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6-1
6
Interest
S imple I nterest
Chapter 6
McGraw-Hill Ryerson©
Simple
6-2
6
Interest
Learning Objectives
After completing this chapter, you will be able to:
Calculate
LO-1 … interest, maturity value,
future value, and present value
in a simple interest environment
LO-2 … the equivalent value on any date of a single
payment or a stream of payments, and
Present
… details of the amount and
timing of payments in a time diagram
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Simple
6-3
6
Interest
LO-1
Example: Loan
Parties
Lender Borrower
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Simple
6-4
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Interest
Example: Loan
Lender Borrower
Earns (Income) from Borrower Borrower pays
i.e. Interest on the Principal Interest to Lender
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Simple
6-8
6
Interest Yes, it would!
In fact, interest continues
to accumulate as each day passes!
Example
Invest $1000 at 10% simple interest
for 30 days!
Interest earned is?
McGraw-Hill Ryerson©
Simple
6-9
6
Interest
“What is the formula that can
be used to calculate SI?”
McGraw-Hill Ryerson©
Simple
6 - 10
6
Interest
Formula I = Prt
I= P * r * t
$5000 * .04 * 7 /12
I = $116.67
McGraw-Hill Ryerson©
Simple
6 - 11
6
Interest
McGraw-Hill Ryerson©
Simple
6 - 12
6 There are three methods
Interest that can be used to
calculate the number of days:
McGraw-Hill Ryerson©
Simple
6 - 13
6
Interest Calculating the Number of Days
What is the interest earned on $5000 invested
from Oct. 11th to Dec. 29th at 4.5%?
Days
Method 1. Oct 11th to end of month = 20
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Simple
6 - 14
6
Interest
The “Hand Calculator!”
McGraw-Hill Ryerson©
Simple
6 - 15
6
Interest
McGraw-Hill Ryerson©
Simple Day of TABLE6.2 6 - 16
6
Interest
Month
1
Jan
1
Feb
32
Mar
60
Apr
91
May Jun Jul Aug Sep
The Serial Number of Each Day of the Year
121 152 182 213 244
Oct
274
Nov Dec
305 335
2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8 8 39 67 98 128 159 189 220 251 281 312 342
9
10
Dec 29
9
10
40
41
68
69
99
100
363
129
130
160
161
190
191
221
222
252
253
282
283
313 343
314 344
11 11 42 70 101 131 162 192 223 254 284 315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14
15
16
Oct 11
14
15
16
45
46
47
73
74
75
104
105
106
284
134
135
136
165
166
167
195
196
197
226
227
228
257
258
259
287
288
289
318 348
319 349
320 350
Method 2. 17 17 48 76 107 137 168 198 229 260 290 321 351
18
19
18
19
49
50
=
77
78
108
109
138
139
79 Days
169
170
199
200
230
231
261
262
291
292
322 352
323 353
20 20 51 79 110 140 171 201 232 263 293 324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 238 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
31 31 90 151 212 243 304 365
McGraw-Hill Ryerson©
Simple
i Texas Instruments 6 - 17
6
Interest
Using…
BAII PLUS
Method 3.
2nd
Example 1. DBD = 79 Date
Calculate… 10.1102 Enter
the interest
earned
on $5000 12.2902 Enter
invested
from
Oct. 11th to Dec. CPT
29th, 02 at 4.5%.
Days Between Dates
McGraw-Hill Ryerson©
Simple
6 - 18
6
Interest
Formula I = Prt
I = $5000*.045 * 79/365
I = $48.70
McGraw-Hill Ryerson©
Simple
6 - 19
6
Interest Calculating the Number of Days
What is the interest earned on $5000 invested
from Nov 30th, 02 to Jan 6th, 03 at 4.5%?
Days
Method 1. Nov 30th to end of month = 0
Method 3.
