Chapter 6: Borrowing PDF

# Chapter 6: Borrowing ## Learning Objectives - Understanding the meaning of Borrowing. - Understanding the need and sources of borrowings. - Basic understanding about Loans ## Introduction In today's world, businesses operate on a large scale, requiring a significant amount of money. However, e...

# Chapter 6: Borrowing ## Learning Objectives - Understanding the meaning of Borrowing. - Understanding the need and sources of borrowings. - Basic understanding about Loans ## Introduction In today's world, businesses operate on a large scale, requiring a significant amount of money. However, engaging in such extensive business activities involves substantial risks. Therefore, it is not advisable for a businessperson to invest all their personal funds into the business. Instead, it is often more beneficial for them to seek financial support from other parties. In this chapter, we will explore the meaning, importance, and necessity of borrowing to establish a sustainable business with stable finances. ## Meaning of Borrowing When a business needs money and gets it from outside sources, it is called borrowed funds. These funds are different from the business's own money, which is called equity funds. So, borrowed funds are like money borrowed from someone else. Let us try to understand it with the help of an example. Imagine a businessman named David wants to start a business selling skincare products. He needs money to get started, but using all his own savings would be risky. So, he asks a bank for a loan. The bank agrees to give him the money he needs to start his business. With this borrowed money, David can start his business while keeping his personal savings safe. He will have to pay back the loan later, but borrowing helps him start his business and reduces his personal risks. Note: Such loans (borrowed money) can also be taken from private sources or private investors. ## Need for Borrowing Following are few needs of why borrowing is being done. 1. **Starting a Business:** Borrowing money helps entrepreneurs get the initial funds they need to start their new business and have enough resources to get it up and running. 2. **Expansion and Growth:** Businesses that want to grow can borrow money to take advantage of opportunities, like opening new branches in new locations or investing in research and development, which helps them expand and become more successful. 3. **Managing day-to-day working:** Borrowing money ensures that businesses can handle their day-to-day operations smoothly by having enough funds for things like paying employees buying raw materials and stocks. 4. **Investment in business:** Borrowed money can be used for important investments in equipment, technology upgrades, or buying property, which helps businesses improve their productivity and stay competitive. 5. **Emergency Preparedness:** When unexpected events happen, like natural disasters or economic downturns, borrowing money can provide a safety net to help businesses cover immediate expenses and continue operating until things get better. ## Sources of Borrowing Sources of borrowing in business mean individuals, entities, or places from where businesses can borrow money. Following are some very common sources of borrowing. 1. **Banks:** Banks are one of the major and the most convenient sources from where businessmen can borrow funds. Banks offer various types of loans in order to meet the different financial needs of the business, with the help of these loans, businesses can achieve various goals and targets. 2. **Financial Institutions:** Other than banks, there are specialized financial institutions that deal only in providing financial help and assistance to businesses. Their main objective is to provide medium and short term loans to the business; an example of such an institute are credit unions, lending companies, credit, cooperative societies, etc. 3. **Government Programs:** From time to time in order to improve the infrastructure and the economic base of the country, the government formulates certain programs in order to provide financial assistance and funding to businesses. The Pradhan Mantri MUDRA Yojana (PMMY) is a program introduced by the respected Prime Minister on April 8, 2015. It aims to offer loans up to 10 lakh to small and micro enterprises that are not part of big corporations or agricultural activities. 4. **Family and Friends:** Family and friends can serve as an informal and personal source of borrowing when individuals or businesses need financial support. In times of need, reaching out to loved ones can be a way to obtain funds without going through formal financial institutions. Borrowing from family and friends often involves more flexibility in terms of repayment schedules and interest rates. ## Loan Principle and Interest When you borrow money from someone, the amount you borrow is called the loan principle amount. This is the actual sum of money you receive. However, when you borrow money, you usually have to pay back more than the principle amount. This extra money is called interest/interest is like a fee for borrowing the money. It is a percentage of the loan principle that you have to pay back along