CHAPTER 1: Simple and Discount Interest

1.1 Interest

.1 Simple Interest

Interest

• Interest

-the cost of borrowing money

• Principal

-the money borrowed

• Rate of interest

-stated as a percentage and is based on a certain time period

Simple Interest

• Formula:

Interest = Principal * Rate * Time

• Example:

– What is the interest charged on a $1500 loan @ 10% for 1 year?

» $1500 * .10 * 1 = $150 Total Interest

Ordinary and Exact Interest

• If the loan is for less than one year, use a fraction of a year
 • Two ways to calculate simple interest:

• Ordinary Interest

• based on a 360 day per year calendar

• assumes 30 days in each month

• Exact Interest

• based on a 365 day per year calendar

Ordinary/Exact Example

• Assume you have a $2500 loan at 12% interest for

60 days

• What is the ordinary interest you would pay?

• Formula: Principal * Rate * Days/360

$2500 * .12 * 60/360

• What is the exact interest you would pay?

• Formula: Principal * Rate * Days/365

$2500 * .12 * 60/365

Calculating Days

• To calculate the number of days between two dates:

• Count the days in the first month excluding the first day
• Count the days in each succeeding month

Days in Each Month

March
May
June

• Use your knuckles Feb April

July
• start on the left hand and work your
way through your hands using yourJan
knuckles and the space between your
knuckles

• on the knuckle - 31 days

• between the knuckles - 30 days

• exception - February
 Calendar

January 31 July

February 28 August

March 31 September 30

April 30 October

May June 31 30 November 30 December 31

Calculating Days Example

• How many days are from July 15 to September 15?

• Solution:

July (31-15) = 16
August = 31
September = 15

Total Days = 62

Calculating Days Example 2

• From June 10 to September 22 is how many days?

• Solution:

June =
July =
Augu
st=
September=

Total Days =
Calculating Days Answer

• From June 10 to September 22 is how many days?

• Solution:

June (30 - 10) = 20

July = 31 August =
31
September = 22

Total Days = 104

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The 6% Method
When the rate of interest is 6%, use is often made of what is known as
the 6% method or the 60-day method. By this method the time is reduced
to multiples or fractions of 60 days or of 6 days.

Rule:

1. 2. 3.
 To find interest for 60
days by the 6%
method, move the
decimal point in the
principal two places to
the left.
To find interest for To find interest for
6 days, move the other intervals of
decimal point in time,multiply or divide
the principal three as may be necessary,
places to the left. the amounts which are
thus found.

Example: What is the interest on $500 for 5 months and 8 days at 6%?
5 = 60 days + 60 days + 30
months days.

8 days = 6 days + 2 days.

$5.00 int. for 60 days.

$5.00 int. for 60 days.

$2.50 int. for 30 days.

.50 int. for 6 days.

.17int. for 2 days.

$13.17total int. - Answer

EXPLANATION:
Since the interest for 1 year is 0%, the interest for 2 months or 60 days is
1% and the interest for 6 days is 1/10 of that for 60 days, or .1%. Taking the
given example, the time is divided as shown. Each 60-day period earns 1%
or $5.00 of interest. The 30-day period earns 1/2 of $5.00 or $2.50. For 6
days the interest is 1/10 of 1%, or $0.50 and for 2 days it is 1/2 of 1/10 of
1% or $0.162/3, which is changed to $0.17. Adding these figures gives the
total interest for the whole period.

http://www.telacommunications.com/nutshell/math/interest.htm

Accumulation and Discount at Simple Interest

1. Accumulate.

Given:
P = ₱ 10,000, r = 7% or 0.07 and t = 5 years

Required: F

Solution:

F = P (1 + rt)

F = ₱ 10,000 (1 + (0.7)5)

F = ₱ 10,000 (1.35)

F = ₱ 13,
500

2. Discount.

Given:

P = ₱ 10,000, r = 5% or 0.05 and t = 5 years

Required: P

9Solution:

F
P=
(1+ r t )

P = ₱ 10,000/(1 + (0.05) (5)

rate used to determine the present

P = ₱ value of cash.

8,000 Interest Rate

https://www.academia.edu/38
36384/Math_of_Investment
 Interest rates and
discount rates both relate to the cost
of money, although in different ways.
An interest rate is the rate you can
expect to pay for borrowing money, or
the rate of return you expect from an
investment. Discount rate refers to the
Interest is the price a borrower
pays to use someone else's money.
Say you take out a $150,000
mortgage at a 6 percent annual
interest rate. The bank didn't really
"give" you $150,000. It's just letting
you use its money for a while (up to
30 years). You'll pay the money back,
of course, but each year, you'll also
pay the bank 6 percent of your
outstanding mortgage balance for the
privilege of using its money. Car
loans, credit cards and student loans
all work on the same principle. Buy a
bond or put money in a savings
account, and you'll be the one earning
interest: Someone will pay you for the
privilege of using your money.
Associated Risk
Interest rates reflect risk. The
greater the risk that a loan won't be
repaid, the higher the interest rate the
borrower will have to pay. That's why
people, companies and governments
with poor credit have higher borrowing
costs than those with good credit. But
even "risk-free" loans will involve
interest. U.S. Treasury securities,
which the financial world generally
views as having zero risk of default,
still pay interest, albeit at relatively low
rates. Investors expect to earn a
return for their money, even if they put
it somewhere safe.
Discount Rate
In finance, there are two
different things that go by the name
discount rate. One is the rate that the
Federal Reserve charges banks for
short-term loans. The second
definition is of more interest to
investors – it's the rate you use when
adjusting for the "time value of
money." The time value of money is a
basic principle of finance. It means
that a certain amount of money has
different values at different points in
time. Given a choice between
receiving $100 today and getting $100
in a year, you should take the money
now. You could invest it, and if you
earned any return at all (even a risk-
free rate), you'd end up with more
than $100 a year from now.
Present Value
If $100 today is worth more
than $100 next year, then there must
be some value today that's equal to
$100 a year from now. That value is
called the "present value" of $100 a
year from now, and you determine
present value using the discount rate.
If the discount rate is 10 percent, for
example, then the present value is
$90.00. If you invested $90.00 today
and earned a 10 percent return, you'd
have $100 a year from now. The trick,
though, is in determining the proper
discount rate. There are financial
professionals whose entire jobs
involve figuring this out.
Factors
An array of factors go into
determining the appropriate discount
rate to use in a time value of money
calculation. For example, say an
investment promised to pay $100 in a
year. How much you'd be willing to
pay for that investment today depends
on the return you require to make it
worth your while. Interest rates are
one factor: You'll expect to earn a rate
equal to your risk (and certainly better
than the risk-free rate). Inflation is
another: You want to make sure you
don't lose ground while your money is
tied up. Taxes also play a role: If
you're going to take a tax hit on your
profit, then that profit had better be
worth it. And the return offered by
similar investments will also factor in.
If you can get a better return
somewhere else, you might not bother
with this one.
https://pocketsense.com/
interest-rate-vs-discount-rate-
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