Simple

6 Interest
Up to this point we have used two formulae:

6-1

Formula

I = Prt & Sum = P + I

We can combine them as follows:

Step 1

Sum = Sum =

P+ I P + Prt

Now, we substitute for

with

Step 2

Collecting like terms

Future Value Formula

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Sum = P(1+rt)

Simple

6 Interest

6-2

Sum =
I place $17000 in a 150 day term deposit on Jan. 6 paying 6.5%.
How much will the bank pay me on the maturity date?
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P(1+rt)

150 $17000 1+ .065( 365) S=

S = $17000(1.0267123)
S = $17454.11

Simple

6 Interest
Determine the Maturity Date

6-3

I place $17000 in a 150 day term deposit on Jan. 6 paying 6.5% pa. = 6 days + 150 = 156 days
Day of Month

Look up

Find 156 The Term Deposit will mature on June 5th.

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1 2 3 4 5 6 7

Jan 1 2 3 4 5 6 7

Feb 32 33 34 35 36 37 38

Mar 60 61 62 63 64 65 66

Apr 91 92 93 94 95 96 97

The Serial Number of Each Day of the Year

May 121 122 123 124 125 126 127

Jun 152 153 154 155 156 157 158

TABLE6.2
Jul 182 183 184 185 186 187 188

Aug 213 214 215 216 217 218 219

Sep 244 245 246 247 248 249 250

Oct 274 275 276 277 278 279 280

Nov 305 306 307 308 309 310 311

Dec 335 336 337 338 339 340 341

Simple

6 Interest
I invest $1,000 on Feb. 14th at 6%. The changes in interest rates to July 4th are as follows:

6-4

Date rate Feb 14th 6% April 20th 6.8% May 18th 7.1% How much Interest did I earn up to July 4th ?

Investment $1,000

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Simple

6 Interest

6-5

by finding the number of days between each rate change!

Investment $1,000
Look up for Days

Date Feb 14th April 20th May 18th

July 4th

rate 6% 6.8% 7.1%

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Simple

6 Interest
Table reading Number of Days

6-6

Feb 14th
Look up for Days

April 20th May 18th July 4th

= 45 = 110 = 138 = 185

= 65 Days
= 28 Days = 47 Days

Interest Earned
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Simple

6 Interest
Interest Earned

6-7

Formula
Feb 14th 65 Days April 20th May 18th 28 Days July 4th 47 Days
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I = Prt
= $10.68 = = 5.22 9.14

I1 = 1000 * .06 * 65/365

I2 = 1000 * .068 * 28/365 I3 = 1000 * .071 * 47/365

$25.04

Simple

6 Interest

6-8

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Simple

6 Interest

6-9

How much must I invest in order for it to grow to $5000 within 6 months @ 4.4% simple interest?

What are we being asked to

must I invest to grow
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provide?

How much

this suggests finding the Principal

Simple

6 Interest
How much must I invest in order for it to grow to $5000 within 6 months, @ 4.4% simple interest?

6 - 10

What data do we

need?

data to be able to use the appropriate formula

Formulae
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We need the appropriate

I = Prt & Sum = P(1+rt)

Simple

6 Interest
How much must I invest in order for it to grow to $5000 within 6 months, @ 4.4% simple interest?

6 - 11

Formulae

I = Prt & Sum = P(1+rt)

What data do we

have?

r = 4.4%

t = 6 months = .5

Sum = $5000
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Simple

6 Interest
How much must I invest in order for it to grow to $5000 within 6 months, @ 4.4% simple interest?

6 - 12

Formulae

I = Prt & Sum = P(1+rt)

Sum = P(1+rt) As we know the Sum, the formula now becomes

Using

P = Sum/(1+rt)
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Simple

6 Interest
How much must I invest in order for it to grow to $5000 within 6 months, @ 4.4% simple interest?

6 - 13

Formula

P = Sum/(1+rt)

P =5000/ 1 + 0.044(.5) P = $4892.37

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Simple

6 Interest
LO-2

6 - 14

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Simple

6 Interest
Heather owes Mark $3000 payable on April 27. If money can earn 4%, what amount should Mark accept in settlement of the debt: A) 30 days before the scheduled payment? B) 90 days before the scheduled payment?

6 - 15

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Simple

6 Interest
Step 1

6 - 16

April 27
Present Value

Draw a Timeline

90 days

30 days

$3000

Step 2

P = Sum/(1+rt)

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Simple

6 Interest

6 - 17

P = Sum/(1+rt)
A P = 3000/[1+.04(30/365)]

P = $2990.17
B P = 3000/[1+.04(90/365)]

P = $2970.17
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Simple

6 Interest

6 - 18

You can prepay $1234 tuition for a course or delay payment for 3 months and pay $1432. If you can earn 6% on your money, which option should you choose?

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Simple

6 Interest
$1234 = Present Value = P1

6 - 19

$1432 = Future Value = S2

Which Tip: Find the formula PV of the should future you use? payment!

P = Sum/(1+rt)

P2 = 1432/[1+.06(.25)] P2 = $1410.84 $1234.00

3 months = 1/4

Money saved ($176.84) by paying now!

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Simple

6 Interest

6 - 20

This completes Chapter 6

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