with the principle amount. The interest rate determines how much extra you will have to pay. It is important to understand that when you take a loan, you need to repay both the loan principle amount and the additional interest over time. ## Example Imagine you borrow ₹1,000/- from your friend. This ₹1,000/- is the loan principle amount, which is the actual money you receive. However, your friend asks you to pay back ₹1,200/- after a month. The extra ₹200/- that you need to pay back is the interest. In this example, the interest rate is 20% because the interest amount ₹200/- is 20% of the loan principle amount (₹1,000/-). So, when you borrow money, it is important to consider the interest you need to pay on top of the loan principle amount when you repay the borrowed funds. ## Conclusion Borrowing is crucial for businesses, providing funds for starting, growing, and managing operations. It allows for investments, day-to-day management, and emergency preparedness. Sources of borrowing include banks, financial institutions, government programs, and support from family and friends. When borrowing, it is important to consider the loan principle amount and the additional interest that needs to be repaid over time. By borrowing wisely and responsibly, businesses can achieve their goals and ensure sustainability. ## Things to Remember 1. Borrowing is the process of obtaining funds from external sources to meet the financial needs of a business. 2. Businesses borrow money for various reasons, such as starting a new venture, expanding operations, managing day-to-day expenses, making investments, and preparing for emergencies. 3. Common sources of borrowing include banks, financial institutions, government programs, and support from family and friends. 4. When borrowing, it is important to consider the loan principle amount (the money borrowed) and the additional interest that needs to be repaid over time. 5. Borrowing should be done wisely and responsibly, considering the business's ability to repay the borrowed funds and the impact on its financial stability. ## Suggested Class Activities Divide the students into small groups and ask them to brainstorm and discuss different scenarios where borrowing could be beneficial for a business. Each group can present one scenario to the class, explaining the need for borrowing and the potential source of funds. Encourage creative thinking and emphasize the importance of responsible borrowing. ## Exercises **A. Multiple Choice Questions:** 1. What is borrowing? - Investing personal funds into a business - Obtaining funds from external sources for business needs - Acquiring equity funds for a business - Starting a new business venture 2. Why do businesses borrow money? - To expand and grow operations - To manage day-to-day expenses - To make investments in equipment and technology - All of the above 3. Which of the following is a common source of borrowing? - Schools - Parks - Banks - Hospitals 4. What is the loan principle amount? - The interest charged on borrowed funds - The total amount of money borrowed - The repayment schedule for borrowed funds - The additional funds received from investors 5. Why is it important to borrow responsibly? - To avoid interest charges - To maintain personal savings - To ensure the business's financial stability - To achieve short-term goals **B. Fill in the Blanks:** 1. Borrowing involves obtaining funds from ___________________ sources to meet business needs. 2. The Pradhan Mantri MUDRA Yojana (PMMY) provides loans to small _______________ and micro enterprises. 3. The loan principle amount is the __________________ sum of money borrowed. 4. Family and friends can serve as a _________________ source of borrowing. 5. Borrowing wisely helps businesses achieve their goals and ensure ____________________. **C. Short Answer Type Questions:** 1. What is the purpose of borrowing in a business? 2. Name two common sources of borrowing for businesses. 3. Explain the concept of the loan principle amount and interest. 4. Why is it important for businesses to consider the impact of borrowing on their financial stability? 5. How can borrowing from family and friends be different from borrowing from formal financial institutions? **D. Crossword Puzzle:** **Across** 3. When business needs money and gets it from outside source it is called _________________. 5. The amount you ________________ from any source is called the _________________ amount. 6. __________________ is like a fee for borrowing the money. **Down** 1. Pradhan Mantri mudra yojana is a program to help ___________________ providing financial help to business. 2. There are ___________________ financial intuitions that deal only in ___________________ financial help to business. 