Chapter 7

Simple
Interest
Microsoft® PowerPoint® Presentation by
Copyright © 2022 McGraw-Hill Education Limited. Hussam Jawad and Howard Umrah, Durham College.
Previously updated by Julie Howse, St. Lawrence College
 Learning Objectives
LO1 Calculate interest, maturity value,
present value, rate and time in a simple
interest environment.
LO2 Present details of the amount and timing
of payments in a time diagram.
LO3 Calculate the equivalent value on any
date of a single payment or stream of
payments.

7-2
 Introduction
• Debt plays an important role in our personal
and business lives.
• Interest is the fee that lenders charge to
borrowers for the use of their money.
• Simple interest is used for short-terms loans
and investments.
• We will learn how to calculate simple
interest and explore the time value of
money.
7-3
 Simple Interest Basics
We define the following symbols:

𝑰 Interest – Amount of interest paid or earned

𝑷 Principal – Amount the of loan or investment

𝒓 Rate – Annual rate of simple interest

𝒕 Term – Time period in years of the loan or

investment

𝑰 =𝑷 x 𝒓 x 𝒕
The formula for calculating simple interest is:

7-4
 Simple Interest
Diagram

𝑰 =𝑷 ×𝒓 × 𝒕
I

P r t
7-5
 Simple Interest
Diagram
We can re-arrange the basic simple interest formula to give us three
new versions:

𝑰
I 𝑷=
𝒓 ×𝒕

P r t
7-6
 Simple Interest
Diagram
We can re-arrange the basic simple interest formula to give us three
new versions:

r
I

P r t
7-7
 Simple Interest
Diagram
We can re-arrange the basic simple interest formula to give us three
new versions:

t
I

P r t
7-8
 Example: Calculating the Interest Amount

Suppose that you borrow $500 for one year at a rate of 6%

per annum. How much simple interest will you pay?

Given:

The amount of interest you will pay is:

*Note that the interest rate is converted to decimal form.

7-9
 Example: Calculating the Principal Amount

If a 3 month term deposit pays a simple interest rate of

1.5%, how much must be deposited in order to earn $100
in interest?

Given:

The amount to be deposited is:

7-10
 Example: Calculating the Interest Rate
Interest of $78.42 was charged on a loan of $1500 for
seven months. What simple annual rate of interest was
charged on the loan?

Given:

The rate of simple interest was:

7-11
 Example: Calculating the Time Period
How long must you invest $4,000 at a simple interest rate
of 2.5% in order to earn $50 interest?

Given:

The amount of time needed to earn $50 is:

7-12
 Determining the Time Period
• If the problem is given in months, you can easily
convert to years (i.e. 3 months =3/12 years).
• When using dates, however, it is usually best to
work with the exact number of days.
• To do this, you can use Table 7.2 or you can use
the date function on your calculator (appendix 7B
shows this for the Texas Instruments calculator).
• Once you have the number of days, you can convert to
years by dividing by 365 (exact method).

