DPB20053

BUSINESS MATHEMATICS
CHAPTER 4 (PART A)

INTEREST
 LEARNING OUTCOME
4.1 Calculate the simple interest, principal, rate, time, maturity date
and maturity value.

4.2 Solve the concepts of promissory notes.

4.3 Apply of interest based on financial and business practices in

Malaysia. (personal loan & housing loan)

4.4 Calculate the rebate and early payments methods for personal loan
and housing loan.
 DEFINITION

 Interest can be defined in two ways.

Definition 1
Interest is the money earned when money is invested
For example, you deposited RM1000 in a bank for a year and you find that at
the end of the year, you have RM1050 in your account. The additional amount
of RM50 is the interest earned when you invested RM1000
Definition 2
Interest is the charge incurred when a loan or credit is obtained
For example, you borrowed RM1000 from the same bank for a year and you
paid back RM1080 at the end of that year. The additional amount of RM80 is
the charge or interest you need to pay when you borrow RM1000
 SIMPLE INTEREST

 Simple interest is the interest calculated on the original principal for

the entire period it is borrowed or invested. It is the product of the
principal multiplied by the rate and time. This may be stated as the
formula below.
 I = Prt
 Where I = simple interest
P = principal
r = rate of simple interest
t = time
 SIMPLE AMOUNT FORMULA

 The simple amount, S is the sum of the original principal and the
interest earned. The simple amount formula is given as:
S = Original principal + Interest earned
S = P + Prt
@
S = P(1 + rt)
 EXAMPLE SIMPLE INTEREST & SIMPLE
AMOUNT FORMULA
Zahirah saves RM4000 for 3 years in his savings account. She is earning a
simple interest of 3% per annum. Find the simple interest (i) and simple
amount earned by her.
P = 4000 , r = 3% , t = 3 years
I = Prt
= 4000 x 0.03 x 3
= RM360
S = P (1 + rt) S = P + Prt
= 4000 (1 + (0.03x3)) = 4000 + 360
= 4000 (1.09) = RM4360
= RM4360
 EXAMPLE QUESTION

Question 1
 Zarra deposited RM6000 in a bank and obtained RM120 simple
interest after three months. Find the simple interest rate offered.

Question 2
 Amsyar borrows RM7000 for 100 days at 9% per annum simple
interest. What is the simple amount at the end of 100 days? How
much is the interest charged?
 EXAMPLE QUESTION
Question 1
 Zarra deposited RM6000 in a bank and obtained RM120 simple
interest after three months. Find the simple interest rate offered.

P = 6000, I = 120 , r = ? , t = 3 months

I = Prt
120 = 6000 x r x 3/12
120 = 6000 x r x 0.25
120 = 1500r
r = 120/1500
= 0.08@8%
 EXAMPLE QUESTION

Question 2
 Amsyar borrows RM7000 for 100 days at 9% per annum simple interest.
What is the simple amount at the end of 100 days? How much is the interest
charged?

P = 7000, t = 100days, r = 9%
I = 7000 x 0.09 x 100/360
= RM175
S = P (1 + rt)
= 7000 ( 1+ (0.09 x 100/360))
= 7000(1.025)
= RM7175
 FOUR BASIC CONCEPTS
 When the period/time of an investment is given in terms of two dates,
the period may be calculated using the following concept:
1. Exact time
 It is the exact number of days between two given dates.

2. Approximate time
 It assumes a month has 30 days in the calculation of number of days
between two given dates.
3. Ordinary simple interest
 In calculating ordinary simple interest we use 360 day per year

4. Exact simple interest

 This uses a 365 or 366 day per year in interest computation
 EXAMPLE QUESTION
Question 1
 Find the exact time and approximate time from 15 March to 29
August of the same year.
Number of Days
Month Exact time Approximate time
March 16 15
April 30 30
May 31 30
June 30 30
July 31 30
August 29 29
Total 167 164
 EXAMPLE
 RM1,000 was invested on 15 March 2013. If the simple interest rate offered was 10% per annum, find
the interest received on 29 august 2013 using
a) exact time and exact simple interest
b) exact time and ordinary simple interest
c) approximate time and exact simple interest
d) approximate time and ordinary simple interest

