Business Math

Chapter 11:
Simple Interest and
Simple Discount
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 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.

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 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.
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 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

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Find the simple interest using
the simple interest formula

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Identify the principal,
rate and time.
P= R x B
 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)

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 Find the interest paid on a loan.
 Principal = (P) $1,500.
 Interest rate = 9% (or 0.09)
 Time = 1 year
 Interest = P x R x T
 Interest = 1,500 x 0.09 x 1
 Interest = $135
 The interest on the loan is $135.
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 Try these examples.
 Find the interest on a 2-year loan of
P4,000 at a 6% rate.

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 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)

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 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 P2,500 loan?
 MV = P (1 + RT) Substitute known values.
 MV = P2,500 ( 1 + 0.09 x 2)
(See next slide)

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 What is the maturity value?
 MV = P2,500 ( 1 + 0.09 x 2)
 MV = P2,500 (1 + 0.18)
 MV = P2,500 (1.18)
 MV = P2,950
 Marcus will pay P2,950 at the end of two years.

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Try these examples.
 Terry Williams is going to borrow P4,000 at 7.5%
interest. What is the maturity value of the loan
after three years?

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 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.

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 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 = ¾ = 0.75
 9 months = ¾ or 0.75 of a year
 15/12 = 1 3/12 = 1 ¼ = 1.25
 15 months = 1 ¼ or 1.25 of a year.

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 Look at this example.
 To save money, Stan Wright invested P2,500 for
45 months at 3 ½ % simple interest. How much
interest did he earn?
 45 months = 45/12 = 3.75
 I=PxRxT
 I = P2,500 x 0.035 x 3.75
 I = P328.13
 Stan will earn P328.13
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Try these examples.
 Koko is saving a little extra money to pay for his
car insurance next year. If he invests P1,000 for
18 months at 4%, how much interest can he
earn?

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 11.1.4 Find the principal, rate or time
using the simple interest formula.

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Find the principal using the simple
interest formula.
 P = I / RT
 Judy paid P108 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 = P1,800
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Find the rate using the simple
interest formula.
 R = I / PT
 Sam wants to borrow P1,500 for 15 months and
will have to pay P225 in interest. What is the
rate he is being charged?
 Substitute the known values and solve.
 R = 225/ P1,500 x 1.25
 R = .12 or 12%
 The rate Sam will pay is 12%.
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Find the time using the simple
interest formula.
 T = I / RP
 Shelby borrowed P10,000 at 8% and paid
P1,600 in interest. What was the length of the
loan?
 Substitute the known values and solve.
 T = P1,600/0.08 x P10,000
 T=2
 The length of the loan was two years.
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 11.2 Ordinary and Exact
Time and Interest
 Find ordinary and exact time.

 Find the due date.

 Find the interest using the ordinary and exact

interest rates.

 Find simple interest using a table.

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 11.2.1 Find ordinary and
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.

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 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

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Sequential Numbers for
Dates of the Year
 Find the exact time of a loan using the sequential
numbers table.

 If the beginning and due dates of the loan fall

within the same year, subtract the beginning
date’s sequential number from the due date’s
sequential number.
 Ex.: From May 15 to October 15
 288-135 = 153 days is the exact time.
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Beginning and due dates in
different years.
 Subtract the beginning date’s sequential number
from 365.

 Add the due date’s sequential number to the

result from the previous step.

 If February 29 falls between the two dates, add

1. (Is it a leap year?)

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Look at this example.
 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.

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 11.2.3 Find the ordinary interest rate per day
and the exact interest rate per day.

 Ordinary interest: a rate per day that

assumes 360 days per year.
 Exact interest: a rate per day that
assumes 365 days per year.
 Banker’s rule: calculating interest on a
loan based on ordinary interest and
exact time which yields a slightly higher
amount of interest.
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 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

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 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

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Use ordinary time to find the
ordinary interest on a loan.
 A loan of P500 at 7% annual interest rate. The
loan was made on March 15 and due on May
15. (Principal = P500) I = P x R x T
 Length of loan (ordinary time) = 60 days
 Rate = 0.07/360 (ordinary interest)
 Interest = P500 x 0.07/360 x 60
 Interest = P5.83

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Find the ordinary interest using
exact time for the previous loan.
 A loan of P500 at 7% annual interest rate. The
loan was made on March 15 and due on May
15. (Principal = P500) I = P x R x T
 Length of loan (exact time) = 61 days
 Rate = 0.07/360 (ordinary interest)
 Interest = P500 x 0.07/360 x 61
 Interest = P5.93

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Find the exact interest using exact
time for the previous loan.
 A loan of P500 at 7% annual interest rate. The
loan was made on March 15 and due on May
15. (Principal = P500) I = P x R x T
 Length of loan (exact time) = 61 days
 Rate = 0.07/365 (exact interest)
 Interest = P500 x 0.07/365 x 61
 Interest = P5.84
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Try these examples.
 Find the exact interest on a P5,000 loan for 30
days at 8%.
 P32.88

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved