Chapter (9)

Simple interest
Interest on loans of a year or less is frequently calculated as simple interest, a type
of interest that is charged (or paid) only on the principal borrowed (or invested). The
rate of interest is given as a percentage per year, expressed as a decimal.
Simple interest Rule:
𝐼 =𝑃∗𝑖∗𝑛
Where:
▪ 𝑰: 𝑆𝑖𝑚𝑝𝑙𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡.
▪ 𝑷: 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙. (money borrowed)
▪ 𝒊: 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒. (per year)
▪ 𝒏: 𝑡𝑖𝑚𝑒.

Note:
In simple interest calculation the time (n) must be in years by which if the time is
not given in years it must be converted into years as the following table:
Time conversion
Monthly n/12
Weekly n/52
Quarterly n/4
Daily ordinary n/360
Daily exact n/365 or n/366

Note:
A leap year is a year of 366 days and can be divided by 4 like 2008, 2012, 2020,
While a simple year is a year of 365 days and can not be divided by 4 like 2019,
2021.

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Exercises:
A- Find the interest in the following:
Principal Interest rate Time
1) $4800 14% 15 months
2) $10000 10% 13 weeks
3) $5000 16% 2 years & 3 months
4) $3000 10% 60 days ordinary interest
5) $8000 12% 90 days exact interest

Solution:
𝐼 =𝑃∗𝑖∗𝑛
15
1) 𝐼 = 4800 ∗ 0.14 ∗ = $840
12
13
2) 𝐼 = 10000 ∗ 0.1 ∗ = $250
52
27 3
3) 𝐼 = 5000 ∗ 0.16 ∗ ( 𝑜𝑟 2 + ) = $1800
12 12
60
4) 𝐼 = 3000 ∗ 0.10 ∗ = $50
360
90
5) 𝐼 = 8000 ∗ 0.12 ∗ = $236.71 (default)
365
90
𝐼 = 8000 ∗ 0.12 ∗ =$236.07
366

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 B- Find the exact interest:
Principal Interest rate Time
1) $4380 19.5% From Feb. 1, 2004 to April 14,
2004
Solution:
Calculating n:
Feb. March April n
28 31 14 73
73
𝐼 = 𝑃 ∗ 𝑖 ∗ 𝑛 = 4380 ∗ 0.195 ∗ = $170.8
366

C- Find the exact interest:

Principal Interest rate Time
1) $2190 16% From March 5, 2008 to Sept 28,
2008
Solution:
Calculating n:
March April May June July Aug. Sept. n
26 30 31 30 31 31 28 207
207
𝐼 = 𝑃 ∗ 𝑖 ∗ 𝑛 = 2190 ∗ 0.16 ∗ = $198.18
366
D- A man borrowed $1350 (ordinary interest) and paid $13.5 as a simple
interest at the end of 30 days. What was the interest rate?
Solution:
𝑰 𝟏𝟑𝟓𝟎
𝒊= = = 𝟎. 𝟏𝟐 ∗ 𝟏𝟎𝟎 = 𝟏𝟐%
𝑷 ∗ 𝒏 𝟏𝟑𝟓𝟎 ∗ 𝟑𝟎
𝟑𝟔𝟎
E- How long will it $1000 a principal yield $100 interest at 8%?
𝑰 𝟏𝟎𝟎
𝒏= = = 𝟏. 𝟐𝟓 𝒚𝒆𝒂𝒓
𝑷 ∗ 𝒊 𝟏𝟎𝟎𝟎 ∗ 𝟖
𝟏𝟎𝟎
F- A woman received $300 interest in three months from an investment
pays 12% interest rate. What is the principal that she received?
𝑰 𝟑𝟎𝟎
𝒑= = = $𝟏𝟎𝟎𝟎𝟎
𝒊 ∗ 𝒏 𝟎. 𝟏𝟐 ∗ 𝟑
𝟏𝟐
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Amount (S): the amount is the sum of principal and interest.

𝑆 =𝑃+𝐼
𝑆 =𝑃+𝑃∗𝑖∗𝑛
𝑆 = 𝑃(1 + 𝑖 ∗ 𝑛)
Exercises:
A- A man borrows $500 for four months at 9%. What is the amount he
must paid at the end of the four months?
4
𝑆 = 𝑃(1 + 𝑖 ∗ 𝑛) = 500 (1 + 0.09 ∗ ) = $515
12

B- What is the simple interest and amount on $700 for 125 days at
10%?
125
𝐼 = 𝑃 ∗ 𝑖 ∗ 𝑛 = 700 ∗ 0.10 ∗ = $24.3
360
𝑆 = 𝑃 + 𝐼 = 700 + 24.3 = $724.3

