Simple Interest and Simple Discount

CHAPTER 11
Simple Interest and

Simple Discount
Copyright © 2014, 2010, 2007 Pearson Education, Inc. 1

11-1 Learning Outcomes
 Find simple interest by using the simple interest

formula.
 Find the maturity of a loan.
 Convert months to a fractional or decimal part of a
year.
 Find the principal, rate or time using the simple
interest formula.

Find simple interest using
11-1-1 the simple interest formula
Section 11-1 The Simple Interest Formula
 The interest formula shows how interest, rate,

and time are related.
– It gives us a way of finding one of these values
if the other three values are known.
I=PxRxT

HOW TO: Identify the principal, rate and time
 The price paid for using money is called interest.

 Principal is the amount borrowed or invested.
 Rate is the percent of the principal paid as
interest per period, usually one year.
 Time must be expressed in the same unit
of time as the rate. (i.e. one year)

Key Terms…
 Interest
– An amount paid or earned for the use of money.
 Simple interest
– Interest earned when a loan or investment is
repaid in a lump sum.
 Principal
– The amount of money borrowed or invested.

Key Terms…
 Rate
– The percent of the principal paid as interest
per time period.
 Time
– The number of days, months or years that the
money is borrowed or invested.

HOW TO: Find the interest paid on a loan
Principal = (P) = $1,200

Interest rate = 8% (or 0.08)
Time = 1 year
Interest = P x R x T
Interest = 1,200 x 0.08 x 1
Interest = $96
The interest on the loan is $96

Examples…
 Find the interest on a 2-year loan of $4,000 at a

6% rate.
– $480
 Find the interest earned on a 3-year investment of
$5,000 at 4.5% interest.
– $675

11-1-2 Find the maturity value of a loan
 Maturity value is the total amount of money

due by the end of a loan period.
– The amount of the loan and interest.
 If principal and interest are known, add them.
– MV = principal + PRT
– MV = P(1+RT)

An Example…
Marcus Logan can purchase furniture on a 2-year

simple interest loan at 9% interest per year.
What is the maturity value for a $2,500 loan?
MV = P(1 + RT); (substitute known values)
MV = $2,500 (1 + 0.09 x 2)
MV = $2,500 (1 + 0.18)
MV = $2,500 (1.18)
MV = $2,950
Marcus will pay $2,950 at
the end of two years.

Examples…
 Terry Williams is going to borrow $4,000 at 7.5%

interest. What is the maturity value of the loan
after three years?
– $4,900
 Jim Sherman will invest $3,000 at 8% for 5
years. What is the maturity value of the
investment?
– $4,200

Convert months to a fractional
11-1-3 or decimal part of a year
 Write the number of months as the numerator

of a fraction.
– Write 12 as the denominator of the fraction.
 Reduce the fraction to lowest terms if using
the fractional equivalent.
 Divide the numerator by the denominator to
get the decimal equivalent of the fraction.

Convert months to a fractional
11-1-3 or decimal part of a year
Convert 9 months & 15 months, respectively, to

years, expressing both as fractions & decimals.
9 3
= = 0.75
12 4
9 months = ¾ or 0.75 of a year
15 3 1
=1 = 1 = 0.75
12 12 4
15 months = 1 ¼ or 1.25 of a year

An Example…
To save money, Stan Wright invested $2,500

for 42 months at 4 ½ % simple interest.
How much interest did he earn?
42
42 months = = 3.5
12
I=PxRxT
I = $2,500 x 0.045 x 3.5
I = $393.75
Stan will earn $393.75.

Examples…
 Akiko is saving a little extra money to pay for her

car insurance next year. If she invests $1,000
for 18 months at 4%, how much interest can she
earn?
– $60
 Habib is going to borrow $2,000 for 42 months at

7% . What will be the amount of interest owed?
– $490

Find the Principal, Rate or Time
11-1-4 Using the Simple Interest Formula

Find the principal using
HOW TO: the simple interest formula
Judy paid $108 in interest on a loan that she had

for 6 months. The interest rate was 12%.
How much was the principal?
Substitute the known values and solve.
I $108
P= P=
RT (0.12)(0.5)
P = $1,800

Find the rate using
Sam wants to borrow $1,500 for 15 months

and will have to pay $225 in interest.
What is the rate he is being charged?
I $225
R= R=
PT ($1,500)(1.25)
R = .12 or 12%
The rate Sam will pay is 12%.

