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# Simple

6-1
6
Interest

S imple I nterest
Chapter 6
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

Simple
6-3
6
Interest

LO-1
Example: Loan

Parties
Lender Borrower

## Lends the Principal Borrower OWES (Debt)

to Lender

Simple
6-4
6
Interest

Example: Loan

Lender Borrower
Earns (Income) from Borrower Borrower pays
i.e. Interest on the Principal Interest to Lender

## Rate of Interest: Simple Interest …

Calculated on an ANNUAL or
per annum (pa) basis
Simple
6-5
6
Interest Examples

## Invest \$1000 at 10% simple interest

for one year.
Interest earned is?
Principal X Interest Rate = \$1000 *10% = \$100

## Invest \$1000 at 10% simple interest

for six months.
Interest earned is?
Principal X Interest Rate = \$1000 * 10% /2 = \$50
Simple
6-6
6
Interest Examples

## Invest \$1000 at 10% simple interest

for three months
Interest earned is?
Principal X Interest Rate = \$1000 X 10% /4 = \$25

## Invest \$1000 at 10% simple interest

for one month.
Interest earned is?
Principal X Interest Rate = \$1000 X 10% /12 = \$8.33
Simple
6-7
6
Interest

## Up to this point we have taken months to

represent 1/12th of a year,
i.e. each month is treated as having
the same number of days!

## Would it not be more accurate to

calculate the interest due or payable
based on the actual
number of days in each month?

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?

365

## Year = 365 days or 366 in a Leap Year

Simple
6-9
6
Interest
“What is the formula that can
be used to calculate SI?”

## Interest Principal Interest Rate Time

Time period
I P r t
Amount Principal Amount Annual Rate
(paid or (loan or of SI …expressed
or a multiple
Formula I = Prt of a year

Simple
6 - 10
6
Interest

Formula I = Prt

## Calculate the Interest earned

on \$5000 invested at 4%
for 7 months.

I= P * r * t
\$5000 * .04 * 7 /12
I = \$116.67
Simple
6 - 11
6
Interest

## “I may need to invest or

need a loan for a number
of days rather than a
complete month.”

## “How do I calculate the

time between the
starting date and the
ending date?”

Simple
6 - 12
6 There are three methods
Interest that can be used to
calculate the number of days:

## Add up the days according to the

Include either days covered by the specific months.
the FIRST date
or the LAST Use a Number of Days TABLE
date when doing
this calculation!

## Use the TI BAII Plus calculator!

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

## From 1st to 29th

Dec of month = 29
Includes the last date 79

Simple
6 - 14
6
Interest
The “Hand Calculator!”

## Knuckles are ALL 31 days

Spaces are ALL 30 days
except for February which can be either
28 or 29 days in a Leap year!

Simple
6 - 15
6
Interest

## Thirty days has September,

April, June and November.
All the rest have 31,
but February with just 28 days clear
plus one more in each leap year!

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
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

Simple
6 - 18
6
Interest

Formula I = Prt

## Calculate the Interest earned

on \$5000 invested
at 4.5%
? .
for 79 Days

I = \$5000*.045 * 79/365
I = \$48.70
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

## From 1st to 6th

Jan of month = 6
37
Includes the last date
Simple
Day of TABLE6.2 6 - 20
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 9 40 68 99 129 160 190 221 252 282 313 343
10
11
12
Dec 31
10
11
12
41
42
43
69
70
71
100
101
102
130
131
132
365
161
162
163
191
192
193
222
223
224
253
254
255
283
284
285
314 344
315 345
316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14
15
Nov 30
14
15
45
46
73
74
104
105
134
135
334
165
166
195
196
226
227
257
258
287
288
318 348
319 349
Method 2. 16 16 47 75 106 136 167 197 228 259 289 320 350
17
18
19
17
18
19
48
49
50
76
77
78
107
108
109
=
137
138
139
168
169
170
31 Days
198
199
200
229
230
231
260
261
262
290
291
292
321 351
322 352
323 353
20 20 51 79 110 140 171 201 232 263 293 324 354
21
22
23
21
Jan 6
22
23
52
53
54
80
81
82
111
112
113
141
142
143
172
173
174
6
202
203
204
233
234
235
264
265
266
294
295
296
325 355
326 356
327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25
26
27
25
26
27
56
57
58
84
85
86
115
116
117
145
=
146
147
176
177
178
37 Days
206
207
208
237
238
239
268
269
270
298
299
300
329 359
330 360
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
Simple
i Texas Instruments 6 - 21
6
Interest
Using…
BAII PLUS

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

Simple
6 - 22
6
Interest

Formula I = Prt

## Calculate the Interest earned

on \$5000 invested
at 4.5%
?
for 37 Days .