Concepts Used Interest calculations

a) exact time and exact simple interest I = 1000x 0.1 x 167 = RM45.75
365
b) exact time and ordinary simple interest I = 1000x 0.1 x 167 = RM46.39
360

c) approximate time and exact simple interest I = 1000x 0.1 x 164 = RM44.93
365

d) approximate time and ordinary simple interest I = 1000x 0.1 x 164 = RM45.56
360
 PRESENT VALUE

 The present value is the value in today’s money sum of money to be

received in the future . Hence, from the formula,
S = P(1 + rt)
P is the present value, that is

Present Value, P = S
(1+ rt)
@
P = S (1+ rt)⁻ ¹
 EXAMPLE QUESTION
 Find the present value at 8% simple interest of a debt worth
RM3,000 due in ten months
S = P(1 + rt)
Present Value, P = S
(1+ rt)
@
P = S (1+ rt)⁻ ¹
Solution
P = 3000 1 + (0.08 x 10 ) ̄ ¹
12
= RM2812.50
 PROMISSORY NOTE AND BANK DISCOUNT

 A promissory note is a written promise made by one person or party to

repay a loan or debt on a specified future date to another person or party.
 Promissory notes are negotiable documents and can be of two types,
interest bearing notes and non-interest bearing notes.
 For an interest bearing note, the rate of interest is stated on the note and is
usually a simple interest rate.
 PROMISSORY NOTE AND BANK DISCOUNT
 The main features of a promissory note are as follows.

Maker
 The maker (promisor or obligor) is the person who signs the note.

Payee
 The payee (promise or oblige) is the person to whom the payment is to be made

Date of the note

 The date of the note is the date on which the note is made

Term of the note

 The term of the note is the length of period till the note is due for payment

Face value
 The face value of the note is the amount stated on the note

Maturity value
 The maturity value of the note is the total sum of money which the payee will receive on the maturity
date. The maturity value of a non-interest bearing note is the face value while the maturity value of an
interest-bearing note is the face value plus any interest that is due.

Maturity Value = Face Value + Interest Due (Prt)

Maturity date
 The maturity date of the note is the date on which the maturity value is due.
 PROMISSORY NOTE AND BANK DISCOUNT

 An example of a promissory note is shown below:

RM2500.00 20 April 2013

Sixty days after date I promise to pay the order of Alesya Ringgit
Malaysia: Two thousand five hundred only for value received with
interest at the rate of 8.00% per annum until paid.

No. 1234 Date: 19 June 2013

Harisya

In the promissory note above

a. Who is the maker of the note - Harisya

b. Who is the payee of the note - Alesya

c. Calculate the maturity value of the note

Maturity value = Face value + Interest due

= 2500 + ( 2500 x 0.08 x 60/360)

= 2500 + 33.33 = RM2533.33

 EXAMPLE QUESTION

Question 1
 The interest on a 90- day promissory note is RM46. If the interest rate
is 7 % per annum, find the face value(principal) of the note
I = 46 I = Prt
P=? 46 = P x 0.07 x 90/360
r = 7% 46 = 0.0175P
t = 90 days P = 46/0.0175 = RM2628.57
 EXAMPLE QUESTION

Question 2
 The maturity value of a 60-day interest bearing promissory note is
RM2020. If the interest rate is 6% per annum. What is the face value of
the note?
Maturity value = 2020, t = 60 days, r = 6%
Maturity value = face value + interest due
2020 = FV + ( P x 0.06 x 60/360)
2020 = P + 0.01P
2020 = 1.01P
P = 2020/1.01 = RM2000
 BANK DISCOUNT