4. __________________ is one of the major source of borrowing. # Chapter 7: Basic Terms in Financial Literacy ## Learning Objectives - Understanding Basic Terminologies like profit, discount, selling price, etc. Once upon a time, there were two friends named Ethan and George. They loved exploring their neighborhood and often stumbled upon interesting treasures. One sunny day, while wandering around, they came across a dusty old bookstore in Prayagraj. Excitedly, Ethan and George approached the shopkeeper, Mr. Simon, and asked about the book. Mr. Simon explained that the marked price was the amount written on the tag, indicating the original price of the book. However, he also mentioned that they could buy it at a discounted price. Intrigued by the idea of a discount, Ethan and George asked Mr. Simon how it worked. He explained that a discount is a reduction in the marked price of an item, allowing customers to buy it at a lower cost. In this case, he offered them a 20% discount on the book. Curiosity sparked within them, and they decided to step inside. The shop was filled with rows and rows of colorful books, each one waiting to be read. As they roamed through the aisles, their eyes fell upon a captivating adventure novel. The book was marked with a price tag of 100 rupees. As they walked out of the store, they realized that they can make another deal. They could sell the same book to a scrap dealer for 90 rupees. Profit is the amount earned when the selling price of an item is greater than its cost price. In this case, their profit would be 10 rupees as they had bought the book for 80 rupees and they will sell it for 90 rupees. George was amazed by this newfound knowledge and understood that sometimes, discounts can lead to profitable deals. They both felt a sense of accomplishment and couldn't wait to share their adventure and their newly acquired book with their classmates at St. Joseph's College. From that day forward, Ethan and George became savvy shoppers, always keeping an eye out for market prices, discounts, and opportunities to make smart purchases. Their understanding of marked price, selling price, cost price, profit, and discounts helped them navigate the world of commerce with confidence and excitement. ## Important Terms: 1. **Marked Price:** The marked price is the original price of an item, as indicated by the price tag or label. In the story, the adventure novel had a marked price of 100 rupees. It represents the initial value set by the seller before any discounts or negotiations. 2. **Selling Price:** The selling price is the actual price at which an item is sold to the customer. It may differ from the marked price due to discounts or other factors. In the story, Ethan and George bought the book at a discounted price of 80 rupees. Therefore, 80 rupees is the selling price they paid. 3. **Cost Price:** The cost price is the amount paid by the seller to acquire or produce the item. It includes the cost of production, manufacturing, or purchasing the item from a supplier. In the story, the cost price of the adventure novel is not explicitly mentioned, but we can assume it to be lower than the marked price for the seller to make a profit. 4. **Profit:** Profit is the amount earned when the selling price exceeds the cost price of an item. It represents the financial gain made by the seller. In the story, Ethan and George will make a profit of 10 rupees if they are able to sell the book to the scrap dealer for 90 rupees, because they bought the book at a discounted price of 80 rupees, while its original marked price was 100 rupees. 5. **Discount:** A discount is a reduction in the marked price of an item, usually offered by the seller to attract customers or promote sales. It allows customers to purchase the item at a lower price than the original marked price. In the story, Ethan and George received a 20% discount on the adventure novel, reducing the selling price from 100 rupees to 80 rupees. 6. **Loss:** When the selling price of the article or product is less than the cost price it is called loss. In the story if Ethan after reading the book sells the book to the scrap dealer for 50 rupees he will suffer a loss of 30 rupees. ## Conclusion By understanding these terms, one can navigate the world of buying and selling, make informed decisions, and calculate profits or savings. The story of Ethan and George provides a practical context for comprehending these concepts and their significance in everyday transactions. ## Things to Remember: 1. Marked price is the original price of an item before any discounts. 2. Selling price is the price at which an item is sold to the customer. 3. Cost price is the amount paid by the seller to acquire or produce the item. 4. Profit is the financial gain made when the selling price exceeds the cost price. 5. Discounts are reductions in the marked price, allowing customers to buy items at lower prices. ## Exercises: **A. Multiple Choice Questions:** 1. What is the purpose of a discount? - Increase the marked price - Reduce the selling price - Raise the cost price - Decrease the profit 2. What is the selling price if an item has a marked price of 50/- and a 10% discount? - ₹40/- - ₹50/- - ₹45/- - ₹55/- 3. How is profit calculated? - Selling price - Marked price - Marked price - Cost price - Selling price - Cost price - Cost price - Selling price 4. If an item has a cost price of ₹80/- and is sold for 100/-, what is the profit? - ₹20/- - ₹80/- - ₹100/- - ₹180/- 5. Which term represents the original price of an item? - Selling price - Marked price - Cost price - Discount **B. Fill in the Blanks:** 1. A discount is a __________________ in the marked price of an item. 2. The selling price is the actual price at which an item is sold to the __________________. 