Chapter 8:

Simple interest
Compound interest
Question 2: Simple interest accumulation:
(a) Define and explain the notion of simple interest.

(b) An investor makes a $3500 deposit from 1 June to 31 August at 4.25 per cent per annum
simple interest. How much interest will the investor earn? (8.1)
I = A x d/365 x i = $3500 x 92/365 x 4.25% = $37.49
(c) A bank accepts a $5000 term deposit to mature in 547 days and pays 5.75 per cent per
annum. How much interest will the bank have to pay?
I = A x d/365 x I
= $5000 x 547/365 x 5.75%
= $430.86

(d) A bank accepts a deposit of $6500 for a term of one year and 90 days, with an interest
rate of 5.95 per cent per annum simple interest. Interest is payable six monthly and at the
maturity date. What amount will be paid at each interest date and at the maturity date?
(Assume the deposit is made on 1 July 2016.)
First 6-month payment (184 days)
I = A x d/365 x I = $6500 x 184/365 x 5.95% = $194.96
Second 6-month payment (365-184 = 181 days)
I = A x d/365 x I = $6500 x 181/365 x 5.95% = $191.79
Amount paid at marturity (principal + interest)
S = A.[1 + (d/365 x i)] = $6500 [1 + (90/365 x 0.0595)] = $6595.36

(e) What is the future value of $10000 invested for 270 days at a current yield of 6.50 per
cent
simple interest? (LO 8.1)
S = A.[1 + (d/365 x i)]  FV = PV x [1+ (n.i)]
= $10000 x (1 + (270/365 x 6.5%))
= $10.280,82