Simple

Simple 6-1
6
Interest
Interest

S imple I nterest
Chapter 6
McGraw-Hill Ryerson©
 Simple
Simple 6-2
6
Interest
Interest
Learning Objectives
Learning Objectives
After completing this chapter, you will be able to:
Calculate
LO-1 … interest, maturity value,
future value, and present value
in a simple interest environment
LO-2 … 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
6
Interest
Interest
LO-1
Example:
Example: Loan
Loan

Parties
Parties
Lender Borrower

Lendsthe
Lends thePrincipal
Principal BorrowerOWES
Borrower OWES(Debt)
(Debt)
toLender
to Lender

McGraw-Hill Ryerson©
 Simple
Simple 6-4
6
Interest
Interest

Example:
Example: Loan
Loan

Lender Borrower

Earns (Income)from
Earns(Income) fromBorrower
Borrower Borrowerpays
Borrower pays
i.e. Intereston
i.e. Interest onthe
thePrincipal
Principal InteresttotoLender
Interest Lender

Rate of Interest: Simple Interest

Simple Interest …
…
Calculated on
Calculated on an
an ANNUAL
ANNUAL or or
per annum
per annum (pa)
(pa) basis
basis
McGraw-Hill Ryerson©
 Simple
Simple 6-5
6
Interest
Interest 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 = $1000 * 10% /2 = $50
McGraw-Hill Ryerson©
 Simple
Simple 6-6
6
Interest
Interest 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 = $8.33
McGraw-Hill Ryerson©
 Simple
Simple 6-7
6
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 6-8
6
Interest
Interest 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 = $8.22

365

Year == 365
Year 365 days
days or
or 366
366 in
in aa Leap
LeapYear
Year

McGraw-Hill Ryerson©
 Simple
Simple 6-9
6
Interest
Interest “What is the formula that can
be used to calculate SI?”

FourElements
Four Elementsare
areinvolved
involved…
…

Interest Principal Interest Rate Time

Amount PrincipalAmount
Amount AnnualRate
Rate Timeperiod
Time period
Amount
(paidor
(paid or I P
Principal
(loanor
(loan or r
Annual
ofSI
of SI t
…expressed
…expressed
received) investment) asaafraction
as fraction
received) investment)
oraamultiple
or multiple
Formula
Formula I = Prt ofaayear
of year

McGraw-Hill Ryerson©
 Simple
Simple 6 - 10
6
Interest
Interest

Formula
Formula I = Prt

Calculate the Interest earned

on $5000
invested at 4%
for 7 months.

I= P * r * t
$5000 * .04 * 7 /12

II =
= $116.67
$116.67
McGraw-Hill Ryerson©
 Simple
Simple 6 - 11
6
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 6 - 12
6 There are three methods
Interest
Interest
that can be used to
calculate the number of days:

Add up the days according to the

Include either
Include either days covered by the specific months.
theFIRST
the FIRSTdatedate
orthe
or theLAST
LAST Use a Number of Days TABLE
datewhen
date whendoing
doing
thiscalculation!
this calculation!

Use the TI BAII Plus calculator!

McGraw-Hill Ryerson©
 Simple
Simple 6 - 13
6
Interest
Interest Calculating the Number of Days
What is the interest earned on $5000 invested
from Oct. 11th to Dec. 29th at 4.5%?

Days
Method 1.
Method 1. Oct 11th to end of month = 20

Nov Total month = 30

From 1st to 29th

Dec of month = 29
Includes the last date 79
79

McGraw-Hill Ryerson©
 Simple
Simple 6 - 14
6 The “Hand Calculator!”
Interest
Interest

