Simple

6-1
6
Interest

S imple I nterest
Chapter 6
McGraw-Hill Ryerson©
 Simple
6-2
6
Interest
Learning Objectives
After completing this chapter, you will be able to:
Calculate
LO-1 … interest, maturity value,
future value, and present value
in a simple interest environment
LO-2 … the equivalent value on any date of a single
payment or a stream of payments, and

Present
… details of the amount and
timing of payments in a time
diagram
McGraw-Hill Ryerson©
 Simple
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Interest

LO-1
Example: Loan

Parties
Lender Borrower

Lends the Principal Borrower OWES (Debt)

to Lender

McGraw-Hill Ryerson©
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Interest

Example: Loan

Lender Borrower
Earns (Income) from Borrower Borrower pays
i.e. Interest on the Principal Interest to Lender

Rate of Interest: Simple Interest …

Calculated on an ANNUAL or
per annum (pa) basis
McGraw-Hill Ryerson©
 Simple
6-5
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Interest Examples

Invest $1000 at 10% simple interest

for one year.
Interest earned is?
Principal X Interest Rate = $1000 *10% = $100

Invest $1000 at 10% simple interest

for six months.
Interest earned is?
Principal X Interest Rate = $1000 * 10% /2 = $50
McGraw-Hill Ryerson©
 Simple
6-6
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Interest Examples

Invest $1000 at 10% simple interest

for three months
Interest earned is?
Principal X Interest Rate = $1000 X 10% /4 = $25

Invest $1000 at 10% simple interest

for one month.
Interest earned is?
Principal X Interest Rate = $1000 X 10% /12 = $8.33
McGraw-Hill Ryerson©
 Simple
6-7
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Interest

Up to this point we have taken months to

represent 1/12th of a year,
i.e. each month is treated
as having the same number of days!

Would it not be more accurate to

calculate the interest due or payable
based on the actual
number of days
in each month?

McGraw-Hill Ryerson©
 Simple
6-8
6
Interest Yes, it would!
In fact, interest continues
to accumulate as each day passes!

Example
Invest $1000 at 10% simple interest
for 30 days!
Interest earned is?

Principal x Interest Rate = $1000 *10%* 30 = $8.22

365

Year = 365 days or 366 in a Leap Year

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Interest
“What is the formula that can
be used to calculate SI?”

Four Elements are involved …

Interest Principal Interest Rate Time

Amount Principal Amount Annual Rate Time period

(paid orI P
(loan or r
of SI t
…expressed
received) investment) as a fraction
or a multiple
Formula I = Prt of a year

McGraw-Hill Ryerson©
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Interest

Formula I = Prt

Calculate the Interest earned

on $5000
invested at 4%
for 7 months.

I= P * r * t
$5000 * .04 * 7 /12
I = $116.67
McGraw-Hill Ryerson©
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6 - 11
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Interest

“I may need to invest or

need a loan for a number
of days rather than a
complete
month.”
“How do I calculate the
time between the
starting date and the
ending date?”

McGraw-Hill Ryerson©
 Simple
6 - 12
6 There are three methods
Interest
that can be used to
calculate the number of days:

Add up the days according to the

Include either days covered by the specific months.
the FIRST date
or the LAST Use a Number of Days TABLE
date when doing
this calculation!

Use the TI BAII Plus calculator!

McGraw-Hill Ryerson©
 Simple
6 - 13
6
Interest Calculating the Number of Days
What is the interest earned on $5000 invested
from Oct. 11th to Dec. 29th at 4.5%?

Days
Method 1. Oct 11th to end of month = 20

Nov Total month = 30

From 1st to 29th

Dec of month = 29
Includes the last date 79

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Interest
The “Hand Calculator!”

l y Jun Sept
Ju A p r Nov Aug
Ma y e b Oct
F
Mar Dec
Jan

Knuckles are ALL 31 days

Spaces are ALL 30 days
except for February which can be either
28 or 29 days in a Leap
year!
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Interest

Thirty days has September,

April, June and November.
All the rest have 31,
but February with just 28 days clear
plus one more in each leap year!

