Simple

Simple

6-1

Interest
Interest

S imple I nterest
Chapter

6
McGraw-Hill Ryerson

Simple
Simple

Learning
Learning
Objectives
Objectives
After completing this chapter, you will be able to:

6-2

Interest
Interest

Calculate
LO-1

LO-2

interest, maturity value,

future value, and present value
in a simple interest environment
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
Simple

6-3

Interest
Interest

LO-1
Example:
Example:

Loan
Loan

Parties
Parties
Lender Borrower

Lendsthe
thePrincipal
Principal
Lends

McGraw-Hill Ryerson

BorrowerOWES
OWES(Debt)
(Debt)
Borrower
toLender
Lender
to

Simple
Simple

6-4

Interest
Interest

Example:
Example:

Lender

Borrower

Earns(Income)
(Income)from
fromBorrower
Borrower
Earns
i.e. Interest
Intereston
onthe
thePrincipal
Principal
i.e.

Rate of Interest:
McGraw-Hill Ryerson

Loan
Loan

Borrowerpays
pays
Borrower
InteresttotoLender
Lender
Interest

Simple Interest
Interest

Simple

Calculated on
on an
an ANNUAL
ANNUAL or
or
Calculated
per annum
annum (pa)
(pa) basis
basis
per

Simple
Simple

Interest
Interest

6-5

Examples
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
McGraw-Hill Ryerson

= $1000 * 10% /2 = $50

Simple
Simple

Interest
Interest

6-6

Examples
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 =
McGraw-Hill Ryerson

$8.33

Simple
Simple

6-7

Interest
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
Simple

Interest
Interest

6-8
Yes, it would!
In fact, interest continues
to accumulate as each day passes!

Example
Example
Invest $1000 at 10% simple interest
for 30 days!
Interest earned is?
Principal x Interest Rate = $1000 *10%* 30

365

= $8.22

Year == 365
365 days
days or
or 366
366 in
in aa Leap
LeapYear
Year
Year
McGraw-Hill Ryerson

Simple
Simple

6-9

What is the formula that can

be used to calculate SI?

Interest
Interest

FourElements
Elementsare
areinvolved
involved

Four
Interest
Amount
Amount
(paidor
or
(paid
received)
received)

Principal
PrincipalAmount
Amount
Principal
(loanor
or
(loan
investment)
investment)

Formula
Formula
McGraw-Hill Ryerson

Interest Rate
AnnualRate
Rate
Annual
ofSI
SI
of

I = Prt

Time

Timeperiod
period
Time
expressed
expressed
asaafraction
fraction
as
oraamultiple
multiple
or
ofaayear
year
of

Simple
Simple

6 - 10

Interest
Interest

Formula
Formula

I = Prt

Calculate the Interest earned

on $5000
invested at 4%
for 7 months.

I=

$5000

r *
.04 *

*
= $116.67
$116.67
II =
McGraw-Hill Ryerson

7 /12

Simple
Simple

6 - 11

Interest
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
Simple

Interest
Interest

Calculating the Number of

6 - 12

Days

What is the interest earned on $5000

invested
from Oct. 11th to Dec.
29th at 4.5%?
Days
Oct 11th to end of month =
Method 1.
1.
20
Method

Nov

Total month

30

Dec

From 1st to 29th

of month

29
79
79

Includes the last date

McGraw-Hill Ryerson

Simple
Simple

Interest
Interest

6 - 13

The Hand Calculator!

un
J
y
l
r
Ju
p
A
May
b
e
F
Mar
Jan

Sept
Nov

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!
McGraw-Hill Ryerson

Aug

Oct
Dec

Simple
Simple

6 - 14

Interest
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
Simple

6 - 15

Interest
Interest

Formula
Formula

I = Prt

Calculate the Interest

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

I = $5000*.045 *79/365
= $48.70
$48.70
II =
McGraw-Hill Ryerson

Simple
Simple

Interest
Interest

Calculating the Number of

6 - 16

Days

What is the interest earned on $5000

invested
from Nov 30th, 02 to Jan
6th, 03 at 4.5%?

