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Simple Interest
Lecture Outline
Teaching Comments
A. General Suggestions
1. Encourage the students to write down the formulas and steps necessary to solve each
problem. Encourage them to make a mental estimate (approximation) of the answer.
Then have them calculate the answer on their calculator.
2. We recommend that students solve the equations I = PRT, M = P(1 + RT) and for any of
the variables by using algebraic techniques, rather than by the memorization of a
formula. However, we have included the triangle device for use if that is deemed best
for students.
3. The concept of time value of money is first introduced here to give the student a basic
understanding of that concept. Present value is especially challenging since the phrase
“present value” is generally accepted to mean the principal that must be invested at some
point to generate a specific future value. However, we also can speak of the value of an
investment at some time within the overall term of the investment. That is what is its
value presently, which is often phrased as present value of the investment. This early
introduction will provide an opportunity to explore the meaning of the words with
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students and then set up a means to solve the problem.
B. Teaching Notes
7.1 Simple Interest
a. Interest is a sum of money paid or charged for the use of money.
b. Interest = principal × rate × time
I = PRT
c. Maturity value of simple interest equals principal plus interest.
M=P+I
M = P + I = P + PRT = P(1 + RT)
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g. Future value of a simple interest investment is the maturity value.
Fv = M = P(1 + RT)
h. Present value of an investment is the amount that must be invested presently in
order to have a specific amount in the future.
Maturity value
Present value of a simple interest investment =
(1 + RT)
Pv = M(1 + RT)
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