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SIMPLE INTEREST

Kolej Perdana
Business Mathematics (Chapter 1)
29 May 2019
nanteniganesan@gmail.com
By the end of this chapter, you should be able to:

1. Explain the concept of simple interest,


2. Use the simple interest formula to calculate interest, interest rate,
time and dates with data provided,
3. Use the simple amount formula to calculate the present and future
values of some investments,
4. Identify four concepts of exact simple interest, ordinary simple
interest, exact time and approxiamate time,
5. Apply Banker’s Rule to some investment and loan problems and
6. Use the concepts of equation of solve some investment and loan
problems
INTEREST ???
• DEFINITION 1:

Interest is money earned when money is invested

• DEFINITON 2:

Interest is charge incurred when a loan or credit is obtained


Simple Interest

I = Prt
Where, I = simple interest
P = principal
r = rate of simple interest and
t = time or term in years
1) You want to buy this tractor. It costs RM 15,000. You decided
to get a five year loan with 6.5% interest rate. How much
interest will you pay?
2) The simple interest on RM 45,000 in 3 years is RM 13,500.
What is the rate of interest?
SIMPLE AMOUNT
FORMULA

S = P (1+ rt)
3) RM10, 000 is invested for 4 years 9 months in a bank earning a
simple interest rate of 10% per annum. Find the simple amount at
the end of the investment period.
4. Albert invests RM5,000 in an investment fund for three years. At
the end of the investment period, his investment will be worth
RM6,125. Find the simple interest rate that is offered.
PRACTICE 1
1. Mr Anu deposits RM6,000 in a bank and obtains RM120 simple
interest after three months. Find the simple interest rate offered.

2. Mrs. Kavita invests RM3,600 at 4.5% simple interest per annum


in a bank. Find the amount in the account after nine months.

3. Hafiz borrows RM7,000 for one hundred days at nine per cent
per annum simple interest. What is the amount at the end of one
hundred days? How much is the interest charged?
5. Twenty-four months ago, a sum of money was invested. Now the
investment is worth RM12,000. If the investment is extended for
another twenty-four months, it will become RM14,000. Find the
original principal and the simple interest rate that was offered.
TRY YOURSELF
Two years ago, Kim Ean invested RMp in her account which earns
r% simple interest. After eighteen months, she noticed that the
amount had become RM10,450 and today the amount is
RM10,600. Find the value of P and r.
Four basic concepts
1. EXACT TIME is the exact number of days between
two given dates

2. APPROXIMATE TIME assumes a month has 30 days


in the calculation of number of days between two give
dates (inclusive last date)

3. ORDINARY SIMPLE INTEREST is calculated using


360-day year

4. EXACT SIMPLE INTEREST uses a 365/366-day year


for interest computation.
1. Find the (a) exact time and (b) approximate time from 15 March to 29 August of the
same year.

Solution:

Number of Days
Month Exact Time Approximate Time
March 16 15
April 30 30
May 31 30
June 30 30
July 31 30
August 29 29
Total 167 164
RM 1,000 is invested on 15 March 2015. If the simple interest rate
offered is ten per cent per annum, find the interest received on 29
August 2015 using the:

a) Exact time and exact simple interest

b) Exact time and ordinary simple interest

c) Approximate time and exact simple interest

d) Approximate time and ordinary simple interest


Concept used Interest Calculations

a) Exact time and exact simple interest I = 1,000 x 0.1 x 167/365


I = RM 45.75

b) Exact time and ordinary simple I = 1,000 x 0.1 x 176/360


interest I = RM 46.39

c) Approximate time and exact simple I = 1,000 x 0.1 x 164/365


interest I = RM 44.93

d) Approximate time and ordinary I = 1,000 x 0.1 x 164/360


simple interest I = RM 45.56
BANKER’S RULE
• Method (b) is called Banker’s Rule.

• Mostly used in US and in international business transactions


but not in Malaysia.

• Malayisa, calculation of interest is governed by a banking rule


which states that the 365-day year must be used (method a).

• We shall use the EXACT TIME & 360-DAY YEAR in the


interest discussions.
PRACTICE 2
Calculate the exact and ordinary number of days

1. From 12 February 2012 to 26 August 2012

2. From 8 February 2009 to 21 November 2009

3. From 19 November 2009 to 1 May 2010

4. From 12 February 2009 to 1 January 2010


Present Value
We have to find the present value, that is:

S = P (1+ rt)
Example:

Find the present values at 8% simple interest of a debt RM3,000


due in ten months.

Solution:
Try yourself
1. Find the present values at 2% simple interest of a debt
RM5,000 due in ten months.

2. Find the present values at 1.2% simple interest of a


debt RM10,000 due in ten months.

3. Find the present values at 10% simple interest of a debt


RM350,000 due in ten months.

4. Find the present values at 6.5% simple interest of a


debt RM7,000 due in ten months.
Equation of value
1. Draw a time diagram with all the dated values

2. Select the focal date

3. Pull all the dated values to the focal date using


the stated interest rate
4. Set up the equation of value and then solve
Example:

A debt of RM800 due in four months and another of RM1,000 due


in nine months are to be settled by a single payment at the end of six
months. Find the size of this payment using the
a) Present as the focal date and

b) Date of settlement as the focal date, assuming the money is worth


6 % per annum simple interest
Solution
Continues...
Continues
SUMMARY

Simple interest

Simple amount
Simple interest, Present value,
formula,
I = Prt P= S(1 + rt)-1
S = P(1+ rt)
Next week class begins with mini quiz covering Chapter 1
Make sure you bring your calculator and own text pad.

THANK YOU