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Section 3.1 (Simple Interest)

INTRODUCTION
q Making wise decisions about financial matters now and in the future improves your
chances for success in life!
o How do you compare student loans to make the best choice?
o Is dealer financing a better option than taking the rebate on a new car
purchase?
o How do you know when refinancing a home mortgage is the best option?
q This chapter is a study of the mathematics of compound and simple interest.
q Understanding the basics of the mathematics of finance can equip you with analytical
tools that can help you make wise financial decisions.
q To use these tools, you will need a calculator that includes exponential and
logarithmic processes, preferably a graphing calculator. (FREE APP: Calculate 84)
q Throughout this chapter, interest rates are to be converted to decimal form before
they are used in a formula!!!

REMINDERS:
à Write the percent as a decimal.
(Move the decimal 2 places to the left and remove the percent sign)

q 5.7%

q 8.25%
we
8,251 1.08257
à Write the decimal as a percent.
(Move the decimal 2 places to the right and add the percent sign)

04970
q .0049
w
q .741
w 74.10
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Simple Interest
Notes:
q Simple interest is used for short-term debt (usually less than one year.)
q The concept of simple interest forms the basis for the material in this chapter.
q When money is deposited into a savings account or borrowed from a lender, the

Principal and is often

amount deposited or borrowed is called the _______________
symbolized with the letter P.
q When money is deposited into a savings account the savings institution is the
AMEXSavings
Ally
borrower and they pay a fee to the depositor for the use of the money.
q When money is borrowed from a lending institution, the borrower pays a fee to the
lending institution for the use of the money.

Interest
q The fee charged for the use of money is called ________________.
q Interest is rent paid for the use of money.
q Interest is usually computed as a percentage (the interest rate) of the principal over a
given period of time.
q Unless otherwise stated, the interest rate is an annual rate.

Definition Simple Interest

I = Prt
where I = interest
P = principal
r = annual simple interest rate (in decimal form)
t = time in years

Example:

R 1800 I Prt
2
rid 08 I 180031.08
2 1200
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Example:
Compute the interest on a loan of $500 at 8% for 6 months.

P 500 E Prt
08 I 5007C 08 Y2
F 81
t 6 months
toconverttoyrs
IAIN
TIM
Example:
Compute the interest on a loan of $100 at 12% for 9 months.

I Prt
D 100
I 400C I C 75
2
F.ly o

19z 4t 15I MI

A = amount or future value

P=
principal or present value
r=
annualsimple interest rate written as a decimal
t=
time in years
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Example: “Total Amount Due on a Loan”
Find the total amount due on a loan of $800 at 9% simple interest at the end of 4 months

A A PCItrt
A 80011 1.09 43
p800 As 80061.03
F917.09 A 820
EYE's

Example: “Present Value of an Investment”

If you want to earn an annual rate of 10% on your investments, how much (to the nearest
cent) should you pay for a note that will be worth $5,000 in 9 months?

A 55000 A PC rt
D

jkjfjrsa.us
r 1,070 010

t as
I
4651.162 P
Simple Interest and Investments

q Simple interest on short-term notes often has the time period given in days rather than
a
months or years.
q Depending on the specifics of the problem, at times the number of days is divided
by 360 to convert the number of days to years. This is called a banker’s year.
q At other times, the number of days is divided by 365 to convert to years. The choice
will always be clearly stated in the problem.
q Calculations where the time period is not given in days are not affected.
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Example: “Interest Rate Earned on a Note”

Treasury bills (T-bills) are used by the U.S. Treasury Department to finance the public debt.
Suppose a 180-day T-bill with a maturity value of $10,000 is purchased for $9,893.78. What
annual simple interest rate is earned on this T-bill? (Answer as a percentage rounded to three
decimal places.)
A PLI
Todays
rt
A 10,000
10,000 9893.7811 1 3
8 9893.78 10,000 9893 7877.5 r
r 10,000 9893.78 4946.89 r
9893.78 9893.7
1 48601 5
1
9,44

worth
percent t.GL FgI
Example: “Interest Rate Earned on an Investment”

74.253
I PI
159336717120
1 69
F
69
7 21days
560
92 25 2 25 7
120
T P 1593
14253
74.253702h