UDC2008: BUSINESS MATHEMATICS

CH 2: SIMPLE INTEREST
Prepared by: Mdm Nisa, UMCCed, 2025 1
 Learning Outcomes
By the end of this chapter, you should be able to
✓explain the concept of simple interest
✓explain basic Islamic banking concepts
✓use the simple interest formula to calculate interest, interest rate,
time and dates with data provided
✓use the simple amount formula to calculate the present and future
values of investments
✓identify four concepts of exact simple interest, ordinary simple
interest, exact time and approximate time

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 2.1 Introduction
• The word interest originates from the Latin word intereo, which
means ‘to be lost’.
• The study of interest is very important and fundamental to the
understanding of the economy of a country.

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 2.2 Interest
• Definition 1:
Interest is money earned when money is invested.
• Definition 2:
Interest is charge incurred when a loan or credit is obtained.
• Interest (unless stated otherwise) is usually expressed as per cent per
annum.

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 2.3 Basic concepts of Islamic Banking
• Islamic banking is a non-interest banking. It is based on the principles
of Islamic (or shariah) law.
• In conventional banking, interest is considered as money earned
when money is invested. Interest is also considered as money charged
when a loan or credit is obtained.
• In Islamic banking, money invested is considered participating in
profit sharing. Islamic law prohibits collecting interest or riba.
• While a conventional bank states a simple interest rate as r% per
annum, an Islamic bank states the rate as a profit rate of r% per
annum.
Additional info: [Link]
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 2.4 Simple Interest Formula
• Simple interest is the interest calculated on the original principal for
the entire period it is borrowed or invested.
• Simple interest formula
I = Prt
where, I = simple interest,
P = principal,
r = rate of simple interest, and
t = time or term in years.

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 2.4 Simple Interest Formula (Cont.)
Example 2.1
RM1,000 is invested for two years in a bank, earning a simple interest rate of 8% per
annum. Find the simple interest earned.
Solution
I = Prt
= 1,000 × 0.08 × 2
= RM160

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 2.5 Simple Amount Formula
• The simple amount is the sum of the original principal and the interest
earned.
• The simple amount formula is given as
S = Original principal + Interest earned
S=P+I
0R
S = P + Prt
S = P(1 + rt)
where S = Simple amount
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 2.5 Simple Amount Formula (Cont.)
Example 2.2
RM10,000 is invested for four years nine 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
Here,
P = RM10,000,
r = 10%,
t = 4.75 years
From I = Prt, we get
I = 10,000 ×0.1 × 4.75
= RM4,750
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 2.5 Simple Amount Formula (Cont.)
From S = P + I, we get OR
S = RM10,000 + RM4,750 From S = P (1 + rt), we get
= RM14,750 S = 10,000 (1 + (0.1 × 4.75))
= simple amount = RM14,750
OR = simple amount
From S = P + Prt, we get
S = 10,000 + (10,000 × 0.1 × 4.75)
= RM14,750
= simple amount
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 2.5 Simple Amount Formula (Cont.)
Example 2.3
Raihan invests RM5,000 in an investment fund for three years. At the end of the
investment period, his investment will be worth RM6,125.
Find the simple interest rate that is offered.

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 2.5 Simple Amount Formula (Cont.)
Solution
Here,
P = RM5,000,
I = RM6,125 – RM5,000 = RM1,125,
t = 3 years
From I = Prt, we get
1,125 = RM5,000 × r × 3
r = 7.5%

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 2.5 Simple Amount Formula (Cont.)
Example 2.4
How long does it take a sum of money to triple itself at a simple
interest rate of 5% per annum?

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 2.5 Simple Amount Formula (Cont.)
Solution
Let P = the original principal and t = time taken in years. Hence,
interest earned is 3P – P = 2P.
Then from I = Prt, we get
2P = P × 0.05 × t
2P ÷ 0.05P = t
t = 40 years

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 2.5 Simple Amount Formula (Cont.)
Example 2.5
Twenty-four months ago, a sum of money was invested. Now the investment
is worth RM12,000. If the investment is extended for another twenty-four
months, it will become RM14,000. Find the original principal and the simple
interest rate that was offered.

