MAT112

TOPIC 2
INTEREST
1.0 INTRODUCTION

1.1 Definition of interest :

- amount of money you earned (saving or investement)
- amount of money you pay or extra money paid ( loan or instalment
purchases)

1.2 Terms involve in interest :

- Interest ( I ): amount of money earned or pay
- Type of Interest (or activity involving interest)
i) Simple Interest : interest calculated based on the original
principal
ii) Compound Interest : interest calculated based on the
frequency or how many times the interest is calculated per
year
iii) Annuity : interest calculated same as compound interest,
except saving and payment regularly or involving periodic
payment
iv) Instalment Purchases : buying things or product by making
instalment payment, interest divided into two i) based on
original value or flat rate ii) reducing balance
v) Bank Discount : deduct the interest from the loan
vi) Promissory Notes : types of loan, interest is calculated base
on Simple interest.

- Rate : the interest charge depend on the method used

i) simple interest rate : r
ii) compound interest : i= k/m
iii) annuity : i = k/m
15 Jan to 28 June iv) bank discount : d
2006 v) instalment - a) based on original b) reducing
method
Exact time :
Jan 31 – 15 : 16 - Time (t) : the length or duration of saving/investment/loan (always in
Feb : 28 year)
Mac : 31 i) given the duration in months : t = number of months / 12
April : 30 ii) given the duration in weeks : t = number of weeks / 52
May : 31 iii) given the duration in days : t = number of day/(360 or 366
June : 28 or 365)
Total days : 164 Rules to change days to year
a) Exact time : Calculate the number of days between two
Approximate time dates using exact number of days in the particular
Jan 30 – 15 : 15 months involve
Feb : 30 b) Approximate time : Calculate the number of days
Mac : 30 between two dates using 30 days in every month
April : 30 c) Ordinary Simple Interest : 360 days per year
May : 30 d) Exact Simple Interest : 365 or 366 days per year (exact)
June : 28 e) Banker’s Rule : exact time / ordinary simple interest
Total days : 163 Or exact time / 360.

- Principal : i) amount of deposit or amount of money that we invest or

save in the bank
ii) amount of loan or amount of money that we borrow from
bank or anyone that charge interest

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 MAT112

iii) the balance or the price of the product that we buy,

by paying monthly or weekly (instalment)

- Accumulated amount : i) amount accumulated at the end of the

period of saving/investment (your money in
the bank)
ii) amount accumulated at the end of the
period of loan (you need to pay the
bank)

- Promissory Notes : is the notes or agreement between the payee (a

person who buy the notes), maker (a person who write the
notes and sell the notes to payee)

2.0 FORMULA/CALCULATION INVOLVE

2.1 SIMPLE INTEREST

- I=Prt

where P = principal , r = rate , t = time (in year)

- S=P + I or S=P(1+rt)

where S = the accumulated amount, P = principal , r = rate , t = time (in

year)

- Examples :

1) Ahmad saved RM3000 in the bank that pays 6% simple interest, for 5
years.

Find the interest earn end of 5 years, and the amount in Ahmad’s account end
of 5 years.

i) P = 3000, r = 0.06, t = 5 : I = P r t

I = 3000 (0.06) (5) = RM 900

ii) S = P + I = 3000 + 900 = RM3900

Or S = P ( 1 + r t ) = 3000 ( 1 + 0.06 (5) ) = RM3900

2) Ahmad borrowed RM3000 in the bank that pays 6% simple interest, for
32 months.

Find the amount of interest charge, and the amount Ahmad needs to pay at
the end of 32 months.

i) P = 3000, r = 0.06, t = 32/12 : I = P r t

I = 3000 (0.06) (32/12) = RM 480

iii) S = P + I = 3000 + 480 = RM3480

Or S = P ( 1 + r t ) = 3000 ( 1 + 0.06 (32/12) ) = RM3480

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 MAT112

2.2 PROMISSORY NOTES

- S=P(1+rt) D = S d td H = S ( 1 – d t ) or H = S
-D
where S = the simple amount, P = principal, r = rate, t = time
D = bank discount, d = discount rate, td = discount period, H = proceed.

