CHAPTER 2
1.1 The Simple Interest Formula
Find simple interest by using the simple
interest formula.
Find the maturity of a loan.
Convert months to a fractional or decimal
part of the year.
Find the principal, rate or time using the
simple interest formula.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Key Terms
Interest: an amount paid or earned for the use
of money.
Simple interest: interest earned when a loan
or investment is repaid in a lump sum.
Principal: the amount of money borrowed or
invested.
Rate: the percent of the principal paid as
interest per time period.
Time: the number of days, months or years
that the money is borrowed or invested.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
1.1.1 The Simple Interest Formula
The interest formula shows how interest, rate,
and time are related and gives us a way of
finding one of these values if the other three
values are known.
I=PxRxT
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Find the simple interest using
the simple interest formula
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Identify the principal,
rate and time
The interest is a percentage.
Principal is the amount borrowed or invested.
Rate of interest is a percent for a given time
period, usually one year.
Time must be expressed in the same unit of
time as the rate. (i.e. one year)
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Find the interest paid on a loan
Principal = (P) $1,200
Interest rate = 8% (or 0.08)
Time = 1 year
Interest = P x R x T
Interest = 1,200 x 0.08 x 1
Interest = $96
The interest on the loan is $96.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Try these examples
Find the interest on a 2-year loan of $4,000 at
a 6% rate.
$480
Find the interest earned on a 3-year
investment of $5,000 at 4.5% interest.
$675
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
1.1.2 Find the Maturity
Value of a Loan
Maturity value: the total amount of money due
by the end of a loan period; the amount of the
loan and interest.
If the principal and the interest are known, add
them.
MV = principal + PRT
MV = P(1+RT)
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Look at this example
Marcus Logan can purchase furniture on a
2-year simple interest loan at 9% interest
per year.
What is the maturity value for a $2,500
loan?
MV = P (1 + RT) Substitute known values.
MV = $2,500 ( 1 + 0.09 x 2)
(See next slide)
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
What is the maturity value?
MV = $2,500 ( 1 + 0.09 x 2)
MV = $2,500 (1 + 0.18)
MV = $2,500 (1.18)
MV = $2,950
Marcus will pay $2,950 at the end of two
years.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Try these examples
Terry Williams is going to borrow $4,000 at 7.5%
interest. What is the maturity value of the loan
after three years?
Jim Sherman will invest $3,000 at 8% for 5
years. What is the maturity value of the
investment?
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
1.1.3 Convert Months to a
Fractional or Decimal Part of a Year
Write the number of months as the
numerator of a fraction.
Write 12 as the denominator of the fraction.
Reduce the fraction to lowest terms if using the
fractional equivalent.
Divide the numerator by the denominator to get
the decimal equivalent of the fraction.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Convert the following to
fractional or decimal part of a year
Convert 9 months and 15 months, respectively,
to years, expressing both as fractions and
decimals.
9/12 = = 0.75
9 months = or 0.75 of a year
15/12 = 1 3/12 = 1 = 1.25
15 months = 1 or 1.25 of a year.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Look at this example
To save money, Stan Wright invested $2,500
for 42 months at 4 % simple interest. How
much interest did he earn?
42 months = 42/12 = 3.5
I=PxRxT
I = $2,500 x 0.045 x 3.5
I = $393.75
Stan will earn $393.75
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Try these examples
Akiko is saving a little extra money to pay for
her car insurance next year. If she invests
$1,000 for 18 months at 4%, how much interest
can she earn?
Habib is going to borrow $2,000 for 42 months
at 7% . What will the amount of interest owed
be?
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
1.1.4 Find the Principal, Rate or Time
Using the Simple Interest Formula
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Find the principal using
the simple interest formula
P = I / RT
Judy paid $108 in interest on a loan that she
had for 6 months. The interest rate was 12%.
How much was the principal?
Substitute the known values and solve.
P = 108/ 0.12 x 0.5
P = $1,800
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Find the rate using the
simple interest formula
R = I / PT
Sam wants to borrow $1,500 for 15 months and
will have to pay $225 in interest. What is the
rate he is being charged?
Substitute the known values and solve.
R = 225/ $1,500 x 1.25
R = .12 or 12%
The rate Sam will pay is 12%.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved
Find the time using the
simple interest formula
T = I / RP
Shelby borrowed $10,000 at 8% and paid
$1,600 in interest. What was the length of the
loan?
Substitute the known values and solve.
T = $1,600/0.08 x $10,000
T=2
The length of the loan was two years.
Business Math, Eighth Edition 2009 Pearson Education, Inc. Upper Saddle River, NJ
Cleaves/Hobbs 07458 All Rights Reserved