Business Math

Simple Interest

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 OBJECTIVES:

• Find simple interest by using the

simple interest formula.
• Find the maturity of a loan.
• Convert months to a fractional or
decimal part of the year.
• Find the principal, rate or time
using the simple interest formula.
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 Key Terms
• Interest: an amount paid or earned for
the use of money.
• Simple interest: interest earned when a
loan or investment is repaid in a lump sum.
• Principal: the amount of money borrowed
or invested.
• Rate: the percent of the principal paid as
interest per time period.
• Time: the number of days, months or
years that the money is borrowed or
invested. 3

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Simple Interest Formula
 The interest formula shows how
interest, rate, and time are related and
gives us a way of finding one of these
values if the other three values are
known.

I=PxRxT
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the simple interest
using the simple
interest formula

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Identify the principal, rate and time.
P= R x B
 The interest is a percentage.
 Principal is the amount borrowed or
invested.
 Rate of interest is a percent for a
given time period, usually one year.
 Time must be expressed in the same
unit of time as the rate. (i.e. one year)
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the interest paid on a
loan.
 Principal = ₱1,500.
Interest rate = 9% (or 0.09)
Time = 1 year
Interest = P x R x T
Interest = 1,500 x 0.09 x 1
Interest = ₱ 135
The interest on the loan is ₱ 135.
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Try these examples!

loan of ₱4,000 at a 6% rate. ₱ 480

a. Find the interest on a 2-year

year investment of ₱ 5,000 at 4.5%

b. Find the interest earned on a 3-

interest.
₱ 675
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the maturity value of
a loan.
• Maturity value: the total amount of money
due by the end of a loan period; the
amount of the loan and interest.
• If the principal and the interest are
known, add them.
• MV = principal + PRT
• MV = P(1+RT) 9

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 EXAMPLE:
Marcus Logan can purchase furniture on a
2-year simple interest loan at 9% interest per year.

₱2,500 loan?
What is the maturity value for a

MV = P (1 + RT) Substitute known

values.
MV = ₱ 2,500 ( 1 + 0.09 x 2)

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What is the maturity value?
• MV = ₱ 2,500 ( 1 + 0.09 x 2)
• MV = ₱ 2,500 (1 + 0.18)
• MV = ₱ 2,500 (1.18)
• MV = ₱ 2,950

Marcus will pay ₱ 2,950 at the end of

two years.
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Try these examples!
a. Terry Williams is going to borrow ₱ 4,000
at 7.5% interest. What is the maturity value
of the loan after three years?
• ₱ 4,900

b. Jim Sherman will invest ₱ 3,000 at 8% for

5 years. What is the maturity value of the
investment?
• ₱ 4,200 12

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the principal, rate
or time using the simple
interest formula.

13

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the principal using the simple interest
formula.
P = I / RT
1. Judy paid ₱ 108 in interest on a loan
that she had for 6 months. The interest
rate was 12%. How much was the
principal?
Substitute the known values and solve.
P = 108/ 0.12 x 0.5
P = ₱ 1,800 14

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the rate using the simple interest formula.

R = I / PT
2. Sam wants to borrow ₱ 1,500 for 15
months and will have to pay ₱ 225 in
interest. What is the rate he is being
charged?
Substitute the known values and solve.
R = 225/ ₱ 1,500 x 1.25
R = .12 or 12%
The rate Sam will pay is 12%. 15

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the time using the simple interest formula.

T = I / RP
3. Shelby borrowed $10,000 at 8% and paid
$1,600 in interest. What was the length of
the loan?
•Substitute the known values and solve.
T = $1,600/0.08 x $10,000
T=2
The length of the loan was two years.
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 Ordinary and Exact
Time and Interest
 Find ordinary and exact time.

Find the due date.

Find the interest using the ordinary and

exact interest rates.

Find simple interest using a table.

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Ordinary and Exact Time

 Ordinary time: time that is based on

counting 30 days in each month.

 Exact time: time that is based on

counting the exact number of days in a
time period.

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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Examples:

The ordinary time from July 12 to September 12

is 60 days.

To find the exact time from July 12 to

September 12, add the following:
Days in July 31 -12 = 19
Days in August 31
Days in September +12
19
62 days
Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Examples:
A loan made on September 5 is due
July 5 of the following year.

Find: a) ordinary time

b) exact time in a non-leap year
c) exact time in a leap year.
•Ordinary time = 300 days
•Exact time (non-leap year) = 303 days
•Exact time (leap year) = 304 days
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 Find the ordinary interest
per day.
• For ordinary interest rate per day,
divide the annual interest rate by
360.

Ordinary interest rate per day

Interest rate per year
360
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the exact interest per
day.
• For exact interest rate per day,
divide the annual interest rate by
365.

Exact interest rate per day

Interest rate per year
365
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 Use ordinary time to find the ordinary

A loan of ₱500 at 7% annual interest rate.

interest on a loan.

The loan was made on March 15 and due on

May 15.
(Principal = ₱ 500) I = P x R x T
Length of loan (ordinary time) = 60 days
Rate = 0.07/360 (ordinary interest)
Interest = ₱ 500 x 0.07/360 x 60

Interest = ₱ 5.83 23

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the ordinary interest using

A loan of ₱ 500 at 7% annual interest rate.

exact time for the previous loan.

The loan was made on March 15 and due on

May 15.
(Principal = ₱ 500 ) I = P x R x T
Length of loan (exact time) = 61 days
Rate = 0.07/360 (ordinary interest)
Interest = ₱500 x 0.07/360 x 61

Interest = ₱ 5.93 24

Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All
 Find the exact interest using exact time

A loan of ₱500 at 7% annual interest rate.

for the previous loan.

The loan was made on March 15 and due

on May 15.
(Principal = ₱500 ) I = P x R x T
Length of loan (exact time) = 61 days
Rate = 0.07/365 (exact interest)
Interest = ₱500 x 0.07/365 x 61

Interest = ₱5.84
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Cleaves/Hobbs: Business Math, 7e Copyright 2005 by Pearson Education, Inc. Upper Saddle River, NJ 07458 All