l y Jun Sept
Ju A p r Nov Aug
May e b Oct
F
Mar Dec
Jan

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©
 Simple
Simple 6 - 15
6
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 Day of TABLE6.2 6 - 16
6 Month
1
Jan
1
Feb
32
Mar
60
Apr
91
May Jun Jul Aug Sep
The Serial Number of Each Day of the Year
121 152 182 213 244
Oct
274
Nov Dec
305 335
Interest
Interest 2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8
9
10
11
8
Dec 29
9
10
11
39
40
41
42
67
68
69
70
98
99
100
101
363
128
129
130
131
159
160
161
162
189
190
191
192
220
221
222
223
251
252
253
254
281
282
283
284
312 342
313 343
314 344
315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14
15 Oct 11
14
15
45
46
73
74
104
105 284
134
135
165
166
195
196
226
227
257
258
287
288
318 348
319 349
Method 2.
Method 2. 16
17
16
17
47
48
75
76
106
107
136
137
167
168
197
198
228
229
259
260
289
290
320 350
321 351
18
19
20
18
19
20
49
50
51
==
77
78
79
108
109
110
79 Days
79
138
139
140
Days
169
170
171
199
200
201
230
231
232
261
262
263
291
292
293
322 352
323 353
324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 238 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
31 31 90 151 212 243 304 365
McGraw-Hill Ryerson©
 Simple
Simple 6 - 17
i Texas Instruments
6 Using… BAII PLUS
Interest
Interest

Method 3.
3. Start
Method
2nd
Example 1.
Example 1. DBD = 79 Date
Calculate… 10.1102 Enter
the interest
earned
on $5000 12.2902 Enter
invested
from
Oct. 11th to CPT
Dec. 29th, 02 at
4.5%. Days Between
Days Between Dates
Dates

McGraw-Hill Ryerson©
 Simple
Simple 6 - 18
6
Interest
Interest

Formula
Formula I = Prt

Calculate the Interest earned

on
$5000 invested
79 at 4.5%
Days
for ? .
I = $5000*.045 * 79/365
II =
= $48.70
$48.70
McGraw-Hill Ryerson©
 Simple
Simple 6 - 19
6
Interest
Interest Calculating the Number of Days
What is the interest earned on $5000 invested
from Nov 30th, 02 to Jan 6th, 03 at 4.5%?

Days
Method 1.
Method 1. Nov 30th to end of month = 0

Dec Total month = 31

From 1st to 6th

Jan of month = 6
37
37
Includes the last date
McGraw-Hill Ryerson©
 Simple
Simple 6 - 20
Day of TABLE6.2
6 Month
1
Jan
1
Feb
32
Mar
60
Apr
91
May Jun Jul Aug Sep
The Serial Number of Each Day of the Year
121 152 182 213 244
Oct
274
Nov Dec
305 335
Interest
Interest 2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8 8 39 67 98 128 159 189 220 251 281 312 342

365
9 9 40 68 99 129 160 190 221 252 282 313 343
10
11
Dec 31
10
11
41
42
69
70
100
101
130
131
161
162
191
192
222
223
253
254
283
284
314 344
315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13
14
15
13
15
44
Nov 30
14 45
46
72
73
74
103
104
105
133
134
135 334
164
165
166
194
195
196
225
226
227
256
257
258
286
287
288
317 347
318 348
319 349
Method 2.
Method 2. 16 16 47 75 106 136 167 197 228 259 289 320 350
17
18
19
17
18
19
48
49
50
76
77
78
107
108
109
==
137
138
139
168
169
170
31 Days
31 Days
198
199
200
229
230
231
260
261
262
290
291
292
321 351
322 352
323 353
20 20 51 79 110 140 171 201 232 263 293 324 354
21
22
23
21
Jan 6
22
23
52
53
54
80
81
82
111
112
113
141
142
143
172
173
174
6
202
203
204
233
234
235
264
265
266
294
295
296
325 355
326 356
327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25
26
27
25
26
27
56
57
58
84
85
86
115
116
117 ==
145
146
147
176
177
178
37 Days
37 Days
206
207
208
237
238
239
268
269
270
298
299
300
329 359
330 360
331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
McGraw-Hill Ryerson©
31 31 90 151 212 243 304 365
 Simple
Simple 6 - 21
i Texas Instruments
6 Using… BAII PLUS
Interest
Interest

