Fundamentals of Business Math

Canadian 3rd Edition Jerome Solutions

Manual
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7 Applications of Simple Interest
Math App (Section 7.1)
What to do with a Small Amount of Savings in a Low Interest Rate Environment?

“Smart Saver” Account:

Interest Paid on October 1 = Prt = $5000(0.0045) =$1.85

Interest Paid on November 1 = Prt = $5001.85(0.0045) =$1.91

Interest Paid on December 1 = Prt = $5003.76(0.0045) =$1.85

Interest Paid on January 1 = Prt = $5005.61(0.0045) =$1.91

Total interest earned in the “Smart Saver” Account = $1.85+$1.91+$1.85+$1.91 = $7.52

“Savings Builder” Account:

Interest Paid on October 1 = Prt = $5000(0.0025) =$1.03

Interest Paid on November 1 = Prt = $5001.03(0.0025) =$1.06

Interest Paid on December 1 = Prt = $5002.09(0.0025) =$1.03

Interest Paid on January 1 = Prt = $5003.12(0.0025) =$1.06

Total interest earned in the “Smart Saver” Account = $1.03+$1.06+$1.03+$1.06 = $4.18

Non-redeemable GIC: I = Prt = $5000(0.006) = $10.03 of interest earned

Redeemable GIC: I = Prt = $5000(0.0005) = $0.84 of interest earned

Therefore, the non-redeemable GIC is the best option, providing $10.03- $0.84 = $9.19 more in
interest than the least attractive option, the redeemable GIC.

Exercise 7.1
Basic Problems
1. Period Balance No. of
(inclusive) in account days Interest earned
17
Sept. 1-17 $2800 17 $2800(0.0105) = $1.369
365
13
Sept. 18-30 $3500 13 $3500(0.0105) = $1.309
365
Interest earned in September = $2.68
178 Fundamentals of Business Mathematics in Canada, 3/e
Exercise 7.1 (continued)
 91 
2. I = Prt = $15,000(.002)   = $7.48
 365 
  120 
3. a. Maturity value, S = P(1 + rt) = $15,000 1  0.0125  = $15,061.64
  365 
  90 
b. Maturity value = $15,061.64 1  0.0115  = $15,104.35
  365 
Intermediate Problems
4. The 59-day term deposit option will have a maturity value of
  59 
S = P(1 + rt) = $12,000 1  0.002  = $12,003.88
  365 
The 60-day term deposit option will have a maturity value of
  60 
S = P(1 + rt) = $12,000 1  0.004  = $12,007.89
  365 
By choosing the 60-day term deposit, Janette will earn $12,007.89 – $12,003.88 = $4.01
more than the 59-day term deposit.
5. If she invests in the non-redeemable GIC, Julienne will have a maturity value of:
  195 
S = P(1 + rt) = $185,000 1  0.01  = $185,988.36
  365 
If she invests in the redeemable GIC, Julienne will have a maturity value of
  195 
S = P(1 + rt) = $185,000 1  0.0075  = $185,741.27
  365 
By choosing the non-redeemable GIC, Julienne will earn
$185,988.36 – $185,741.27 = $247.09 more than the redeemable GIC.
  91 
6. Maturity amount = $20,000 1  0.005  = $20,024.93
  365 
  80 
Proceeds of redemption after 80 days = $20,000 1  0.002  = $20,008.77
  365 
Extra interest earned = $20,024.93 – $20,008.77 = $16.16

  364 
7. Maturity value of the 364-day GIC = $10,000 1  0.0065  = $10,064.82
  365 
  182 
Maturity value of the first 182-day GIC = $10,000 1  0.006  = $10,029.92
  365 
  182 
Maturity value of the second 182-day GIC = $10,029.92 1  0.006  = $10,059.93
  365 
Therefore, the investor will earn
$10,064.82 – $10,059.93 = $4.89 more from the 364-day GIC.

Chapter 7: Applications of Simple Interest 179

Exercise 7.1 (continued)

8. Period Balance No. of

(inclusive) in account days Interest earned
6
Sept. 1-6 $2239 6 $2239(0.015) = $0.552
365
3
Sept. 7-9 $2973 3 $2973(0.015) = $0.367
365
11
Sept. 10-20 $2673 11 $2673(0.015) = $1.208
365
10
Sept. 21-30 $3000 10 $3000(0.015) = $1.233
365
Interest earned in September = $3.36

9. Period Amount subject

(inclusive No. of to a rate of:
of end dates) days Balance 0.10% 0.15% Interest
March 1-4 4 $1678 $1678 $0.018
March 5-14 10 978 0 0.00
March 15-22 8 3478 3000 $478 0.081 
March 23-31 9 2578 2578 0.064
Interest credited for March = $0.16
 8 
 Interest = $3000 (0.001)  $ 478 0.0015    = $0.081
 365 

Advanced Problems
10. Period No. of Amount subject to a rate of:
(inclusive) days Balance 0.25% 0.5% 0.75%
April 1-9 9 $2439 $1000 $1439
April 10-22 13 3389 1000 2000 $389
April 23-30 8 2889 1000 1889
Interest earned from April 1-9 inclusive
 9 
= [$1000(0.0025) + $1439(0.005)]   = $0.239
 365 

