Download Simple Interest Mobile Lesson 01-Introduction and Formula Interest

Simple Interest Mobile Lesson 01‐Introduction and Formula Interest is a fee paid by the borrower of money to its owner for its use. Simple interest is a method of calculating interest based on 3 concepts: Principal, Rate and Time. Principal = P = the base amount of money borrowed Rate = R = the interest rate of the loan expressed as an annual percentage Time = T = the length of the loan expressed as a year Sometimes, the principal of a simple interest loan is called the face value. In other words, the face value of the loan is what the interest calculation is based upon. The following formula is used for calculating simple interest: Interest = Principal X Rate X Time Or I = P X R X T Mobile Lesson 02‐Working with Time Simple interest is generally used to calculate loans which are shorter than 1 year in length. Because the interest rate (R) is stated as an annual rate, the time (T) must also be stated in terms of a year (or a portion of a year). Mobile Lesson 03‐ Maturity Value The maturity value (M) is the amount paid back to the owner of the money when the loan is completed. The borrower must pay back both the principal and the interest. The following formula is used to calculate maturity value: Maturity Value = Principal + Interest Or M = P + I Mobile Lesson 04‐Simple Discount Notes Simple discount notes are a different way of setting up simple interest loans. The primary difference between the 2 methods is that, in simple interest loans, the interest calculation is based on the principal (the amount of money exchanged up front). With simple discount notes, the calculation is based on the maturity value (what is paid back at the end). In other words, the face value of a simple discount note is the maturity value. In a simple discount note, the amount of money the borrower pays for the use of money is called Bank Discount rather than Simple Interest. Let’s look at a comparison of simple interest loans and simple discount notes: Simple Interest: Principal + Interest = Maturity Value Simple Discount: Proceeds + Bank Discount = Maturity Value What are the face values in each of these? Simple Interest: Face Value + Interest = Maturity Value Simple Discount: Proceeds + Bank Discount = Face Value Mobile Lesson 05‐The Discount Formula Let’s look at some different terms used in simple discount notes: Bank Discount = B = fee paid by the borrower of money for it use Proceeds = P = the amount of money borrowed Discount Rate = D = the discount rate of the note expressed as an annual percentage Time = T = the length of the note expressed as a year The following formula is used to calculate simple discount: Bank Discount = Maturity Value X Discount Rate X Time Or B = M X D X T Exercise 01 Exercise 02 Exercise 03 Mobile Lesson 06‐Finding Proceeds Because simple discount notes are stated in terms of their maturity value, it is often necessary to calculate proceeds. Given: Maturity Value = Proceeds + Bank Discount Or M = P + B Rearranging this formula for Proceeds, gives us: Proceeds = Maturity Value ‐ Bank Discount Or P = M – B