McGraw-Hill Ryerson©
 Simple Day of TABLE6.2 6 - 16
6
Interest
Month
1
Jan
1
Feb
32
Mar
60
Apr
91
May
The
121
SerialJun
Number Jul
152
of EachAug
182
Sep
Day of the
213 244
Year Oct
274
Nov Dec
305 335
2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8
9
10
11
8
Dec 29
9
10
11
39
40
41
42
67
68
69
70
98
99
100
101
363
128
129
130
131
159
160
161
162
189
190
191
192
220
221
222
223
251
252
253
254
281
282
283
284
312 342
313 343
314 344
315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14
15
Oct
14
15
45
46
73
74
104
105 284
134
135
165
166
195
196
226
227
257
258
287
288
318 348
319 349
Method 2. 16
17
16
11
17
47
48
75
76
106
107
136
137
167
168
197
198
228
229
259
260
289
290
320 350
321 351
18
19
18
19
49
50 =
77
78
108
109
138
13979 Days
169
170
199
200
230
231
261
262
291
292
322 352
323 353
20 20 51 79 110 140 171 201 232 263 293 324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 238 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
31 31 90 151 212 243 304 365
McGraw-Hill Ryerson©
 Simple
i Texas Instruments 6 - 17
6 Using…
Interest BAII PLUS

Method 3. Start
2nd
Example 1. DBD = 79 Date
Calculate… 10.1102 Enter
the interest
earned
on $5000 12.2902 Enter
invested
from
Oct. 11th to CPT
Dec. 29th, 02 at
4.5%. Days Between Dates

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6
Interest

Formula I = Prt

Calculate the Interest earned

on
$5000 invested
79 at 4.5%
Days
for ? .
I = $5000*.045 * 79/365
I = $48.70
McGraw-Hill Ryerson©
 Simple
6 - 19
6
Interest Calculating the Number of Days
What is the interest earned on $5000 invested
from Nov 30th, 02 to Jan 6th, 03 at 4.5%?

Days
Method 1. Nov 30th to end of month = 0

Dec Total month = 31

From 1st to 6th

Jan of month = 6
37
Includes the last date
McGraw-Hill Ryerson©
 Simple
Day of TABLE6.2 6 - 20
6
Interest
Month
1
Jan
1
Feb
32
Mar
60
Apr The
MaySerialJun
Number Jul
of EachAug
91 121 152 182 213 244
Sep
Day of the Year Oct
274
Nov Dec
305 335
2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8 8 39 67 98 128 159 189 220 251 281 312 342

365
9 9 40 68 99 129 160 190 221 252 282 313 343
10
11
Dec 31
10
11
41
42
69
70
100 130 161 191 222 253
101 131 162 192 223 254
283
284
314 344
315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13
14
15
13
15
44
Nov 30
14 45
46
72
73
74 334
103 133 164 194 225 256
104 134 165 195 226 257
105 135 166 196 227 258
286
287
288
317 347
318 348
319 349
Method 2. 16 16 47 75 106 136 167 197 228 259 289 320 350
17
18
19
17
18
19
48
49
50
76
77
78
= 31 Days
107 137 168 198 229 260
108 138 169 199 230 261
109 139 170 200 231 262
290
291
292
321 351
322 352
323 353
20 20 51 79 110 140 171 201 232 263 293 324 354
21
22
23
21
Jan 6
22
23
52
53
54
80
81
82
6
111 141 172 202 233 264
112 142 173 203 234 265
113 143 174 204 235 266
294
295
296
325 355
326 356
327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25
26
27
25
26
27
56
57
58
84
85
86
= 37 Days
115 145 176 206 237 268
116 146 177 207 238 269
117 147 178 208 239 270
298
299
300
329 359
330 360
331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
McGraw-Hill Ryerson©
31 31 90 151 212 243 304 365
 Simple
i Texas Instruments 6 - 21
6 Using…
Interest BAII PLUS

Method 3. Start
2nd
Example 1. DBD = 37 Date
Calculate… 11.3002 Enter
the interest
earned
on $5000 01.0603 Enter
invested
from
Nov. 30th,, 02 CPT
to Jan 6th. 03 at
4.5%. Days Between Dates

McGraw-Hill Ryerson©
 Simple
6 - 22
6
Interest

Formula I = Prt

Calculate the Interest earned

on
$5000 invested
37 at 4.5%
Days
for ? .