Interest earned from April 10-22 inclusive

 13 
= [$1000(0.0025) + $2000(0.005) + $389(0.0075)]   = $0.549
 365 
Interest earned from April 23-30 inclusive
 8 
=[$1000(0.0025) + $1889(0.005)]   = $0.262
 365 
Total interest for April = $0.239 + $0.549 + $0.262 = $1.05

180 Fundamentals of Business Mathematics in Canada, 3/e

Exercise 7.1 (continued)
11. Number of days from June 1 to September 1 = 30 + 31 + 31 = 92 days
The value of the term deposit on September 1
  92 
= $12,000 1  0.008  = $12,024.20
  365 
Date Amount in savings account
  30 
July 1 $12,000 1  0.0025  = $12,002.47
  365 
  31 
August 1 $12,002.47 1  0.0025  = $12,005.02
  365 
  31 
Sept. 1 $12,005.02 1  0.0025  = $12,007.57
  365 
Joan will earn $12,024.20 – $12,007.57 = $16.63 more
from the term deposit up to September 1.

  364 
12. The maturity value of a 364-day GIC = $10,000 1  0.007  = $10,069.81
  365 
  182 
Maturity value of the first 182-day GIC = $10,000 1  0.0065  = $10,032.41
  365 
If the second 182-day GIC is to have a maturity value of $10,069.81,
it must earn interest = $10,069.81 – $10,032.41 = $37.40
The interest rate that will generate this interest on the second GIC is
I $37.40
r   0.00748 = 0.748%
Pt $10,032.41182365

Hence, the interest rate on the second 182-day GIC must be 0.748% in order that
Ranjit end up in the same financial position.

Checkpoint Questions (Section 7.2)

1. a. True. A higher rate of return is required in order for a smaller purchase price, P, to
be the present value of a future payment, S.
b. False. If an investor is guaranteed to receive future cash flows totalling $3000, he or
she will need to purchase that investment for less than $3000 in order to build in the
required 2% rate of return.
c. False. The fair market value increases because the smaller difference between the
purchase price and the (unchanged) future cash flows can provide the lower rate of
return.
2. We need to know:
 The amounts of the future payments;
 The dates of the future payments;
 The prevailing (or market) rate of return on similar investments.

Chapter 7: Applications of Simple Interest 181

Checkpoint Questions (Section 7.2) (continued)

3. Estimate the amounts and dates of the future cash flows from the investment. Decide on
the minimum rate of return you are prepared to accept from the investment. Calculate the
sum of the present values of the forecast cash flows, discounting them at the minimum
acceptable rate of return.
4. a. The fair market value will steadily increase because the time intervals in the present
value calculations become smaller (for all payments).
b. If you purchase an investment just before a payment from the investment, you are
entitled to receive that payment. If you purchase an investment just after a payment,
you are not entitled to receive that payment. Therefore, the fair market value of the
investment will drop by the amount of the payment ($500) on the date of the payment.

Exercise 7.2
Basic Problems
1. Value today = Present value of the future payment
$5250
=
1  0.05124 
= $5163.93
2. Value today = Present value of the future payment
$17,400
1  0.0125 12 
= 9

= $17,238.39

3. Value today = Present value of payments

$500 $500
=
1  0.09 12
3 
+
1  0.09 12
6  
= $489.00 + $478.47
= $967.47
$1000 $1000
1  0.03365  1  0.03365 
4. Price = 60
+ 90
= $995.09 + $992.66 = $1987.75

Intermediate Problems
5. Value of certificate A = Sum of the present values of the payments.
$1000 $1000
1  0.0275 124  1  0.0275 12 
= + 8

= $990.917 + $981.997
= $1972.91

$1000 $1000
1  0.0275 12  1  0.0275 12 
Value of certificate B = 5
+ 9

= $988.671 + $979.792
= $1968.46
Since the payments from B are received a month after the respective payments
from A, certificate B is not as valuable as certificate A.

182 Fundamentals of Business Mathematics in Canada, 3/e

Exercise 7.2 (continued)

6. Value of contract today = Sum of the present values of the payments

$1500 $ 2000 $1000

= + +
1  0.105 365  1  0.105 365  1  0.105 200
100 150
365 
= $1458.056 + $1917.269 + $945.596
= $4320.92
7. Maximum price = Sum of the present values of the payments
$4000 $2500 $5000
1  0.062512  1  0.062512  1  0.062512 
= 3
+ 6
+ 9

= $3938.462 + $2424.242 + $4776.119

= $11,138.82
8. The investment will earn interest of $2000 - $1951.62 = $48.38 over the seven month
term. The corresponding rate of return will be
I $48.38
r= = = 0.0425 = 4.25%
Pt $1951.6212 7

The investment will yield 4.25% to the buyer.
9. The investment will earn interest of $9000 - $8872.82 = $127.18 over the term. The
term of the investment will be
I $127.18
t= = = 0.6666 x 12 months = 8 months
Pr $8872 .820.0215 
The term of the investment is 8 months.