 It is common for lenders such as banks and financial institutions to deduct the interest
charge in advance for short-term loans
 This charge is called bank discount or interest in advance
 The net amount received by the borrower is called the proceeds
 For example, assume a person wants to borrow RM1000 for a year from a lender who
charges a 12% discount rate
 The lender will take RM1000 X 12% X 1 = RM120 as interest in advance and the man
will receive RM880 as proceeds = 1000 -120 = 880
 It must be noted that the man who borrows RM1000 will have to pay RM1000 at the
end of the year
 It is different if the lender charges a 12% simple interest rate
 In such a case, the man who borrows RM1000 will receive RM1000 but has to payback
more than RM1000 at the end of one year
 Bank discount is computed in much the same way as simple interest except that it is
based on the final amount (to be paid back) or maturity value
 BANK DISCOUNT
 Formula
D = Sdt
Where
D = bank discount
S = amount of maturity date
d = discount rate
t = term of discount in years
 The proceeds, P are computed as follows
Bank proceed = maturity value – bank discount
P@R=S–D
P @ R = S – Sdt
@
R = S(1 - dt)
 EXAMPLE QUESTION

Question 1
 Elmira borrows RM8000 for three months from a lender who charges a
discount rate of 10%. Find a. The discount b. The proceeds
S = 8000, t = 3 months, d = 10%
D = Sdt
= 8000 x 0.1 x 3/12
= RM200

R = S (1 - dt) R = S-D
= 8000 (1 - (0.1 x3/12)) = 8000 - 200
= 8000 (0.975) = RM7800 = RM7800
 LOANS

 There two types of loans:

i. Personal loans
ii. Housing loans

 Methods of calculating interest of these two types of loans are different –

personal loans use the simple interest method while housing loans use yearly-
rest method.

 Loans are usually paid through monthly instalments.

 PERSONAL LOANS

MP = S

I = Prt n
=P+I
where, n (t x12)
I = Interest where,
P = loan amount/balance of loan S = Amount to be paid/maturity
value/instalment price
r = interest rate MP = Monthly Payment
t = period (length of time) I =Pxrxt
n = t x 12

IP = S = CP + I
where,
IP = Instalment Price
CP = Cash Price/Principal/loan amount
I = Interest
 EXAMPLE QUESTION

Question
A computer has a cash price of RM4,500. If Aini intends to pay through
monthly repayment, she required to pay a deposit of 10% of the cash
payment. The balance must be paid equal monthly payments with fixed
interest rate of 8% for 2 years. Calculate:
a) Total interest charged
b) Instalment price
c) Monthly payment
 EXAMPLE QUESTION
Question
A computer has a cash price of RM4,500. If aini intends to pay through monthly
repayment, she required to pay a deposit of 10% of the cash payment. The balance must be
paid equal monthly payments with fixed interest rate of 8% for 2 years. Calculate:
a) Total interest charged
Principal/loan amount = 4500 x 10% = 450
= 4500 – 450 = 4050
I = Prt
= 4050 x 0.08 x 2
= RM648
b) Instalment price
IP = CP + I
= 4050 + 648 = RM = 4698
 EXAMPLE QUESTION

Question
A computer has a cash price of RM4,500. If aini intends to pay through monthly
repayment, she required to pay a deposit of 10% of the cash payment. The
balance must be paid equal monthly payments with fixed interest rate of 8% for
2 years. Calculate:
c) Monthly payment
MP = S/n
= (P + I )/n
= 4698/ 24 (2x12)
= RM195.75
 HOUSING LOANS