I = \$5000*.045 * 37/365
I = \$22.81
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

## Mar To 11th of month = 11

151
Includes the last date

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
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

Simple
6 - 26
6
Interest

Formula I = Prt

## Calculate the Interest earned

on \$5000 invested
at 4.0%
for 151?Days .

## I = \$5000* .04 *151/365

I = \$82.74
Simple
6 - 27
6
Interest

Formula I = Prt
We can ‘reorganize’ the formula to also get
each of the following separately:

Principal
Rate
Time

Shortcut Tool!
Simple
6 - 28
6
Interest The Triangle …another useful non-calculator!

## To help remember this… Formula I = Prt

we can place the formula into a triangle as follows…

## Where variables are

P*r*t BESIDE EACH OTHER this
I means to MULTIPLY!

## Prt Where a variable is ABOVE

I ANOTHER this means to
Prt DIVIDE!

Using this tool!
Simple
6 - 29
6
Interest The Triangle …another useful non-calculator!

then

## I If you want to find r then I /Pt

Prt
If you want to find t then I /Pr

Simple
6 - 30
6
Interest
Using a Time Line

## What is A Time Line is, as the name suggests, a line

a Time that shows the various points of time along
Line? which a loan or investment travels to maturity.
It is used for diagramming problems involving
multiple payments or investments.

## …Helps organize data

Two Benefits
…Indicates the steps needed
to implement the solution

Simple
6 - 31
6
Interest
Using a Time Line
Calculate the interest earned at 4% on \$5000
invested from Oct. 11th to March 11th

## Step 1 Draw a line for Start Finish

the entire period
Oct 11 Dec 31 March 11
Step 2 Enter the key
dates on the line Look up
\$5000
284 365 70
Step 3 Enter the 81 days
Investment 70 days

## Step 4 Enter the

number of days 151 days
between each
The calculation can now be
restated as follows…
Simple
6 - 32
6
Interest
Using a Time Line

## Calculate the interest earned at 4% on \$5000

invested for 151 days.

## Using this tool! I = Prt

I I = 5000 * .04 * 151/365
Prt = \$82.74
Simple
6 - 33
6
Interest
You can now use this tool!

I
Prt

## In the next few examples you have to…

(a) First identify which variable you are
being asked to solve for, and
(b) Reorganize the formula in order to
meet the requirement in (a).

Simple
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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 .

## P = \$195 .0525 *(150/365)

P = \$195 .0121575342
P = \$9,038.10
Simple
6 - 35
6
Interest P = \$195 .0525 *(150/365)
.0525
9038.10 *
150
/
365
=
/
195
=
1/x \$9038.10
Simple
6 - 36
6
Interest
Calculating the Rate

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%
Simple
6 - 37
6
Interest r = \$200 /(\$5000*180/365)
5000
0.08111 *
180
/
365
=
/
200
=
1/x 8.11%
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%?

## Step 1 Find the amount of Interest

P + I = Sum P I
\$2100 - \$2000 = \$100

More
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
Simple
6 - 40
6
Interest t= \$100 / (\$2000*.056)
100
325.89
/
2000
/
0.056
=
0.8928 Years
*
365
=
326 days
Simple
6 - 41
6
Interest

Simple
6 - 42
6
Interest

## Up to this point we have used two formulae:

Formula I = Prt & Sum = P + I
We can combine them as follows:

## Step 1 Sum = P+I Now, we substitute for I

Sum = P + Prt with
Step 2 Collecting like terms

## Future Value Formula Sum = P(1+rt)

Simple
6 - 43
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?
Simple
6 - 44
6
Interest

150
S = \$17000 1+ .065( 365)
17454.11 .065
*
150
/
365
= \$17454.11
+
1
=
*
17000
Date of Maturity
Simple
6 - 45
6
Interest

