CHAPTER 4 :

SIMPLE INTERESTSOLVE PROBLEMS INVOLVING SIMPLEINTEREST & DISCOUNT

What is interest?

Definition 1 Money earned when invested. EX: You deposited RM1,000 in a A bank for a year and at the end of 1 year you have RM1,050. RM50 is the Interest you earned when invested RM1,000.

Definition 2 Interest incurred when loan/credit obtain. EX: You borrowed RM1,000 from the bank for a year and paid back RM1,080 at the end of the year.Additional amount of RM80 is the charge of the interest that need to paywhen you borrow RM1,000

Simple Interest FormulaTo find simple interest we use the following formula:

I = prtInterestPrincipalInterest rate written as a decimalThe amount of time the money is invested or borrowed (years)

Find The Interest PaidCory borrows RM1,200 from the bank for a riding lawn mower. The interest rate is 8% per year. How much simple interest will he pay if he takes 2 years to repay the loan? I = prt , P = RM1,200 , r = 0.08 (8%) , t = 2 I = RM1,200 X 0.08 X =RM192

*Corry will pay RM192 interest in 2 years.

Find The Interest EarnedKates bank offered 4% simple interest on her deposit. She has RM1,500 to invest. How much interest will she earn in 30 months?

30 months is how many years? 30/12 = 2.5 years I = prt , P = RM1,500 , r = 0.04 (4%) , t = 2.5 I = RM1,500 x 4% x 2.5=RM150Kate will earn RM150 interest in 30 months

Exact and Ordinary interestBank/lending institutions use two methodto calculate the due date which are:

Exact TimeOrdinary Time

Exact TimeExact time: time that is based on counting the exact number of days in a time period.Use 365 days for 1 year and use 366 days if leap year is specified just add 1.If loan includes the February of a leap year (29 days)If not specified the leap year then its 28 days

A loan was made on January 4 for 90 days. Find the due date using exact time.

1st Divide 90 days with 30 to get 3 months2nd - Find the numbers of days left in January (31-4=27)3rd Make a list as shown:January27 daysFebruary28 daysMarch31 daysApril? 90 days27+28+31=8690-86= 4, The loan is due on 4 April

Ordinary TimeOrdinary time: time that assume each month has 30 days and each year has 360 days.

EX: 90-day loan dated March 12 will be due on June 12.

By using ordinary time simply count the month using 30 days as 1 month and use the same day number on which the loan is due.

Ordinary/Exact time method to calculate interestA loan of RM9270 was made on April 6 and repaid on June 10. Find the interest if the rate is 12% and exact time is used.

1st - 30-6=24 days 2nd Use I=prt , 1yr=365 April24 days =9270 x 0.12 x 65/365May31 days =RM198.09June30 days 65 days

Find the interest on an RM800 loan at 9% for 28 days using ordinary time.

I=prt , 1 year = 360 days=800 x 0.09 x 28/360=5.6

Ordinary/Exact time method to calculate interest

Promissory NotesFace ValueTermInterest RatePayeeDate of Note

Face Value: Amount of money has been borrowTerm: Time period of the notePayee: Person , company that loaned the moneyMaturity value: The date the money is to be repaid.

Promissory Notes

Legal document promising to pay back at future date with a sum of money that has been borrow.

Promissory Notes Basic Formula:Interest= Face Value (FV) x Rate (r) x Time (T) , I = frtMaturity Value (MV)= FV + I , MV = FV + I

Promissory Notes

Loan of RM9000 was made to Mary on 27 June for 90 days. Promissory notes specified the interest is 12%. Using ordinary time, find maturity value of the note

I = FRT , to find the interest = 9000x0.12x90/360 = 270Maturity Value, MV= FV + I= 9000 + 270= RM9270

The amount of time that the bank holds the promissory note is called the discount period.

Formulas for discounting notes:

Discount Amount (DA) = MV X R X T

Proceeds (P) = MV - DAPromissory Notes & Discount

A maturity value of note was RM9270, length discount period was 62 days. Using ordinary time, find discount amount and the proceeds when discount rate is 9%.

DA = MV x r x t = 9270x0.09x62/360 = RM143.69P = MV DA = 9270 143.69 = RM9126.31

THE END