Total Loan
I = Pr (1 + t) S = P+ I

2
Monthly Instalment
= S
where,
n
P = loan amount
r = interest rate =P+I
t = period (length of time) n
 EXAMPLE QUESTION

Question
Mr Alif wants to buy a detached house at RM110,000. The developers
require 10% as a deposit and suggests that the balance can be borrowed
from a finance company which offers interest at a rate of 7.5% per year
for 20 years. Apart from that, Mr Alif was charged some additional fees
such as legal fees and insurance of RM2,500 and RM1,700
respectively. You are required to calculate:
a) Total interest charged
b) Total loan
c) Monthly payment
Question EXAMPLE QUESTION
Mr Alif wants to buy a detached house at RM110,000. The developers require 10% as a
deposit and suggests that the balance can be borrowed from a finance company which
offers interest at a rate of 7.5% per year for 20 years. Apart from that, Mr Alif was
charged some additional fees such as legal fees and insurance of RM2,500 and RM1,700
respectively. You are required to calculate:
a) Total interest charged
I = Pr + Yr x t
2
@
I = Pr (1 + t)
2
Principal = 110000 x 0.9 = 99,000 = 110000 x 0.1 = 110000 – 11000 = 99000
= 99,000 + 2500 + 1700 = RM103,200
I = 103200(0.075) (1 + 20)
2
= RM81,270
 EXAMPLE QUESTION

Question
Mr Alif wants to buy a detached house at RM110,000. The developers require 10% as a
deposit and suggests that the balance can be borrowed from a finance company which
offers interest at a rate of 7.5% per year for 20 years. Apart from that, Mr Alif was charged
some additional fees such as legal fees and insurance of RM2,500 and RM1,700
respectively. You are required to calculate:
b) Total loan
S=P +I
= 103,200 + 81,270 = RM 184,470
c) Monthly payment
MP = S/n
= 184,470/240
= RM 768.625
 REBATE AND EARLY PAYMENTS

Rebate
R = x I
n

Where, N
I = Total Interest
n = The remaining Number of Instalments
Payable Amount payable = (Number of remaining
N = The actual Number of Instalment Payments Instalments x Monthly payment) - Rebate
(total)
 EXAMPLE QUESTION

Question
Mr Thalleh borrowed RM62,000 from a finance company to buy a new
car at 2.4% per annum for 9 years. He paid RM700 per month and
intends to settle his debts after his 50th instalment. How much should he
pay for an early settlement?
Principal = 62,000
t = 9 years
= 9 x 12 = 108 months (N)
= 108 – 50 = 58 months (n)
r = 2.4%
 EXAMPLE QUESTION
Question
Mr Thalleh borrowed RM62,000 from a finance company to buy a new car at 2.4%
per annum for 9 years. He paid RM700 per month and intends to settle his debts
after his 50th instalment. How much should he pay for an early settlement?
n
= 58
= 1,711

N
= 108
= 5886
 EXAMPLE QUESTION
Question
Mr Thalleh borrowed RM62,000 from a finance company to buy a new car at 2.4% per annum for
9 years. He paid RM700 per month and intends to settle his debts after his 50 th instalment. How
much should he pay for an early settlement?

R = x I
∑N
I = Prt
= 62000 x 0.024 x 9 = 13,392
R = x I
∑N

= 1711 x 13392
5886
= RM3892.91

Amount to be paid = Balance of loans – Rebates

= (Number of remaining Installments x Monthly payments) – Rebate
= (58 x 700) – 3892.91
= 40,600 – 3892.91
= RM36,707.09 (amount payable)
 EXERCISE QUESTION

Question 1
Natasha invests RM3600 at 4.5% per annum simple interest in a bank.
Find the amount in the account after nine months.
S=P+I
Question 2
Melissa deposited RM4000 (P) in a bank and obtained a simple interest of RM300 (I) after
three years (t). What was the simple interest rate offered? (R)How much interest could she
earn if she deposited RM15000 in the same bank for eight months? I = RM250
I =Prt
300 = 4000 x r x 3
300 = 12000r
r = 300/12000
= 0.025 @ 2.5%
 EXERCISE QUESTION

Question 3
Juliana borrows RM5000 for six months from a lender who charges a discount rate of 9%.
Find:
a) the simple discount.
b) the proceeds.
S = 5000 , d = 0.09 t = 6 months
D = Sdt
= 5000 x 0.09 x 6/12
= RM225

R@P = S-D
= 5000 – 225
= RM4775
THANK YOU

Any Questions