CH11 PPT

11.
1 The Simple Interest Formula
Find simple interest by using the simple

interest formula.
Find the maturity of a loan.
Convert months to a fractional or decimal

part of the year.
Find the principal, rate or time using the

simple interest formula.
Business Math, Eighth Edition

Cleaves/Hobbs
2009 Pearson Education, Inc. Upper Saddle River, NJ

07458 All Rights Reserved
Key Terms
Interest: an amount paid or earned for the use

of money.
Simple interest: interest earned when a loan

or investment is repaid in a lump sum.
Principal: the amount of money borrowed or

invested.
Rate: the percent of the principal paid as

interest per time period.
Time: the number of days, months or years

that the money is borrowed or invested.
Cleaves/Hobbs

11.1.1 The Simple Interest Formula
The interest formula shows how interest, rate,

and time are related and gives us a way of
finding one of these values if the other three
values are known.
I=PxRxT

Cleaves/Hobbs

Find the simple interest using

the simple interest formula

Cleaves/Hobbs

Identify the principal,

rate and time
The interest is a percentage.
Principal is the amount borrowed or invested.
Rate of interest is a percent for a given time

period, usually one year.
Time must be expressed in the same unit of

time as the rate. (i.e. one year)

Cleaves/Hobbs

Find the interest paid on a loan
Principal = (P) $1,200
Interest rate = 8% (or 0.08)
Time = 1 year
Interest = P x R x T
Interest = 1,200 x 0.08 x 1
Interest = $96
The interest on the loan is $96.

Cleaves/Hobbs

Try these examples
Find the interest on a 2-year loan of

$4,000 at a 6% rate.
$480
Find the interest earned on a 3-year

investment of $5,000 at 4.5% interest.
$675

Cleaves/Hobbs

11.1.2 Find the Maturity

Value of a Loan
Maturity value: the total amount of money due

by the end of a loan period; the amount of the
loan and interest.
If the principal and the interest are known, add

them.
MV = principal + PRT
MV = P(1+RT)
Cleaves/Hobbs

Look at this example
Marcus Frank Lampard Logan can purchase

furniture
on
a
2-year simple interest loan at 9% interest per
year.
What is the maturity value for a $2,500 loan?
MV = P (1 + RT) Substitute known values.
MV = $2,500 ( 1 + 0.09 x 2)
(See next slide)

Cleaves/Hobbs

What is the maturity value?
MV = $2,500 ( 1 + 0.09 x 2)
MV = $2,500 (1 + 0.18)
MV = $2,500 (1.18)
MV = $2,950
Marcus will pay $2,950 at the end of two

years.

Cleaves/Hobbs

Try these examples
Terry Williams is going to borrow $4,000 at 7.5%

interest. What is the maturity value of the loan
after three years?
$4,900
Jim Sherman will invest $3,000 at 8% for 5

years. What is the maturity value of the
investment?
$4,200
Cleaves/Hobbs

11.1.3 Convert Months to a

Fractional or Decimal Part of a Year
Write the number of months as the

numerator of a fraction.
Write 12 as the denominator of the fraction.
Reduce the fraction to lowest terms if using the

fractional equivalent.
Divide the numerator by the denominator to get

the decimal equivalent of the fraction.
Cleaves/Hobbs

Convert the following to

fractional or decimal part of a year
Convert 9 months and 15 months, respectively,

to years, expressing both as fractions and
decimals.
9/12 = = 0.75
9 months = or 0.75 of a year
15/12 = 1 3/12 = 1 = 1.25
15 months = 1 or 1.25 of a year.

Cleaves/Hobbs

To save money, Stan Wright invested $2,500 for

42 months at 4 % simple interest. How much
interest did he earn?
42 months = 42/12 = 3.5
I=PxRxT
I = $2,500 x 0.045 x 3.5
I = $393.75
Stan will earn $393.75

Cleaves/Hobbs

Try these examples
Akiko is saving a little extra money to pay for

her car insurance next year. If she invests
$1,000 for 18 months at 4%, how much interest
can she earn?
$60
Habib is going to borrow $2,000 for 42 months

at 7% . What will the amount of interest owed
be?
$490
Cleaves/Hobbs

11.1.4 Find the Principal, Rate or Time

Using the Simple Interest Formula

Cleaves/Hobbs

Find the principal using

the simple interest formula
P = I / RT
Judy paid $108 in interest on a loan that she

had for 6 months. The interest rate was 12%.
How much was the principal?
Substitute the known values and solve.
P = 108/ 0.12 x 0.5
P = $1,800
Cleaves/Hobbs

Find the rate using the

simple interest formula
R = I / PT
Sam wants to borrow $1,500 for 15 months and

will have to pay $225 in interest. What is the
rate he is being charged?
R = 225/ $1,500 x 1.25
R = .12 or 12%
The rate Sam will pay is 12%.