Method 3.
3. Start
Method
2nd
Example 1.
Example 1. DBD = 37 Date
Calculate… 11.3002 Enter
the interest
earned
on $5000 01.0603 Enter
invested
from
Nov. 30th,, 02 CPT
to Jan 6th. 03 at
4.5%. Days Between
Days Between Dates
Dates

McGraw-Hill Ryerson©
 Simple
Simple 6 - 22
6
Interest
Interest

Formula
Formula I = Prt

Calculate the Interest earned

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

I = $5000*.045 * 37/365
II =
= $22.81
$22.81
McGraw-Hill Ryerson©
 Simple
Simple 6 - 23
6
Interest
Interest Calculating the Number of 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
30 &
Nov 31
Dec Total = 61
Method 1.
Method 1.
Jan
31 & Feb
28 Total = 59

Mar To 11th of month = 11

151
Includes the last date

McGraw-Hill Ryerson©
 Simple
Simple 6 - 24
Day of TABLE6.2
6 Month
1
Jan
1
Feb
32
Mar
60
Apr
91
May Jun Jul Aug Sep
The Serial Number of Each Day of the Year
121 152 182 213 244
Oct
274
Nov Dec
305 335
Interest
Interest 2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5
6
5
6Dec 31
36
37
64
65
95
96365 125
126
156
157
186
187
217
218
248
249
278
279
309 339
310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8
9
8
9Oct 11
39
40
67
68
98
99284 128
129
159
160
189
190
220
22181 Days
== 81 Days
251
252
281
282
312 342
313 343
Method 2.
Method 2. 10
11
10
11
41
42
69
70
100
101
130
131
161
162
191
192
222
223
253
254
283
284
314 344
315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14
15
16
14
15
16
Mar 11
45
46
47
73
74
75
104
105
106
70
134
135
136
165
166
167
195
196
197
226
227
228
70 Days
== 70
257
Days
258
259
287
288
289
318 348
319 349
320 350
17 17 48 76 107 137 168 198 229 260 290 321 351
18 18 49 77 108 138 169 199 230 261 291 322 352
19
20
19
20
50
51
78
79
109
110
139
140
170
171
200
201 151 Days
==151
231
232 Days
262
263
292
293
323 353
324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 238 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
McGraw-Hill Ryerson©
31 31 90 151 212 243 304 365
 Simple
Simple 6 - 25
i Texas Instruments
6 Using… BAII PLUS
Interest
Interest

Method 3.
3. Start
Method
2nd
Example 1.
Example 1. DBD = 151 Date
Calculate… 10.1102 Enter
the interest
earned
on $5000 03.1103 Enter
invested
from
Oct. 11th,, 02 CPT
to Mar 11th. 03
at 4.0%. Days Between
Days Between Dates
Dates

McGraw-Hill Ryerson©
 Simple
Simple 6 - 26
6
Interest
Interest

Formula
Formula I = Prt

Calculate the Interest earned

on
$5000 invested
151atDays
4.0%
for ? .

I = $5000* .04 *151/365

II =
= $82.74
$82.74
McGraw-Hill Ryerson©
 Simple
Simple 6 - 27
6
Interest
Interest

Formula
Formula I = Prt
We can ‘reorganize’ the formula to also get
each of the following separately:

Principal
Rate
Time

Shortcut
Shortcut Tool!
Tool!
McGraw-Hill Ryerson©
 Simple
Simple 6 - 28
6
Interest
Interest The Triangle …another useful non-calculator!

To help remember this… Formula

Formula I = Prt
we can place the formula into a triangle as follows…

Where variables are

P*r*t
P*r*t BESIDE EACH OTHER this
I means to MULTIPLY!

Prt Where a variable is ABOVE

I ANOTHER this means to
Prt DIVIDE!

McGraw-Hill Ryerson©
Using this
Using this tool!
tool!
 Simple
Simple 6 - 29
6
Interest
Interest The Triangle …another useful non-calculator!

