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CHAPTER 2

SIMPLE INTEREST

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2.1 INTEREST
 “Interest” comes from the Latin word intereo which means
“to be lost”.

 When developed into the concept of borrowing money, the

lender is likely to lose his money when he pays back the
money with interest.

 Nowadays, interest is not only paid but gained if we make

an investment.

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2.2 SIMPLE INTEREST FORMULA

 The simple interest amount is calculated by the following

formula:

I = Prt
Where: I = Simple interest
P = Principal
r = Interest rate (in decimals)
t = Time / Period (in years)

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2.3 SIMPLE AMOUNT FORMULA

 Simple amount is the sum of the original principal and the interest
earned.

 Therefore, the simple amount formula is given as:

S = P(1 + rt)
Where: S = Maturity value
P = Principal
r = Interest rate (in decimals)
t = Term / Period (in years)

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Example 1 pg 22
RM 10000 is invested for 4 years 9 months in a bank earning a
simple interest rate of 10% per annum. Find the simple
amount at the end if the investment period.

Example 2 pg 23
Raihan invested RM 5000 in an investment find for three
years. At the end of the investment period, his investment
will be worth RM 6125. find the simple rate that is offered.

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Example 3 pg 23
Twenty four month ago, a sum of money was invested. Now
the investment is worth RM 12000. if the investment is
extended for another twenty four months, it will become RM
14000. Find the original principle and the simple interest
that was offered.

Example 4 pg 24
Muthu invested RM 10000 in two accounts, some at 10% per
annum and the rest at 7% per annum. His total interest for
one year was RM 820. find the amount invested at each rate.

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2.4 FOUR BASIC CONCEPTS

 There are four different methods for determining terms (t):

1. Exact time : It is the exact number if days
between two given dates.
2. Approximate time : Time computed on the
assumption that each month has 30 days.
3. Exact interest : Interest calculated based on 365
days a year or 366 days for a leap year.
4. Ordinary interest : Interest is calculated based on
360 a year.

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Example 1 pg 25
Find a) exact time,
b) approximate time
From 15 March to 29 August of the same years.

Example 2 pg 25
RM 1000 was invested on 15 March 2005. if the simple interest rate offered
was 10% per annum, find the interest received on 29 August 2005 using
a) Exact time and exact simple interest.
b) Exact time and ordinary simple interest.
c) Approximate time and exact simple interest.
d) Approximate time and ordinary simple interest.

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2.5 PRESENT VALUE

 Present value may be debt or an investment amount
that is lent or invested today, and that will be mature
in a specific time together with interest.
 By transposing the maturity value formula, we have
the present value formula as follows:

P = S / (1 + rt)
or
P = S (1 + rt)-1

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2.6 EQUATION OF VALUE

 Every value of money has an attached date, the date on
which it is due.
 An equation that states the equivalence of two sets of
dated values at a stated date is called an equation of
value or equivalence.
 The stated date is called the focal date, the comparison
date or the valuation date.
 To set up and solve an equation of value, the following
procedure should be carried out:

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1. Draw a time diagram with all the dated values.

2. Select the focal date.

3. Pull all the dated values to the focal date

using the stated interest rate.

4. Set up the equation of value and then

solve.

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Example 1 pg 26
Find the present value at 8% simple interest of a debt RM
3000 due in ten months.

Example 2 pg 27
A debt of RM 800 due in four months and another of RM
1000 due in nine months are to be settled by a single
payment at the end of six months. Find the size of this
payment using
a) the present as the focal date,
b) the date of settlement as the focal date,
Assuming money is worth 6% per annum simple interest.

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Example 3 pg 28
A debt of RM 500 due two months ago and RM 900 due in
nine months are to be settled by two equal payments, one
at the end of three months and another at the end of six
months. Find the size of the payment using
a) the present as the focal date
b) the end of six months as a focal date
Assuming money is worth 10% per annum simple interest.

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