418. Rates of Interest. The rate of interest depends upon many factors: the length of time of the loan, the security offered, the locality, and the conditions of the money market. In new sections of the country where capital is scarce, the rates of interest are high. 419. Legal Interest. Below is a list of the legal interest rates in the various states of the Union. The legal interest is the rate of interest which a debt bears if no rate is agreed upon, the agreement merely being that the debt is to bear interest. If no agreement whatever is made about interest then no interest is paid. 420. Legal and Maximum Rates of Interest. The following table also gives the highest rate of interest permitted in the various states. Legal rates of interest are being changed from time to time. In the state of New York any rate may be charged by agreement on call loans (see page 372) of $5000 and upwards. 421. Usury. Charging higher interest than the highest permitted by law is called usury. Usury is punishable by penalties ranging from the loss of the extra interest charged to the loss of all interest and the principal. ORAL EXERCISE'S 1. Discuss the reasons for the difference in the legal rate of interest in the various states. 2. Give some of the arguments both for and against laws regulating the rate of interest. 3. What would be the effect of a law making the highest rate of interest permitted very low, as, for instance, 2 or 3 per cent? 4. What is the effect of very low rates of interest on the value of a farm or any other income producing property? 5. What would be the effect of a very high rate of interest on the rental value of a house? 6. What is the effect of very low rates of interest on general business? (Remember that nearly all business concerns borrow money at certain times of the year.) PROBLEMS 1. A merchant borrowed $85,000 each year for an average of 150 days. Find the interest at the legal rates in Alabama, Illinois, New York, South Dakota. Also find the interest at the highest rates permitted in Michigan, Nebraska, and Washington. The results obtained in this example give one element in the difference in the cost of doing business in various parts of the United States. 2. A farmer borrowed $13,000 for 3 years. Find the interest at the legal rates in Ohio, Illinois, Minnesota. At the highest rates in Montana, North Dakota. 3. A man borrowed $2500 for 250 days. Find the interest if he borrowed it at legal interest in Wyoming, Washington, North Dakota, Michigan. CHAPTER XXVI COMPOUND INTEREST 422. Situations Giving Rise to Compound Interest. Problems in compound interest occur in connection with deposits in savings banks and with many general problems of investment. Thus the life insurance companies in calculating the future value of an investment make use of compound interest. Again in computing the income from stocks and bonds paying dividends, quarterly or semi-annually, and in figuring cost of life insurance, compound interest is used. By all odds the most frequent use of compound interest is in connection with savings deposits. 423. Simple Interest. In the case of ordinary loans the interest is supposed to be paid when due, but if not paid it becomes an ordinary debt bearing no interest. That is, only the original principal bears interest even if there is interest due and unpaid. 424. Compound Interest. When money is deposited in a savings bank the interest, when due, is added to the principal, the sum forming a new principal all of which bears interest. The difference between simple and compound interest will be made clear by an example: Simple Interest Compound Interest 1st Principal Principal = $600 Rate 6%, Time 4 yr. Interest = 600 X 18 X 4 = $144 2d Principal Hence the amount due in four $600 .06 36. 600 636 years would be $744. Continuing in this manner we find that the amount due at end of four years is $757.49 The difference between simple and compound interest is $13.49. Compound interest on ordinary loans is prohibited by law in many states, but if offered and accepted it is not regarded as usury. |