7-13
 TABLE 7.2
The Serial Numbers for Each Day of the
Day of
Jan Feb Mar Apr
Year
May Jun Jul Aug Sep Oct Nov Dec
Day of
Month Month
1 1 32 60 91 121 152 182 213 244 274 305 335 1
2 2 33 61 92 122 153 183 214 245 275 306 336 2
3 3 34 62 93 123 154 184 215 246 276 307 337 3
4 4 35 63 94 124 155 185 216 247 277 308 338 4
5 5 36 64 95 125 156 186 217 248 278 309 339 5
6 6 37 65 96 126 157 187 218 249 279 310 340 6
7 7 38 66 97 127 158 188 219 250 280 311 341 7
8 8 39 67 98 128 159 189 220 251 281 312 342 8
9 9 40 68 99 129 160 190 221 252 282 313 343 9
10 10 41 69 100 130 161 191 222 253 283 314 344 10
11 11 42 70 101 131 162 192 223 254 284 315 345 11
12 12 43 71 102 132 163 193 224 255 285 316 346 12
13 13 44 72 103 133 164 194 225 256 286 317 347 13
14 14 45 73 104 134 165 195 226 257 287 318 348 14
15 15 46 74 105 135 166 196 227 258 288 319 349 15
16 16 47 75 106 136 167 197 228 259 289 320 350 16
17 17 48 76 107 137 168 198 229 260 290 321 351 17
18 18 49 77 108 138 169 199 230 261 291 322 352 18
19 19 50 78 109 139 170 200 231 262 292 323 353 19
20 20 51 79 110 140 171 201 232 263 293 324 354 20
21 21 52 80 111 141 172 202 233 264 294 325 355 21
22 22 53 81 112 142 173 203 234 265 295 326 356 22
23 23 54 82 113 143 174 204 235 266 296 327 357 23
24 24 55 83 114 144 175 205 236 267 297 328 358 24
25 25 56 84 115 145 176 206 237 268 298 329 359 25
26 26 57 85 116 146 177 207 238 269 299 330 360 26
27 27 58 86 117 147 178 208 239 270 300 331 361 27
28 28 59 87 118 148 179 209 240 271 301 332 362 28
29 29 * 88 119 149 180 210 241 272 302 333 363 29
30 30 89 120 150 181 211 242 273 303 334 364 30
31 31 90 151 212 243 304 365 31

7-14
 Determining the Time Period
• Let’s use table 7.2 to calculate the number of days
Day of Month
1
Jan
1
Feb
32
Mar
60
Apr
91
May
121
Jun
152
Jul
182
Aug
213
Sep
244
Oct
274
Nov
305
Dec
335
Day of Month
1

between March 3rd and August 21st.

2 2 33 61 92 122 153 183 214 245 275 306 336 2
3 3 34 62 93 123 154 184 215 246 276 307 337 3
4 4 35 63 94 124 155 185 216 247 277 308 338 4
5
6
5
6
36
37
64
65
95
96
125
126
156
157
186
187 March 3 = 62
217
218
248
249
rd
278
279
309
310
339
340
5
6
7 7 38 66 97 127 158 188 219 250 280 311 341 7
8 8 39 67 98 128 159 189 220 251 281 312 342 8
9
10
9
10
40
41
68
69
99
100
129
130
160
161
190
191
August 21st = 333
221
222
252
253
282
283
313
314
343
344
9
10
11 11 42 70 101 131 162 192 223 254 284 315 345 11
12
13
12
13
43
44
71
72
102
103
132
133
163
164
193
194 Term is 333-62=171 days
224
225
255
256
285
286
316
317
346
347
12
13
14 14 45 73 104 134 165 195 226 257 287 318 348 14
15 15 46 74 105 135 166 196 227 258 288 319 349 15
16 16 47 75 106 136 167 197 228 259 289 320 350 16
17 17 48 76 107 137 168 198 229 260 290 321 351 17
18 18 49 77 108 138 169 199 230 261 291 322 352 18
19 19 50 78 109 139 170 200 231 262 292 323 353 19
20 20 51 79 110 140 171 201 232 263 293 324 354 20
21 21 52 80 111 141 172 202 233 264 294 325 355 21
22 22 53 81 112 142 173 203 234 265 295 326 356 22
23 23 54 82 113 143 174 204 235 266 296 327 357 23
24 24 55 83 114 144 175 205 236 267 297 328 358 24
25 25 56 84 115 145 176 206 237 268 298 329 359 25
26 26 57 85 116 146 177 207 238 269 299 330 360 26
27 27 58 86 117 147 178 208 239 270 300 331 361 27
28 28 59 87 118 148 179 209 240 271 301 332 362 28
29 29 * 88 119 149 180 210 241 272 302 333 363 29
30 30 89 120 150 181 211 242 273 303 334 364 30
31 31 90 151 212 243 304 365 31

7-15
 Calculator Date Function
• The Texas Instruments BAII+ has a built-in date
function which can be used instead of table 7.2.
• You can access it by pressing 2nd DATE
• You can then enter any two of the three variables
shown below and compute the third:

Variable Description
DT1 Start date (MM.DDYY)
DT2 End date (MM.DDYY)
DBD Days between dates

7-16
 Example
What interest rate will an
investment of $900 earn $60 in
simple interest from March 23rd
to July 5th, 2019?

