1. Chapter 10
Simple Interest

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

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

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

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

6. Simple Interest Formula
Simple Interest (I) = Principal (P) x Rate (R) x Time (T)
Stated as a
Percent
Stated in years
Jan Carley borrowed $30,000 for office furniture. The loan was for 6 months at an annual interest rate of 8%. What are Jan’s interest and maturity value?
SI = $30,000 x.08 x 6 = $1,200 12
MV = $30,000 + $1,200 = $31,200

7. Simple Interest Formula
Simple Interest (I) = Principal (P) x Rate (R) x Time (T)
Stated as a
Percent
Stated in years
Jan borrowed $30,000. The loan was for 1 year at a rate of 8%. What is interest and maturity value?
SI = $30,000 x.08 x 1 = $2,400
MV = $30,000 + $2,400 = $32,400

8. Two Methods of Calculating Simple Interest and Maturity Value
On March 4, Peg Carry borrowed $40,000 at 8%. Interest and principal are due on July 6.
Method 1 – Exact Interest
Used by Federal Reserve banks
and the federal government
Exact Interest (365 Days)
I = P X R X T
$40,000 x .08 x 124
365
$1,087.12
MV = P + I
$40,000 + $1,087.12
$41,087.12
Exact Interest (365 Days)
Time = Exact number of days
365

9. Two Methods of Calculating Simple Interest and Maturity Value
Method 2 – Ordinary Interest
Bankers Rule
On March 4, Peg Carry borrowed $40,000 at 8%. Interest and principal are due on July 6.
Ordinary Interest (360 Days)
I = P X R X T
$40,000 x .08 x 124
360
$1,102.22
MV = P + I
$40,000 + $
$41,102.22
Ordinary Interest (360 Days)
Bankers Rule
Time = Exact number of days
360

10. Two Methods of Calculating Simple Interest and Maturity Value
On May 4, Dawn Kristal borrowed $15,000 at 8%.
Interest and principal are due on August 10.
Exact Interest (365 Days)
Ordinary Interest (360 Days)
I = P X R X T
$15,000 x .08 x 98
365
$322.19
MV = P + I
$15,000 + $322.19
$15,322.19
I = P X R X T
$15,000 x .08 x 98
360
$326.67
MV = P + I
$15,000 + $326.67
$15,326.67

11. Finding Unknown in Simple Interest Formula - PRINCIPAL
Principal = Interest
Rate x Time
Tim Jarvis paid the bank $19.48 interest at 9.5% for 90 days. How much did Tim
borrow using ordinary interest method? $
P = .095 x (90/360) = $820.21
.095 times 90 divided by Do not round answer
Interest (I) = Principal (P) x Rate (R) x Time (T)
Check: = x .095 x 90/360

12. Finding Unknown in Simple Interest Formula - RATE
Rate = Interest
Principal x Time
Tim Jarvis borrowed $ from a bank. Tim’s interest is $19.48 for 90 days. What rate of interest did Tim pay using ordinary interest method? $
R = $ x (90/360) = 9.5%
Interest (I) = Principal (P) x Rate (R) x Time (T)
Check: = x .095 x 90/360

13. Finding Unknown in Simple Interest Formula - TIME
Time (yrs) = Interest
Principle x Rate $
T = $ x = .25
.25 x 360 = 90 days
Tim Jarvis borrowed $ from a bank. Tim’s interest is $19.48 for 90 days. What rate of interest did Tim pay using ordinary interest method?
Convert years to days (assume 360 days)
Interest (I) = Principal (P) x Rate (R) x Time (T)
Check: = x .095 x 90/360

14. 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

15. U.S. Rule - Example
Joe Mill owes $5,000 on an 11%, 90-day note. On day 50, Joe pays $600 on the note. On day 80, Joe makes an $800 additional payment. Assume a 360-day year. What is Joe’s adjusted balance after day 50 and after day 80? What is the ending balance due?
Step 1. Calculate interest on principal from date of loan to date of first principal payment
$5,000 x .11 x 50 = $76.39
360
Step 2. Apply partial payment to interest due. Subtract remainder of payment from principal
$ = $523.61
$5,000 – = $4,476.39

16. U.S. Rule - Example
Joe Mill owes $5,000 on an 11%, 90-day note. On day 50, Joe pays $600 on the note. On day 80, Joe makes an $800 additional payment. Assume a 360-day year. What is Joe’s adjusted balance after day 50 and after day 80? What is the ending balance due?
$4, x .11 x 30 = $41.03
360
$ = $758.97
$4, – = $
Step 3. Calculate interest on adjusted balance that starts from previous payment date and goes to new payment date. Then apply Step 2.
Step 4. At maturity, calculate interest from last partial payment. Add this interest to adjusted balance.
$3, x .11 x 10 = $11.36
360
$3, $11.36 = $3,728.78