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

3. 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

4. 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

5. 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

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

7. 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

8. 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

9. 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 Do not round answer $
P = .11 x (120/360) = $1,200

10. 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 $
R = $1,200 x (120/360) = .11

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) $
T = $1,200 x .11 = .33
.33 x 360 = 120 days

12. 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

13. 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, = $1,166.67
$3, , = $1,833.33
Step 3. At maturity, calculate interest from last partial payment. Add this interest to adjusted balance.
$1, x .10 x 50 = $25.46
360
$ $1, = $1,858.80