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Simple interest
Interest on loans of a year or less is frequently calculated as simple interest, a type
of interest that is charged (or paid) only on the principal borrowed (or invested). The
rate of interest is given as a percentage per year, expressed as a decimal.
Simple interest Rule:
𝐼 =𝑃∗𝑖∗𝑛
Where:
▪ 𝑰: 𝑆𝑖𝑚𝑝𝑙𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡.
▪ 𝑷: 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙. (money borrowed)
▪ 𝒊: 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒. (per year)
▪ 𝒏: 𝑡𝑖𝑚𝑒.
Note:
In simple interest calculation the time (n) must be in years by which if the time is
not given in years it must be converted into years as the following table:
Time conversion
Monthly n/12
Weekly n/52
Quarterly n/4
Daily ordinary n/360
Daily exact n/365 or n/366
Note:
A leap year is a year of 366 days and can be divided by 4 like 2008, 2012, 2020,
While a simple year is a year of 365 days and can not be divided by 4 like 2019,
2021.
Page 1 of 7
Exercises:
A- Find the interest in the following:
Principal Interest rate Time
1) $4800 14% 15 months
2) $10000 10% 13 weeks
3) $5000 16% 2 years & 3 months
4) $3000 10% 60 days ordinary interest
5) $8000 12% 90 days exact interest
Solution:
𝐼 =𝑃∗𝑖∗𝑛
15
1) 𝐼 = 4800 ∗ 0.14 ∗ = $840
12
13
2) 𝐼 = 10000 ∗ 0.1 ∗ = $250
52
27 3
3) 𝐼 = 5000 ∗ 0.16 ∗ ( 𝑜𝑟 2 + ) = $1800
12 12
60
4) 𝐼 = 3000 ∗ 0.10 ∗ = $50
360
90
5) 𝐼 = 8000 ∗ 0.12 ∗ = $236.71 (default)
365
90
𝐼 = 8000 ∗ 0.12 ∗ =$236.07
366
Page 2 of 7
B- Find the exact interest:
Principal Interest rate Time
1) $4380 19.5% From Feb. 1, 2004 to April 14,
2004
Solution:
Calculating n:
Feb. March April n
28 31 14 73
73
𝐼 = 𝑃 ∗ 𝑖 ∗ 𝑛 = 4380 ∗ 0.195 ∗ = $170.8
366
𝑆 =𝑃+𝐼
𝑆 =𝑃+𝑃∗𝑖∗𝑛
𝑆 = 𝑃(1 + 𝑖 ∗ 𝑛)
Exercises:
A- A man borrows $500 for four months at 9%. What is the amount he
must paid at the end of the four months?
4
𝑆 = 𝑃(1 + 𝑖 ∗ 𝑛) = 500 (1 + 0.09 ∗ ) = $515
12
B- What is the simple interest and amount on $700 for 125 days at
10%?
125
𝐼 = 𝑃 ∗ 𝑖 ∗ 𝑛 = 700 ∗ 0.10 ∗ = $24.3
360
𝑆 = 𝑃 + 𝐼 = 700 + 24.3 = $724.3
𝟕𝟑 𝟕𝟐
𝑰= 𝑰𝒆 𝒂𝒏𝒅 𝑰𝒆 = 𝑰
𝟕𝟐 𝟕𝟑
The difference between ordinary and exact interest:
Page 5 of 7
Prove that:
𝟕𝟑 𝟕𝟐
𝑰= 𝑰𝒆 𝒂𝒏𝒅 𝑰𝒆 = 𝑰
𝟕𝟐 𝟕𝟑
Proof:
𝑛
𝐼 =𝑃∗𝑖∗
360
𝑛
𝐼𝑒 = 𝑃 ∗ 𝑖 ∗
365
By dividing the first equation on the second equation:
𝑛
𝐼 𝑃∗𝑖∗
= 360
𝐼𝑒 𝑃 ∗ 𝑖 ∗ 𝑛
365
𝑛
𝐼
= 360
𝑛
𝐼𝑒
365
𝐼 𝑛 365
= ∗
𝐼𝑒 360 𝑛
𝐼 73
=
𝐼𝑒 72
𝟕𝟑 𝟕𝟐
∴𝑰= 𝑰𝒆 𝒂𝒏𝒅 𝑰𝒆 = 𝑰
𝟕𝟐 𝟕𝟑
Page 6 of 7
Prove that:
Page 7 of 7