Simple Interest

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Simple Interest

  1. 1. T- 1-855-694-8886 Email- info@iTutor.com By iTutor.com
  2. 2. What is Simple Interest ?  Interest computed only on the principal not on principal plus interest earned or incurred in the previous period(s).  Simple interest is used commonly in variable rate consumer lending and in mortgage loans where a borrower pays interest only on funds used.  Formula:  Principal amount  Annual interest rate  Number of years Where,  Principle Amount - The amount of money invested or borrowed.  Rate - Is in the annual interest converted to a decimal.  TIME - in years. © iTutor. 2000-2013. All Rights Reserved
  3. 3. Formula  Definition: I = Prt  I = interest earned  P = principal (amount invested)  r = interest rate (as a decimal)  t = time © iTutor. 2000-2013. All Rights Reserved
  4. 4. Interest  Interest: How much is paid for the use of money (as a percent, or an amount) Money is Not Free to Borrow People can always find a use for money, so it costs to borrow money. How Much does it Cost to Borrow Money? Different places charge different amounts at different times! But they usually charge this way: As a percent (per year) of the amount borrowed It is called Interest © iTutor. 2000-2013. All Rights Reserved
  5. 5. Example of Interest  Borrow $2,000 from the Bank  Jordan wants to borrow $2,000. The local bank says "10% Interest". So to borrow the $2,000 for one year will cost: $2,000  10% = $200 In this case the "Interest" is $200, and the "Interest Rate" is 10% (but people often say "10% Interest" without saying "Rate") Jordan will have to pay back the original $2,000 after one year, so this is what happens: Today Bank Jordan $2,000 $2,000 next Year Jordan Bank $2,000 $200 Interest Jordan Borrows $2,000, but has to pay back $1,200
  6. 6. Example Example :Find the interest on a boat loan of $5,000 at 16% for 8 months. Solution: Use I = P  r  t I = 5,000(0.16)(0.6667) (8 months = 8/12 of one year 0.6667 years) I = $533.33 Example :Felisha wants to buy a new computer. She wants to borrow $2,500 for 3 years. She will pay an interest rate of 5%. How much will she owe at the end of the 3 years? Solution: Use I = P  r  t I = 25,00 (0.05) 3 I = $375 The cost of the loan is $375 Making the cost of the computer $2,500 + $375 = $2,875 © iTutor. 2000-2013. All Rights Reserved
  7. 7. Total Amount to Be Paid Back  In general, the future value (amount) is given by the following equation: A = P + Prt = P (1 + rt) Example: What is the annual interest rate earned by a 33-day T-bill with a maturity value of $1,000 that sells for $996.16? Solution: Use the equation A = P (1 + rt) 1,000 = 996.16 33 1 360 r           We normally use 360 days for a financial year 1000 = 996.16(1+r(0.09166)) 1000=996.16+996.16(0.09166)r 1000-996.16 996.16(0.09166) 0.042 4.2% r r       © iTutor. 2000-2013. All Rights Reserved
  8. 8. The End Call us for more Information: www.iTutor.com 1-855-694-8886 Visit
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