3. Profit is the amount earned when the selling price is greater than the __________________ price. 4. Ethan and George bought the adventure novel at a __________________ price of 80 rupees. 5. The marked price of the book was 100 rupees, so Ethan and George received a __________________ % discount. # Chapter 8: Simple Interest ## Learning Objectives - Understanding Basic Terminologies like profit, discount, selling price, etc. Once upon a time in the beautiful town of Prayagraj, there were two friends named Ethan and George. They were both students at St. Joseph's College and shared a passion for exploring practical math concepts. One day, their teacher, Mr. Simon, introduced them to the fascinating world of simple interest. Ethan and George were curious to understand how simple interest worked in real-life situations. Inspired by their teacher's lesson, they decided to explore its application through a small business venture. They started a lemonade stand in their neighborhood, investing 100 rupees in purchasing lemons, sugar, and cups. As the days went by, Ethan and George sold refreshing lemonade and covered their expenses. After a few weeks, they were delighted to find that they had made a profit of 20 rupees. Intrigued by their earnings, they wondered if they could calculate the interest earned on their initial investment. Remembering Mr. Simon's explanation about simple interest, Ethan and George set out to determine their earnings. They knew that their initial investment, or principal amount, was 100 rupees, and their profit was 20 rupees. They wanted to find out how much interest they had earned over this period. To find the interest rate, they divided their profit of 20 rupees by their principal amount of 100 rupees. They then multiplied the result by 100 to convert it into a percentage. After their calculation, they discovered that their interest rate was 20%. With the interest rate and the time period known, Ethan and George proceeded to calculate their interest. They multiplied their principal amount of 100 rupees by the interest rate of 20% and the time period in months. In this case, since they calculated their earnings over a few weeks, they adjusted the time period to represent a fraction of a year. Their calculation revealed that they had earned 10 rupees in interest on their initial investment of 100 rupees. Ethan and George were thrilled by their findings. They realized that simple interest played a crucial role in their business and financial decisions. By investing their money wisely, they could earn extra income through interest. Armed with this knowledge, Ethan and George expanded their lemonade stand business and started exploring new investment opportunities. They shared their experiences with their classmates at St. Joseph's College, inspiring them to delve into the world of finance and make smart financial choices. ## What is Simple Interest? Simple interest is an additional amount of money earned or paid based on the initial amount of money borrowed or invested, the interest rate, and the time period involved. It is a basic form of interest calculation that does not take compounding into account. In the story of Ethan and George, they set up a lemonade stand and invested 100 rupees in their business. Over the time, they made a profit of 20 rupees. This profit represents the interest they earned on their initial investment. By calculating the interest rate and multiplying it by the principal amount and the time period, they determined the amount of simple interest earned. In simpler terms, simple interest is like a little extra reward for lending money or investing money wisely. It is a way to encourage individuals to save, invest, or lend money, while also compensating the lender or investor for the use of their funds. So, in essence, simple interest is a straightforward way of calculating the additional amount earned or paid based on the principal amount, the interest rate, and the duration of the loan or investment. It helps individuals understand how their money can grow over time or how much they need to pay for borrowing funds. ## How is Simple Interest Calculated? Based on the story of Ethan and George, simple interest can be calculated using three key factors: the principal amount, the interest rate, and the time period. 1. **Principal Amount:** The principal amount is the initial sum of money invested or borrowed. In this case, Ethan and George invested 100 rupees in their lemonade stand. 2. **Interest Rate:** The interest rate is the percentage of the principal amount that determines how much interest is earned or paid. In the story, Ethan and George calculated an interest rate of 20% based on their profit of 20 rupees. 3. **Time Period:** The time period represents the duration for which the money is invested or borrowed. Ethan and George operated their lemonade stand for few weeks, which can be considered as a fraction of a year. To calculate the simple interest, follow these steps: 1. Divide the interest rate by 100 to convert it to a decimal. In this case, 20% becomes 0.20. 