Advanced Problems
  5 
10. Payment due 2 months from now = $1800 1  0.05  = $1837.50
  12 
  10 
Payment due 7 months from now = $1800 1  0.05  = $1875.00
  12 
The price that yields a return of 10% is the present value of the payments,
discounted at 10%.

$1837.50 $1875
Price = + = $1807.377 + $1771.654 = $3579.03
1  0.1012  1  0.1012
2 7


11. Number of days from:

March 20 to July 1 = 182 – 79 = 103 days
March 20 to September 1 = 244 – 79 = 165 days
  103 
Payment on July 1 = $3000 1  0.08  = $3067.73
  365 
  165 
Payment on September 1 = $5000 1  0.08  = $5180.82
  365 
(continued)
Chapter 7: Applications of Simple Interest 183
Exercise 7.2 (continued)
Sale proceeds = Sum of present values of payments
$3067.73 $5180.82
1  0.12365  1  0.12165 
= 103
+
365

= $2967.250 + $4914.239
= $7881.49

Checkpoint Questions (Section 7.3)

1. a. False. Commerical paper is issued by corporations which will generally carry a higher
degree of risk than the Government of Canada. In order to be compensated for that
higher degree of risk, an investor will require a higher rate of return. In order to
generate a higher rate of return, an investor must pay a smaller amount, P, for the right
to receive the face value, S, of the commercial paper in the future. Therefore, the
commercial paper will sell for less than the comparable Government of Canada T-bill.
b. False. T-bills are bought and sold in the open market. Therefore, the investor who
purchases the T-bill on its issue date is not required to hold the T-bill until maturity.
c. True. If short-term rates have increased, investors will pay less because they need a
larger difference between the face value and the purchase price to provide the higher
rate of return.
d. False. Government of Canada T-bills are sold at auction on alternate Tuesdays to
institutional investors. The maximum price the investors will bid is dictated by the rate
of return that they have determined they need to earn on the investment. Therefore,
the rate of return is determined by the investors themselves through the auction
process, and not by the Government of Canada.
2. The price of the 98-day T-bill is higher because less time remains until the $100,000 face
value is received. You do not need as large a difference between the face value and the
purchase price to provide the required rate of return.
3. The fair market value will steadily rise, reaching the T-bill’s face value on the maturity date.

Exercise 7.3
Basic Problems
S $25,000
1  rt  1  0.01672365 
1. Price = Present value of face value = = 91
= $24,896.22

S $100,000
1  rt  1  0.00932365 
2. Price = = 90
= $99,770.72

3. Term Price
30 days $100,000
1  0.035365 
30
= $99,713.15

60 days $100,000
1  0.035365 
60
= $99,427.95

90 days $100,000
1  0.035365 
90
= $99,144.37

The longer the term of the commercial paper, the lower the price paid on issue date.

184 Fundamentals of Business Mathematics in Canada, 3/e

Exercise 7.3 (continued)

4. Effectively, the interest earned by the buyer will be

I = S – P = $100,000 – $99,250 = $750
The corresponding rate of return will be
I $750
r=
Pt
=
 
90
$99,250 365
= 0.03065 = 3.065%

The investment will yield 3.065% to the buyer.

5. Effectively, the interest earned by the buyer will be
I = S – P = $100,000 – $99,760 = $240
The corresponding rate of return will be
I $240
$99,760 365 
r= = 98
= 0.00896 = 0.896%
Pt
The investment will yield 0.896% to the buyer.
Intermediate Problems
6. Time remaining until maturity = 91 – 37 = 54 days
$100,000
1  0.0114 365 
Selling price = 54
= $99,831.63

7. Time remaining until maturity = 62 days

S $1,000,000
1  rt  1  0.0210365 
Price = Present value of face value = = 62
= $996,445.56

8. Time remaining
until maturity Price
$100,000
 $99,258
91 days
 
1  0.03 365
91

$100,000
 $99,501
61 days
 
1  0.03 365
61

$100,000
 $99,746
31 days
 
1  0.03 365
31

$100,000
 $99,992
1 day
 
1  0.03 365
1

As time passes, a T-bill's price rises (finally reaching its face value on the maturity date).

$100,000
1  0.0017  365 
9. Price at the February 2010 discount rate = 91
= $99,957.63

$100,000
1  0.2082 365 
Price at the August 1981 discount rate = 91
= $95,065.40

You would have paid $99,957.63 – $95,065.40 = $4892.23 more at the lower required rate
of return.
10. Time remaining until maturity = 90 – 27 = 63 days
$300,000
1  0.0215 365 
Selling price = 63
= $298,890.83

Chapter 7: Applications of Simple Interest 185

Exercise 7.3 (continued)

Advanced Problems
11. a. The interest effectively earned if held until maturity is
I = S – P = $25,000 – $24,812= $188
The corresponding rate of return is
I $188
$24,812182 
r= = = 0.0152 = 1.520%
Pt 365

b. The interest effectively earned during the final 122 days was
I = $25,000 – $24,875 = $125
The rate of return required by the market was
$125
$24,875 122 
r= = 0.01503 = 1.503%
365
c. The original investor earned $24,875 – $24,812 = $63 on a $24,812 investment for
60 days. The rate of return was
I $63
$24,812365 
r= = 60
= 0.01545 = 1.545%
Pt
$100,000
1  0.021168 
12. a. Purchase price = = $99,042.68
365
$100,000
1  0.024365 
b. (i) Market value = 83
= $99,457.21

