Investment

Mathematics
 Simple Interest

LEARNING OBJECTIVES:

To identify the concepts of the following:

>>Simple Interest
>>Concept of Time
>>Manipulation of Simple Interest Formula
 >>Simple Interest<<
Definition of Terms
Simple Interest – an amount computed on the amount the borrower
received at the time the loan is obtained and is added to the amount
when the loan becomes due.
It is computed only once for the entire time period of the loan.
Principal – the amount of deposit made by a depositor or the face
amount lent to the borrower on a loan date.
Simple Interest Rate – expressed as a percentage, is converted to
decimal for computation purposes. Unless otherwise stated, the
simple interest is an annual interest rate.
Time – the length of time for which the money is borrowed or lent. The
time expressed in years or fractional part of a year is the period
between the loan date- the date when the loan was obtained and the
maturity date-the date when the loan is due.
 >>Simple Interest<<
Finding the Simple Interest – to find the Simple Interest we use the following
formula;
I = PRT

where: I=Interest P= Principal

R=Rate T=Time

Finding the Maturity Value – to find the Maturity Value; the amount due on
the maturity date; we simply add the interest to the principal.

MV = P + I or MV = P(1+RT)
where: MV=Maturity Value I=Interest
P=Principal

click here for some example

Example 1
Mr. Serrano borrowed P120,000.00 at simple interest of 11% due in 8
months. What is the interest and the maturity value of Mr. Serrano’s
loan?
Given; P=120,000 T=8 months (2/3yrs.)
R=11% (.11)
Required;
Find the interest and the maturity value.
Formulas;
I=PRT MV=P+I
Computation;
I=120,000 x .11 x (2/3) MV=120,000 + 8,800
=P8,800 =P128,800
Conclusion;
The interest of the loan is P8,800.00 and the maturity value
of the loan is P128,800.00
 >>Concept of Time
The time (T) in the simple interest formula is the period between the loan
date and the maturity date. If the time is not exact, it has to be
converted to decimals to facilitate computation. There are cases where
the time given is in terms of months in this case we divide the
number by 12, thus the number is converted in terms of years.
There are also cases where the time is stated in terms in days. In this
case we use two methods to measure the term;

+Exact Interest Method – uses 365 days as time denominator. Note

that in a leap year 366 days denominator is used.

+Ordinary Interest Method – uses 360 days as time denominator.

>>click here for some examples

++Example
If Mario borrowed $100,000.00 at 09% interest for 25 days, how much would the
interest be using exact and ordinary method?
Given;
P=100,000.00 R=09%(.09) T=25 days
Required;
How much would the interest be using exact and ordinary
method?
Formulas;
I = PRT
Computation;
For exact interest method:
I = 100,000 x .09 x (25/365) *note that the time denominator
= $616.44 is 365 days.
For ordinary interest method:
I = 100,000 x .09 x (25/360) *note that the time denominator
= $625 is 360 days
 >>Concept of Time
When the loan date and the maturity date are given, the number of days may be
counted as either actual time or approximate time.
>Actual time is determined by counting every day excluding the loan date
until the maturity date.
>Approximate time is determined by assuming that each month days 30
days.

Illustration: Count the actual time and the approximate time from January 24,’05 to
June 17,’05.
Actual Time Approximate Time
January (31-24) 7 January (30-24) 6
February 28 February 30
March 31 March 30
April 30 April 30
May 31 May 30
June _17_ June _17_
144 days 143 days

Note that the approximate time turns out to be shorter than the actual time.
 >>Concept of Time
It could be deduced from past discussions that when only the loan date and the
maturity date are given, there are four possible time combination;

1. Exact interest using actual time;

I = PRT where T = actual time/365
2. Exact interest using approximate time;
I = PRT where T = approximate time/365
3. Ordinary interest using actual time;
I = PRT where T = actual time/360
4. Ordinary interest using approximate time;
I = PRT where T = approximate time/360

In cases where the problem did not state as to what the time combination to be
used, we use Ordinary interest using actual time. This time combination is
also known an Banker’s Rule.

>>click for some examples

 >>Concept of Time
It could be deduced from past discussions that when only the loan date and the
maturity date are given, there are four possible time combination;

1. Exact interest using actual time;

I = PRT where T = actual time/365
2. Exact interest using approximate time;
I = PRT where T = approximate time/365
3. Ordinary interest using actual time;
I = PRT where T = actual time/360
4. Ordinary interest using approximate time;
I = PRT where T = approximate time/360

In cases where the problem did not state as to what the time combination to be
used, we use Ordinary interest using actual time. This time combination is
also known an Banker’s Rule.

>>click for some examples

 ++Examples
On March 16, Joey Tribianni loan Chandler Bing $100,00.00 with the
interest of 11%. The loan is due on August 07. Compute for the interest
using the four time combination.

Given: P = 100,000 R = 11% (.11) Time = ?

Requirement: Compute for the interest using the our time combination.
Procedure:
1. Compute for actual and approximate time.

Actual time Approximate Time

March (31-16) 15 March (30-16) 14
April 30 April 30
May 31 May 30
June 30 June 30
July 31 July 30
August _ 07_ August _ 07_
144 days 141 days
2.Compute for the Interest using the four time combination.

A. Exact interest using actual time;

I = PRT
= 100,000 x 0.11 x (144/365)
= $4339.73
B. Exact interest using approximate time;
I = PRT
= 100,000 x 0.11 x (141/365)
= $4249.32
C. Ordinary interest using actual time;
I = PRT
= 100,000 x 0.11 x (144/360)
= $4400
D. Ordinary interest using approximate time;
I = PRT
= 100,000 x 0.11 x (141/360)
= $4308.33
 Manipulation of Simple Interest Formula

When the Time is not given;

Basically we only have to remember the Simple Interest Formula, and

derive the other formula from it. It is not necessary to memorize all the other
formula.

>>click for some Illustration.

++Examples
>>Unknown Principal
A bank loaned Rachel Greene money at 9% simple interest for 85
days. If the interest of the loan is $8,00.00, what is the principal.

Given; R = 9% (0.09) T = 85 days (85/360 or .236)

I = 8,000
Required;
Find the principal of the loan.
Formula;
P = _I_
RT
Computation;
P = 8,000_
(0.09)(0.236)
P = $376,647.83 Conclusion;
If the interest of the loan is $8,000.00, the principal is $376,647.83
 >>Unknown Interest Rate
If Rachel Greene applies for a $50,000.00 loan in a bank and the interest
is $4,800.00 for 200 days, what is the interest rate being charge.

Given; P = 50,000 T = 200 (200/360 or .556) I = 4,800

Required;
Find the interest rate of the loan.
Formulas;
R = __I__
PT
Computation;
R= 4,800___
(50,000)(200/360)
R = 0.1728 or 17.28%
Conclusion;
The interest rate of Rachel Greene’s loan is 17.28%.
 >>Unknown Time
What would the time period of Rachel Greene’s loan for $50,000.00, at
12%, if the interest if $499.00?

Given; P = 50,000 R = 12% (0.12) I = 499

Required;
Find the time period of the loan.
Formulas;
T = _ I_
PR
Computation;
T = _ 499____
(50,000)(.12)
T = 0.0832 year or 30 days
Conclusion;
The time period of Rachel Greene’s loan is 0.0832 yr or 30 days.