2nd
Example 1. DBD = 37 Date
Calculate… 11.3002 Enter
the interest
earned
on $5000 01.0603 Enter
invested
from
Nov. 30th,, 02 to CPT
Jan 6th. 03 at
4.5%. Days Between Dates
McGraw-Hill Ryerson©
Simple
6 - 22
6
Interest
Formula I = Prt
I = $5000*.045 * 37/365
I = $22.81
McGraw-Hill Ryerson©
Simple
6 - 23
6
Interest Calculating the Number of Days
What is the interest earned on $5000 invested
from Oct 11th , 02 to Mar 11th, 03 at 4.0%?
Days
Oct 11th to end of month = 20
30 & Dec
Nov 31 Total = 61
Method 1.
31 & Feb
Jan 28 Total = 59
McGraw-Hill Ryerson©
Simple
Day of TABLE6.2 6 - 24
6
Interest
Month
1
Jan
1
Feb
32
Mar
60
Apr
91
May Jun Jul Aug Sep
The Serial Number of Each Day of the Year
121 152 182 213 244
Oct
274
Nov Dec
305 335
2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6Dec 31
37 65 96365 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8
9
8
9Oct 11
39
40
67
68
98
99284 128
129
159
160
189
190 = 81 Days
220
221
251
252
281
282
312 342
313 343
Method 2. 10
11
10
11
41
42
69
70
100
101
130
131
161
162
191
192
222
223
253
254
283
284
314 344
315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14 14 45 73 104 134 165 195 226 257 287 318 348
15 15Mar 11
46 74 105 70
135 166 196 = 70 Days
227 258 288 319 349
16 16 47 75 106 136 167 197 228 259 289 320 350
17 17 48 76 107 137 168 198 229 260 290 321 351
18 18 49 77 108 138 169 199 230 261 291 322 352
19
20
19
20
50
51
78
79
109
110
139
140
170
171
200
201 =151 Days
231
232
262
263
292
293
323 353
324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 238 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
McGraw-Hill Ryerson©
31 31 90 151 212 243 304 365
Simple
i Texas Instruments 6 - 25
6
Interest
Using…
BAII PLUS
Method 3.
2nd
Example 1. DBD = 151 Date
Calculate… 10.1102 Enter
the interest
earned
on $5000 03.1103 Enter
invested
from
Oct. 11th,, 02 to CPT
Mar 11th. 03 at
4.0%. Days Between Dates
McGraw-Hill Ryerson©
Simple
6 - 26
6
Interest
Formula I = Prt
Formula I = Prt
We can ‘reorganize’ the formula to also get
each of the following separately:
Principal
Rate
Time
Shortcut Tool!
McGraw-Hill Ryerson©
Simple
6 - 28
6
Interest The Triangle …another useful non-calculator!
McGraw-Hill Ryerson©
Using this tool!
Simple
6 - 29
6
Interest The Triangle …another useful non-calculator!
Prt
If you want to find t then I /Pr
McGraw-Hill Ryerson©
Simple
6 - 30
6
Interest
Using a Time Line
McGraw-Hill Ryerson©
Simple
6 - 31
6
Interest
Using a Time Line
Calculate the interest earned at 4% on $5000
invested from Oct. 11th to March 11th
I
Prt
McGraw-Hill Ryerson©
Simple
6 - 34
6
Interest
Calculating the Principal
Formula P= I rt
$195 interest is earned on a 150 day
GIC at 5.25%.
Find the initial investment .
Formula r = I Pt
What Rate of Interest is needed to
earn $200 on a $5000 investment
invested for 180 days?
r = $200 /($5000*180/365)
r = $200 /2465.75
r = 0.081111 or 8.11%
McGraw-Hill Ryerson©
Simple
6 - 37
6
Interest r = $200 /($5000*180/365)
5000
0.08111 *
180
/
365
=
/
200
=
1/x 8.11%
McGraw-Hill Ryerson©
Simple
6 - 38
6
Interest
Calculating the Time
Formula t = I Pr
What is the length of Time
required for $2000 to grow to
$2100 when invested at 5.6%?
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Simple
6 - 39
6
Interest
Calculating the Time
Formula t = I Pr
What is the length of Time
required for $2000 to grow to
$2100 when invested at 5.6%?
