MAT112 BUSINESS MATHEMATICS

SIMPLE INTEREST

AZLINA BINTI JUMADI@FSKM

 Introduction

Simple interest formula

Exact simple interest Ordinary simple interest

Present value of a debt

 Simple interest is the interest due at the end of a

term. In simple interest transaction, only principle (original value) will earn the interest. The principal can be the amount of money deposited in an account or the amount of money borrowed. The amount of interest due at the end of a term depends on the principal, the length of the term and the rate of interest. The rate is given in percent and often as annual rate. The time is measured in years or a fraction of a year.

 The formula to find the interest (I) due at interest rate

(r%) for a principal (P) for a length of t years is

I = Prt
In calculation, r% is converted to decimal number.
When the time is given in months, then

t = number of month 12 For the time given in days, we will discuss it later.

 The future value (S) is the total amount received or

due at the end of the term. i.e:

S=P+I = P + Prt

S = P(1 + rt)

Find the interest on RM 2535.00 if the rate is 5.5 % for 3 years ? Solution:

P = 2535,

r = 5.5 % = 0.055,

t=3

Therefore, interest, I: I = Prt = 2535 (0.055)(3) = 418.28

Mr . Raju borrowed RM4560.00 from a lender. He was charged simple interest at 8.5%. If he wanted to settle his debt in 4 years, how much will he be paying the lender? Solution:

(time given in days)

Exact interest is calculated based on 365 days a year,

and for a leap year, using 366 days. Ordinary interest is calculated using a 360 days a year. It is using an approximation that each month having 30 days. This is to simplify computing and of course it increases the amount of interest due to the lender.

Find the exact and ordinary simple interest on RM2000 for 50 days at 5% per annum. SOLUTION:

When dates are given, the number of days between the two dates is calculated in two ways. Those two ways are exact time and approximate time.
Exact time, as the name suggested, is the exact

number of days as in the calendar between two dates given. Approximate time is found by assuming each month is 30 days flat.

It is customary to include one either the beginning or maturity dates only.

Find the exact and approximate time from May 20, 2001 to August 28, 2001. SOLUTION:

Find the exact and approximate time from 5 February 2000 to 30 May 2000. SOLUTION:

Using the exact time, find the due date for 100 days from 6 May 2002. SOLUTION:

 Since there are two ways of computing interest and

two ways of calculating time, there are four distinct methods for computing interest on short-term loans or deposits. They are:
Exact time exact simple interest Exact time ordinary simple interest Approximate time exact simple interest Approximate time ordinary simple interest

Find the exact and ordinary simple interest on RM 2500 at 7% from April 2002 to July 1, 2002 using a) exact time b) approximate time SOLUTION:

 Of the four ways to compute simple interest, the

most popular is that of ordinary interest for the exact number of days. It is popularly known as the Bankers rule. Of the four methods, this yields the maximum interest in any transaction. NOTE : Unless otherwise stated, we will use the Bankers Rule in computing interest problems.

The value of a debt at some time before the due date is called present value of the debt on that date. It is best illustrated on the time line. t 0
present value
maturity value

We obtain the formula from the future value formula

S = P(1 + rt)
Solving for P, we have

P=

S 1 +rt

Find the present value at 7% simple interest of RM1500 due in 10 months. SOLUTION:

Mr. X promised to pay his debt with interest amounted to RM 3500 in 3 years time. If the charge is 7%, find the amount he borrowed? SOLUTION:

TUTORIAL 2 (PAST YEAR QUESTIONS) SET A

(PAST YEAR QUESTIONS) SET B