$100,000
1  0.021 365 
(ii) Market value = 83
= $99,524.74

$100,000
1  0.018365 
(iii) Market value = 83
= $99,592.35

c. The amount earned in each case was:

(i) I = S – P = $99,457.21 – $99,042.68 = $414.53
(ii) I = S – P = $99,524.74 – $99,042.68 = $482.06
(iii) I = S – P = $99,592.35 – $99,042.68 = $549.67
The rate of return actually realized in each case was:
I $414.53
$99,042.68365 
(i) r= = 85
= 0.01797 = 1.797%
Pt
$482.06
$99,042.68365 
(ii) r= 85
= 0.02090 = 2.090%

$549.67
$99,042.68365 
(iii) r= 85
= 0.02383 = 2.383%

13. If purchased for $99,900, the T-bill will effectively pay $100 interest when it matures
at $100,000. The time remaining until maturity (when the T-bill will have a market value
of $99,900) is
I $100
t= = = 0.22444 year = 0.22444  365 days = 82 days
Pr $99,900 (0.00446 )
The T-bill's price will first exceed $99,900 82 days before its maturity date.

186 Fundamentals of Business Mathematics in Canada, 3/e

Exercise 7.4
Intermediate Problems
Revolving Demand Loans
1. Number Interest Accrued Payment Principal
Date of days rate Interest interest (Advance) portion Balance
12-Jun -- -- -- -- -- $65,000
30-Jun 18 6.25% $200.34 $200.34 ($10,000) ($10,000) 75,000
3-Jul 3 6.25 38.53 238.87 75,000
12-Jul 9 6.50 120.21 359.08 359.08 75,000
29-Jul 17 6.50 227.05 227.05 75,000
12-Aug 14 7.00 201.37 428.42 428.42 75,000
The interest charges to Delta's current account were $359.08 on July 12 and $428.42
on August 12.
2. Number Interest Accrued Payment Principal
Date of days rate Interest interest (Advance) portion Balance
5-Feb -- -- -- -- ($15,000) ($15,000) $15,000
28-Feb 23 3.70% $34.97 $34.97 34.97 15,000
15-Mar 15 3.70 22.81 22.81 10,000 10,000 5000
31-Mar 16 3.70 8.11 30.92 30.92 5000
30-Apr 30 3.70 15.21 15.21 15.21 5000
1-May 1 3.70 0.51 0.51 (7000) (7000) 12,000
31-May 30 3.70 36.49 37.00 37.00 12,000
The interest charged to Dr. Robillard's account was $34.97 on February 28,
$30.92 on March 31, $15.21 on April 30, and $37.00 on May 31.

3. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) Portion Balance
3-Jul -- -- -- -- ($25,000) ($25,000) $25,000
20-Jul 17 5.00% $58.22 $58.22 58.22 25,000
29-Jul 9 5.00 30.82 30.82 (30,000) (30,000) 55,000
5-Aug 7 5.00 52.74 83.56 55,000
20-Aug 15 4.75 107.36 190.92 190.92 55,000
The amounts of interest charged on July 20 and August 20 were $58.22 and $190.92,
respectively.

Fixed-Payment Demand Loans

4. Number Interest Accrued Payment Principal

Date of days rate Interest interest made Portion Balance
3-Jun -- -- -- -- -- -- $5000.00
1-Jul 28 8.75% $33.56 $33.56 $1000.00 $966.44 4033.56
1-Aug 31 8.75 29.98 29.98 1000.00 970.02 3063.54
1-Sep 31 8.75 22.77 22.77 1000.00 977.23 2086.31
1-Oct 30 8.75 15.00 15.00 1000.00 985.00 1101.31
1-Nov 31 8.75 8.18 8.18 1000.00 991.82 109.49
1-Dec 30 8.75 0.79 0.79 110.28 109.49 0.00

Chapter 7: Applications of Simple Interest 187

Exercise 7.4 (continued)
5. Number Interest Accrued Payment Principal
Date of days rate Interest interest (Advance) portion Balance
20-Jul -- -- -- -- -- -- $7000.00
19-Aug 30 8.75% $50.34 $50.34 7000.00
1-Sep 13 9.25 23.06 73.40 $1400.00 $1326.60 5673.40
1-Oct 30 9.25 43.13 43.13 1400.00 1356.87 4316.53
1-Nov 31 9.25 33.91 33.91 1400.00 1366.09 2950.44
2-Nov 1 9.25 0.75 0.75 2950.44
1-Dec 29 9.50 22.27 23.02 1400.00 1376.98 1573.46
1-Jan 31 9.50 12.70 12.70 1400.00 1387.30 186.16
1-Feb 31 9.50 1.50 1.50 187.66 186.16 0.00