Cleaves/Hobbs

Find the time using the

simple interest formula
T = I / RP
Shelby borrowed $10,000 at 8% and paid $1,600

in interest. What was the length of the loan?
T = $1,600/0.08 x $10,000
T=2
The length of the loan was two years.

Cleaves/Hobbs

11.2 Ordinary and Exact Interest
Find exact time.
Find the due date.
Find the ordinary interest and the exact

interest.
Make a partial payment before the maturity

date.

Cleaves/Hobbs

11.2.1 Find Exact Time
Ordinary time: time that is based on

counting 30 days in each month.
Exact time: time that is based on counting

the exact number of days in a time period.

Cleaves/Hobbs

Examples
The ordinary time from July 12 to September

12 is 60 days.
To find the exact time from July 12 to

September 12, add the following:
Days in July
(31 - 12 =)
Days in August
Days in September
19
31
+12
62 days

Cleaves/Hobbs

Sequential Numbers for

Dates of the Year
Find the exact time of a loan using the

sequential numbers table.
(Table 11-1 in the text)
If the beginning and due dates of the loan fall

within the same year, subtract the beginning
dates sequential number from the due dates
sequential number.
Ex.: From May 15 to October 15
288-135 = 153 days is the exact time

Cleaves/Hobbs

Beginning and due

dates in different years
Subtract the beginning dates sequential

number from 365.
Add the due dates sequential number to the

result from the previous step.
If February 29 falls between the two dates,

add 1. (Is it a leap year?)

Cleaves/Hobbs

Find the exact time from May 15 on Year 1 to

March 15 in Year 2.
365 135 = 230
230 + 74 = 304 days
The exact time is 304 days.
Note: If Year 2 is a leap year, the exact time is

305 days.
Cleaves/Hobbs

Try this example
A loan made on September 5 is due July 5 of

the following year.
Find:
Ordinary time = 300 days
Exact time (non-leap year) = 303 days
Exact time (leap year) = 304 days

Cleaves/Hobbs
a) ordinary time
b) exact time in a non-leap year
c) exact time in a leap year.

11.2.3 Find the Ordinary Interest

and the Exact Interest
Ordinary interest: a rate per day that assumes

360 days per year.
Exact interest: a rate per day that assumes

365 days per year.
Bankers rule: calculating interest on a loan

based on ordinary interest and exact time
which yields a slightly higher amount of interest.

Cleaves/Hobbs

Find the ordinary interest per day
For ordinary interest rate per day, divide the

annual interest rate by 360.
Ordinary interest rate per day =
Interest rate per year
360

Cleaves/Hobbs

Find the exact interest per day
For exact interest rate per day, divide the

annual interest rate by 365.
Exact interest rate per day =
Interest rate per year
365

Cleaves/Hobbs

Use ordinary time to find

the ordinary interest on a loan
A loan of $500 at 7% annual interest rate. The

loan was made on March 15 and due on May
15. (Principal = $500) I = P x R x T
Length of loan (ordinary time) = 60 days
Rate = 0.07/360 (ordinary interest)
Interest = $500 x 0.07/360 x 60
Interest = $5.83
Cleaves/Hobbs

Find the ordinary interest using

exact time for the previous loan

Length of loan (exact time) = 61 days
Rate = 0.07/360 (ordinary interest)
Interest = $500 x 0.07/360 x 61
Interest = $5.93
Cleaves/Hobbs

Find the exact interest using

exact time for the previous loan

Length of loan (exact time) = 61 days
Rate = 0.07/365 (exact interest)
Interest = $500 x 0.07/365 x 61
Interest = $5.84
Cleaves/Hobbs

11.2.4 Make a Partial Payment

Before the Maturity Date
To find the adjusted principal and adjusted
balance due at maturity for a partial payment
made before the maturity date:
1. Determine the exact time from the date of the
loan to the first partial payment.
2. Calculate the interest using the time found in
Step 1.
(continue on next slide)
Cleaves/Hobbs

11.2.4 Make a Partial Payment

Before the Maturity Date
3. Subtract the amount of interest found in Step 2
from the partial payment.
4. Subtract the remainder of the partial payment
(Step 3) from the original principal. This is the
adjusted principal.
5. Repeat process for additional partial payments.
6. At maturity, calculate interest from the last
partial payment and add to adjusted principal.
This is the adjusted balance due at maturity.
Cleaves/Hobbs

Tony borrows $5,000 on a 10%, 90 day note.

On the 30th day, Tony pays $1,500 on the note.
If ordinary interest is applied, what is Tonys
adjusted principal after the partial payment, and
adjusted balance due at maturity?
$5,000(.1)(30/360) = $41.67
$1,500 - $41.67 = $1,458.33
$5,000 - $1,458.33 = $3,541.67 (Adj. Principal)
$3,541.67(.1)(60/360) = $59.03 (Interest)
$3,541.67 + $59.03 = $3,600.70 (Adj. Balance)
Cleaves/Hobbs

11.3 Promissory Notes
Find the bank discount and proceeds for a

simple discount note.
Find the true effective interest rate of a

simple discount note.
Find the third-party discount and proceeds

for a third-party discount note.

