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    Simple Interest: Study Material & Notes

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    Xian Sheng
    This document defines the key terms used to calculate simple interest: principal (amount borrowed), interest (fee for borrowing money), rate of interest (percentage charged per time period), and time (number of time periods money is borrowed for). The simple interest formula is defined as: Interest = Principal x Rate of Interest x Time. Several examples are provided calculating interest, principal, rate of interest, and time given values for three of the four variables. Interest can be calculated on loans for periods expressed in years, months, or other time intervals.

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    Simple Interest: Study Material & Notes

    Uploaded by

    Xian Sheng
    130 views4 pages
    This document defines the key terms used to calculate simple interest: principal (amount borrowed), interest (fee for borrowing money), rate of interest (percentage charged per time period), and time (number of time periods money is borrowed for). The simple interest formula is defined as: Interest = Principal x Rate of Interest x Time. Several examples are provided calculating interest, principal, rate of interest, and time given values for three of the four variables. Interest can be calculated on loans for periods expressed in years, months, or other time intervals.

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    Simple Interest

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    Simple Interest

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    This document defines the key terms used to calculate simple interest: principal (amount borrowed), interest (fee for borrowing money), rate of interest (percentage charged per time period), and time (number of time periods money is borrowed for). The simple interest formula is defined as: Interest = Principal x Rate of Interest x Time. Several examples are provided calculating interest, principal, rate of interest, and time given values for three of the four variables. Interest can be calculated on loans for periods expressed in years, months, or other time intervals.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    130 views4 pages

    Simple Interest: Study Material & Notes

    Uploaded by

    Xian Sheng
    This document defines the key terms used to calculate simple interest: principal (amount borrowed), interest (fee for borrowing money), rate of interest (percentage charged per time period), and time (number of time periods money is borrowed for). The simple interest formula is defined as: Interest = Principal x Rate of Interest x Time. Several examples are provided calculating interest, principal, rate of interest, and time given values for three of the four variables. Interest can be calculated on loans for periods expressed in years, months, or other time intervals.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    SIMPLE INTEREST

    STUDY MATERIAL & NOTES

    Introduction
    Everyday, money is borrowed and loaned in tens of thousands of
    transactions amounting, in total of millions of dollars.
    Borrowing and lending are two sides of the same transaction. To the
    lender a loan represents an investment in a debt obligation. Since
    borrowing and lending are so central to our daily lives and our economic
    system, it is essential that every student is able to perform and explain the
    computation of interest in borrowing/lending transactions.

    Definition of Terms:
    • Principal (P) – Is the AMOUNT BORROWED.
    • Interest (I) – is the FEE OR RENT that the lenders charge to
    borrowers for the temporary us of the borrowed money; Payment for
    the use of money.
    • Rate of Interest (r) – is the PERCENTAGE of the principal that
    will be charged for a specified period of time, normally 1 year;
    Interest rate per period (expressed in percentage or fraction).
    • Time or Terms (t) – Number of units EXPRESSED IN DAYS,
    MONTHS OR YEARS for which the money is borrowed (in year
    basis).
    • Maturity Amount (Final Amount) – PRINCIPAL PLUS THE
    INTEREST.

    Formula:
    Simple Interest = Principal x Rate of Interest x Time
    If any three of the four variables I, P, r, and t in the formula are known
    in a particular application, the formula may be easily manipulated to
    solve for the UNKNOWN variable.
    𝐼
    P=
    𝑟𝑡
    𝐼
    r=
    𝑃𝑡
    𝐼
    t=
    𝑃𝑟
    Example 1.1 CALCULATION OF THE AMOUNT OF INTEREST
    What amount of interest will be charged on $6500 borrowed for 5 months
    at a simple interest rate of 11% per annum (abbreviated 11% pa)?

    Given:
    P = $6500
    t = 5/12 years (5 months per annum)
    r = 11% pa

    Solution:
    The amount of interest payable at the end of the loan period is
    I = Prt
    I = $6500 (0.11) (5/12)
    I = $297.92

    Example 1.2 CALCULATION OF THE PRINCIPAL AMOUNT


    1
    If a 3-month term deposit at a bank pays a simple interest rate of 8 % pa,
    2
    how much will have to be deposited to earn $100 of interest?

    Given:
    t = 3/12
    r = 8.5% pa
    I = $100

    Solution:
    Divide both sides of formula by rt to isolate P:
    𝐼 $100
    P= = = $4705.88
    𝑟𝑡 (0.085)(3/12)
    Example 1.3 CALCULATION OF THE INTEREST RATE
    Interest of $429.48 was charged on a loan of $9500 for 7 months. What
    simple annual rate of interest was charged on the loan?

    Given:
    I = $429.48
    P = $9500
    t = 7/12

    Solution:
    Rearrange the formula to isolate r,
    𝐼 $429.48 $429.48
    r= = 7 = = 0.0775 = 7.75%
    𝑃𝑡 ($9500)12 $5541.66

    An interest rate of 7.75% pa was charged on the loan.

    Example 1.4 CALCULATION OF THE TIME PERIOD


    The interest earned on a $6000 term deposit was $240. How many months
    was the term if the interest rate is 6% pa?

    Given:
    P = $6000
    I = $240
    r = 6% pa

    Solution:
    Rearrange the formula to solve for t,
    𝐼 $240
    t= = = 0.66667 𝑦𝑒𝑎𝑟 = 8 𝑚𝑜𝑛𝑡ℎ𝑠
    𝑃𝑟 ($6000)(0.06)

    The duration of the term deposit was 8 months.


    Example 1.5 USING MONTHS AS THE UNIT OF TIME
    The simple interest rate being charged on a $5000 loan is three-quarters
    of 1% per month. If the principal and interest are to be paid in 9 months,
    how much interest will be charged?

    Given:
    P = $5000
    Loan term = 9 months
    Interest rate = 0.75% per month

    Solution:
    Method 1: with time expressed in years
    9
    𝑡= = 0.75 𝑦𝑒𝑎𝑟𝑠 𝑎𝑛𝑑 𝑟 = 12(0.75%) = 9% 𝑝𝑎
    12
    𝐼 = 𝑃𝑟𝑡 = $5000 x 0.09 x 0.75 = $337.50
    Method 2: With time expressed in months
    𝑡 = 9 𝑚𝑜𝑛𝑡ℎ𝑠 𝑎𝑛𝑑 𝑟 = 0.75% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
    𝐼 = 𝑃𝑟𝑡 = $5000 x 0.0075 x 9 = $337.50
    The interest that will be charged on the loan is $337.50

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