2ND DATE

7-17
 Example
What interest rate will an
investment of $900 earn $60 in
simple interest from March 23rd
to July 5th, 2019?

2ND DATE
03.2319 ENTER ↓

07.0519 ENTER ↓

7-18
 Example
What interest rate will an
investment of $900 earn $60 in
simple interest from March 23rd
to July 5th, 2019?

2ND DATE
03.2319 ENTER ↓

07.0519 ENTER ↓

CPT

7-19
 Example
What interest rate will an
investment of $900 earn $60 in
simple interest from March 23rd
to July 5th, 2019?

2ND DATE
03.2319 ENTER ↓

07.0519 ENTER ↓

CPT
2ND QUIT

The term is 104 days

7-20
 Example
What interest rate will an investment of $900 earn
$60 in simple interest from March 23rd to July 5th,
2019?
Given:

𝐼 $ 60
𝑟= = = 0.234=23.4 %
𝑃𝑡
$ 9 00 (104
365 )

7-21
 Skill Check
• Solve the following Simple Interest
questions.
i. Calculate the amount of interest an
investment of $580 will earn over 3 years
and 4 months at 4.2% simple interest.
ii. How long will it take $650 to grow to
$720 at 5% simple interest?

7-22
 Variable or Floating Interest
Rates
• The interest rate on loans is often linked to the
prime rate charged by banks.
• The prime rate is the banks lowest lending rate.
• Usually loans charge interest at prime plus
anywhere from 0.5% to 5%.
• The prime rate is adjusted by banks to reflect
changes in financial markets, so the interest
rate payable on a loan may vary over time.

7-23
 Example 7.2B – Variable Rate of Interest

Lajos borrows $5,000 on April 7 at prime + 1%. The prime rate was
initially 3%. It increased to 3.25% on May 23 and to 3.50% on July 13.
What was the amount required to repay the loan on August 2?
To solve, we need to break the time period into separate intervals for
each rate. We can then use our formula to calculate the interest
amount for each interval before adding them together at the end.

=$5000(0.04)(46/365)=$25.205
=$5000(0.0425)(51/365)=$29.692
=$5000(0.045)(20/365)=$12.329

So, the total to be repaid on August 2nd is $5,067.23

7-24
 Maturity Value (Future Value)
• When a loan or investment reaches the end
of its term, we say that it matures.

• The Maturity Value (or Future Value ) is

the total of the original principal plus
interest due on the maturity date.
• The maturity value is represented by the
symbol S.

7-25
 Maturity Value (Future Value)
• The basic formula for the maturity value is:
S  PI
• We know that I=Prt, so we can re-write the
formula as:
S  P  Prt
• We can then re-arrange terms as follows:
𝑺= 𝑷 (1+𝑟𝑡 )
7-26
 Example: Calculating the Maturity Value

You borrow $2,000 for eight months at a simple interest

rate of 5% p.a. What is the maturity value of the loan?

Given:

The maturity value of the loan is:

7-27
 Present Value
• We can re-arrange our maturity value
formula to solve for the present value.
• In other words, what original amount must
be invested in order to reach a specified
maturity?

7-28
 Example: Calculating the Present Value
What amount of money would have to be invested at a
simple interest rate of 3% p.a. in order to have $4,000 after
175 days?

Given:

The amount needed (present value) is:

7-29
 Skill Check
• Calculate the following

i. Find the principal of a 225 day loan with a

maturity value of $5680.44. Assume there
was simple interest of 8.3% charged on the
loan.

ii. $4000 was invested for 3 months at 5.7%

simple interest. Find the maturity of the
investment.
7-30
 Time Value of Money
• Money received at different points in time may
have different values.

