money. If you lend,
your friend may avoid paying back the borrowed money because of their poor money
management, and if you borrow you will fall out of your savings, as you turn into a spendthrift,
and face humiliation.
There are some debts worth taking on such as buying real estate for your first home, or a
business that produces goods or services in demand that can also repay the loan through your
industry and commerce.

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