Find the time using
Shelby borrowed $10,000 at 8%

and paid $1,600 in interest.
What was the length of the loan?
I $1,600
T= T=
PR ($10,000)(0.08)
Length of the
loan was two years.

 Find the exact time.

 Find the due date.
 Find the ordinary interest and the exact interest.
 Make a partial payment before the maturity date.

Key Terms…
Section 11-2 Ordinary and Exact Interest
 Ordinary time
– Time that is based on counting 30 days in each
month.
 Exact time
– Time that is based on counting the exact number of
days in a time period.

11-2-1 Find the exact time
The ordinary time from July 12

to September 12 is 60 days.
To find the exact time from July 12
to September 12, add the following:
Days in July (31 – 12) = 19

Days in August 31
Days in September +12
62 days

HOW TO: Sequential numbers for dates of the year
Find the exact time of a loan using

the sequential numbers table. See page
(Table 11-1 in the text) 394
If the beginning and due dates of the loan fall within the
same year, subtract the beginning date’s sequential
number from the due date’s sequential number.
Example: From May 15 to October 15
288 – 135 = 153 days, the exact time

An Example…
Find the exact time from May 15

of Year 1 to March 15 in Year 2.
365 – 135 = 230
230 + 74 = 304 days
The exact time is 304 days.
Note: If Year 2 is a leap year, the exact time is 305 days.

11-2-2 Find the due date
Subtract the beginning date’s

sequential number from 365.
Add the due date’s sequential number
to the result from the previous step.
If February 29 falls between the
two dates, add 1. (Is it a leap year?)

An Example…
A loan made on September 5

is due July 5 of the following year.
a) ordinary time
Find: b) exact time in a non-leap year
c) exact time in a leap year
Ordinary time = 300 days

Exact time (non-leap year) = 303 days
Exact time (leap year) = 304 days

11-2-3 Find the ordinary and exact interest
 An interest rate is normally given as rate per year.

 If the time period of the loan is in days, using the
simple interest formula requires that the rate
also be expressed as a rate per day.
– Ordinary interest: assumes 360 days per year.

Key Terms…
 Ordinary interest
– A rate per day that assumes 360 days per year.
 Exact interest
– A rate per day that assumes 365 days per year.
 Banker’s rule
– Calculating interest on a loan based on ordinary
interest which yields a slightly higher amount of
interest.

HOW TO: Find the ordinary interest
For ordinary interest rate per day,

divide the annual interest rate by 360.
Ordinary interest rate per day =

Interest rate per year
360

HOW TO: Find the exact interest
For exact interest rate per day,

divide the annual interest rate by 365.
Exact interest rate per day =

Interest rate per year
365

Use ordinary time to find
HOW TO: the ordinary interest on a loan
A loan of $500 at 7% annual interest rate.

The loan was made on March 15 and due
on May 15. (Principal = $500)
I=PxRxT
Length of loan (ordinary time) = 60 days
0.07
Rate = (ordinary interest)
360
 60 
Interest = $500(0.07)   = $5.83
 360 

Use exact time to find the
HOW TO: ordinary interest the same loan

I=PxRxT
Length of loan (exact time) = 61 days
0.07
360
 61 
Interest = $500(0.07)   = $5.93
 360 

Use exact time to find the
HOW TO: exact interest the same loan

I=PxRxT
Length of loan (exact time) = 61 days
0.07
365
 61 
Interest = $500(0.07)   = $5.84
 365 

Make a Partial Payment
11-2-4 Before the Maturity Date
To find the adjusted principal and adjusted balance

due at maturity for a partial
payment made before the maturity date:
STEP 1
Determine the exact time from the date of the loan to the
first partial payment.
STEP 2
Calculate the interest using the time found in Step 1.