Advanced Problems
Revolving Demand Loans
6. Number Interest Accrued Payment Principal
Date of days rate Interest interest (Advance) Portion Balance
15-Sep -- -- -- -- -- -- $23,465.72
15-Oct 30 4.35% $83.90 $83.90 $706.49 $622.59 22,843.13
15-Nov 31 4.35 84.39 84.39 687.83 603.44 22,239.69
15-Dec 30 4.35 79.51 79.51 669.58 590.07 21,649.62
15-Jan 31 4.35 79.98 79.98 651.89 571.91 21,077.71

7. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) Portion Balance
15-Aug -- -- -- -- -- -- $3589.80
31-Aug 16 5.75% $9.05 $9.05 $300.00 $300.00 3289.80
15-Sep 15 5.75 7.77 16.82 100.00 83.18 3206.62
30-Sep 15 5.75 7.58 7.58 300.00 300.00 2906.62
11-Oct 11 5.75 5.04 12.62 2906.62
15-Oct 4 5.50 1.75 14.37 100.00 85.63 2820.99
31-Oct 16 5.50 6.80 6.80 300.00 300.00 2520.99
15-Nov 15 5.50 5.70 12.50 100.00 87.50 2433.49

Fixed-Payment Demand Loans

8. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) portion Balance
1-Apr -- -- -- -- -- -- $6000.00
1-May 30 4.50% $22.19 $22.19 $1000.00 $977.81 5022.19
1-Jun 31 4.50 19.19 19.19 1000.00 980.81 4041.38
7-Jun 6 4.50 2.99 2.99 4041.38
1-Jul 24 4.35 11.56 14.55 1000.00 985.45 3055.93
1-Aug 31 4.35 11.29 11.29 1000.00 988.71 2067.22
27-Aug 26 4.35 6.41 6.41 2067.22
1-Sep 5 4.50 1.27 7.68 1000.00 992.32 1074.90
1-Oct 30 4.50 3.98 3.98 1000.00 996.02 78.88
1-Nov 31 4.50 0.30 0.30 79.18 78.88 0.00
Total of the interest charges = $79.18

188 Fundamentals of Business Mathematics in Canada, 3/e

Exercise 7.4 (continued)

9. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) portion Balance
13-Sep -- -- -- -- -- -- $15,000.00
20-Oct 37 9.00% $136.85 $136.85 $700.00 $563.15 14,436.85
20-Nov 31 9.00 110.35 110.35 700.00 589.65 13,847.20
26-Nov 6 9.00 20.49 20.49 13,847.20
20-Dec 24 8.75 79.67 100.16 700.00 599.84 13,247.36
20-Jan 31 8.75 98.45 98.45 700.00 601.55 12,645.81
29-Jan 9 8.75 27.28 27.28 12,645.81
20-Feb 22 9.25 70.50 97.78 700.00 602.22 12,043.59

Exercise 7.5
Intermediate Problems
1. Number of days from June 1 to September 3 = 246 – 152 = 94
Number of days from Sept. 3 to (and including) Nov. 30 = 334 + 1 – 246 = 89
Interest accrued during the 6-month grace period
 $94000.0625  $94000.06
94 89
= $288.82
365 365

Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) Portion Balance
1-Dec --- --- --- --- --- --- $9688.82
31-Dec 30 6.00% $47.78 $47.78 $135.00 $87.22 9601.60
17-Jan 17 6.00 26.83 26.83 0.00 9601.60
31-Jan 14 6.25 23.02 49.85 135.00 85.15 9516.45
28-Feb 28 6.25 45.63 45.63 135.00 89.37 9427.08

2. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) portion Balance
1-Jul --- --- --- --- --- --- $3800.00
31-Jul 30 7.7% $24.05 $24.05 $60.00 $35.95 3764.05
31-Aug 31 7.7 24.62 24.62 60.00 35.38 3728.67
30-Sep 30 7.7 23.60 23.60 60.00 36.40 3692.27

3. a. Number of days from January 1 to March 29 = 88 – 1 = 87

Number of days from March 29 to (and including) June 30 = 181 + 1 – 88 = 94
Interest accrued during the 6-month grace period
87 94
 $58000.052  $58000.057 = $157.03
365 365
b. Number Interest Accrued Payment Principal
Date of days rate Interest interest (Advance) portion Balance
1-Jul --- --- --- --- --- --- $5800.00
31-Jul 30 8.20% $39.09 $39.09 $95.00 $55.91 5744.09
31-Aug 31 8.20 40.00 40.00 95.00 55.00 5689.09
30-Sep 30 8.20 38.34 38.34 95.00 56.66 5632.43
Total interest in first 3 payments = $117.43
Chapter 7: Applications of Simple Interest 189
Exercise 7.5 (continued)
Advanced Problems

4. Number of days from July 1 to September 22 = 265 – 182 = 83

Number of days from Sept. 22 to (and including) Dec. 31 = 365 + 1 – 265 = 101
Interest accrued during the 6-month grace period
 $68000.075  $68000.0725
83 101
= $252.39
365 365
Number Interest Accrued Payment Principal
Date of days Rate Interest interest (Advance) portion Balance
1-Jan --- --- --- --- --- --- $7052.39
31-Jan 30 7.25% $42.02 $42.02 $200.00 $157.98 6894.41
28-Feb 28 7.25 38.34 38.34 200.00 161.66 6732.75
2-Mar 2 7.25 2.67 2.67 6732.75
25-Mar 23 6.75 28.64 31.31 500.00 500.00 6232.75
31-Mar 6 6.75 6.92 38.23 200.00 161.77 6070.98

