Simple Interest and Simple Discount

11.
1 The Simple Interest Formula
Find simple interest by using the simple

interest formula.
Find the maturity of a loan.
Convert months to a fractional or decimal
part of the year.
Find the principal, rate or time using the
simple interest formula.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
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.
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.
11.1.1 The Simple Interest Formula
The interest formula shows how interest, rate,

and time are related and gives us a way of
finding one of these values if the other three
values are known.
I=PxRxT
Find the simple interest using
the simple interest formula
Identify the principal,
rate and time
P=RxT
The interest is a percentage.
Principal is the amount borrowed or invested.
Rate of interest is a percent for a given time
period, usually one year.
Time must be expressed in the same unit of
time as the rate. (i.e. one year)
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.
Try these 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: the total amount of money due

by the end of a loan period; the amount of the
loan and interest.
If the principal and the interest are known, add
them.
MV = principal + PRT
MV = P(1+RT)
Look at this 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)
(See next slide)
What is the maturity value?
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.
Try these 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
11.1.3 Convert Months to a
Fractional 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 the following to
fractional or decimal part of a year
Convert 9 months and 15 months, respectively,

to years, expressing both as fractions and
decimals.
9/12 = = 0.75
9 months = or 0.75 of a year
15/12 = 1 3/12 = 1 = 1.25
15 months = 1 or 1.25 of a year.
To save money, Stan Wright invested $2,500 for
42 months at 4 % simple interest. How much
interest did he earn?
42 months = 42/12 = 3.5
I=PxRxT
I = $2,500 x 0.045 x 3.5
I = $393.75
Stan will earn $393.75
Try these 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 the amount of interest owed
be?
$490
11.1.4 Find the Principal, Rate or Time
Using the Simple Interest Formula
Find the principal using
the simple interest formula
P = I / RT
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.
P = 108/ 0.12 x 0.5
P = $1,800
Find the rate using the
simple interest formula
R = I / PT
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?
R = 225/ $1,500 x 1.25
R = .12 or 12%
The rate Sam will pay is 12%.
Find the time using the
simple interest formula
T = I / RP
Shelby borrowed $10,000 at 8% and paid $1,600
in interest. What was the length of the loan?
T = $1,600/0.08 x $10,000
T=2
The length of the loan was two years.
11.2 Ordinary and Exact Interest
Find exact time.
Find the due date.
Find the ordinary interest and the exact

interest.
Make a partial payment before the maturity

date.
11.2.1 Find Exact Time
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.
Examples
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
Sequential Numbers for
Dates of the Year
Find the exact time of a loan using the

sequential numbers table.
(Table 11-1 in the text)
If the beginning and due dates of the loan fall
within the same year, subtract the beginning
dates sequential number from the due dates
sequential number.
Ex.: From May 15 to October 15
288-135 = 153 days is the exact time
Beginning and due
dates in different years
Subtract the beginning dates sequential

number from 365.
Add the due dates sequential number to the

result from the previous step.
If February 29 falls between the two dates,

add 1. (Is it a leap year?)
Find the exact time from May 15 on 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.
Try this example
A loan made on September 5 is due July 5 of
the following year.
Find: a) ordinary time
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 Interest
and the Exact Interest
Ordinary interest: a rate per day that assumes

360 days per year.
Exact interest: a rate per day that assumes
365 days per year.
Bankers rule: calculating interest on a loan
based on ordinary interest and exact time
which yields a slightly higher amount of interest.
Find the ordinary interest per day
For ordinary interest rate per day, divide the
annual interest rate by 360.
Ordinary interest rate per day =
Interest rate per year

360
Find the exact interest per day
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
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 = P x R x T
Length of loan (ordinary time) = 60 days
Rate = 0.07/360 (ordinary interest)
Interest = $500 x 0.07/360 x 60
Interest = $5.83
Find the ordinary interest using
exact time for the previous loan

Length of loan (exact time) = 61 days
Rate = 0.07/360 (ordinary interest)
Interest = $500 x 0.07/360 x 61
Interest = $5.93
Find the exact interest using
exact time for the previous loan

Length of loan (exact time) = 61 days
Rate = 0.07/365 (exact interest)
Interest = $500 x 0.07/365 x 61
Interest = $5.84
11.2.4 Make a Partial Payment
Before the Maturity Date
To find the adjusted principal and adjusted

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

Step 1.
(continue on next slide)

11.2.4 Make a Partial Payment
Before the Maturity Date
3. Subtract the amount of interest found in Step 2
from the partial payment.
4. Subtract the remainder of the partial payment
(Step 3) from the original principal. This is the
adjusted principal.
5. Repeat process for additional partial payments.
6. At maturity, calculate interest from the last
partial payment and add to adjusted principal.
This is the adjusted balance due at maturity.
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 Tonys
adjusted principal after the partial payment, and
adjusted balance due at maturity?
$5,000(.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)
11.3 Promissory Notes
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.
11.3.1 Find the Bank Discount and
Proceeds for a Simple Discount Note
For the bank discount, use:

Bank discount = face value x disc. rate x
time
[I = P x R x T]
For the proceeds, use:

Proceeds = face value bank discount
A=P-I
A promissory note
11.3.2 Find the True of Effective Interest
Rate of a Simple Discount Note
To find the true or effective interest rate of a

simple discount note:
1. Find the bank discount (interest).
I = PRT
2. Find the proceeds:
proceeds = principal bank discount.
3. Find the effective interest rate: R = I/PT
using the proceeds as the principal
Try this 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(.12)(90/360)
I = $150 (Bank discount)
Proceeds = $5,000 - $150 = $4,850
R = I/PT; R = $150/$4,850(90/360)
R = .1237113402
R or the effective interest rate = 12.4%
11.3.3 Find the Third Party Discount and
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
Mihoc Trailer made a note of $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
taken to a third party on September 5.
The third-party agrees to accept the note with a
13% annual discount using the bankers rule.
Find the proceeds of the note.
Mihoc Trailer Sales
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)
Exact interest rate is .09/365
MV = P(1+ RT)
MV = $10,000 ( 1 + 0.09/365 x 90)
MV = $10.221.92
Find the proceeds of the note
Exact time of the discount period is 66 days.
(314 - 248) period 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

Simple Interest and Simple Discount

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11.

1 The Simple Interest Formula

Find simple interest by using the simple

The interest formula shows how interest, rate,

Find the interest earned on a 3-year

Maturity value: the total amount of money due

Jim Sherman will invest $3,000 at 8% for 5

Write the number of months as the

Convert 9 months and 15 months, respectively,

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

Find exact time.

Find the due date.

Find the ordinary interest and the exact

Make a partial payment before the maturity

Ordinary time: time that is based on

Exact time: time that is based on counting

Find the exact time of a loan using the

Subtract the beginning dates sequential

Add the due dates sequential number to the

If February 29 falls between the two dates,

Ordinary interest: a rate per day that assumes

Ordinary interest rate per day =

Interest rate per year

Exact interest rate per day =

Interest rate per year

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

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

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

To find the adjusted principal and adjusted

2. Calculate the interest using the time found in

(continue on next slide)

Find the bank discount and proceeds for a

Find the true effective interest rate of a

Find the third-party discount and proceeds

For the bank discount, use:

For the proceeds, use:

To find the true or effective interest rate of a

For the bank discount, use:

For the proceeds, use:

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