STEP 3
Subtract the amount of interest found in Step 2 from
the partial payment.
STEP 4
Subtract the remainder of the partial payment (Step 3)
from the original principal. This is the adjusted principal.
STEP 5
Repeat process for additional partial payments.

STEP 6
At maturity, calculate interest from the last partial
payment and add to adjusted principal. This is the
adjusted balance due at maturity.

An Example…
Tony borrows $5,000 on a 10%, 90 day note. On the

30th day, Tony pays $1,500 on the note. If ordinary
interest is applied, what is Tony’s adjusted
principal after the partial payment, and
adjusted balance due at maturity?
$5,000(0.1)(30 ÷ 360) = $41.67

$1,500 - $41.67 = $1,458.33
$5,000 - $1,458.33 = $3,541.67 (Adj. Principal)
$3,541.67(.1)(60 ÷ 360) = $59.03 (Interest)
$3,541.67 + $59.03 = $3,600.70 (Adj. Balance)

 Find the bank discount and proceeds for a simple

discount note.
 Find the true effective interest rate of a simple
discount note.
 Find the third-party discount and proceeds for a
third-party discount note.

Find the bank discount and
11-3-1 proceeds for a simple discount note
Section 11-3 Promissory Notes
For the bank discount, use:
Bank discount = face value x disc. rate x time

I=PxRxT
For the proceeds, use:
Proceeds = face value – bank discount

A=P-I

A Promissory Note

Find the True or Effective Interest
11-3-2 Rate of a Simple Discount Note
To find the true or effective interest

rate of a simple discount note:
STEP 1
Find the bank discount (interest).
I = PRT
STEP 2
Find the proceeds:
proceeds = principal – bank discount.
STEP 3
Find the effective interest rate:
R = I/PT (using the proceeds as the principal)
An Example…
What is the effective interest rate of a $5,000 simple

discount note, at an ordinary bank
discount rate of 12%, for 90 days?
I = PRT; I = $5,000(0.12)(90 ÷ 360)
I = $150 (Bank discount)
Proceeds = $5,000 – $150 = $4,850
I $150
R= R=
PT ($4,850)(0.25)
R = 0.1237113402
R or the effective interest rate = 12.4%

Find the Third Party Discount and
11-3-3 Proceeds for a Third Party Discount Note
For the bank discount, use:
Third party discount = maturity value of the

original note x discount rate x discount period
For the proceeds, use:
Proceeds = maturity value of

original note – third-party discount
A=P-I
An Example…
Mihoc Trailer made a note for $10,000 with Darcy

Mihoc, owner, at 9% simple interest based
on exact interest and exact time.
The note is made on August 12 and due
November 10. Since Mihoc Trailer needs cash,
the note is sold to a third party on September 5.
The third-party agrees to accept the note with
a 13% annual discount using the banker’s rule.
Find the proceeds of the note.

An Example…
Find the proceeds of the note:
To find the proceeds, we find the maturity value

of the original note, then the third-party discount.
Exact time is 90 days (314-224)
I = PRT; I = $10,000(0.09)(90 ÷ 365) = $221.92
MV = P + I = $10,000 + $221.92
MV = $10.221.92

An Example…
Find the proceeds of the note:

Exact time of the discount period is 66 days
(314 - 248) between Sept. 5 and Nov. 10.
Ordinary discount rate is 0.13 ÷ 360.
Third party discount: I = PRT
Third party discount = $10,221.92(0.13 ÷ 360)(66)

Third party discount = $243.62
Proceeds: A = P – I
Proceeds = $10,221.92 - $243.62 = $9,978.30

Exercises Set A

EXERCISE SET A
2. Find the simple interest. Round to the nearest cent

when necessary.
Principal Interest Time Interest
$3575 11% 3 years ??
I = 3,575(0.11)(3) = 1,179.75

EXERCISE SET A
4. Find the rate of annual simple interest.

