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Simple Interest

Simple Interest is a method to calculate the interest earned or paid on a principal amount of money using a fixed rate over a specific period

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50 views16 pages

Simple Interest

Simple Interest is a method to calculate the interest earned or paid on a principal amount of money using a fixed rate over a specific period

Uploaded by

manistat1903
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Business Mathematics

Part 1: Simple Interest


Mani N
Assistant Professor of Statistics
Sri Ramakrishna College of Arts & Science,
Coimbatore
Introduction to Mathematics of
Finance
Financial mathematics is the use of mathematical techniques to
financial problem solving. This area of study is essential to
comprehending how savings, loans, and investments generate
wealth over time. Among the essential ideas are:
-Simple Interest
- Compound Interest
-Retirement Plans - Sinking Funds
The evaluation of the time value of money, which is crucial for
financial planning and decision-making, is aided by each of
these subjects.
Introduction to Simple Interest
• Simple interest is a method for calculating the
interest charged on a loan or the interest
gained on an investment using the original
principal amount. It is one of the most
straightforward techniques to calculate
interest over time.
Simple Interest
Definition:
Simple interest is the interest calculated on the
principal amount (initial investment or loan)
only. It is straightforward and does not take
into account the effect of compounding.
Applications of Simple Interest
• Bank Loans: The amount owed increases
linearly over time.
• Savings Accounts: The interest earned on a
principal is straightforward.
• Bonds and Debentures: Simple interest is
used to calculate returns on certain fixed-
income securities.
Key Terminology
• Principal (P): The initial amount of money
borrowed or invested.
• The rate of interest (R) is the proportion of
principal charged as interest each period.
• Time (T): The term for which money is
borrowed or invested.
• Interest (I): Money paid or gained during a
specific period.
Calculating the Total Amount (A)
• The total amount after the interest is applied
is:
A=P+I
• Substituting the interest formula, we get:
A=P+(P×R×T)
Simple Interest Formula
The formula for calculating simple interest is:
I=P×R×T
Where:
• I is the interest.
• P is the principal amount.
• R is the annual interest rate (in decimal form, so
5% becomes 0.05).
• T is the time the money is invested or borrowed
for, in years.
Example Problems
Problem 1: Basic Calculation
• Question: What is the simple interest earned
on a Rs.1,000 investment at an annual interest
rate of 5% for 3 years?
• Solution: P=Rs. 1,000, R=0.05, T=3 &
I=P×R×T=1000×0.05×3= Rs.150
• Interest earned: Rs.150
• Total Amount: A=P+I=1000+150=Rs.1,150
Example Problems
Problem 2: Finding the Principal
• Question: If the interest earned over 4 years
at an annual interest rate of 7% is $280, what
was the initial principal?
• Solution: I=Rs. 280, R=0.07, T=4
We use the formula I=P×R×T
280=P×0.07×4 = 280/0.28= Rs.1,000
Principal: Rs.1,000
Example Problems
Problem 3: Finding the Rate
• Question: A principal of Rs.2,000 earns Rs.400 as
interest in 5 years. What is the annual interest
rate?
• Solution: P=Rs. 2,000, I=Rs.400, T=5 Using
I=P×R×T
400=2000×R×5
R=400/10000=0.04
• Annual Interest Rate: 4%
Example Problems
Problem 4: Finding the Time
• Question: How long will it take for a Rs. 500
investment to grow to Rs.700 if the annual
interest rate is 6%?
• Solution: P=Rs. 500, A=Rs.700,R=0.06
First, find the interest earned:
I=A−P=700−500=Rs.200
Using I=P×R×T :200=500×0.06×T
T=200/30​=6.67 years
• Time: 6.67 years
Practice Problems
• Problem 1: Calculate the simple interest on a Rs.1,500 loan
with a 3% annual interest rate for four years.
• Problem 2: If Rs.2,000 increases to Rs.2,300 in two years,
what is the yearly interest rate?
• Problem 3: A sum of money is invested at 8% annual simple
interest. It comes to Rs.1,200 after five years. Find the
principal.
• Problem 4: How much interest will be generated on Rs.800
over 7 years if the annual interest rate is 4.5%?
• Problem 5: A Rs.600 loan must be repaid with a total of
Rs.720. What is the annual interest rate on a three-year loan?
Solutions to Practice Problems

• Solution 1: P=Rs.1,500, R=0.03, T=4


I=P×R×T=1500×0.03×4=Rs.180.
• Solution 2: P=Rs.2,000, A=Rs.2,300,
I=A−P=2300−2000=Rs.300 Using I=P×R×T:
300=2000×R×2300 = 2000
R=300/4000=0.075 or 7.5%
• Solution 3: A=Rs.1,200, R=0.08, T=5 Using
A=P(1+RT) : 1200=P(1+0.08×5)1200
= 1200=P(1.4)​=Rs. 857.14
Solutions to Practice Problems

• Solution 4: Simple Interest=P×R×T


P=Rs.800, R=0.045, T=7
I=P×R×T=800×0.045×7=Rs.252
• Solution 5: P= Rs.600 A=Rs720, T=3
I=A−P=720−600=Rs.120 Using I=P×R×T
120=600×R×3
R=120/1800 ​=0.0667 or 6.67%

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