Cleaves/Hobbs

11.3.1 Find the Bank Discount and

Proceeds for a Simple Discount Note
For the bank discount, use:

Bank discount = face value x disc. rate x
time
[I = P x R x T]
For the proceeds, use:

Proceeds = face value bank discount
A=P-I

Cleaves/Hobbs

A promissory note

Cleaves/Hobbs

11.3.2 Find the True of Effective Interest

Rate of a Simple Discount Note
To find the true or effective interest rate of a
simple discount note:
1. Find the bank discount (interest).
I = PRT
2. Find the proceeds:
proceeds = principal bank discount.
3. Find the effective interest rate: R = I/PT
using the proceeds as the principal
Cleaves/Hobbs

Try this example
What is the effective interest rate of a $5,000

simple discount note, at an ordinary bank
discount rate of 12%, for 90 days?
I = PRT; I = $5,000(.12)(90/360)
I = $150 (Bank discount)
Proceeds = $5,000 - $150 = $4,850
R = I/PT; R = $150/$4,850(90/360)
R = .1237113402
R or the effective interest rate = 12.4%

Cleaves/Hobbs

11.3.3 Find the Third Party Discount and

Proceeds for a Third Party Discount Note
For the bank discount, use:

Third party discount = maturity value of the
original note x discount rate x discount
period.
For the proceeds, use:

Proceeds = maturity value of original note
third-party discount
A=P-I

Cleaves/Hobbs

Mihoc Trailer made a note of $10,000 with Darcy

Mihoc, owner, at 9% simple interest based on
exact interest and exact time. The note is
made on August 12 and due November 10.
Since Mihoc Trailer needs cash, the note is
taken to a third party on September 5.
The third-party agrees to accept the note with a

13% annual discount using the bankers rule.
Find the proceeds of the note.

Cleaves/Hobbs

Mihoc Trailer Sales
To find the proceeds, we find the maturity value

of the original note, then the third-party
discount.
Exact time is 90 days (314-224)
Exact interest rate is .09/365
MV = P(1+ RT)
MV = $10,000 ( 1 + 0.09/365 x 90)
MV = $10.221.92
Cleaves/Hobbs

Find the proceeds of the note
Exact time of the discount period is 66 days.

(314 - 248) period between Sept. 5 and Nov. 10.
Ordinary discount rate is 0.13/ 360.
Third party discount = I = PRT
Third party discount = $10,221.92 (0.13/360)(66)
Third party discount = $243.62
Proceeds = A = P I
Proceeds = $10,221.92 - $243.62 = $9,978.30

Cleaves/Hobbs


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11.

1 The Simple Interest Formula

Find simple interest by using the simple

Find the maturity of a loan.

Convert months to a fractional or decimal

Find the principal, rate or time using the

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Interest: an amount paid or earned for the use

Simple interest: interest earned when a loan

Principal: the amount of money borrowed or

Rate: the percent of the principal paid as

Time: the number of days, months or years

2009 Pearson Education, Inc. Upper Saddle River, NJ

11.1.1 The Simple Interest Formula

The interest formula shows how interest, rate,

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Find the simple interest using

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Identify the principal,

The interest is a percentage.

Principal is the amount borrowed or invested.

Rate of interest is a percent for a given time

Time must be expressed in the same unit of

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Find the interest paid on a loan

Principal = (P) $1,200

Interest rate = 8% (or 0.08)

Interest = 1,200 x 0.08 x 1

The interest on the loan is $96.

2009 Pearson Education, Inc. Upper Saddle River, NJ

Try these examples

Find the interest on a 2-year loan of

Find the interest earned on a 3-year

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

11.1.2 Find the Maturity

Maturity value: the total amount of money due

If the principal and the interest are known, add

2009 Pearson Education, Inc. Upper Saddle River, NJ

Look at this example

Marcus Frank Lampard Logan can purchase

What is the maturity value for a $2,500 loan?

MV = P (1 + RT) Substitute known values.

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

What is the maturity value?

Marcus will pay $2,950 at the end of two

Business Math, Eighth Edition

2009 Pearson Education, Inc. Upper Saddle River, NJ

Try these examples

Terry Williams is going to borrow $4,000 at 7.5%

Jim Sherman will invest $3,000 at 8% for 5

2009 Pearson Education, Inc. Upper Saddle River, NJ

11.1.3 Convert Months to a

Write the number of months as the

Write 12 as the denominator of the fraction.

Reduce the fraction to lowest terms if using the

Divide the numerator by the denominator to get

2009 Pearson Education, Inc. Upper Saddle River, NJ