Principal Interest Time Rate
$800 $124 1 year ??
I
R
PT
124
  0.155  15.5%
800(1)

EXERCISE SET A
6. Find the time period of the loan using the formula

for simple interest.
Principal Annual Interest Time
Rate
$450 10% $135 ??
I
T 
PR
135 135
   3 years
450(0.1) 45

EXERCISE SET A
8. Find the principal, based on simple interest.
Interest Annual Time Principal

Rate
$300 3% 2 years ??
I
P
RT
300 300
   5,000
0.03(2) 0.06

EXERCISE SET A
10. A loan for three years with an annual simple

interest rate of 9% costs $486 interest. Find the
principal.
I
P
RT
486 486
   1,800
0.09(3) 0.27

EXERCISE SET A
12. Write a fraction expressing each amount of time as

a part of a year ( 12 months = 1 year ).
16 4 1
 1
12 3 3
14. Use the banker’s rule to find the interest paid on a

loan of $1,200 for 60 days at a simple interest rate
of 6% annually.  60 
I  1,200(0.06)  
 360 
 $12
EXERCISE SET A
18. Use Table 11-1 to find the exact time from the first
date to the second date for non–leap years unless
a leap year is identified.
January 27, 2008, to September 30, 2008
Leap year (add 1 to total)

September 30 = day 273
January 27 = day 27
273 - 27 = 246 days; 246 days + 1 day = 247 days

EXERCISE SET A
20. If a loan is made on the given date, find the date it

is due.
August 12 for 60 days
August 12 = 224th day

60 days + 224 days = 284 days = October 11

EXERCISE SET A
22. Find the discount (ordinary interest) and proceeds

on a promissory note for $2,000 made by Barbara
Jones on February 10, 2011, and payable to First
State Bank on August 10, 2011, with a discount
rate of 9%.
August 10 = day 222
February 10 = day 41
Exact time = 222 - 41 = 181 days
Discount = 2,000(0.09)(181/360) = 90.50
Proceeds = 2,000 - 90.50 = 1,909.50

EXERCISE SET A
24. Malinda Levi borrows $12,000 on a 9.5%, 90-day note. On

the 30th day, Malinda pays $4,000 on the note. If ordinary
interest is applied, what is Malinda’s adjusted principal after
the partial payment? What is the adjusted balance due at
maturity? What is the amount of interest saved by making
the partial payment?
12,000(0.095)(30/360) = 95
4,000 - 95 = 3,905
12,000 - 3,905 = 8,095
8,095(0.095)(60/360) = 128.17
8,095 + 128.17 = 8,223.17
The adjusted principal after 30 days is $8,095 and the
adjusted balance due at maturity is $8,223.17.

EXERCISE SET A
24. Malinda Levi borrows $12,000 on a 9.5%, 90-day note. On

the 30th day, Malinda pays $4,000 on the note. If ordinary
interest is applied, what is Malinda’s adjusted principal after
Interest with no partial payment:

$12,000(0.095)( 90/360) = $285
Interest with partial payment: $95 + $128.17 = $223.17

Interest saved: $285 - $223.17 = $61.83

EXERCISE SET A
26. Bennett Sales holds a 180-day note of $7,500 that

has an interest rate of 8% annually. After 60 days,
the note is sold to a bank at a discount rate of 7%
annually. Find the proceeds on the third-party
discount note.
I = $7,500(0.08)(180/360) = $300
MV = $7,500 + $300 = $7,800
Bank discount time: 180 - 60 = 120 days
Bank discount interest:
$7,800(0.07)(120/360) = $182
Proceed to original payee: $7,800 - $182 = $7,618

Practice Test

PRACTICE TEST
2. How much money was borrowed at 12% annually

for 6 months if the interest was $90?
I
P
RT
90
  1,500
0.12(0.5)

PRACTICE TEST
4. A loan of $5,000 at 12% annually requires $1,200

interest. For how long is the money borrowed?
I
T 
PR
1,200
  2 years
5,000(0.12)

PRACTICE TEST
6. Find the exact time from October 12 to March 28

of the following year (a leap year).
December 31 = day 365
October 12 = day 285
80 days
March 28 = day 87
87 + 80 = 167 days
+ 1 leap day
168 days