- Examples:
Length of
Payee time (period) Date of note Maker (borrower)

1) Ros received a 90-day note on 23 January 2004 from Ali with a face
value of RM3000, at 6% simple interest. Find
Rate
90 days
i) the maturity date
Start 23 Jan 2006
90 – 8 = 82
Jan 31 – 23 : 8 82 – 29 = 53
Feb : 29 53 – 31 = 22
Mac : 31 22 – 22 = 0
April : 22
Total days must be : 90
Thus maturity date is 22 April 2006

ii) the maturity value

Using simple interest formula
S = P(1 + rt)
= 3000 ( 1 + 0.06 (90/360))
= RM3045

2) Ros received a 90-day note on 23 January 2004 from Ali with a face
value of RM3000, at 6% simple interest. On 21 February 2004, Ros
discounted the notes to the bank at 4%.
90 days
i) the maturity date
Start 23 Jan 2006
90 – 8 = 82
Jan 31 – 23 : 8 82 – 29 = 53
Feb : 29 53 – 31 = 22
Mac : 31 22 – 22 = 0
April : 22
Total days must be : 90
Thus maturity date is 22 April 2006

ii) the maturity value

Using simple interest formula
S = P(1 + rt)
= 3000 ( 1 + 0.06 (90/360))
= RM3045

iii) the discount period

Calculate the number of days starting from discount date until maturity
date
Start 21 February 2004
Feb 29 – 21 : 8
Mac : 31
April : 22
Total days : 60
Thus the discount period is 60 days
iv) the discount
Means the discount amount that the bank will charge

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 MAT112

D=Sdt
= 3045 ( 0.04) (60/360)
= RM20.3

v) the proceed
Means the amount received by Ros from the bank

H=S–D or H = S ( 1 – d t )
= 3045 – 20.3 = 3045 ( 1 – (0.04)(60/360))
= RM3024.7 = RM3024.7

3.0 STEPS TO SOLVE QUESTIONS ON SIMPLE INTEREST AND PROMISSORY NOTES

3.1 Steps to solve questions on Simple interest and Promissory notes

1 Identify the type of Examples

) question

How ? a) Ali saved RM2300 in the bank pays 6%

- Stated in the simple interest for 5 years.
question
Only simple interest
involve b) Isa received a 100-day note from
Firdaus at 5%, with face value of RM2500
dated on 31 Mac 2005.
Promissory notes, but using
simple interest formula c) Isa received a 100-day note from
Firdaus at 5%, with face value of RM2500
dated on 31 Mac 2005. He sold the note
to the bank at 4% on 5 May 2005.
Promissory notes, using
simple interest and also
bank discount (involve
proceed)

2 Solving a
)
1) write the formula S = P ( 1 + r t)
involve for simple interest
2) get the information P = 2300, r = 0.06 , t = 5
from the question and
substitute in the formula
3) calculate the missing S = 2300 ( 1 + 0.06 (5))
value or ask by the = RM2990
question

3 Solving b (same as a)
)
1) write the formula S = P ( 1 + r t)
involve for simple interest
2) get the information P = 2500, r = 0.05 , t = 100/360
from the question and
substitute in the formula
3) calculate the missing S = 2500 ( 1 + 0.05 (100/360))
value or ask by the = RM2534.72
question

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 MAT112

4 Solving c (divided into Simple Interest Bank Discount

) two parts) S = P ( 1 + r t) D = S d td
P = 2500 H = S ( 1 – d td )
1) involve simple interest r = 0.05 d = 0.04
like solution above. t = 100/360
2) using bank discount S = RM2534.72
formula (using the value S = 2500 (1 + td = from 31 Mac to
of S from 1) 0.05 (100/360)) maturity date
3) calculate the missing = RM2534.72 - calculate the
value or ask by the number of days from
question 31 Mac to 5 May : 35
days
100 – 35 days = 65
days
td = 65/360

H = 2534.72 ( 1 –
0.04 (65/360))
= RM2516.41

4.0 EXERCISES

a) RM1500 was invested for a certain period. The simple interest rate offered
was 8% per annum. If the value at the end of the period was RM1770,
find the period of investment.

b) On 5th February 2000, Rahim opened an account in a bank by depositing

RM5000. The account offered simple interest at 10.5% per annum. He
closed the account on 14th June 2000. Using Banker’s Rule, find the
amount he obtained. (4 marks)

c) Aliah received 120-day promissory notes with a face value of RM3000 at

6% interest rate. The date of the note is 12 March 1996, and this note is
sold to the bank on 14 May 1996 with the rate of 8%.
i. Find the maturity date;
ii. Find the maturity value;
iii. Find the proceed;
iv. Find the discount rate that is equivalent to the simple interest above.

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