5. Number of days from June 1 to (and including) Nov. 30 = 334 + 1 – 152 = 183
Interest accrued during the 6-month grace period
 $52000.0575
183
= $149.91
365
Number Interest Accrued Payment Principal
Date of days rate Interest interest (Advance) portion Balance
1-Dec --- --- --- --- --- --- $5349.91
31-Dec 30 5.75% $25.28 $25.28 $110.00 $84.72 5265.19
31-Jan 31 5.75 25.71 25.71 110.00 84.29 5180.90
14-Feb 14 5.50 10.93 10.93 300.00 300.00 4880.90
28-Feb 14 5.50 10.30 21.23 110.00 88.77 4792.13

Review Problems
Basic Problems

1. Period Balance No. of

(inclusive) in account days Interest earned
7
May 1-7 $1834.38 7 $1834.38(0.0185) = $0.651
365
24
May 8-31 $2400.00 24 $2400.00(0.0185) =$2.919
365
Interest earned in May = $3.57

S $27,500
1  rt  1  0.0425128 
2. Price = = = $26,742.30

S $50,000
1  rt  1  0.01273 365 
3. Price = = 91
= $49,841.81

190 Fundamentals of Business Mathematics in Canada, 3/e

Review Problems (continued)
4. The earnings from the certificate will be
I = S – P = $100,000 – $98,950 = $1050
The corresponding annual rate of return is
I $1050
 
r= = 90
= 0.04304 = 4.304%
Pt $98,950 365
The investment will yield the buyer 4.304%.
 91 
5. I =Prt = $65,000(0.0115)  = $186.36
 365 
  120 
6. S  P(1  rt)  $55001  0.0275   $5549.73
  365 

Intermediate Problems
7. The maximum price will be the sum of the present values of the payments discounted at
the minimum required rate of return. That is,
$4500 $3000 $5500
1  0.05512  1  0.05512  1  0.0551
Price = 4
+ 8
+

= $4418.985 + $2893.891 + $5213.270

= $12,526.15
The highest price the investor should pay is $12,526.15.
8. Period No. of Amount subject to a rate of:
(inclusive) days Balance 0.50% 1.00% 1.50%
Jan. 1-13 13 $3678 $1000 $2000 $678
Jan. 14-24 11 878 878
Jan. 25-31 7 1828 1000 828
I (Jan. 1-13) = $1000(0.00 5)  $2000 0.01  $678(0.015 ) 365
13 
= $1.253
11 = $0.132
I (Jan. 14-24) = $878(0.005) 365
I (Jan. 25-31) = $1000(0.00 5)  $828 0.01 3657  = $0.255
Total interest for January = $1.253 + $0.132 + $0.255 = $1.64

9. Time remaining until maturity = 182 – 66 = 116 days

$100,000
1  0.0248116 
Price = = $99,218.00
365

10. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) portion Balance
8-Mar -- -- -- -- ($40,000) ($40,000) $40,000
24-Mar 16 5.00% $87.67 $87.67 $87.67 40,000
2-Apr 9 5.00 49.32 49.32 (15,000.00) (15,000) 55,000
24-Apr 22 5.00 165.75 215.07 215.07 55,000
13-May 19 5.00 143.15 143.15 55,000
24-May 11 4.75 78.73 221.88 221.88 55,000
5-Jun 12 4.75 85.89 85.89 25,000.00 25,000 30,000
24-Jun 19 4.75 74.18 160.07 160.07 30,000
The first four interest deductions were $87.67, $215.07, $221.88, and $160.07.

Chapter 7: Applications of Simple Interest 191

Review Problems (continued)

11. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) portion Balance
23-May --- --- --- --- --- --- $15,000.00
15-Jun 23 6.50% $61.44 $61.44 $700.00 $638.56 14,361.44
15-Jul 30 6.50% 76.73 76.73 700.00 623.27 13,738.17
26-Jul 11 6.50% 26.91 26.91 13,738.17
15-Aug 20 6.25% 47.05 73.96 700.00 626.04 13,112.13
14-Sep 30 6.25% 67.36 67.36 13,112.13
15-Sep 1 6.75% 2.42 69.78 700.00 630.22 12,481.91

12. Number of days from May 1 to July 9 = 190 – 121 = 69

Number of days from July 9 to (and including) Oct. 31 = 304 + 1 – 190 = 115
Interest accrued during the 6-month grace period
 $72000.06  $72000.0575
69 115
= $212.10
365 365
Number Interest Accrued Payment Principal
Date of days rate Interest interest (Advance) portion Balance
1-Nov --- --- --- --- --- --- $7412.10
30-Nov 29 5.75% $33.86 $33.86 $120.00 $86.14 7325.96
13-Dec 13 5.75 15.00 15.00 7325.96
31-Dec 18 5.50 19.87 34.87 120.00 85.13 7240.83
31-Jan 31 5.50 33.82 33.82 120.00 86.18 7154.65

Advanced Problems
  180 
13. Maturity value of the 180-day GIC = $20,000 1  0.015  = $20,147.95
  365 
  90 
Maturity value of the first 90-day GIC = $20,000 1  0.013  = $20,064.11
  365 
  90 
Maturity value of the second 90-day GIC = $20,064.11 1  0.013  = $20,128.43
  365 
Therefore, Paul will earn $20,147.95 – $20,128.43 = $19.52 more
by purchasing the 180-day GIC.