I = $5000*.045 * 37/365
I = $22.81
McGraw-Hill Ryerson©
 Simple
6 - 23
6
Interest Calculating the Number of Days
What is the interest earned on $5000 invested
from Oct 11th , 02 to Mar 11th, 03 at
4.0%?
Days
Oct 11th to end of month = 20
30 &
Nov 31
Dec Total = 61
Method 1.
Jan
31 & Feb
28 Total = 59

Mar To 11th of month = 11

151
Includes the last date

McGraw-Hill Ryerson©
 Simple
Day of TABLE6.2 6 - 24
6
Interest
Month
1
Jan
1
Feb
32
Mar
60
Apr The
MaySerialJun
Number Jul
of EachAug
91 121 152 182 213 244
Sep
Day of the Year Oct
274
Nov Dec
305 335
2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5
6
5
6Dec 31
36
37
64
65 365
95 125 156 186 217 248
96 126 157 187 218 249
278
279
309 339
310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8
9
8
9Oct 11
39
40
67
68 284
98 128 159 189 220 251
99 129 160 190 221 252 = 81 Days 281
282
312 342
313 343
Method 2. 10
11
10
11
41
42
69
70
100 130 161 191 222 253
101 131 162 192 223 254
283
284
314 344
315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14
15
16
14
15
16
Mar 11
45
46
47
73
74
75
70
104 134 165 195 226 257
105 135 166 196 227 258
106 136 167 197 228 259
= 70 Days 287
288
289
318 348
319 349
320 350
17 17 48 76 107 137 168 198 229 260 290 321 351
18 18 49 77 108 138 169 199 230 261 291 322 352
19
20
19
20
50
51
78
79
109 139 170 200 231 262
110 140 171 201 232 263 =151 Days 292
293
323 353
324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 238 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
McGraw-Hill Ryerson©
31 31 90 151 212 243 304 365
 Simple
i Texas Instruments 6 - 25
6 Using…
Interest BAII PLUS

Method 3. Start
2nd
Example 1. DBD = 151 Date
Calculate… 10.1102 Enter
the interest
earned
on $5000 03.1103 Enter
invested
from
Oct. 11th,, 02 CPT
to Mar 11th. 03
at 4.0%. Days Between Dates

McGraw-Hill Ryerson©
 Simple
6 - 26
6
Interest

Formula I = Prt

Calculate the Interest earned

on
$5000 invested
151atDays
4.0%
for ? .

I = $5000* .04 *151/365

I = $82.74
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Interest

Formula I = Prt
We can ‘reorganize’ the formula to also get
each of the following separately:

Principal
Rate
Time

Shortcut Tool!
McGraw-Hill Ryerson©
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Interest The Triangle …another useful non-calculator!

To help remember this… Formula I = Prt

we can place the formula into a triangle as follows…

Where variables are

P*r*t BESIDE EACH OTHER this
I means to MULTIPLY!

Prt Where a variable is ABOVE

I ANOTHER this means to
Prt DIVIDE!

McGraw-Hill Ryerson©
Using this tool!
 Simple
6 - 29
6
Interest The Triangle …another useful non-calculator!

Using this tool! If you want to find P I /rt

then

I If you want to find r then I /Pt

Prt
If you want to find t then I /Pr

McGraw-Hill Ryerson©
 Simple
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6
Interest
Using a Time Line

What is A Time Line is, as the name suggests, a line

a Time that shows the various points of time along
Line? which a loan or investment travels to maturity.
It is used for diagramming problems involving
multiple payments or investments.

…Helps organize data

Two Benefits …Indicates the steps needed
to implement the solution

McGraw-Hill Ryerson©
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Interest
Using a Time Line
Calculate the interest earned at 4% on $5000
invested from Oct. 11th to March 11th

Step 1 Draw a line for Start Finish

the entire period
Oct 11 Dec 31 March 11
Step 2 Enter the key
dates on the line $5000 Look up
284 365 70
Step 3 Enter the 81 days
Investment 70 days

Step 4Enter the

number of days 151 days
between
The calculation can now be
each date and
restated as follows…
add
McGraw-Hill Ryerson©
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6
Interest
Using a Time Line

Calculate the interest earned at 4% on $5000

invested for 151 days.

Using this tool! I = Prt

I I = 5000 * .04 * 151/365
Prt = $82.74
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6
Interest You can now use this tool!

I
Prt

In the next few examples you have to…

(a) First identify which variable you are
being asked to solve for, and
(b) Reorganize the formula in order to
meet the requirement in (a).

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Interest
Calculating Principal
the
Formula P= I rt
$195 interest is earned on a 150 day
GIC at 5.25%.
Find the initial investment .

