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McGraw-Hill Ryerson© Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I S imple nterest

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Page 1: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 1

Chapter

6McGraw-Hill Ryerson©

IISS imple nterest

Page 2: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 2

Calculate

Learning ObjectivesLearning

ObjectivesAfter completing this chapter, you will be able to:

… interest, maturity value,

future value, and present value

in a simple interest environment

… details of the amount and timing of payments in a time

diagram

… the equivalent value on any date of a single

payment or a stream of payments, and

Present

LO-1LO-1

LO-2LO-2

Page 3: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 3

Borrower

Example: LoanExample: Loan

Lender

PartiesParties

Lends the PrincipalLends the Principal Borrower OWES (Debt) to Lender

Borrower OWES (Debt) to Lender

LO-1LO-1

Page 4: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 4

BorrowerLender

Earns (Income) from Borrower

i.e. Interest on the Principal

Earns (Income) from Borrower

i.e. Interest on the PrincipalBorrower pays

Interest to Lender

Borrower pays Interest to Lender

Rate of Interest: Simple Interest …Calculated on an ANNUAL or

per annum (pa) basis

Simple Interest …Calculated on an ANNUAL or

per annum (pa) basis

Example: LoanExample: Loan

Page 5: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 5

ExamplesExamples

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% $50/2 =

=

=

Page 6: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 6

Invest $1000 at 10% simple interest for three months

Interest earned is?Principal X Interest Rate = $1000 X 10% $25

Invest $1000 at 10% simple interest for one month.

Interest earned is?

Principal X Interest Rate = $1000 X 10% $8.33/12 =

/4 =

ExamplesExamples

Page 7: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 7

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?

Page 8: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 8

Yes, it would! In fact, interest continues

to accumulate as each day passes!

Invest $1000 at 10% simple interest for 30 days!

Interest earned is?

ExampleExample

Principal x Interest Rate = $1000 *10% * 30

Year = 365 days or 366 in a Leap YearYear = 365 days or 366 in a Leap Year

$8.22=365

Page 9: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 9

trPI

“What is the formula that can be used to calculate SI?”

Principal Interest Rate Time

Four Elements are involved …Four Elements are involved …

Interest

Formula Formula

Principal Amount (loan or

investment)

Principal Amount (loan or

investment)

Annual Rateof SI

Annual Rateof SI

Amount (paid or received)

Amount (paid or received)

Time period …expressed as a fraction or a multiple

of a year

Time period …expressed as a fraction or a multiple

of a yearI = Prt

Page 10: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 10

Calculate the Interest earned on $5000

invested at 4% for 7 months.

Formula Formula I = Prt

I = P * r * t $5000 *

.04 * 7 /12

I = $116.67I = $116.67

Page 11: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 11

“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?”

Page 12: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 12

Formula Formula I = Prt

Calculate the Interest earned on $5000 invested

at 4.5%

for ? .

79 Days

I =$5000*.045 * 79/365

I = $48.70I = $48.70

Page 13: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 13

Formula Formula I = Prt

I =$5000*.045 * 37/365

I = $22.81I = $22.81

Calculate the Interest earned on $5000 invested

at 4.5%

for ? .

37 Days

Page 14: McGraw-Hill Ryerson© Simple Interest Simple Interest 6 6 6 - 1 Chapter 6 McGraw-Hill Ryerson© I I S S imple nterest

McGraw-Hill Ryerson©

Simple

Interest

Simple

Interest 66 666 - 14

Formula Formula I = Prt

I =$5000* .04 * 151/365

I = $82.74I = $82.74

Calculate the Interest earned on $5000 invested

at 4.0%

for ? .

151 Days


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