Download - Chapter 4 - Simple Interest
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CHAPTER 4 :
SIMPLE INTERESTSOLVE PROBLEMS INVOLVING SIMPLEINTEREST & DISCOUNT
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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
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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)
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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.
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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
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Exact and Ordinary interestBank/lending institutions use two methodto calculate the due date which are:
Exact TimeOrdinary Time
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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
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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
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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.
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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
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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
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Promissory NotesFace ValueTermInterest RatePayeeDate of Note
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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
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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
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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
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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
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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
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THE END