2. Multiply the principal amount by the interest rate. Simple Interest = Principal Amount * Interest Rate In the story, the calculation would be: 100 rupees = × 0.20 = 20 rupees. 3. Adjust the time period if necessary. If the time period is given in years, no adjustment is required. However, if the time period is given in months or another unit, it needs to be converted to a fraction of a year. For example, if the time period is six months, it would be considered as 6/12 or 0.5 years. 4. Multiply the result from step 2 by the time period to obtain the total simple interest earned. Total Interest = Simple Interest × Time Period In the story, Ethan and George calculated the simple interest as 20 rupees. If they operated their lemonade stand for six months, the total interest would be: 20 rupees × 0.5 = 10 rupees. Therefore, based on the story, Ethan and George calculated their simple interest to be 10 rupees, which represents the additional amount earned on their initial investment of 100 rupees over a period of time. ## Practical Questions **Question-1:** Ethan borrowed 500 rupees from his friend George for a period of 2 years. George charged him an interest rate of 8% per annum. How much simple interest does Ethan need to pay back to George? **Answer-1:** To calculate the simple interest, we can use the formula: Simple Interest = (Principal Amount × Interest Rate × Time Period) / 100 Given: * Principal Amount (P) = 500 rupees * Interest Rate (R) = 8% per annum * Time Period (T) = 2 years Using the formula, we can calculate the simple interest: Simple Interest = (500 rupees × 8 × 2 years) / 100 = (500 × 8 × 2) / 100 = 80 rupees Therefore, Ethan needs to pay back 80 rupees as simple interest to George. **Question-2:** Sarah invested 1,200 rupees in a savings account that offers an interest rate of 6% per annum. If she keeps the money in the account for 3 years, how much total amount will she habe at the end of the period, including the simple interest earned? **Answer-2:** To calculate the total amount including the simple interest, we can use the formula: Total Amount = Principal Amount + Simple Interest Given: * Principal Amount (P) = 1,200 rupees * Interest Rate (R) = 6% per annum * Time Period (T) = 3 years First, let's calculate the simple interest using the formula: Simple Interest = (Principal Amount × Interest Rate × Time Period) / 100 = (1,200 rupees × 6 × 3 years) / 100 = (1,200 × 6 × 3) / 100 = 216 rupees Now, we can calculate the total amount: Total Amount = Principal Amount + Simple Interest = 1,200 rupees + 216 rupees = 1,416 rupees Therefore, Sarah will have a total amount of 1,416 rupees at the end of the 3-year period, including the simple interest earned. ## Things to Remember 1. Simple interest is an additional amount of money earned or paid based on the principal amount, interest rate, and time period. 2. To calculate simple interest, divide the interest rate by 100 to convert it to a decimal, then multiply it by the principal amount and the time period. 3. The time period should be adjusted if it is given in units other than years. 4. Simple interest does not take compounding into account and is a basic form of interest calculation. 5. Simple interest can be used to determine the additional amount earned on an investment or the amount to be paid back on a loan. ## Exercises: **A. Multiple Choice Questions:** 1. What factors are involved in calculating simple interest? - Principal amount, compound interest, time period - Principal amount, interest rate, time period - Principal amount, future value, time period - Principal amount, annual percentage yield, time period 2. Which of the following is true about simple interest? - It takes compounding into account. - It is calculated using the formula A = P(1+r/n)^(nt). - It is a more complex form of interest calculation. - It is an additional amount based on the principal, interest rate, and time period. 3. How is the interest rate expressed in simple interest calculations? - As a decimal - As a fraction - As a whole number - As a percentage 4. What is the purpose of adjusting the time period in simple interest calculations? - To make the calculation more accurate - To convert it to a whole number - To determine the total investment amount - To represent a fraction of a year 5. Which of the following is NOT true about simple interest? - It encourages saving and investing. - It is a basic form of interest calculation. - It considers compounding. - It compensates lenders or investors for the use of their funds. **B. Fill in the Blanks:** 1. Simple interest is calculated based on the __________, __________, and time period. 2. The _____________ amount represents the initial sum of money invested or borrowed. 3. The interest __________ is the percentage used to calculate the additional amount earned or paid. 4. Adjusting the time period allows for representation in ______________ of a year. 5. Simple interest does not take ______________ into account. **C. Short Answer Type Questions:** 1. What is simple interest? 2. How is simple interest calculated? 3. Why is the time period adjusted in simple interest calculations? 4. What role does simple interest play in financial decisions?