Using this
Using this tool!
tool! If you want to find P I /rt
then

I If you want to find r then I /Pt

Prt
If you want to find t then I /Pr

McGraw-Hill Ryerson©
 Simple
Simple 6 - 30
6
Interest
Using a Time Line
Interest

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

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

…Helpsorganize
…Helps organizedata
data
TwoBenefits
Two Benefits …Indicatesthe
…Indicates thesteps
stepsneeded
needed
toimplement
to implementthe
thesolution
solution

McGraw-Hill Ryerson©
 Simple
Simple 6 - 31
6
Interest
Using a Time Line
Interest
Calculate the
Calculate the interest
interest earned
earned at at 4%
4% on
on $5000
$5000
invested from
invested from Oct.
Oct. 11
11thth to
to March
March 11
11thth

Step 11 Draw a line for

Step Start Finish
the entire period
Oct 11 Dec 31 March 11
Step 22 Enter the key
Step
dates on the line Look up
$5000
284 365 70
Step 33
Step Enter the 81 days
Investment 70 days

Step 44Enter the

Step
number of days 151 days
between
The calculation can now be
each date and
restated as follows…
add
McGraw-Hill Ryerson©
 Simple
Simple 6 - 32
6
Interest
Using a Time Line
Interest

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

Using this
Using this tool!
tool! I = Prt
I I = 5000 * .04 * 151/365
Prt = $82.74

McGraw-Hill Ryerson©
 Simple
Simple 6 - 33
6 You can
You can now
now use
use this
this tool!
tool!
Interest
Interest

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©
 Simple
Simple 6 - 34
6
Interest
Calculating Principal
Interest
the
Formula
Formula 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©
 Simple
Simple 6 - 35
6
Interest
Interest P = $195 .0525 *(150/365)
.0525
9038.10 *
150
/
365
=
/
195
=
1/x $9038.10
$9038.10
McGraw-Hill Ryerson©
 Simple
Simple 6 - 36
6
Interest
Calculating the
Calculating Rate
the Rate
Interest

Formula
Formula r = I Pt
What Rate
What Rate of
of Interest
Interest is
is needed
needed to
to
earn $200
earn $200 on
on aa $5000
$5000 investment
investment
invested for
invested for 180
180 days?
days?

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

McGraw-Hill Ryerson©
 Simple
Simple 6 - 37
6 r = $200 /($5000*180/365)
Interest
Interest

5000
0.08111 *
180
/
365
=
/
200
=
1/x 8.11%
8.11%
McGraw-Hill Ryerson©
 Simple
Simple 6 - 38
6
Interest
Calculating the
Calculating Time
the Time
Interest

Formula
Formula t = I Pr
What is
What is the
the length
length of
of Time
Time
required for
required for $2000
$2000 to
to grow
grow to
to
$2100 when
$2100 when invested
invested atat 5.6%?
5.6%?

Step 11
Step Find the amount of Interest
PP ++ II == Sum
Sum PP II
$2100 - $2000 = $100

McGraw-Hill Ryerson©
More
 Simple
Simple 6 - 39
6
Interest
Calculating the
Calculating Time
the Time
Interest

Formula
Formula t = I Pr
What is
What is the
the length
length of
of Time
Time
required for
required for $2000
$2000 to
to grow
grow to
to
$2100 when
$2100 when invested
invested atat 5.6%?
5.6%?
Step 22
Step
Calculate
t= $100/ ($2000*.056)
Calculate
t= $100/ 112
t= 0.8928 Years *365
365 days
days
t= 326 days
McGraw-Hill Ryerson©
 Simple
Simple 6 - 40
6
Interest
Interest t= $100 / ($2000*.056)
100
325.89 /
2000
/
0.056
=
0.8928 Years
*
365
=
326 days
326 days
McGraw-Hill Ryerson©
 Simple
Simple 6 - 41
6
Interest
Interest

McGraw-Hill Ryerson©
 Simple
Simple 6 - 42
6
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 Sum = P+ I Now,we
Now, wesubstitute forII
substitutefor

