MAT 112

I MP L E IN T ER E S T
2.1 S
CHAPTER 2
MATHEMATICAL APPLICATION IN BANKING AND FINANCE

PREPARED BY NORA BAIZURA BINTI MOHD ISA

LEARNING OUTCOMES
By the end of this chapter, student should be able to:
explain the concept of simple interest,

use the simple interest formula to calculate interest, interest rate,

time and dates with data provided,

use the simple amount formula to calculate the present and future
values of some investments,

identify four concepts of exact simple interest, ordinary simple

interest, exact time and approximate time, and

apply Banker's Rule to some investments and loan problems.

 SIMPLE
INTEREST
 SIMPLE
INT E R E S T

Exact and Types of

What is Simple Simple Number of
Approximat Simple
Interest? Interest Amount Terms
ed Time Interest
 WHAT IS INTEREST?
DEFINITION 1
Interest is money earned when money is invested

Example: Deposited RM1,000 in a bank for a year and find that at the end of the
year 1, the total of money is RM1,050 in the account. The extra of money which is
RM50 is the interest earned for the invested
 WHAT IS INTEREST?
DEFINITION 2

Interest is charge incurred when a loan or credit is obtained.

Example: Loan RM1,000 from a bank for a year and need to pay back RM1,080
at the end of the year. The extra amount which is RM80 is the charged or interest
of the loan.
WHAT IS SIMPLE INTEREST?
Interest charged is always based on the original principal ( the amount
borrowed or invested). The amount of interest earned or paid of each
year is a constant.

TODAY NEXT YEAR IN TWO YEARS

RM1000 INTEREST RM1000

OWED TO
NORA BANK THE NORA BANK
BANK
RM100
RM200
 SIMPLE
INTEREST
FORMULA
SIMP LE I NT E R ES T FORMULA

I=prt Number of
Interest amount term(years)
(earned/paid)
Interest rate (%)

Principal, original amount

borrowed/deposited/invested, present
value
 SIMP LE I NT E R E ST EXAMPLE 1

Solution:
 SIMPLE IN T ER E ST EXAMPLE 2

Solution:
CHANGING MONTHS AND How to determine the value of time, t in years if the term is given
in months or weeks.
WEEKS INTO YEARS

×52 Week
÷52
Year
÷12
×12 Month
 SIMP LE I N T ER E ST EXAMPLE 3

Solution:
FOUR CONCEPTS
OF SIMPLE
INTEREST
 TYPES OF SIMPLE INTEREST
When the duration is given in days, there are two ways to calculate
interest, namely the exact simple interest and the ordinary simple
interest.
 SIMP LE IN T ER E ST EXAMPLE 4

RM 10,000 is invested for 900 days in a bank earning a simple

interest rate of 10% per annum. Calculate the interest earned after
900 days.

a) Exact Simple Interest

b) Ordinary Simple Interest
Solution:
 EXACT AND APPROXIMATE TIME
When two dates are given, then we need to determine the number of
days between those two dates first. The number of days between the
two dates can be calculated in two ways which are exact time and
approximate time.
 SIMPLE IN T ER E S T EXAMPLE 5
Find the exact and ordinary simple interest on RM 2500 at 7% from 20
April 2019 to 1 July 2019 using:
a) Exact Time
b) Approximate Time Date: 20 April 2019 to 1 July 2019:
EXACT TIME APPROXIMATE TIME
Solution: APRIL 20 30 - 20 = 10 30 - 20 = 10

P = RM 2500 MAY 31 30
r = 7% = 0.07 JUNE 30 30
t= ? years JULY 1 1 1
72 days 71 days
 EXACT SIMPLE INTEREST ORDINARY SIMPLE INTEREST

a) Exact Time a) Exact Time BANKER’S

RULE
I=Prt I=Prt
= RM 2500 x 0.07 x (72 / 365) = RM 2500 x 0.07 x (72 / 360)
= RM 34.52 = RM 35

b) Approximate Time b) Approximate Time

I=Prt I=Prt
= RM 2500 x 0.07 x (71 / 365) = RM 2500 x 0.07 x (71 / 360)
= RM 34.04 = RM 34.51
 SIMPLE IN T ER E ST EXAMPLE 6
Number of Days
RM 1,000 was invested on 15th March 2012. if Month Exact time Approximate time
the simple interest rate offered was 10% per
March 16 (31-15) 15 (30-15)
annum, find the interest received on 29th August
2012 using April 30 30

a) exact time and exact simple interest, May 31 30

b) exact time and ordinary simple interest June 30 30

c) approximate time and exact simple interest July 31 30

d) approximate time and ordinary simple interest. August 29 29

Total 167 164

 Solution:
Concepts used Interest Calculations
exact time and exact simple interest 167
ᵃ = ᵄᵄ 1,000×0.1× = ᵄᵄ 45.90
366
exact time and ordinary simple interest 167
ᵃ = ᵄᵄ 1,000×0.1× = ᵄᵄ 46.39
360
approximate time and exact simple interest 164
ᵃ = ᵄᵄ 1,000×0.1× = ᵄᵄ 44.81
366
approximate time and ordinary simple interest 164
ᵃ = ᵄᵄ 1,000×0.1× = ᵄᵄ 45.56
360
 SIMPLE I N T E R E ST EXAMPLE 7
Sammy invested RM8000 into Amanah Saham Malaysia that offered a simple interest
rate of r % per annum on 13 March 2019. The amount of interest received on 10
August 2019 was RM200. Find the interest rate, r% by using the Banker's Rule.

Solution: Number of Days

Month Exact time
P = RM 8,000 ; I = RM 200 r=r% March 13 31 – 13 = 18
I = Prt April 30
200 = 8000 r (150 / 360 ) May 31
= 8000 r ( 0.4167 ) June 30
= 3333.6 r July 31

r = 200 / 3333.6 August 10 10

Total 150 days
= 0.06 @ 6%
 SIMPLE
AMOUNT
(FUTURE VALUE)
 SIMP L E A MO U N T FORMULA
The simple amount (S) is the total amount received or due at the end of
the term.

S=P+ I or S=P(1+rt)
Simple amount Interest
Interest rate (%)
Principal / present Number of
value term(years)
 SIM P L E A M OU N T EXAMPLE 1

Solution:
 SIMP LE A M O UN T EXAMPLE 2
On 20th February 2016, Encik Basri took a personal loan of RM 6000 from a bank
that charged a simple interest rate of 8%. Find the amount paid on 15th June 2016
using Banker’s Rule.
Number of Days
Solution: Month Exact time
February 20 29 – 20 = 9
P = RM 6,000 ; r = 8% =0.08
March 31
S = P (1+rt)
= RM 6,000 (1+(0.08)( 116 / 360)) April 30

= RM 6,000 (1+(0.08)(0.3222)) May 31

= RM 6,000 ( 1+0.0258) June 15 15

= RM 6154.80 Total 116 days

The amount paid on 15th June 2016 is RM 6154.80.

 THANK
Y O U
NORA BAIZURA BINTI MOHD ISA
0133592385
[email protected]
FSKM, UiTM KEDAH