P = $195 .0525 *(150/365)

P = $195 .0121575342
P = $9,038.10
McGraw-Hill Ryerson©
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Interest P = $195 .0525 *(150/365)
.0525
9038.10 *
150
/
365
=
/
195
=
1/x $9038.10
McGraw-Hill Ryerson©
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6
Interest
Calculating the Rate

Formula r = I Pt
What Rate of Interest is needed to
earn $200 on a $5000 investment
invested for 180 days?

r = $200 /($5000*180/365)
r = $200 /2465.75
r = 0.081111 or 8.11%
McGraw-Hill Ryerson©
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6
Interest r = $200 /($5000*180/365)
5000
0.08111 *
180
/
365
=
/
200
=
1/x 8.11%
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6
Interest
Calculating the Time

Formula t = I Pr
What is the length of Time
required for $2000 to grow to
$2100 when invested at 5.6%?

Step 1 Find the amount of Interest

P + I = Sum P I
$2100 - $2000 = $100

McGraw-Hill Ryerson©
More
 Simple
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Interest
Calculating the Time

Formula t = I Pr
What is the length of Time
required for $2000 to grow to
$2100 when invested at 5.6%?
Step 2
Calculate
t= $100/ ($2000*.056)
t= $100/ 112
t= 0.8928 Years *365 days
t= 326 days
McGraw-Hill Ryerson©
 Simple
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6
Interest t= $100 / ($2000*.056)
100
325.89 /
2000
/
0.056
=
0.8928 Years
*
365
=
326 days
McGraw-Hill Ryerson©
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Interest

McGraw-Hill Ryerson©
 Simple
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Interest

Up to this point we have used two formulae:

Formula I = Prt & Sum = P + I
We can combine them as follows:

Step 1 Sum = P+I Now, we substitute for I

Sum = P + Prt with
Step 2 Collecting like terms

Future Value Formula Sum = P(1+rt)

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Interest

Sum = P(1+rt)
I place $17000 in
a 150 day term S = $17000 1+ .065( 150
)
deposit on Jan. 6 365

paying 6.5%. S = $17000(1.0267123)

How much will
the bank pay me S = $17454.11
on the
maturity date?
McGraw-Hill Ryerson©
 Simple
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6
Interest

S= $17000 150
1+ .065( )
365
17454.11 .065
*
150
/
365
= $17454.11
+
1
=
*
17000
Date of Maturity
McGraw-Hill Ryerson© =
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6 - 45
6
Interest

Determine the Maturity Date

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

= 6 days + 150 = 156 days

Day of TABLE6.2
Month Jan Feb Mar Apr May
The SerialJun
Number Jul
of EachAug Sep
Day of the Year Oct Nov Dec
1 1 32 60 91 121 152 182 213 244 274 305 335
Look up 2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
Find
156 The Term Deposit will mature on June 5th.
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Interest

During the year, I invested the

following funds at a constant 4% p.a.
(The second and third amounts were
added to the Feb 14th amount.)
Feb 14th $5,000 5,000
Mar 17th $3,000 8,000
July 1st $2,000 10,000

What Total amount will I have on December 29th?

McGraw-Hill Ryerson©
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Interest

Three Steps are required to solve this problem:

Step Draw a time line,

1 including the dates and
dollar amounts.

Step Determine the time

2 between each of the dates

Calculate the interest

Step
amounts,
3
and add together.
McGraw-Hill Ryerson©
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6 - 48
6
Interest

Look up

Step
1 45 76 182 363
Feb 14 March 17 July 1 Dec 29
Draw a
time line
$5000 363 – 45 = 318 Days

Step $3000 363 – 76 = 287 Days

2
Determine $2000 363 – 182 = 181 Days
the Time
McGraw-Hill Ryerson©
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Interest

Formula I = Prt
Step
3
I1 = 5000 *.04 *318/365 $174.25
Calculate
the I2 = 3000 *.04 *287/365 94.36
Interest
amounts, I3 = 2000 *.04 *182/365 39.67
$308.28
and $10000 + $308.2 S = $10308.28
add 8 Total Amount
together.
McGraw-Hill Ryerson©
 Simple
6 - 50
6
Interest

“During the year I made an

investment that had changes in
the rate of interest.
How do I determine the total
interest earned during the
period under review?”