The Relation between ordinary and Exact interest:

𝟕𝟑 𝟕𝟐
𝑰= 𝑰𝒆 𝒂𝒏𝒅 𝑰𝒆 = 𝑰
𝟕𝟐 𝟕𝟑
The difference between ordinary and exact interest:

𝑰 = 𝟕𝟑(𝑰 − 𝑰𝒆 ) 𝒂𝒏𝒅 𝑰𝒆 = 𝟕𝟐(𝑰 − 𝑰𝒆 )

Exercises:
A- Find the ordinary interest if the exact interest is $36.5, then find the
exact interest if the ordinary interest is $28.80.
73 73
𝐼= 𝐼𝑒 = ∗ 36.5 = $37
72 72
72 72
𝐼𝑒 = 𝐼= ∗ 28.80 = $28.40
73 73
B- Find the ordinary and exact interest if the difference between ordinary
and exact interest is $3.65.
𝐼 = 73(𝐼 − 𝐼𝑒 ) = 73 ∗ 3.65 = $266.45
𝐼𝑒 = 72(𝐼 − 𝐼𝑒 ) = 72 ∗ 3.65 = $262.80
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Partial Payment (Merchant’s Rule):
Example (1):
A debt of $1000 is due in one year with interest at 15%, the debtor pays $300 in 4
months and $200 in 10 months. Find the balance due in one year using merchant’s
rule. focal date is the date of final settlement.
Solution:
𝑖 = 0.15
First payment $300
Focal date
Original Reminder period
One
debt = (12-4) = 8 months
year=
$1000 Second payment $200 12 months
Reminder period
(12-10) = 2 months

Original debt 1000

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 (𝑝 ∗ 𝑖 ∗ 𝑛) 1000*0.15*1 150
$1150
First Payment 300
Interest 300*0.15*8/12 30
$330
second Payment 200
Interest 200*0.15*2/12 5
$205
Sum of Partial payment $535
Ending Balance $615

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Prove that:
𝟕𝟑 𝟕𝟐
𝑰= 𝑰𝒆 𝒂𝒏𝒅 𝑰𝒆 = 𝑰
𝟕𝟐 𝟕𝟑
Proof:
𝑛
𝐼 =𝑃∗𝑖∗
360
𝑛
𝐼𝑒 = 𝑃 ∗ 𝑖 ∗
365
By dividing the first equation on the second equation:
𝑛
𝐼 𝑃∗𝑖∗
= 360
𝐼𝑒 𝑃 ∗ 𝑖 ∗ 𝑛
365
𝑛
𝐼
= 360
𝑛
𝐼𝑒
365
𝐼 𝑛 365
= ∗
𝐼𝑒 360 𝑛
𝐼 73
=
𝐼𝑒 72
𝟕𝟑 𝟕𝟐
∴𝑰= 𝑰𝒆 𝒂𝒏𝒅 𝑰𝒆 = 𝑰
𝟕𝟐 𝟕𝟑

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Prove that:

𝑰 = 𝟕𝟑(𝑰 − 𝑰𝒆 ) 𝒂𝒏𝒅 𝑰𝒆 = 𝟕𝟐(𝑰 − 𝑰𝒆 )

Proof:
𝟕𝟑 𝟕𝟐
𝑰= 𝑰 𝑰𝒆 = 𝑰
𝟕𝟐 𝒆 𝟕𝟑
By subtracting 𝐼𝑒 from both sides By Subtracting Both sides from 𝐼:
𝟕𝟑 𝟕𝟐
𝑰 − 𝑰𝒆 = 𝑰 − 𝑰𝒆 𝑰 − 𝑰𝒆 = 𝑰 − 𝑰
𝟕𝟐 𝒆 𝟕𝟑
𝟕𝟑 𝟕𝟐 𝟕𝟑 𝟕𝟐
𝑰 − 𝑰𝒆 = 𝑰𝒆 − 𝑰 𝑰 − 𝑰𝒆 = 𝑰− 𝑰
𝟕𝟐 𝟕𝟐 𝒆 𝟕𝟑 𝟕𝟑
𝟏 𝟏
𝑰 − 𝑰𝒆 = 𝑰 𝑰 − 𝑰𝒆 = 𝑰
𝟕𝟐 𝒆 𝟕𝟑
𝟕𝟐(𝑰 − 𝑰𝒆 ) = 𝑰𝒆 𝟕𝟑(𝑰 − 𝑰𝒆 ) = 𝑰
∴ 𝑰𝒆 = 𝟕𝟐(𝑰 − 𝑰𝒆 ) ∴ 𝑰 = 𝟕𝟑(𝑰 − 𝑰𝒆 )

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