• For example, $100 today is not the same as $100

in one year’s time.
• To find out what today’s $100 will be worth in 1
year, we need to add interest at an appropriate
rate.

• This is called the time value of money.

7-31
 Equivalent Payments
• An equivalent payment has the same value as
another payment once interest has been applied.
• For example, using a rate of 5%, the equivalent
payment in one year to $100 today would be
$105.
• Both amounts represent the same value, just at
different points in time.
• We can use the maturity value and present value
formulas to calculate equivalent payments.

7-32
 Example: Calculating the Equivalent Value at a Later Date

• Bob had promised to pay Sally $1,000 on Oct 1st. Sally planned on
investing the money into a GIC earning 2.5%.
• Bob was late with his payment and couldn’t pay Sally until Nov 10th.
What would be a fair amount for Bob to pay?

Given:

The equivalent value on Nov 10th is:

7-33
 Example: Calculating the Equivalent Value at an Earlier
Date

• Bob had promised to pay Sally $1,000 on Oct 1st but would like to pay her back
a few weeks earlier on Sept 10th.
• What would be a fair amount for Bob to pay if Sally can invest his payment at a
rate of 2.5%?

Given:

The equivalent amount on September 10th is:

7-34
 The Equivalent Value of a Payment Stream

• A payment stream is simply a set of

payments over time.
• To get the combined value of a payment
stream, you can’t just add the payments up.
• You must take the time value of money into
account.
• When solving these types of problems, a
good timeline is helpful.

7-35
 Construct a Time Diagram
• A timeline shows all of the amounts in the
payment stream on the dates that they
occur.
• This is an excellent tool for helping us to
determine an equivalent value to the
payment stream.

• Tip: A clearly drawn timeline can really help.

7-36
 Example: Equivalent Value to a Payment Stream

Consider a payment stream consisting of three payments: $1000,

$2000, and $3000, scheduled for March 1, May 1, and December 1 of
the same year. Calculate the single payment on August 1 that is
equivalent to the three scheduled payments. Use a simple interest
rate of 8%.
March 1 May 1 August 1 Dec 1
$1000 $2000 $3000
92 days at 8%
S2
153 days at 8%
S1
P1 122days at 8%

Total

(
𝑺𝟏=$ 𝟏 𝟎𝟎𝟎 𝟏+𝟎 . 𝟎𝟖
𝟏𝟓𝟑
𝟑𝟔𝟓 ( ))
=$ 𝟏𝟎𝟑𝟑 . 𝟓𝟑𝟒
7-37
 Example: Equivalent Value to a Payment Stream

Consider a payment stream consisting of three payments: $1000,

$2000, and $3000, scheduled for March 1, May 1, and December 1 of
the same year. Calculate the single payment on August 1 that is
equivalent to the three scheduled payments. Use a simple interest
rate of 8%.
March 1 May 1 August 1 Dec 1
$1000 $2000 $3000
92 days at 8%
S2
153 days at 8%
S1
P1 122days at 8%

Total

(
𝑺𝟐=$ 𝟐 𝟎𝟎𝟎 𝟏+𝟎 . 𝟎𝟖
𝟗𝟐
𝟑𝟔𝟓 ( ))
=$ 𝟐𝟎𝟒𝟎 . 𝟑𝟐𝟗
7-38
 Example: Equivalent Value to a Payment Stream

Consider a payment stream consisting of three payments: $1000,

$2000, and $3000, scheduled for March 1, May 1, and December 1 of
the same year. Calculate the single payment on August 1 that is
equivalent to the three scheduled payments. Use a simple interest
rate of 8%.
March 1 May 1 August 1 Dec 1
$1000 $2000 $3000
92 days at 8%
S2
153 days at 8%
S1
P1 122days at 8%