Every time the interest rate

changes,you must stop and make
a calculation up to that point.
McGraw-Hill Ryerson©
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6
Interest

I invest $1,000 on Feb. 14th at 6%.

The changes in interest rates to July 4th
are as follows:
Investment Date rate
$1,000 Feb 14th 6%
April 20th 6.8%
May 18th 7.1%
How much Interest did I earn up to July 4th ?

McGraw-Hill Ryerson©
 Simple
6 - 52
6
Interest

… by finding the number of days between

each rate change!
Investment Date rate
$1,000 Feb 14th 6%
Look up April 20th 6.8%
May 18th 7.1%
for Days
July 4th

McGraw-Hill Ryerson©
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6 - 53
6
Interest

Table Number
reading of Days

Feb 14th
= 45
April 20th = 65 Days
Look up = 110
May 18th
for Days = 138 = 28 Days
July 4th = 185 = 47 Days

Interest Earned
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6
Interest

Interest Earned

Formula I = Prt
Feb 14th
65 Days I1 = 1000 * .06 * 65/365 = $10.68
April 20th
May 18th I2 = 1000 * .068 * 28/365 = 5.22
28 Days
July 4th I3 = 1000 * .071 * 47/365 = 9.14
47 Days
$25.04
McGraw-Hill Ryerson©
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6 - 55
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Interest

McGraw-Hill Ryerson©
 Simple
6 - 56
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Interest

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 provide?

“How much …this suggests finding the
must I invest…
Principal
to grow…”
McGraw-Hill Ryerson©
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6 - 57
6
Interest

How much must I invest in order for it to grow to $5000

within 6 months, @ 4.4% simple interest?

What data do we need?

We need the appropriate data to be
able to use the appropriate formula…

Formulae I = Prt & Sum = P(1+rt)

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6
Interest

How much must I invest in order for it to grow to $5000

within 6 months, @ 4.4% simple interest?

Formulae I = Prt & Sum = P(1+rt)

What data do we have?
r = 4.4% t = 6 months = .5
Sum = $5000
McGraw-Hill Ryerson©
 Simple
6 - 59
6
Interest

How much must I invest in order for it to grow to $5000

within 6 months, @ 4.4% simple interest?

Formulae I = Prt & Sum = P(1+rt)

Using Sum = P(1+rt)
As we know the Sum, the formula now becomes…

P = Sum/(1+rt)
McGraw-Hill Ryerson©
 Simple
6 - 60
6
Interest

How much must I invest in order for it to grow to $5000

within 6 months, @ 4.4% simple interest?

Formula P = Sum/(1+rt)

P =5000/ 1 + 0.044(.5)
P = $4892.37
McGraw-Hill Ryerson©
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6 - 61
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Interest

LO-2

McGraw-Hill Ryerson©
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6 - 62
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Interest

What is the equivalent value on September 15

of a $2000 payment on July 4, if money is
worth 6% pa?

July 4 September 15
Step Draw a
1 Timeline $2000
69 Days Future
Value
Step
2 Sum = P(1+rt)
Sum = 2000[1+.06(69/365)]
= $2022.68
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Interest

What is the equivalent value on May 18th of a

$2000 payment due on the following December
15th if money can earn 5.2%?

May 18 December 15
Step Draw a
1 Timeline Present $2000
211 Days
Value
Step
2
P = Sum/(1+rt)
= 2000/[1+.052(211/365)]
= $1941.63
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Interest

Heather owes Mark $3000 payable on

April 27.
If money can earn 4%, what amount
should Mark accept in settlement of the
debt:
A) 30 days before the scheduled
payment?
B) 90 days before the scheduled
payment?

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April 27
Step
1 Present Value $3000
Draw a 30 days
90 days
Timeline

Step
2 P = Sum/(1+rt)

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P = Sum/(1+rt)

A P = 3000/[1+.04(30/365)]
P = $2990.17
B P = 3000/[1+.04(90/365)]
P = $2970.17
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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,
which option should you choose?

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$1234 = Present Value = P1

Data $1432 = Future Value = S2

P = Sum/(1+rt)
Which
Tip: 3 months
Find the
formula
PV of the
P2 = 1432/[1+.06(.25)] = 1/4

should
future
you use?
payment! P2 = $1410.84 $1234.00
Money saved ($176.84) by paying now!
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This completes Chapter 6

McGraw-Hill Ryerson©