Method 1.
1.
Method

Nov

30th to end of month =

Dec

Total month

31

Jan

From 1st to 6th

of month

6
37
37

Includes the last date

McGraw-Hill Ryerson

Days
0

Simple
Simple

6 - 17

Interest
Interest

Formula
Formula

I = Prt

Calculate the Interest

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

I = $5000*.045 *37/365
= $22.81
$22.81
II =
McGraw-Hill Ryerson

Simple
Simple

Interest
Interest

Calculating the Number of

6 - 18

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

Method 1.
1.
Method

30 &
Nov

31
Dec

Total

61

31 & Feb
28
Jan

Total

59

11

Mar

To 11th of month

Includes the last date

McGraw-Hill Ryerson

151

Simple
Simple

6 - 19

Interest
Interest

Formula
Formula

I = Prt

Calculate the Interest

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

I = $5000* .04 *151/365

= $82.74
$82.74
II =
McGraw-Hill Ryerson

Simple
Simple

6 - 20

Interest
Interest

Formula
Formula

I = Prt

We can reorganize the formula to also get

each of the following separately:

Principal
Rate
Time
Shortcut
Shortcut
McGraw-Hill Ryerson

Tool!
Tool!

Simple
Simple

Interest
Interest

The

Triangle

To help remember this

6 - 21
another useful non-calculator!

Formula
Formula

I = Prt

we can place the formula into a triangle as follows

I
Prt

P*r*t
P*r*t
I
Prt

McGraw-Hill Ryerson

Where variables are

BESIDE EACH OTHER this
means to MULTIPLY!
Where a variable is ABOVE
ANOTHER this means to
DIVIDE!

Using this
this tool!
tool!
Using

Simple
Simple

Interest
Interest

The

Triangle

Using this
this tool!
tool!
Using

I
Prt

McGraw-Hill Ryerson

6 - 22
another useful non-calculator!

I /rt
If you want to find r then I /Pt
If you want to find t
then I /Pr
If you want to find

then

Simple
Simple

Interest
Interest

Using a Time Line

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

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

TwoBenefits
Benefits
Two

McGraw-Hill Ryerson

Helpsorganize
organizedata
data
Helps
Indicatesthe
thesteps
stepsneeded
needed
Indicates
toimplement
implementthe
thesolution
solution
to

6 - 23

Simple
Simple

Interest
Interest

6 - 24

Using a Time Line

Calculate the
the interest
interest earned
earned at
at 4%
4% on
on $5000
$5000
Calculate
invested from
from Oct.
Oct. 11
11thth to
to March
March 11
11thth
invested

Step 11 Draw a line for

Step
the entire period
Step 22 Enter the key
Step
dates on the line
Step 33
Step

Enter the
Investment

Step 44Enter the

Step
number of days
between
each date and
add

McGraw-Hill Ryerson

Start

Finish

Oct 11

Dec 31

Look up

$5000
284

March 11

81 days

365

70
70 days

151 days
The calculation can now be
restated as follows

Simple
Simple

Using a Time Line

Interest
Interest

6 - 25

Calculate the
the interest
interest earned
earned at
at 4%
4% on
on $5000
$5000
Calculate
invested for
for 151
151 days.
days.
invested