14. Suppose that the amount invested is $1000. Its maturity value in a 120-day GIC will be
  120 
$1000 1  0.0175  = $1005.75
  365 
If instead, the $1000 is invested in a 60-day GIC,
  60 
Maturity value = $1000 1  0.015  =$1002.47
  365 
For this amount to grow to $1005.75 in another 60 days, it must earn
Interest = $1005.75 – $1002.47 = $3.28
The interest rate on the second 60-day GIC would have to be
I $3.28
$1002.47365 
r= = 60
= 0.01990 = 1.990%
Pt

192 Fundamentals of Business Mathematics in Canada, 3/e

Review Problems (continued)
15. Size of the first payment = P(1 + rt) = $1900 1 0.10512
3
 = $1949.88
Size of the second payment = $1900 1 0.10512
6
 = $1999.75
Price = Sum of present values of the payments (discounted at 16%)
$1949.88 $1999.75
1  0.1612  1  0.1612 
= 2
+ 5

= $1899.234 + $1874.766
= $3774.00
The finance company should pay $3774.00 if it requires an 16% rate of return.

S $25,000
1  rt  1  0.01438 365 
16. a. Price = = 91
= $24,910.69

b. Time left until maturity = 91 – 34 = 57 days

The amount earned by the second investor will be
I = S – P = $25,000 – $24,928 = $72
This will provide a rate of return of
I $72
$24,928  365 
r= = 57
= 0.01850 = 1.850%
Pt

c. During his 34-day holding period, the first investor earned

I = S – P = $24,928 – $24,910.69 = $17.31
This amount provided a rate of return of
I $17.31
$24,910.69  365 
r= = 34
= 0.00746 = 0.746%
Pt

17. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) Portion Balance
3-Jun -- -- -- -- ($50,000) ($50,000) $50,000
26-Jun 23 7.00% $220.55 $220.55 $220.55 50,000
30-Jun 4 7.00 38.36 38.36 (40,000) (40,000) 90,000
5-Jul 5 7.00 86.30 124.66 90,000
17-Jul 12 7.25 214.52 339.18 (25,000) (25,000) 115,000
26-Jul 9 7.25 205.58 544.76 544.76 115,000
31-Jul 5 7.50 118.15 118.15 30,000 30,000 85,000
18-Aug 18 7.50 314.38 432.53 35,000 35,000 50,000
26-Aug 8 7.50 82.19 514.72 514.72 50,000

18. Number Interest Accrued Payment Principal

Date of days rate Interest interest (Advance) portion Balance
28-Jan -- -- -- -- -- -- $4000.00
21-Feb 24 3.75% $9.86 $9.86 $600.00 $590.14 3409.86
21-Mar 28 3.75 9.81 9.81 600.00 590.19 2819.67
21-Apr 31 3.75 8.98 8.98 600.00 591.02 2228.65
15-May 24 3.75 5.50 5.50 2228.65
21-May 6 3.50 1.28 6.78 600.00 593.22 1635.43
21-Jun 31 3.50 4.86 4.86 600.00 595.14 1040.29
5-Jul 14 3.50 1.40 1.40 1040.29
21-Jul 16 3.25 1.48 2.88 600.00 597.12 443.17
21-Aug 31 3.25 1.22 1.22 444.39 443.17 0.00

Chapter 7: Applications of Simple Interest 193

Exercise 7A (ON CONNECT)

Basic Problems

1. Issue date = May 19 = 139th day of the year (Table 6.2)

Legal due date = 139 + 120 + 3 = 262nd day of the year = September 19
2. Issue date = June 30 = 181st day of the year (Table 6.2)
Legal due date = 181 + 90 + 3 = 274th day of the year = October 1

3. Term = October 17 – 3 days – July 6 = 290 – 3 – 187 = 100 days

4. Term = 17 + 31 + 30 – 3 days= 75 days
5. Issue date = Feb. 28 – 3 days – 4 months = October 25

6. Issue date = October 3 – 3 days – 9 months

= September 30 – 9 months
= December 30
7. Issue date = September 2 – 3 days – 180 days
= 245 – 183
= 62nd day of the year
= March 3
8. Issue date = March 1 (leap year) – 3 days – 60 days
= (365 + 61) – 63
= Day numbered 363 of the preceding year
Hence, the issue date is December 29 of the preceding year.