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Solution
Let original principal = RMP and simple interest rate = r% per annum.

From the figure, we derive the following equations:

S = P + Prt
S = P(1 + rt)

12,000 = P(1 + 2r) …….……..(1)

14,000 = P(1 + 4r) ……………(2)
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Equation (2) ÷ equation (1), we get
14,000 1 + 4r
=
12,000 1 + 2r
14,000(1 + 2r) = 12,000(1 + 4r)
14,000 + 28,000r = 12,000 = 48,000r
14,000 – 12,000 = 48,000r – 28,000r
2,000 = 20,000r
r = 2,000 ÷ 20,000
r = 0.1
r = 10%
Substituting r = 10% into equation (1), we get
12,000 = P[1 + 2(10%)]
P = RM10,000
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 2.6 Present Value
• The present value is the value in today’s money of a sum of
money to be received in the future. Hence, from the formula
S = P(1 + rt)
the present value P is
S
P=
(1 + rt )
P = S(1 + rt)–1

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 2.6 Present Value (Cont.)
Example 2.10
Find the present value at 8% simple interest of a debt RM3,000 due in ten
months.

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 2.6 Present Value (Cont.)
Solution
From P = S(1 + rt)-1, we get
10 -1
P = 3,000(1 + 0.08 ×12 )
P = RM2,812.50
Hence, the present value of the debt is RM2,812.50.

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 2.7 Four Basic Concepts
The term or length of a loan is often given in years, but it can be given in days.

• Exact time is the exact number of days between two given dates.
• Approximate time assumes a month has 30 days in the calculation of number of days
between two given dates.

• Exact simple interest uses a 365/366-day year for interest computation.

• Ordinary simple interest is calculated ordinary using a 360-day year.

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 2.7 Four Basic Concepts (Cont.)
Example 2.7
• Find a) exact time, b) approximate time, from 15 March to 29 August of the same year.
• Solution
Number of Days
Month Exact time Approximate time
March 16 15
April 30 30
May 31 30
June 30 30
July 31 30
August 29 29
Total 167 164
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 2.7 Four Basic Concepts (Cont.)
Example 2.8
RM1,000 is invested on 15 March 2019. If the simple interest rate offered is
ten per cent per annum, find the interest received on 29 August 2019 using
the
a) exact time and exact simple interest
b) exact time and ordinary simple interest.
c) approximate time and exact simple interest.
d) approximate time and ordinary simple interest.

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 2.7 Four Basic Concepts (Cont.)
Solution
By using I = Prt, we get
a) Exact time and exact simple interest
167
I = 1,000 × 0.1 × 365 = RM45.75
(b) Exact time and ordinary simple interest
I = 1,000 × 0.1 × 167 = RM46.39
360
(c) Approximate time and exact simple interest
I = 1,000 × 0.1 × 164
365
= RM44.93
(d) Approximate time and ordinary simple interest
I = 1,000 × 0.1 × 164 = RM45.56
360
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 2.7 Four Basic Concepts (Cont.)
• Method (b) is called the Banker’s Rule. This method is mostly used by banks
in the USA and in international business transactions but not in Malaysia.
• In Malaysia, calculation of interest is governed by a banking rule which
states that the 365-day year must be used.
• Henceforth, we shall use the exact time and 360-day year in the interest
discussions.

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 LIST OF FORMULA FOR TODAY’S LESSON
SIMPLE INTEREST FORMULA
Interest I = Prt
Simple Amount S = Original principal + Interest earned
S=P+I
0R
S = P + Prt
0R
S = P(1 + rt)
Present Value S
P=
(1 + rt )
P = S(1 + rt)–1
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