Simple

6-1
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Interest

S imple I nterest
Chapter 6
McGraw-Hill Ryerson
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6-2
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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

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LO-1
Example: Loan

Parties
Lender Borrower

Lends the Principal Borrower OWES (Debt)

to Lender

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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
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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
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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
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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?

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

Four Elements are involved

Interest Principal Interest Rate Time

Time period
I P r t
Amount Principal Amount Annual Rate
(paid or (loan or of SI expressed
received) investment) as a fraction
or a multiple
Formula I = Prt of a year

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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
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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?

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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!

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!

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Interest

Formula I = Prt

Calculate the Interest earned

on $5000 invested
at 4.5%
? .
for 79 Days

I = $5000*.045 * 79/365
I = $48.70
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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
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Interest

Formula I = Prt

Calculate the Interest earned

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

I = $5000*.045 * 37/365
I = $22.81
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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 & Dec
Nov 31 Total = 61
Method 1.
31 & Feb
Jan 28 Total = 59

Mar To 11th of month = 11

151
Includes the last date

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Interest

Formula I = Prt

Calculate the Interest earned

on $5000 invested
at 4.0%
for 151?Days .

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!
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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!
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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

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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

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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 Look up
$5000
284 365 70
Step 3 Enter the 81 days
Investment 70 days

Step 4 Enter the

number of days 151 days
between each
The calculation can now be
date and add
McGraw-Hill Ryerson
restated as follows
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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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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 the Principal

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
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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%
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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 1 Find the amount of Interest

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

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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
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Interest

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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
150
a 150 day term S= $17000 1+ .065( 365)
deposit on Jan. 6
paying 6.5%. S = $17000(1.0267123)
How much will
the bank pay me
S = $17454.11
on the
maturity date?
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Interest

150
S = $17000 1+ .065( 365)
17454.11 .065
*
150
/
365
= $17454.11
+
1
=
*
17000
Date of Maturity
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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 Jun Jul Aug Sep
The Serial Number of Each 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?

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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.
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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
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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
and $308.28
add
together. $10000 + $308.28 S = $10308.28
Total Amount
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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.
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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 ?

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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

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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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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
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Interest

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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
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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 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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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
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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?

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

UsingSum = P(1+rt)
As we know the Sum, the formula now becomes
P = Sum/(1+rt)
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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?

Formula P = Sum/(1+rt)

P =5000/ 1 + 0.044(.5)
P = $4892.37
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Interest

LO-2

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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
211 Days
$2000
Value
Step P = Sum/(1+rt)
2
= 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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Interest

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

Step
2 P = Sum/(1+rt)

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Interest

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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Interest

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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Interest

$1234 = Present Value = P1

$1432 = Future Value = S2

P = Sum/(1+rt)
Which
Tip: 3 months
= 1/4
Find the
formula
PV of the
P2 = 1432/[1+.06(.25)]
should
future
you use?
payment! P2 = $1410.84 $1234.00
Money saved ($176.84) by paying now!
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Interest

This completes Chapter 6

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