PRACTICE TEST
8. Sondra Davis borrows $6,000 on a 10%, 120-day note. On

the 60th day, Sondra pays $2,000 on the note. If ordinary
interest is applied, what is Sondra’s adjusted principal after
 60  The adjusted principal
6,000(0.1)    $100 after 60 days is $4,100
 360 
and the adjusted balance
$2,000  $100  $1,900 due at maturity is
$6,000  $1,900  $4,100 $4,168.33
$4,100  $68.33  $4,168.33

PRACTICE TEST
8. Sondra Davis borrows $6,000 on a 10%, 120-day note. On

the 60th day, Sondra pays $2,000 on the note. If ordinary
interest is applied, what is Sondra’s adjusted principal after
 120 
Interest with no partial payment: $6,000(0.1)  
 360 
Interest with partial payment: $100 + $68.33 = $168.33
Interest saved: $200  $168.33 = $31.67

PRACTICE TEST
10. A bread machine with a cash price of $188 can be

purchased with a one-year loan at 10% annual
simple interest. Find the total amount to be repaid.
I = $88(0.1)(1) = $18.80
Total repaid = $188 + $18.80 = $206.80

PRACTICE TEST
12. Find the exact interest on a loan of $850 at 11%

annually. The loan was made January 15 and was
due March 15.
March 15 = day 74
January 15 = day 15
74  15 = 59 days
I = $850(0.11)(59/365) = $15.11

PRACTICE TEST
14. Find the duration of a loan of $3,000 if the loan

required interest of $213.75 and was at a rate of
91/2 % annual simple interest.
I 213.75 213.75
T    0.75 year
PR 3,000(0.095) 285

PRACTICE TEST
16. A promissory note using the banker’s rule has a

face value of $5,000 and is discounted by the
bank at the rate of 14%. If the note is made
for 180 days, find the amount of the discount.
 180 
5,000(0.14)    350
 360 

PRACTICE TEST
Jerry Brooks purchases office supplies totaling

18. $1,890. He can take advantage of cash terms of 2/10,
n/30 if he obtains a short-term loan. If he can borrow
the money at 10.5 % annual simple ordinary interest
for 20 days, will he save money if he borrows to take
advantage of the cash discount? How much will he
save?
Find discount amount: 1,890(0.02) = 37.80
Discount price = 1,890  37.80 = 1,852.20
I = 1,852.20(0.105)(20/360) = 10.80
1,852.20 + 10.80 = 1,863
1,890  1,863 = 27
Yes, he saves $27.
PRACTICE TEST
20. Find the exact interest on a loan of $1,510 at

7 3/4% annual interest for 27 days.
 27 
1,510(0.0775)    8.66
 365 

Simple Interest and Simple Discount

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CHAPTER 11

Simple Interest and

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 1

 Find simple interest by using the simple interest

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 2

 The interest formula shows how interest, rate,

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 3

 The price paid for using money is called interest.

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 4

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 5

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 6

Principal = (P) = $1,200

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 7

 Find the interest on a 2-year loan of $4,000 at a

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 8

 Maturity value is the total amount of money

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 9

Marcus Logan can purchase furniture on a 2-year

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 10

 Terry Williams is going to borrow $4,000 at 7.5%

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 11

 Write the number of months as the numerator

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 12

Convert 9 months & 15 months, respectively, to

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 13

To save money, Stan Wright invested $2,500

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 14

 Akiko is saving a little extra money to pay for her

 Habib is going to borrow $2,000 for 42 months at

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 15

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 16

Judy paid $108 in interest on a loan that she had

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 17

Sam wants to borrow $1,500 for 15 months

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 18

Shelby borrowed $10,000 at 8%

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 19

 Find the exact time.

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 20

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 21

The ordinary time from July 12

Days in July (31 – 12) = 19

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 22

Find the exact time of a loan using

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 23

Find the exact time from May 15

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 24

Subtract the beginning date’s

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 25

A loan made on September 5

Ordinary time = 300 days

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 26

 An interest rate is normally given as rate per year.

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 27

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 28

For ordinary interest rate per day,

Ordinary interest rate per day =

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 29

For exact interest rate per day,

Exact interest rate per day =

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 30

A loan of $500 at 7% annual interest rate.

Copyright © 2014, 2010, 2007 Pearson Education, Inc. 31