Sum = P + Prt with

with
Step 22
Step Collecting like
Collecting like terms
terms

Future Value
Future Value Formula Sum = P(1+rt)
McGraw-Hill Ryerson©
 Simple
Simple 6 - 43
6
Interest
Interest

Sum = P(1+rt)
II place
place $17000
$17000 inin
aa 150
150 day
day term
term S = $17000 150
1+ .065( 365)
deposit
deposit on
on Jan.
Jan. 66
paying
paying 6.5%.
6.5%. S = $17000(1.0267123)
How much
How much will
will
the bank
bank pay
pay me
me S = $17454.11
the
on the
on the
maturity date
maturity date??
McGraw-Hill Ryerson©
 Simple
Simple 6 - 44
6
Interest
Interest

S= $17000 150
1+ .065( 365)
17454.11 .065
*
150
/
365
= $17454.11
$17454.11
+
1
=
*
17000 Date of Maturity
McGraw-Hill Ryerson© =
 Simple
Simple 6 - 45
6
Interest
Interest

Determine the
Determine Maturity Date
the Maturity Date
II place
place $17000
$17000 inin aa 150
150 day
day term
term deposit
deposit on
on
Jan.
Jan. 66 paying 6.5% pa
paying 6.5% pa..
= 6 days + 150 = 156 days
Day of TABLE6.2
Month Jan Feb Mar Apr May Jun Jul Aug Sep
The Serial Number of Each Day of the Year Oct Nov Dec
1 1 32 60 91 121 152 182 213 244 274 305 335
Look up 2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
Find
Find
156
156 The Term Deposit will mature on June 5 th
.
McGraw-Hill Ryerson©
 Simple
Simple 6 - 46
6
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.)
Feb 14th $5,000 5,000

Mar 17th $3,000 8,000

July 1st $2,000 10,000

What Total
What Total amount
amount will
will II have
have on
on December
December 29
29thth??
McGraw-Hill Ryerson©
 Simple
Simple 6 - 47
6
Interest
Interest

Three Steps are required to solve this problem:

Step Draw a time line,

1 including the dates and
dollar amounts.

Step Determine the time

2 between each of the dates

Calculate the interest

Step
amounts,
3
and add together.
McGraw-Hill Ryerson©
 Simple
Simple 6 - 48
6
Interest
Interest

Look up

Step
1 45 76 182 363
Feb 14 March 17 July 1 Dec 29
Draw a
time line
$5000 363 – 45 = 318 Days

Step $3000 363 – 76 = 287 Days

2
Determine $2000 363 – 182 = 181 Days
the Time
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 Simple
Simple 6 - 49
6
Interest
Interest

Formula
Formula I = Prt
Step
3
I1 = 5000 *.04 *318/365 $174.25
Calculate
Calculate
the
the I2 = 3000 *.04 *287/365 94.36
Interest
Interest
amounts, I3 = 2000 *.04 *182/365 39.67
amounts,
$308.28
and
and $10000 ++ $308.2
$10000 $308.2 S
S== $10308.28
$10308.28
add
add 88 Total
Total Amount
Amount
together.
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 Simple
Simple 6 - 50
6
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.
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Simple 6 - 51
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Interest
Interest

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

The changes in interest rates to July 4th
are as follows:
Investment Date rate
$1,000 Feb 14th 6%
April 20th 6.8%
May 18th 7.1%
How much Interest did I earn up to July 4thth ?
How much Interest did I earn up to July 4 ?