Using this
this tool!
tool!
Using

I
Prt
McGraw-Hill Ryerson

I = Prt
I = 5000 * .04 * 151/365
=

$82.74

Simple
Simple

Interest
Interest

You can
can now
now use
use this
this tool!
tool!
You

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).
McGraw-Hill Ryerson

6 - 26

Simple
Simple

Interest
Interest

Calculating
the
Formula
Formula

Principal

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

6 - 27

Simple
Simple

Calculating the
the Rate
Rate
Calculating

Interest
Interest

Formula
Formula

6 - 28

I Pt

What Rate
Rate of
of Interest
Interest is
is
What
needed to
to earn
earn $200
$200 on
on aa
needed
$5000 investment
investment invested
invested for
for
$5000
180 days?
days?
180

r
r
r

McGraw-Hill Ryerson

= $200 /($5000*180/365)
= $200 /2465.75
= 0.081111 or 8.11%

Simple
Simple

6 - 29

Calculating the
the Time
Time
Calculating

Interest
Interest

Formula
Formula

t = I Pr

What is
is the
the length
length of
of Time
Time
What
required for
for $2000
$2000 to
to grow
grow to
to
required
$2100 when
when invested
invested at
at
$2100
5.6%?
5.6%?

Step 11
Step

Find the amount of Interest

PP

PP ++ II == Sum
Sum
$2100
McGraw-Hill Ryerson

$2000

II

= $100
More

Simple
Simple

Calculating the
the Time
Time
Calculating

Interest
Interest

Formula
Formula

6 - 30

t = I Pr

What is
is the
the length
length of
of Time
Time
What
required for
for $2000
$2000 to
to grow
grow to
to
required
$2100 when
when invested
invested at
at 5.6%?
5.6%?
$2100
Step 22
Step
Calculate
Calculate

McGraw-Hill Ryerson

t
t
t
t

=
=
=
=

$100/ ($2000*.056)
$100/ 112
365 days
days
0.8928 Years *365
326 days

Simple
Simple

Interest
Interest

McGraw-Hill Ryerson

6 - 31

Simple
Simple

6 - 32

Interest
Interest

Up to this point we have used two formulae:

Formula
Formula

I = Prt

&

Sum = P + I

We can combine them as follows:

Step 11
Step

Step 22
Step

Sum =
Sum =

P+I
Now,we
wesubstitute
substitutefor
forII
Now,
with
P + Prt
with

Collecting like
like terms
terms
Collecting

Future Value
Value Formula
Future
McGraw-Hill Ryerson

Sum = P(1+rt)

Simple
Simple

6 - 33

Interest
Interest

Sum =
II place
place $17000
$17000
in
in aa 150
150 day
day
term
term deposit
deposit on
on
Jan.
Jan. 66 paying
paying
6.5%.
6.5%.
How much
much will
will
How
the bank
bank pay
pay
the
me on
on the
the
me
maturity date?
date?
maturity
McGraw-Hill Ryerson

P(1+rt)

S = $17000 1+ .065(365 )
150

S = $17000(1.0267123)
S = $17454.11

Simple
Simple

6 - 34

Interest
Interest

150
$17000
1+ .065(365 )
S=

17454.11

.065

*
150
/

365

=
+
1
=

$17454.11
$17454.11

17000
McGraw-Hill Ryerson

Date of Maturity

Simple
Simple

6 - 35

Interest
Interest

Determine the
the Maturity
Maturity
Determine
Date
Date
I place $17000 in a 150 day term

I place $17000 in a 150 day term

deposit
deposit on
on Jan.
Jan. 66 paying
paying 6.5%
6.5% pa.
pa.
= 6 days + 150 = 156 days
Day of
Month

Look up

1
2
3
4
5
6
7

Jan
1
2
3
4
5
6
7

Feb
32
33
34
35
36
37
38

Mar
60
61
62
63
64
65
66

Apr
91
92
93
94
95
96
97

May
121
122
123
124
125
126
127

TABLE6.2

Jun
152
153
154
155
156
157
158

Jul
182
183
184
185
186
187
188

Aug
213
214
215
216
217
218
219

Sep
244
245
246
247
248
249
250

The Serial Number of Each Day of the Year

Oct
274
275
276
277
278
279
280

Nov
305
306
307
308
309
310
311

Dec
335
336
337
338
339
340
341

Find
Find
th
156
The
Term
Deposit
will
mature
on
June
5
.
156
McGraw-Hill Ryerson

