Chapter 1

Learning Objectives
Understand what is meant by simple interest
Understand the concept of time value of
money
Complete various calculations regarding
simple interest
 Outline
The Concepts of Simple Interest and Time
Value of Money
Manipulation of Simple Interest Equation
Payment with Installment
 Time Value of Money
Which option will you choose?

OR

Receiving Rp 1 million Receiving Rp 1 million

today 6 months from today
The value in the future will be
higher due to interest rate
 Time Value of Money
Which option will you choose?

OR

Receiving Rp 1 million Receiving Rp 1,1 million

today 6 months from today

based on interest rate

 Time Value of Money
The money that we have today will have
different value in the future
The difference of the amount depends on
interest rate and the duration of period

FV PV (1 r ) n

FV : future value r : interest rate

PV : present value n : period
 Simple Interest
Simple interest is calculated as :
SI P r t
SI : simple interest
P : principal
r : interest rate per year
t : time (year)

The calculation of the interest is done only once (at

the end of the period of the payment date).
 Simple Interest
The unit of t is in year, so :
number of months
If it is known in month: t
12

If it is known in days :
number of days
a) Exact Interest Method (SIe) : t
365

number of days
b) Ordinary Interest Method (SIo) : t
360
Simple Interest Equation Manipulation
SI
P
rt

SI P r t
SI
r
Pt

SI
t
Pr
Simple Interest : Final Value (S)
The final value is calculated as :
S P SI

After substituting SI = Prt to that formula, we

can find that :
S P(1 rt )
 Calculating Total Days
Total number of days can be calculated by
calculating the total days per month then sum up
the total amount.

Ex. : Calculate the number of days between June

11th and September 3th!
June = 19 days (30 11)
July = 31 days
August = 31 days
September = 3 days
Total = 84 days
 Payment with Installment
Payment in installment is offered by creditors
(merchants or financial institutions) in order to help
customers who do not have enough money to pay
the goods.
Pay the down payment at
the beginning

Pay the rest in installment

based on agreed interest
House bought rate and period of time