Step 2
Calculate
t= $100/ ($2000*.056)
t= $100/ 112
t= 0.8928 Years *365 days
t= 326 days
McGraw-Hill Ryerson©
Simple
6 - 40
6
Interest t= $100 / ($2000*.056)
100
325.89
/
2000
/
0.056
=
0.8928 Years
*
365
=
326 days
McGraw-Hill Ryerson©
Simple
6 - 41
6
Interest
McGraw-Hill Ryerson©
Simple
6 - 42
6
Interest
Sum = P(1+rt)
I place $17000 in
150
a 150 day term S= $17000 1+ .065( 365)
deposit on Jan. 6
paying 6.5%. S = $17000(1.0267123)
How much will
the bank pay me
S = $17454.11
on the
maturity date?
McGraw-Hill Ryerson©
Simple
6 - 44
6
Interest
150
S = $17000 1+ .065( 365)
17454.11 .065
*
150
/
365
= $17454.11
+
1
=
*
17000
Date of Maturity
McGraw-Hill Ryerson© =
Simple
6 - 45
6
Interest
Look up
Step
1 45 76 182 363
Feb 14 March 17 July 1 Dec 29
Draw a
time line
$5000 363 – 45 = 318 Days
Formula I = Prt
Step
3
I1 = 5000 *.04 *318/365 $174.25
Calculate
the I2 = 3000 *.04 *287/365 94.36
Interest
amounts, I3 = 2000 *.04 *182/365 39.67
and $308.28
add
together. $10000 + $308.28 S = $10308.28
Total Amount
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6 - 50
6
Interest
McGraw-Hill Ryerson©
Simple
6 - 52
6
Interest
McGraw-Hill Ryerson©
Simple
6 - 53
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Interest
Table Number
reading of Days
Feb 14th
= 45
April 20th = 65 Days
Look up = 110
May 18th
for Days = 138 = 28 Days
July 4th = 185 = 47 Days
Interest Earned
McGraw-Hill Ryerson©
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6 - 54
6
Interest
Interest Earned
Formula I = Prt
Feb 14th
65 Days I1 = 1000 * .06 * 65/365 = $10.68
April 20th
May 18th I2 = 1000 * .068 * 28/365 = 5.22
28 Days
July 4th I3 = 1000 * .071 * 47/365 = 9.14
47 Days
$25.04
McGraw-Hill Ryerson©
Simple
6 - 55
6
Interest
McGraw-Hill Ryerson©
Simple
6 - 56
6
Interest
Formula P = Sum/(1+rt)
P =5000/ 1 + 0.044(.5)
P = $4892.37
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6 - 61
6
Interest
LO-2
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6 - 62
6
Interest
July 4 September 15
Step Draw a
1 Timeline $2000
69 Days Future
Value
Step
2 Sum = P(1+rt)
Sum = 2000[1+.06(69/365)]
= $2022.68
McGraw-Hill Ryerson©
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6 - 63
6
Interest
May 18 December 15
Step Draw a
1 Timeline Present
211 Days
$2000
Value
Step P = Sum/(1+rt)
2
= 2000/[1+.052(211/365)]
= $1941.63
McGraw-Hill Ryerson©
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6 - 64
6
Interest
McGraw-Hill Ryerson©
Simple
6 - 65
6
Interest
April 27
Step
1 Present Value $3000
Draw a 30 days
90 days
Timeline
Step
2 P = Sum/(1+rt)
McGraw-Hill Ryerson©
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6 - 66
6
Interest
P = Sum/(1+rt)
A P = 3000/[1+.04(30/365)]
P = $2990.17
B P = 3000/[1+.04(90/365)]
P = $2970.17
McGraw-Hill Ryerson©
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6 - 67
6
Interest
McGraw-Hill Ryerson©
Simple
6 - 68
6
Interest
P = Sum/(1+rt)
Which
Tip: 3 months
= 1/4
Find the
formula
PV of the
P2 = 1432/[1+.06(.25)]
should
future
you use?
payment! P2 = $1410.84 $1234.00
Money saved ($176.84) by paying now!
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6 - 69
6
Interest
McGraw-Hill Ryerson©