Simple
Simple

6 - 36

Interest
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.)
5,000
Feb 14th
$5,000
Mar 17th

$3,000

8,000

July 1st

$2,000

10,000

What Total
Total amount
amount will
will II have
have on
on December
December 29
29thth??
What
McGraw-Hill Ryerson

Simple
Simple

6 - 37

Interest
Interest

Three Steps are required to solve this problem:

Step Draw a time line,
including the dates and
1
dollar amounts.
Step Determine the time
between each of the dates
2

Calculate the interest

Step
amounts,
3
and add together.
McGraw-Hill Ryerson

Simple
Simple

6 - 38

Interest
Interest

Look up
Step
1
Draw a
time line

45
Feb 14

March 17

$5000

Step
2
Determine
the Time
McGraw-Hill Ryerson

76

182

363

July 1

Dec 29

363 45 = 318 Days

$3000

363 76 = 287 Days

$2000

363 182 = 181 Days

Simple
Simple

6 - 39

Interest
Interest

Formula
Formula
Step
3

I = Prt

I1 = 5000 *.04 *318/365

Calculate
Calculate
the
I2 = 3000 *.04 *287/365
the
Interest
Interest
amounts, I3 = 2000 *.04 *182/365
amounts,
and
and
add
add
together.

McGraw-Hill Ryerson

$10000 ++ $308.2
$308.2
$10000
88

$174.25
94.36
39.67

$308.28

S
S=
= $10308.28
$10308.28
Total
Total Amount
Amount

Simple
Simple

6 - 40

Interest
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

Simple
Simple

6 - 41

Interest
Interest

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

The changes in interest rates to July 4th
are as follows:
Investment
$1,000

Date
Feb 14th
April 20th
May 18th

rate
6%
6.8%
7.1%

thth ?
How
much
Interest
did
I
earn
up
to
July
4
How much Interest did I earn up to July 4 ?

McGraw-Hill Ryerson

Simple
Simple

6 - 42

Interest
Interest

by finding the number of days between

each rate change!
Investment
$1,000
Look up
for Days

McGraw-Hill Ryerson

Date
Feb 14th
April 20th
May 18th
July 4th

rate
6%
6.8%
7.1%

Simple
Simple

6 - 43

Interest
Interest

Table
Table
reading
reading

Number
Number
of Days
Days
of

= 45
= 110

= 65 Days

= 138

= 28 Days

= 185

= 47 Days

Feb 14th
Look up
for Days

April 20

th

May 18th
July 4th

McGraw-Hill Ryerson

Interest Earned
Earned
Interest

Simple
Simple

6 - 44

Interest
Interest

Interest Earned
Earned
Interest

Formula
Formula

I = Prt

Feb 14th
65 Daysth
April 20

I1 = 1000 * .06 * 65/365

= $10.68

May 18th
28 Days

I2 = 1000 * .068 * 28/365

5.22

July 4th
47 Days

I3 = 1000 * .071 * 47/365

9.14

McGraw-Hill Ryerson

$25.04

Simple
Simple

Interest
Interest

McGraw-Hill Ryerson

6 - 45

Simple
Simple

6 - 46

Interest
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

How
How much
much

must
mustIIinvest
invest
to
togrow
grow
McGraw-Hill Ryerson

provide?

this suggests finding the

Principal

Simple
Simple

6 - 47

Interest
Interest

Howmuch
muchmust
mustIIinvest
investin
inorder
orderfor
forititto
togrow
growto
to$5000
$5000
How
within66months,
months,@
@4.4%
4.4%simple
simpleinterest?
interest?
within

What data do we

need?