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 Simple
Simple 6 - 52
6
Interest
Interest

… by finding the number of days between

each rate change!
Investment Date rate
$1,000 Feb 14th 6%
Look up April 20th 6.8%
May 18th 7.1%
for Days
July 4th

McGraw-Hill Ryerson©
 Simple
Simple 6 - 53
6
Interest
Interest

Table
Table Number
Number
reading
reading of Days
of Days

Feb 14th
= 45
April 20 th
Look up = 110 = 65 Days
May 18th
for Days = 138 = 28 Days
July 4th
= 185 = 47 Days

Interest Earned
Interest Earned
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 Simple
Simple 6 - 54
6
Interest
Interest

Interest Earned
Interest Earned

Formula
Formula I = Prt
Feb 14th
65 Daysth I1 = 1000 * .06 * 65/365 = $10.68
April 20
May 18th I2 = 1000 * .068 * 28/365 = 5.22
28 Days
July 4th = 9.14
I3 = 1000 * .071 * 47/365
47 Days
$25.04
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 Simple
Simple 6 - 55
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Interest
Interest

McGraw-Hill Ryerson©
 Simple
Simple 6 - 56
6
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 provide?

“How
“Howmuch
much …this suggests finding the
must
mustIIinvest
invest…
…
to Principal
togrow…”
grow…”
McGraw-Hill Ryerson©
 Simple
Simple 6 - 57
6
Interest
Interest

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

What data do we need?

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

Formulae
Formulae I = Prt & Sum = P(1+rt)
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 Simple
Simple 6 - 58
6
Interest
Interest

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

Formulae
Formulae I = Prt & Sum = P(1+rt)
What data do we have?
r = 4.4% t = 6 months = .5
Sum = $5000
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 Simple
Simple 6 - 59
6
Interest
Interest

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

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)
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 Simple
Simple 6 - 60
6
Interest
Interest

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

Formula
Formula P = Sum/(1+rt)

P =5000/ 1 + 0.044(.5)
PP == $4892.37
$4892.37
McGraw-Hill Ryerson©
 Simple
Simple 6 - 61
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Interest
Interest
LO-2

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Simple 6 - 62
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Interest
Interest

What
Whatisisthe
theequivalent
equivalentvalue onSeptember
valueon September15 15
of
ofaa$2000
$2000payment
paymentononJuly
July4,
4,ififmoney
moneyisis
worth
worth6%6%pa?pa?

July 4 September 15
Step Draw a
1 Timeline $2000
69 Days Future
Value
Step
2 Sum = P(1+rt)
Sum = 2000[1+.06(69/365)]
== $2022.68
$2022.68
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Simple 6 - 63
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Interest
Interest

What
Whatisisthe
theequivalent value on
equivalentvalue onMay
May18th
18thof
ofaa
$2000
$2000payment
paymentdue dueon
onthe
thefollowing
followingDecember
December
15th
15thififmoney
moneycan
canearn
earn5.2%?
5.2%?

May 18 December 15
Step Draw a $2000
1 Timeline Present
211 Days
Value
Step P = Sum/(1+rt)
2
= 2000/[1+.052(211/365)]
== $1941.63
$1941.63
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Simple 6 - 64
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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?

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 Simple
Simple 6 - 65
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Interest
Interest

April 27
Step
1 Present Value $3000
Draw a 30 days
90 days
Timeline

Step
2 P = Sum/(1+rt)

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 Simple
Simple 6 - 66
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Interest
Interest

P = Sum/(1+rt)

A P = 3000/[1+.04(30/365)]
A
PP == $2990.17
$2990.17
B P = 3000/[1+.04(90/365)]
B
PP == $2970.17
$2970.17
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Simple 6 - 67
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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?

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 Simple
Simple 6 - 68
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Interest
Interest

$1234 = Present Value = P1

Data $1432 = Future Value = S2

Which
Tip: PP == Sum/(1+rt)
Sum/(1+rt)
Which
Tip: 33 months
months
Find the
formula = 1/4
1/4
Find
PV
PV of
the
formula
ofthe
the
P2 = 1432/[1+.06(.25)] =
should
should
future
future
you use?
payment!
you use?
payment! P2 = $1410.84 $1234.00
Money saved ($176.84) by paying now!
McGraw-Hill Ryerson©
 Simple
Simple 6 - 69
6
Interest
Interest

This completes Chapter 6

McGraw-Hill Ryerson©