Total
$ 𝟑𝟎𝟎𝟎
𝑷 𝟏= =$ 𝟐𝟗𝟐𝟏 . 𝟖𝟕
𝟏 +𝟎 . 𝟎𝟖
𝟏𝟐 𝟐
𝟑𝟔𝟓 ( )
7-39
 Example: Equivalent Value to a Payment Stream

Consider a payment stream consisting of three payments: $1000,

$2000, and $3000, scheduled for March 1, May 1, and December 1 of
the same year. Calculate the single payment on August 1 that is
equivalent to the three scheduled payments. Use a simple interest
rate of 8%.
March 1 May 1 August 1 Dec 1
$1000 $2000 $3000
92 days at 8%

S 2=$ 𝟐𝟎𝟒𝟎 .𝟑𝟐𝟗

153 days at 8%
S 1=$ 𝟏𝟎𝟑𝟑 .𝟓𝟑𝟒
122days at 8%
P 1=$ 𝟐𝟗𝟐𝟏. 𝟖𝟕

Total=5995.733 7-40
 Skill Check
i. A payment stream consists of three payments:
$1500 due today, $2200 due 70 days from today,
and $3000 due 210 days from today. What single
payment, 50 days from today, is economically
equivalent to the payment stream if money can
be invested at a simple interest rate of 4.6%?

ii. A $5000 loan at 6.8% was made on March 1.

Two payments of $2000 each were made on
May 1 and June 1. What payment on August 1
will pay off the loan?
7-41
 Example: Equivalent Value to a Payment Stream

Payments of $5000 due four months ago and $3000 due two months from now are to be
replaced by a payment of $4000 today and a second payment in six months. What must the
second payment be in order to make the replacement payment stream equivalent to the
scheduled payment stream? Money in short-term investments can earn 5%. Use six months
from now as the focal date.
10 Months
S1
4 Months
S2
$5000 $3000 Stream 1

-4 -2 0 2 4 6
$4000
Stream 2
x
6 Months
S3

7-42
 Example: Equivalent Value to a Payment Stream

Payments of $5000 due four months ago and $3000 due two months from now are to be
replaced by a payment of $4000 today and a second payment in six months. What must the
second payment be in order to make the replacement payment stream equivalent to the
scheduled payment stream? Money in short-term investments can earn 5%. Use six months
from now as the focal date.
10 Months
$𝟓𝟐𝟎𝟖.𝟑𝟑
4 Months 𝟑
S2
$5000 $3000 Stream 1

-4 -2 0 2 4 6
$4000
Stream 2
x
6 Months
S3

𝑺𝟏=$ 𝟓 𝟎𝟎𝟎 𝟏+𝟎 . 𝟎𝟓

𝟏𝟎
𝟏𝟐 (
=$ 𝟓𝟐𝟎𝟖 .𝟑𝟑𝟑 ( )) 7-43
 Example: Equivalent Value to a Payment Stream

Payments of $5000 due four months ago and $3000 due two months from now are to be
replaced by a payment of $4000 today and a second payment in six months. What must the
second payment be in order to make the replacement payment stream equivalent to the
scheduled payment stream? Money in short-term investments can earn 5%. Use six months
from now as the focal date.
10 Months
$𝟓𝟐𝟎𝟖.𝟑𝟑
4 Months 𝟑
$3050.00
$5000 $3000 Stream 1

-4 -2 0 2 4 6
$4000
Stream 2
x
6 Months
S3

𝑺 𝟏=$ 𝟑 𝟎𝟎𝟎 𝟏+𝟎 . 𝟎𝟓

𝟒
𝟏𝟐(=$ 𝟑𝟎𝟓𝟎 .𝟎𝟎 ( )) 7-44
 Example: Equivalent Value to a Payment Stream

Payments of $5000 due four months ago and $3000 due two months from now are to be
replaced by a payment of $4000 today and a second payment in six months. What must the
second payment be in order to make the replacement payment stream equivalent to the
scheduled payment stream? Money in short-term investments can earn 5%. Use six months
from now as the focal date.
10 Months
$𝟓𝟐𝟎𝟖.𝟑𝟑
4 Months 𝟑
$3050.00
$5000 $3000 $𝟖𝟐𝟓𝟖.𝟑𝟑
𝟑
-4 -2 0 2 4 6
$4000
Stream 2
x
6 Months
S3

