1. QMT 3301 BUSINESS MATHEMATICS
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CHAPTER 7
SIMPLE INTEREST
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2. QMT 3301 BUSINESS MATHEMATICS
7.1 Interest
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“Interest ” comes from the Latin word intereo which means “to be lost”.
When developed into the concept of borrowing money, the lender is likely to lose his money when he pays back the money with interest.
Nowadays, interest is not only paid but gained if we make an investment.
QMT BUSINESS MATHEMATICS

3. 7.2 Simple Interest Formula
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The simple interest amount is calculated by the following formula:
I = Prt
Where:
I = Simple interest
P = Principal / Present value
r = Interest rate (in decimals)
t = Time / Period (in years)
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4. QMT 3301 BUSINESS MATHEMATICS
Example 1:
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RM 1000 is invested for 2 years in a bank, earning
simple interest rate of 8% per annum. Find the
simple interest earned.
Solution:
I = Prt
= 1000 x 0.08 x 2
= RM 160
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Example 2:
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Raihan invests RM 5000 in an investment fund for
three years. At the end of the investment period,
his investment will be worth RM Find the
simple interest rate that is offered.
Solution:
I = RM 6125 – RM 5000 = RM 1125
From I = Prt, we get
1125 = 5000 x r x 3
r = 7.5%
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Example 3:
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How long does it take a sum of money to triple
itself at a simple interest rate of 5% per annum?
Solution:
Let the original principal be RMK and time taken
be t years.
Hence interest earned is RM 3K – RM K = RM 2K
Then from I = Prt, we get
2K = K x 0.05 x t
t = 40 years
QMT BUSINESS MATHEMATICS

7. QMT 3301 BUSINESS MATHEMATICS
7.3 Simple Amount Formula
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Simple amount is the sum of the original principal and the interest earned.
Therefore, the simple amount formula is given as:
S = P(1 + rt)
Where:
S = Maturity value / Future value
P = Principal / Present value
r = Interest rate (in decimals)
t = Term / Period (in years)
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Example :
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RM is invested for 4 years 9 months in a
bank earning a simple interest rate of 10% per
annum. Find the simple amount at the end of the
investment period.
Solution:
From S = P(1 + rt), we get
S = (1 + (0.1 x 4.75))
= RM 14750
QMT BUSINESS MATHEMATICS

9. QMT 3301 BUSINESS MATHEMATICS
7.4 Four Basic Concepts
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There are four different methods for determining terms (t):
Exact time: It is the exact number of days between two given dates.
Approximate time: Time computed on the assumption that each month has 30 days.
Exact interest: Interest calculated based on 365 days a year or 366 days for a leap year.
Ordinary interest: Interest is calculated based on 360 days a year.
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10. QMT 3301 BUSINESS MATHEMATICS
7.5 Present Value
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Present value may be debt or an investment amount that is lent or invested today, and that will be mature in a specific time together with interest.
By transposing the maturity value formula, we have the present value formula as follows:
P = S
(1 + rt) OR
P = S (1 + rt)-1
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Example :
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If Saleh has to pay RM 350 interest for a loan that
charges 7% simple interest per annum for 2 and a
half years, find the amount of loan.
Solution:
From P = S (1 + rt)-1, we get
P = 350(1 + (0.07 x 2.5))-1
P = RM
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12. QMT 3301 BUSINESS MATHEMATICS
7.6 Equation of Value
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Every value of money has an attached date, the date on which it is due.
An equation that states the equivalence of two sets of dated values at a stated date is called an equation of value or equivalence.
The stated date is called the focal date, the comparison date or the valuation date.
To set up and solve an equation of value, the following procedure should be carried out:
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1. Draw a time diagram with all the dated values.
2. Select the focal date.
3. Pull all the dated values to the focal date using the stated interest rate.
4. Set up the equation of value and then solve.
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Example :
A debt of RM 800 due in four months and another
of RM due in nine months are to be settled
by a single payment at the end of six months. Find
the size of this payment using
a) The present as the focal date,
b) The date of settlement as the focal date,
Assuming money is worth 6% per annum simple
interest.
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Solution:
a) Focal date
months
800 X
1000
Let the single payment at the end of 6 months be RM X.
Amount of the RM 800 debt at the focal date
= 800(1 + (0.06 x 4/12))-1 = RM
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Amount of the RM 1000 debt at the focal date
= 1000(1 + (0.06 x 9/12))-1
= RM
Amount of the single payment at the focal date
= X (1 + (0.06 x 6/12))-1
= RM X
Setting up the equation of value, we get
X =
X =
X = RM
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b) Focal date
months
800 X
1000
Amount of the RM 800 debt at the focal date
= 800(1 + (0.06 x 2/12)) = RM 808
Amount of the RM 1000 debt at the focal date
= 1000(1 + (0.06 x 3/12)) = RM
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Let the amount of payment at the end of 6 months
be RM X.
Setting up the equation of value, we get
X = RM RM
= RM
*(It should be noted that the two answers in part a
and b are different when the focal dates are
different)
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