9/26/2023

INTRODUCTION
TO FINANCE
Giang PHUNG
gphung@iscparis.com

Created by Giang Phung

TOPIC 1: SIMPLE INTEREST

• Introduction
• Calculation
• Exercises

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 9/26/2023

Introduction
• Suppose I borrow the sum of €100 with the intention of returning it
a year later to the lender; the latter will be entitled to claim a price
for the service she rendered me, a sort of "rent" for the sum lent.

• This rent is called interest.

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Introduction
• Interest can be defined as the remuneration for a loan of money. It
is the price to be paid by the borrower to the lender, to remunerate
the service rendered by the provision of a sum of money for a
period of time.

• Three key factors determine the cost of interest:

– the amount lent,
– the term of the loan,
– and the rate at which this sum is lent

• There are two methods for calculating interest:

– simple interest
– compound interest

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Simple interest calculation

• Simple interest due at the end of each period is calculated on the
initial capital only

• C0 : the capital invested (principal - amount of the loan or borrowing)

• r : the annual interest rate
• n : the term/ maturity of the investment
• I : the amount of interest
• Cn : the acquired value after n periods

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Simple interest calculation

Investment of C0 over n periods

C0 + C0.r.n = C0 (1 + r . n)
C0.r C0.r C0.r
0
n
C0

 The amount of interest over n periods is:

I = 0. + 0. + 0. + … + 0. = .C0.r

n times
= 0. .
 Calculated interest is not integrated from period to period.

 The total amount to be paid is = 0 + so Cn = . + .

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REMARKS!!!

The amount of interest earned on the face (nominal) amount 0

is proportional to the interest rate and the term.

It should be noted that the simple interest method is generally

used for transactions lasting less than one year.

In the case of transactions with a duration of more than one

year, the simple interest method is no longer used (the

compound interest method is used)

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Simple interest & periods

Yearly periods
= 0. .

Monthly periods
0. . m
=
12
Daily periods

0. . d
=
360

Normally the interest rate is yearly (annual), but if the duration is expressed in days, we have to
convert the periods: . d
= 0 + = 0. 1+
360

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Exercise 1
Example 1
1) An individual invests €80,000 for 125 days at the annual rate of
4.5%/year, simple interest rate. How much does he have at the end
of the investment?
2) What is the amount of interest provided by an investment of
€34,800 for 90 days (3 months) at a simple annual interest rate of
3%.

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Exercise 1
Solution :
. d 0.045 x125
1) = 0 + = 0. (1 + ) = 80000x 1 +
360 360

= 80000x (1 + 0.015625 )
= 80000x 1.015625
= 81250 €.

0 . . d 80000 x 0.045 x 125

Or: = = = 1250 €
360 360

= 0 + = 80000 + 1250 = 81250 €

2)
0 . . d 34800 x 0.03 x 90
= = = 261 €
360 360

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Exercise 2
Example 2
A sum of €10,000 is invested in an account from April 23 to August 9,
2021, at the simple rate of 7%.
1) Calculate the amount of interest earned at maturity.
2) Calculate the value acquired by this capital.

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Exercise 2
Solution
1) We have: I = C.r.n I C .r. n d
360
C= 10000; r = 7%; we calculate the number of days of the investment.

1/04 1/05 1/06 1/07 1/08

23/04 9/08

April =7 nd = ?
May = 31
nd = 108 days, hence I 10000x 7 x 108
June = 30 100 360
July = 31
August = 9 I  210 €
2) The value acquired by this capital is equal to its FV (future value):
FV = C + I = 10000 + 210 = 10210 €
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Exercise 3
Example 3
1) An individual invests €2,700 in an account. 100 days later, he
recovers €2,734. What is the interest rate paid?
2) An individual invests €2,920 in an account yielding 3.4%. At the end
of the investment, he recovers €2,946.46. How long was the
investment?
3) How much money should be invested today in an account earning
simple interest at 3% per year, to obtain €5,000 in 90 days?

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Exercise 3
Solution :

1) An individual invests €2,700 in an account. 100 days later, he recovers €2,734.

What is the interest rate paid?

0. . d . 360
= ⟺ =
360 0. d

= 2734 − 2700 = 34 €
34 x 360
= = 4.53%
2000 x100

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Exercise 3

Solution :
2) An individual invests €2,920 in an account yielding 3.4%. At the end of the
investment, he recovers €2,946.46. How long was the investment?

0.. d . 360
= d=
360 0.

= 2946,46 − 2920 = 26,46 €

. 360 26,46 x 360
d = = = 95,956 days ≈ 96 day
0. 2920x 0.034

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Exercise 3
Solution :
3) How much money should be invested today in an account earning simple interest at
3% per year, to obtain €5,000 in 90 days?

. d
= 0. 1+ ⟺ 0 = . d
360 1 + 360

5000
⟺ 0 = = 4962.78 €
1+ 0.03 x90
360

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Simple Interest - Summary

Summary:
0. . d
=
360

. d
= 0 + = 0. 1+
360
. 360
=
0. d

. 360
d =
0.

0 =
d
1 + . 360

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Created by Giang Phung 9