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6 Interest

Up to this point we have used two formulae:

6-1

Formula

I = Prt & Sum = P + I

**We can combine them as follows:
**

Step 1

Sum = Sum =

P+ I P + Prt

**Now, we substitute for
**

with

I

Step 2

Collecting like terms

**Future Value Formula
**

McGraw-Hill Ryerson©

Sum = P(1+rt)

Simple

6 Interest

6-2

Sum =

I place $17000 in a 150 day term deposit on Jan. 6 paying 6.5%.

How much will the bank pay me on the maturity date?

McGraw-Hill Ryerson©

P(1+rt)

150 $17000 1+ .065( 365) S=

S = $17000(1.0267123)

S = $17454.11

2 Jul 182 183 184 185 186 187 188 Aug 213 214 215 216 217 218 219 Sep 244 245 246 247 248 249 250 Oct 274 275 276 277 278 279 280 Nov 305 306 307 308 309 310 311 Dec 335 336 337 338 339 340 341 . 6 paying 6.5% pa. McGraw-Hill Ryerson© 1 2 3 4 5 6 7 Jan 1 2 3 4 5 6 7 Feb 32 33 34 35 36 37 38 Mar 60 61 62 63 64 65 66 Apr 91 92 93 94 95 96 97 The Serial Number of Each Day of the Year May 121 122 123 124 125 126 127 Jun 152 153 154 155 156 157 158 TABLE6. = 6 days + 150 = 156 days Day of Month Look up Find 156 The Term Deposit will mature on June 5th.Simple 6 Interest Determine the Maturity Date 6-3 I place $17000 in a 150 day term deposit on Jan.

Simple 6 Interest I invest $1. 14th at 6%.8% May 18th 7.1% How much Interest did I earn up to July 4th ? Investment $1.000 on Feb. The changes in interest rates to July 4th are as follows: 6-4 Date rate Feb 14th 6% April 20th 6.000 McGraw-Hill Ryerson© .

8% 7.1% McGraw-Hill Ryerson© .Simple 6 Interest 6-5 … by finding the number of days between each rate change! Investment $1.000 Look up for Days Date Feb 14th April 20th May 18th July 4th rate 6% 6.

Simple 6 Interest Table reading Number of Days 6-6 Feb 14th Look up for Days April 20th May 18th July 4th = 45 = 110 = 138 = 185 = 65 Days = 28 Days = 47 Days Interest Earned McGraw-Hill Ryerson© .

68 = = 5.071 * 47/365 $25.04 .22 9.068 * 28/365 I3 = 1000 * .14 I1 = 1000 * .06 * 65/365 I2 = 1000 * .Simple 6 Interest Interest Earned 6-7 Formula Feb 14th 65 Days April 20th May 18th 28 Days July 4th 47 Days McGraw-Hill Ryerson© I = Prt = $10.

Simple 6 Interest 6-8 McGraw-Hill Ryerson© .

Simple 6 Interest 6-9 How much must I invest in order for it to grow to $5000 within 6 months @ 4.4% simple interest? What are we being asked to must I invest… to grow…” McGraw-Hill Ryerson© provide? “How much …this suggests finding the Principal .

Simple 6 Interest How much must I invest in order for it to grow to $5000 within 6 months.4% simple interest? 6 .10 What data do we need? data to be able to use the appropriate formula… Formulae McGraw-Hill Ryerson© We need the appropriate I = Prt & Sum = P(1+rt) . @ 4.

Simple 6 Interest How much must I invest in order for it to grow to $5000 within 6 months.5 Sum = $5000 McGraw-Hill Ryerson© .11 Formulae I = Prt & Sum = P(1+rt) What data do we have? r = 4.4% simple interest? 6 .4% t = 6 months = . @ 4.

12 Formulae I = Prt & Sum = P(1+rt) Sum = P(1+rt) As we know the Sum. the formula now becomes… Using P = Sum/(1+rt) McGraw-Hill Ryerson© .4% simple interest? 6 .Simple 6 Interest How much must I invest in order for it to grow to $5000 within 6 months. @ 4.

5) P = $4892.37 McGraw-Hill Ryerson© .044(. @ 4.13 Formula P = Sum/(1+rt) P =5000/ 1 + 0.4% simple interest? 6 .Simple 6 Interest How much must I invest in order for it to grow to $5000 within 6 months.

Simple 6 Interest LO-2 6 .14 McGraw-Hill Ryerson© .

Simple 6 Interest Heather owes Mark $3000 payable on April 27.15 McGraw-Hill Ryerson© . what amount should Mark accept in settlement of the debt: A) 30 days before the scheduled payment? B) 90 days before the scheduled payment? 6 . If money can earn 4%.

Simple 6 Interest Step 1 6 .16 April 27 Present Value Draw a Timeline 90 days 30 days $3000 Step 2 P = Sum/(1+rt) McGraw-Hill Ryerson© .

17 B P = 3000/[1+.17 McGraw-Hill Ryerson© .17 P = Sum/(1+rt) A P = 3000/[1+.04(90/365)] P = $2970.04(30/365)] P = $2990.Simple 6 Interest 6 .

Simple 6 Interest 6 . which option should you choose? McGraw-Hill Ryerson© .18 You can prepay $1234 tuition for a course or delay payment for 3 months and pay $1432. If you can earn 6% on your money.

06(.00 3 months = 1/4 Money saved ($176.19 $1432 = Future Value = S2 Which Tip: Find the formula PV of the should future you use? payment! P = Sum/(1+rt) P2 = 1432/[1+.25)] P2 = $1410.84) by paying now! McGraw-Hill Ryerson© .Simple 6 Interest $1234 = Present Value = P1 6 .84 $1234.

20 This completes Chapter 6 McGraw-Hill Ryerson© .Simple 6 Interest 6 .

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