## Determine the Maturity Date

I place \$17000 in a 150 day term deposit on
Jan. 6 paying 6.5% pa.
= 6 days + 150 = 156 days
Day of TABLE6.2
Month Jan Feb Mar Apr May Jun Jul Aug Sep
The Serial Number of Each Day of the Year Oct Nov Dec
1 1 32 60 91 121 152 182 213 244 274 305 335
Look up 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
Find
156 The Term Deposit will mature on June 5th.
Simple
6 - 46
6
Interest

## During the year, I invested the

following funds at a constant 4% p.a.
(The second and third amounts were
added to the Feb 14th amount.)
Feb 14th \$5,000 5,000
Mar 17th \$3,000 8,000
July 1st \$2,000 10,000

Simple
6 - 47
6
Interest

## Step Draw a time line,

1 including the dates and
dollar amounts.

## Step Determine the time

2 between each of the dates

## Calculate the interest

Step
amounts,
3
Simple
6 - 48
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

## Step \$3000 363 – 76 = 287 Days

2
Determine \$2000 363 – 182 = 181 Days
the Time
Simple
6 - 49
6
Interest

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
together. \$10000 + \$308.28 S = \$10308.28
Total Amount
Simple
6 - 50
6
Interest

## “During the year I made an

the rate of interest.
How do I determine the total
interest earned during the
period under review?”

## Every time the interest rate

changes,you must stop and make
a calculation up to that point.
Simple
6 - 51
6
Interest

## I invest \$1,000 on Feb. 14th at 6%.

The changes in interest rates to July 4th
are as follows:
Investment Date rate
\$1,000 Feb 14th 6%
April 20th 6.8%
May 18th 7.1%
How much Interest did I earn up to July 4th ?

Simple
6 - 52
6
Interest

## … by finding the number of days between

each rate change!
Investment Date rate
\$1,000 Feb 14th 6%
Look up April 20th 6.8%
May 18th 7.1%
for Days
July 4th

Simple
6 - 53
6
Interest

Table Number

Feb 14th
= 45
April 20th = 65 Days
Look up = 110
May 18th
for Days = 138 = 28 Days
July 4th = 185 = 47 Days

Interest Earned
Simple
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
Simple
6 - 55
6
Interest

Simple
6 - 56
6
Interest

## How much must I invest in order for it

to grow to \$5000 within 6 months
@ 4.4% simple interest?

## What are we being asked to provide?

“How much …this suggests finding the
must I invest… Principal
to grow…”
Simple
6 - 57
6
Interest

## How much must I invest in order for it to grow to \$5000

within 6 months, @ 4.4% simple interest?

## What data do we need?

We need the appropriate data to be
able to use the appropriate formula…

Simple
6 - 58
6
Interest

## How much must I invest in order for it to grow to \$5000

within 6 months, @ 4.4% simple interest?

## Formulae I = Prt & Sum = P(1+rt)

What data do we have?
r = 4.4% t = 6 months = .5
Sum = \$5000
Simple
6 - 59
6
Interest

## How much must I invest in order for it to grow to \$5000

within 6 months, @ 4.4% simple interest?

## Formulae I = Prt & Sum = P(1+rt)

UsingSum = P(1+rt)
As we know the Sum, the formula now becomes…
P = Sum/(1+rt)
Simple
6 - 60
6
Interest

## How much must I invest in order for it to grow to \$5000

within 6 months, @ 4.4% simple interest?

Formula P = Sum/(1+rt)

P =5000/ 1 + 0.044(.5)
P = \$4892.37
Simple
6 - 61
6
Interest

LO-2

Simple
6 - 62
6
Interest

## What is the equivalent value on September 15

of a \$2000 payment on July 4, if money is
worth 6% pa?

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
Simple
6 - 63
6
Interest

## What is the equivalent value on May 18th of a

\$2000 payment due on the following December
15th if money can earn 5.2%?

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
Simple
6 - 64
6
Interest

## Heather owes Mark \$3000 payable on

April 27.
If money can earn 4%, what amount
should Mark accept in settlement of the
debt:
A) 30 days before the scheduled
payment?
B) 90 days before the scheduled
payment?

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)

Simple
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
Simple
6 - 67
6
Interest

## You can prepay \$1234 tuition for a course or

delay payment for 3 months and pay \$1432.
If you can earn 6% on your money,
which option should you choose?

Simple
6 - 68
6
Interest

## \$1234 = Present Value = P1

\$1432 = Future Value = S2

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!