Finding Simple Interest
Calculation of Simple Interest and Maturity Value
- The cost of borrowing money from a bank is called interest.
- The bank charges us interest for using its money to buy things such as cars and properties.
- Likewise, when you deposit money in a bank, the bank pays you interest for the privilege of using your money.
- Interest calculated only on principal is called simple interest and
it is computed as a constant percentage of the money borrowed or invested for a specific time.
- By definition simple interest I equals principal (amount borrowed or invested) multiplied by
the interest rate multiplied by the number of years
.
The formula is: I = Prt
Where,
- I = the amount of simple interest,
- P = principal; capital, amount invested, amount borrowed or sometimes called the present value,
- r = annual simple interest rate,
- t = time in years.
- For t: Months or days need to be converted into years.
- Months to years: divide by 12
- Days to years: EXACT INTEREST divide by 365, ORDINARY INTEREST divide by 360 (also called the Banker’s rule.) If not specified in the question, assume ordinary interest.
Maturity Value
Maturity Value is the final amount that must be repaid in the end,
or the final value of the money you deposited in the bank.
Some synonyms often used are future value or total amount due or S.
Maturity Value (MV) = Principal (P) + Interest (I) which is the amount of the loan (face value) + Cost of borrowing money
It is also expressed as below:
- MV = S = P + I
- MV = S = P + Prt
- MV = S = P(1+rt)
- r = (S − P) / (P × t)
- t = (S − P) / (P × r)
Example
Star Appliances borrowed $20,000 to replace office carpets. The loan was for 6 months at an annual interest rate of 4%.
What are Star's interest and maturity value?
Answer: I = $20,000 × 0.04 × 6 / 12 = $400
MV = $20,000 + $400 = &20,400
Example
Star Appliances borrowed $20,000 to replace office carpets.
The loan was for 1 year at a rate of 4%.
What are Star's interest and maturity value?
Answer: I = $20,000 × 0.04 × 1 = $800
MV = $20,000 + $800 = &20,800
Example: How long does it take for AED 120,000 to grow to AED 210,000 at a simple annual interest rate of 7%?
Round your answer to 2 decimals
Answer: t = (S − P) / Pr = (210,000 #8722 120,000)/120,000 × 0.07 = 10.71 years
For more details, please contact me here.
Date of last modification: March 11, 2019