Simple Interest Part 1 Financial Maths

SIMPLE INTEREST (or flat rate interest) The simple interest formula is given to you on the HSC formula sheet The simple interest formula is given to you on the HSC formula sheet I = Prn where I = the interest P = initial quantity (principal) r = percentage interest rate per period expressed as a decimal n = number of time periods. Example: Find the amount of simple interest incurred when you have borrowed $80 at 9% p.a. for 2 years. What is the total amount to be paid on this loan?

Example: Find the amount of simple interest incurred when you have borrowed $80 at 9% p.a. for 2 years. What is the total amount to be paid on this loan? First identify all the information you have been given: First identify all the information you have been given: P = 80 P = 80 r = 9% = 0.09 r = 9% = 0.09 n=2 n=2 Substitute these values into the simple interest formula: I=Prn Substitute these values into the simple interest formula: I=Prn I = 80 x 0.09 x 2 = 14.4 I = 80 x 0.09 x 2 = 14.4 Therefore the amount of interest incurred on the loan is $14.40 Therefore the amount of interest incurred on the loan is $14.40 Amount to be repaid = Principal + Interest (i.e. A = P + I) Total = = Total amount to be repaid is $94.40

Finding the interest rate In some questions you will need to find the interest rate. In some questions you will need to find the interest rate. To do this you will need to transpose the formula. To do this you will need to transpose the formula. Example:On a loan of $5 000, Ken paid $1 800 interest over 3 years. What is the rate of interest per annum? Again, start by identify all the information you have been given. P = I = n = 3 Substitute these values into the simple interest formula I = Prn = x r x = x r r = ÷ r = 0.12 or 12% (0.12 x 100) The annual rate of interest is 12%

Flat rate loans A flat rate loan is one where flat (or simple) interest is charged on the amount borrowed for the term of the loan. A flat rate loan is one where flat (or simple) interest is charged on the amount borrowed for the term of the loan. This type of loan is usually for smaller items such as a holiday, computer, DVD or a car. The term of the loan is usually between 1 and 5 years and there may be a small charge to cover administration costs. This may be paid in cash up front or included in the amount borrowed. This type of loan is usually for smaller items such as a holiday, computer, DVD or a car. The term of the loan is usually between 1 and 5 years and there may be a small charge to cover administration costs. This may be paid in cash up front or included in the amount borrowed. Remember:If you borrow money, you are required to pay it back plus interest. Remember:If you borrow money, you are required to pay it back plus interest. Amount to be repaid = Amount borrowed + interest Amount to be repaid = Amount borrowed + interest Periodical repayment = Amount to be repaid Periodical repayment = Amount to be repaid No. of periodical repayments No. of periodical repayments

Example: Donna wanted to buy a car stereo for $1500. Her bank offered her a loan at a flat interest rate of 12% p.a. to be repaid in fortnightly instalments over 2 years. The bank charges were stamp duty of $7.50, loan insurance of $8.50 and an establishment fee of $12. If Donna included the bank charges in the amount she borrowed, find: the total amount to repay the total amount to repay Write down the information you have been given Write down the information you have been given P = r= 12% = 0.12 n = 2 P = r= 12% = 0.12 n = 2 no. instalments = 52 no. instalments = 52 charges = = 28 charges = = 28 Total amount borrowed = = 1528 Total amount borrowed = = 1528 Total amount to repay = total amount borrowed + interest Total amount to repay = total amount borrowed + interest I = Prn = x 0.12 x 2 = I = Prn = x 0.12 x 2 = Total amount to repay = = $ Total amount to repay = = $ The fortnightly repayment = ÷ 52 = The fortnightly repayment = ÷ 52 = Fortnightly repayment = $36.44 Fortnightly repayment = $36.44