Intermediate Problems

9. Interest period = August 30 + 3 days – April 30 = 242 + 3 – 120 = 125 days

  125 
Maturity value, S = P(1 + rt) = $1000 1  0.045  = $1015.41
  365 

  63 
10. Maturity value, S = P(1 + rt) = $3300 1  0.0675  = $3338.45
  365 
S $2667.57
11. Face value, P  =
 
1  rt  1  0.102 365
93
= $2600.00

12. Interest period = December 3 – August 31 = 337 – 243 = 94 days

S $7644.86
Face value, P  =
365 
1  rt  1  0.075 94
= $7500.00

13. I = S – P = $6388.04 – $6200 = $188.04

I $188.04
r=
Pt
=
365 
$6200 123
= 0.090 = 9.00%

194 Fundamentals of Business Mathematics in Canada, 3/e

Exercise 7A (continued)
14. I = S – P = $4445.28 – $4350 = $95.28
I $95.28
r=
Pt
=
365 
$4350 78
= 0.1025 = 10.25%

15. I = S – P = $5275.22 – $5200 = $75.22

I $75.22
t= = = 0.131504 year = 48 days
Pr $5200(0.11)
Term = 48 – 3 = 45 days

16. I = S – P = $9560.62 – $9400 = $160.62

I $160.62
t= = = 0.172598 year = 63 days
Pr $9400(0.099)
Term = 63 – 3 = 60 days

17. Time until maturity = 50 + 3 – 9 = 44 days

S $1000
1  rt  1  0.05365 
Proceeds = = 44
= $994.01

18. Time from sale date until maturity = 64 days

S $6000
Proceeds = =
365 
1  rt  1  0.09 64
= $5906.79

  185 
19. Maturity value = P(1 + rt) = $2700 1  0.06  = $2782.11
  365 
Time from sale date until maturity = 84 days
S $2782.11
1  rt  1  0.10365 
Proceeds = = 84
= $2719.52

20. Maturity date = October 25 + 120 + 3 days = February 25

  123  
Maturity value = $3500 1  0.10   = $3617.95
  365  
Time from sale date until maturity = 73 days
S $3617.95
Proceeds = =
365 
1  rt  1  0.08 73
= $3560.97

  94  
21. Maturity value = P(1 + rt) = $9000 1  0.08   = $9185.42
  365  
Time from date of sale until maturity = 94 – 35 = 59 days
I $9185.42  $9075.40
Discount rate, r =
Pt
=
$9075.40 59 365  = 0.075 = 7.50%

  78  
22. Maturity value = P(1 + rt) = $4000 1  0.08   = $4068.38
  365  
Time from date of sale until maturity = 78 – 32 = 46 days
I $4068.38  $4015.25
Discount rate, r =
Pt
=
$4015.25 46 365  = 0.105 = 10.50%

Chapter 7: Applications of Simple Interest 195

Exercise 7A (continued)

23. a. Legal due date = February 28, 2017 + 3 days

= March 3, 2017
b. Legal due date = September 29, 2016 + 153 days
= 273rd day + 153 days
= (426 – 366) days into 2017
= 60th day in 2017
= March 1, 2017
24. a. Legal due date = August 30, 2017+ 3 days
= September 2, 2017
b. Legal due date = April 30, 2017+ 123 days
= 120th day + 123 days
= 243rd day
= August 31, 2017

  123 
25. Maturity value, S = P(1 + rt) = $1000 1  0.0475  = $1016.01
  365 
26. Legal due date = May 31 + 3 days = June 3, 2018
  154 
Maturity value = $1000 1  0.095  = $1040.08
  365 
27. Time from sale date until due date = 93 – 31 = 62 days
S $3300
Fair selling price = =
365 
1  rt  1  0.0775 62
= $3257.12

28. Legal due date = March 30, 2017+ 3 days = April 2, 2017.
Time from sale date until maturity = 366 + 92 – 336 = 122 days.
S $3300
1  rt  1  0.0525122 
Proceeds = = = $3243.09
365

  103 
29. Maturity value = $750 1  0.125  = $776.46
  365 
Time from settlement date until legal due date = 103 – 26 = 77 days
$776.46
Settlement amount =
 
1  0.0825 365
77
= $763.17

30. Legal due date = August 19 + 3 days = August 22

Total interest period = 234 – 139 = 95 days
  95 
Maturity value = $2700 1  0.04  = $2728.11
  365 
Time from June 5 to August 22 = 234 – 156 = 78 days
$2728.11
1  0.07365 
Price on June 5 = 78
= $2687.90

196 Fundamentals of Business Mathematics in Canada, 3/e

Exercise 7A (continued)
31. Legal due date = December 30 + 3 days = January 2
Total interest period = 365 + 2 – 181 = 186 days
  186 
Maturity value = $2900 1  0.08  = $3018.22
  365 
Time from September 1 to January 2 = 186 – 63 = 123 days
$3018.22
1  0.0475123 
Proceeds = = $2970.67
365

  123  
32. Maturity value = $4100 1  0.1025   = $4241.62
  365  
Time from purchase date until due date = 123 – 22 = 101 days
$4241.62
Price =
 
1  0.12 365
101
= $4105.30

Chapter 7: Applications of Simple Interest 197