Chapter 10 Simple Interest McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Unit Objectives #10 Simple Interest Learning Unit Objectives LU10.1 Calculation of Simple Interest and Maturity Value Calculate simple interest and maturity value for months and years Calculate simple interest and maturity value by (a) exact interest and (b) ordinary interest

Learning Unit Objectives #10 Simple Interest Learning Unit Objectives LU10.2 Finding Unknown in Simple Interest Formula Using the interest formula, calculate the unknown when the other two (principal, rate, or time) are given

Learning Unit Objectives #10 Simple Interest Learning Unit Objectives LU10.3 U.S. Rule -- Making Partial Note Payments before Due Date List the steps to complete the U.S. Rule Complete the proper interest credits under the U.S. Rule

Maturity Value (MV) = Principal (P) + Interest (I) Cost of borrowing money The amount of the loan (Face value)

Simple Interest Formula Simple Interest (I) = Principal (P) x Rate (R) x Time (T) Stated as a Percent Stated in years Ryan borrowed $20,000. The loan was for 6 months at a rate of 9%. What is interest and maturity value? SI = $20,000 x.09 x 6 = $900 12 MV = $20,000 + $900 = $20,900

Two Methods of Calculating Simple Interest and Maturity Value Exact Interest (365 Days) Ordinary Interest (360 Days) Bankers Rule Time = Exact number of days 365 Time = Exact number of days 360

Finding Unknown in Simple Interest Formula - Principal Interest (I) = Principal (P) x Rate (R) x Time (T) Christina Jones paid the bank $44 interest at 11% for 120 days. How much did she borrow? Principal = Interest Rate x Time .11 times 120 divided by 360. Do not round answer $44 . P = .11 x (120/360) = $1,200

Finding Unknown in Simple Interest Formula - Rate Interest (I) = Principal (P) x Rate (R) x Time (T) Christina Jones borrowed $1,200 from the bank. Her interest is $44 for 120 days. What rate of interest did Christina pay? Rate = Interest Principal x Time $44 . R = $1,200 x (120/360) = .11

Finding Unknown in Simple Interest Formula - Time Interest (I) = Principal (P) x Rate (R) x Time (T) Christina Jones borrowed $1,200 from the bank. Her interest is $44 for 11%. How much time does Christina have to repay the loan? Time = Interest Principle x Rate Convert years to days (assume 360 days) $44 . T = $1,200 x .11 = .33 .33 x 360 = 120 days

U.S. Rule - Making Partial Note Payments before Due Date Any partial loan payment first covers any interest that has built up. The remainder of the partial payment reduces the loan principal. Allows the borrower to receive proper interest credits

U.S. Rule - Example Darren owes $3,000 on an 10%, 90 day note. On day 40, Darren pays $1,200 on the note. Assume a 360- day year. What is Darren’s Adjusted balance after day 40? What is the ending balance due? Step 1. Calculate interest on principal from date of loan to date of first principal payment $3,000 x .10 x 40 = $33.33 360 Step 2. Apply partial payment to interest due. Subtract remainder of payment from principal $1,200 - 33.33 = $1,166.67 $3,000 - 1,166.67 = $1,833.33 Step 3. At maturity, calculate interest from last partial payment. Add this interest to adjusted balance. $1,833.33 x .10 x 50 = $25.46 360 $25.46 + $1,833.33 = $1,858.80