𝐄𝐪𝐮𝐞𝐯𝐚𝐥𝐞𝐧𝐭𝐕𝐚𝐥𝐮𝐞𝐨𝐟𝐒𝐭𝐫𝐞𝐚𝐦 𝟏=$𝟓𝟐𝟎𝟖.𝟑𝟑𝟑+$𝟑𝟎𝟓𝟎=$𝟖𝟐𝟓𝟖.𝟑𝟑𝟑 7-45

 Example: Equivalent Value to a Payment Stream

Payments of $5000 due four months ago and $3000 due two months from now are to be
replaced by a payment of $4000 today and a second payment in six months. What must the
second payment be in order to make the replacement payment stream equivalent to the
scheduled payment stream? Money in short-term investments can earn 5%. Use six months
from now as the focal date.
10 Months
$𝟓𝟐𝟎𝟖.𝟑𝟑
4 Months 𝟑
$3050.00
$5000 $3000 $𝟖𝟐𝟓𝟖.𝟑𝟑
𝟑
-4 -2 0 2 4 6
$4000
Stream 2
x
6 Months
$𝟒𝟏𝟎𝟎.𝟎𝟎

𝑺𝟑=$ 𝟒 𝟎𝟎𝟎 𝟏+𝟎 . 𝟎𝟓

𝟔
𝟏𝟐 (
=$ 𝟒𝟏𝟎𝟎. 𝟎𝟎 ( )) 7-46
 Example: Equivalent Value to a Payment Stream

Payments of $5000 due four months ago and $3000 due two months from now are to be
replaced by a payment of $4000 today and a second payment in six months. What must the
second payment be in order to make the replacement payment stream equivalent to the
scheduled payment stream? Money in short-term investments can earn 5%. Use six months
from now as the focal date.
10 Months
$𝟓𝟐𝟎𝟖.𝟑𝟑
4 Months 𝟑
$3050.00
$5000 $3000 $𝟖𝟐𝟓𝟖.𝟑𝟑
𝟑
-4 -2 0 2 4 6
$4000
Stream 2
x
6 Months
$𝟒𝟏𝟎𝟎.𝟎𝟎

= x + $4100
7-47
 Example: Equivalent Value to a Payment Stream

Payments of $5000 due four months ago and $3000 due two months from now are to be replaced by a
payment of $4000 today and a second payment in six months. What must the second payment be in
order to make the replacement payment stream equivalent to the scheduled payment stream? Money
in short-term investments can earn 5%. Use six months from now as the focal date.
10 Months
$𝟓𝟐𝟎𝟖.𝟑𝟑
4 Months 𝟑
$3050.00
$3000 $𝟖𝟐𝟓𝟖.𝟑𝟑
$5000 𝟑
-4 -2 0 2 4 6
$4000
Stream 2
x
6 Months
$𝟒𝟏𝟎𝟎.𝟎𝟎

= x + $4100
x = $4100 = $4158.333
7-48
 Skill Check
i. A $5000 loan on March 12 was repaid by
payments of $1500 on March 21, $2000 on
June 17, and a final payment on August 29.
What was the third payment if the interest
rate on the loan was 7.6% simple interest?

ii. A $3000 loan at 5.5% simple interest was

repaid by two equal payments made 40
days and 75 days after the date of the loan.
Determine the amount of each payment.
7-49
 Chapter 7

End of
Chapter
Microsoft® PowerPoint® Presentation by
Copyright © 2022 McGraw-Hill Education Limited. Hussam Jawad and Howard Umrah, Durham College.
Previously updated by Julie Howse, St. Lawrence College