Simple Interest and

Simple Discount
  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. 3

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Key Terms
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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 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 = P x R x T

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

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= RxB
 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) Php1,500.
Interest rate = 9% (or 0.09)
Time = 1 year
Interest = P x R x T
Interest = 1,500 x 0.09 x 1
Interest = Php135
The interest on the loan is Php135.
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 Try these examples.

 Find the interest on a 2-year loan of Php

4,000 at a 6% rate.
 Php480
 Find the interest earned on a 3-year
investment of Php 5,000 at 4.5%
interest.
 Php 675
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 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 = F=principal + PRT
MV = F= 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 Php
2,500 loan?
 MV = P (1 + RT) Substitute known
values.
 MV = Php 2,500 ( 1 + 0.09 x 2)
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 What is the maturity value?

MV = Php 2,500 (1 + 0.09 x 2)

MV = Php 2,500 (1 + 0.18)
MV = Php 2,500 (1.18)
MV = Php 2,950
Marcus will pay Php 2,950 at the
end of two years.
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 Try these examples.
 Terry Williams is going to borrow Php 4,000 at
7.5% interest. What is the maturity value of
the loan after three years?
 Php 4,900

 Jim Sherman will invest Php 3,000 at 8% for 5

years. What is the maturity value of the
investment?
 Php 4,200
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 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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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 Php 2,500
for 45 months at 3 ½ % simple interest. How
much interest did he earn?
 45 months = 45/12 = 3.75
 I=PxRxT
 I = Php 2,500 x 0.035 x 3.75
 I = Php 328.13
 Stan will earn Php 328.13
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 Try these examples.
 Akiko is saving a little extra money to pay for
her car insurance next year. If she invests
Php1,000 for 18 months at 4%, how much
interest can she earn?
 Php 60
 Habib is going to borrow Php2,000 for 42
months at 7% . What will the amount of
interest owed be?
 Php490
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 Find the principal, rate or time using
the simple interest formula.

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 Find the principal using the simple
interest formula.
 P = I / RT
 Judy paid Php 108 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 = Php 1,800
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 Find the rate using the simple interest
formula.
 R = I / PT
 Sam wants to borrow Php 1,500 for 15
months and will have to pay Php 225 in
interest. What is the rate he is being
charged?
 Substitute the known values and solve.
 R = 225/ Php 1,500 x 1.25
 R = .12 or 12%
 The rate Sam will pay is 12%.
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 Find the time using the simple interest
formula.
T = I / RP
 Shelby borrowed Php 10,000 at 8% and
paid Php 1,600 in interest. What was the
length of the loan?
 Substitute the known values and solve.
 T = Php 1,600/0.08 x Php10,000
T = 2
 The length of the loan was two years.
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 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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 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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 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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 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
Try this example.
A loan made on September 5 is due July
5 of the following year. Find:
a) ordinary time
b) exact time in a non-leap year
c) exact time in a leap year.
Ordinary time = 300 days
Exact time (non-leap year) = 303 days
Exact time (leap year) = 304 days
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 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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 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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 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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 Use ordinary time to find the ordinary
interest on a loan.
A loan of Php 500 at 7% annual
interest rate. The loan was made on
March 15 and due on May 15.
(Principal = Php 500) I = P x R x T
 Length of loan (ordinary time) = 60
days
 Rate = 0.07/360 (ordinary interest)
 Interest = Php 500 x 0.07/360 x 60
 Interest = Php 5.83 32

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Find the ordinary interest using exact
time for the previous loan.
A loan of Php 500 at 7% annual interest
rate. The loan was made on March 15
and due on May 15. (Principal = Php 500)
I=PxRxT
 Length of loan (exact time) = 61 days
 Rate = 0.07/360 (ordinary interest)
 Interest = Php 500 x 0.07/360 x 61
 Interest = Php 5.93

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 Find the exact interest using exact
time for the previous loan.
 A loan of Php 500 at 7% annual interest rate.
The loan was made on March 15 and due on May
15. (Principal = Php 500) I = P x R x T
 Length of loan (exact time) = 61 days
 Rate = 0.07/365 (exact interest)
 Interest = Php 500 x 0.07/365 x 61
 Interest = Php 5.84
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 Find simple interest using a table.
1. Identify the amount of money that the table
uses as the principal. (Usually Php 1, Php 100
or Php 1000)
2. Divide the loan principal by the table
principal.
3. Select the days row corresponding to the time
period (in days) of the loan.

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

4. Select the annual rate column

corresponding to the annual interest rate
of the loan.
5. Locate the value in the cell where the
two intersect.
6. Multiply the quotient from step 2 by the
value from step 5.

36

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 interest on a loan of Php 6,500 at
7.5% annually for 45 days.
 Use Table 11-2 in your text to locate the interest
for Php 100. Move across the 45-days row to the
7.5% column.
 The number is 0.924658.
 Divide Php 6,500 by $100 ( = 65)
 Multiply 0.924658 x 65 = Php 860.11
 The exact interest is Php 860.11 37

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 Try these examples.

 Find the exact interest on a Php

5,000 loan for 30 days at 8%.
 Php 32.88
 Find the exact interest on a Php
1,800 loan for 20 days at 8.5%.
 Php 8.38

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 Find the bank discount and proceeds for a
simple discount note.

o For the bank discount, use:

Bank discount = face value x disc. rate x
time
[I = P x R x T]
o For the proceeds, use:
Proceeds = face value – bank discount
oA=P-I
39

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 A promissory note

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 Find the third party discount and proceeds
for a third party discount note.
 For the bank discount, use:
Third party discount = maturity value
of the original note x discount rate x
discount period.
 For the proceeds, use:
Proceeds = maturity value of original
note – third-party discount
A=P-I
41

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved
 Look at this example.
 Mihoc Trailer Sales made a note of Php10,000
with Darcy Mihoc,owner, at 9% simple interest
based on exact interest and exact time. The
note is made on August 12 and due November
10. Since Mihoc Trailer Sales needs cash, the
note is taken to a third party on September 5.
 The third-party agrees to accept the note with
a 13% annual discount using the banker’s rule.
 Find the proceeds of the note.
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 Mihoc Trailer Sales
 To find the proceeds, we find the
maturity value of the original note,
then the third-party discount.
 Exact time is 90 days (314-224)
 Exact interest rate is .09/365
 MV = P(1+ RT)
 MV = Php 10,000 ( 1 + 0.09/365 x 90)
 MV = Php 10.221.92 43

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Find the proceeds of the note.
 Exact time of the discount period is 66 days.
(314 - 248) period between Sept. 5 and Nov. 10.
 Ordinary discount rate is 0.13/ 360.
 Third party discount = I = PRT
 Third party discount =
 Php10,221.92 ( 0.13/360)(66)
 Third party discount = $243.62
 Proceeds = A = P – I
 Proceeds =
 Php10,221.92 – Php 243.62 = Php 9,978.30
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