We
Weneed
needthe
theappropriate
appropriatedata
datatotobe
be
able
ableto
touse
usethe
theappropriate
appropriateformula
formula

Formulae
Formulae
McGraw-Hill Ryerson

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

Simple
Simple

6 - 48

Interest
Interest

Howmuch
muchmust
mustIIinvest
investin
inorder
orderfor
forititto
togrow
growto
to$5000
$5000
How
within66months,
months,@
@4.4%
4.4%simple
simpleinterest?
interest?
within

Formulae
Formulae

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

What data do we

r = 4.4%

t = 6 months = .5

Sum = $5000

McGraw-Hill Ryerson

have?

Simple
Simple

6 - 49

Interest
Interest

Howmuch
muchmust
mustIIinvest
investin
inorder
orderfor
forititto
togrow
growto
to$5000
$5000
How
within66months,
months,@
@4.4%
4.4%simple
simpleinterest?
interest?
within

Formulae
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
Simple

6 - 50

Interest
Interest

Howmuch
muchmust
mustIIinvest
investin
inorder
orderfor
forititto
togrow
growto
to$5000
$5000
How
within66months,
months,@
@4.4%
4.4%simple
simpleinterest?
interest?
within

Formula
Formula

P = Sum/(1+rt)

P =5000/ 1 + 0.044(.5)
$4892.37
PP == $4892.37
McGraw-Hill Ryerson

Simple
Simple

Interest
Interest

LO-2

McGraw-Hill Ryerson

6 - 51

Simple
Simple

6 - 52

Interest
Interest

What
Whatis
isthe
theequivalent
equivalentvalue
valueon
on
September
September15
15of
ofaa$2000
$2000payment
paymenton
onJuly
July
4,
4,ififmoney
moneyis
isworth
worth6%
6%pa?
pa?
July 4
Step Draw a
Timeline $2000
1
Step
2

McGraw-Hill Ryerson

September 15

69 Days

Futur
e
Value

Sum = P(1+rt)
Sum = 2000[1+.06(69/365)]
$2022.68
== $2022.68

Simple
Simple

6 - 53

Interest
Interest

What
Whatis
isthe
theequivalent
equivalentvalue
value on
onMay
May18th
18th
of
ofaa$2000
$2000payment
paymentdue
dueon
onthe
thefollowing
following
December
December15th
15thififmoney
moneycan
canearn
earn5.2%?
5.2%?
December 15
May
18
Draw
a
Step
$2000
Timeline
1
Presen
211 Days
t Value

Step
2

McGraw-Hill Ryerson

P = Sum/(1+rt)
= 2000/[1+.052(211/365)]
$1941.63
== $1941.63

Simple
Simple

6 - 54

Interest
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?

McGraw-Hill Ryerson

Simple
Simple

6 - 55

Interest
Interest

Step
1

Draw a
Timeline

Step
2

McGraw-Hill Ryerson

April 27
Present Value

$3000

90 days

30 days

P = Sum/(1+rt)

Simple
Simple

6 - 56

Interest
Interest

P = Sum/(1+rt)
A P = 3000/[1+.04(30/365)]
A
$2990.17
PP == $2990.17
B P = 3000/[1+.04(90/365)]
B
$2970.17
PP == $2970.17
McGraw-Hill Ryerson

Simple
Simple

6 - 57

Interest
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?

McGraw-Hill Ryerson

Simple
Simple

6 - 58

Interest
Interest

$1234 = Present Value = P1

$1432 = Future Value = S2

Data

Which
Tip:
Which
Tip:
Find
the
formula
Find
the
formula
PV
of
the
PV
of
the
should
should
future
future
you
use?
payment!
you
use?
payment!

Sum/(1+rt)
PP == Sum/(1+rt)

3
3
months
months
= 1/4
1/4
=

P2 = 1432/[1+.06(.25)]
P2 = $1410.84 $1234.00

Money saved ($176.84) by paying now!

McGraw-Hill Ryerson

Simple
Simple

6 - 59

Interest
Interest

This completes Chapter 6

McGraw-Hill Ryerson