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Simple Interest Part 1

Simple Interest Part 1. Financial Maths HSC – General Mathematics. The simple interest formula is given to you on the HSC formula sheet. I = Prn where I = the interest P = initial quantity (principal) r = percentage interest rate per period expressed as a decimal

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Simple Interest Part 1

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  1. Simple InterestPart 1 Financial Maths HSC – General Mathematics

  2. The simple interest formula is given to you on the HSC formula sheet I = Prn where I = the interest P = initial quantity (principal) r = percentage interest rate per period expressed as a decimal n = number of time periods. SIMPLE INTEREST (or flat rate interest) Example: Find the amount of simple interest incurred when you have borrowed $80 at 9% p.a. for 2 years. What is the total amount to be paid on this loan?

  3. First identify all the information you have been given: P = 80 r = 9% = 0.09 n=2 Substitute these values into the simple interest formula: I=Prn I = 80 x 0.09 x 2 = 14.4 Therefore the amount of interest incurred on the loan is $14.40 Amount to be repaid = Principal + Interest (i.e. A = P + I) Total = 80 + 14.40 = 94.40 Total amount to be repaid is $94.40 Example: Find the amount of simple interest incurred when you have borrowed $80 at 9% p.a. for 2 years.What is the total amount to be paid on this loan?

  4. In some questions you will need to find the interest rate. To do this you will need to transpose the formula. Example: On a loan of $5 000, Ken paid $1 800 interest over 3 years. What is the rate of interest per annum? Again, start by identify all the information you have been given. P = 5 000 I = 1 800 n = 3 Substitute these values into the simple interest formula I = Prn 1 800 = 5 000 x r x 3 1 800 = 15 000 x r r = 1 800 ÷ 15 000 r = 0.12 or 12% (0.12 x 100) The annual rate of interest is 12% Finding the interest rate

  5. Flat rate loans • A flat rate loan is one where flat (or simple) interest is charged on the amount borrowed for the term of the loan. • This type of loan is usually for smaller items such as a holiday, computer, DVD or a car. The term of the loan is usually between 1 and 5 years and there may be a small charge to cover administration costs. This may be paid in cash up front or included in the amount borrowed. • Remember: If you borrow money, you are required to pay it back plus interest. • Amount to be repaid = Amount borrowed + interest • Periodical repayment = Amount to be repaid No. of periodical repayments

  6. Example: Donna wanted to buy a car stereo for $1500. Her bank offered her a loan at a flat interest rate of 12% p.a. to be repaid in fortnightly instalments over 2 years. The bank charges were stamp duty of $7.50, loan insurance of $8.50 and an establishment fee of $12. If Donna included the bank charges in the amount she borrowed, find: • the total amount to repay • Write down the information you have been given • P = 1 500 r= 12% = 0.12 n = 2 • no. instalments = 52 • charges = 7.50 + 8.50 + 12 = 28 • Total amount borrowed = 1 500 + 28 = 1528 • Total amount to repay = total amount borrowed + interest • I = Prn = 1 528 x 0.12 x 2 = 366.72 • Total amount to repay = 1 528 + 366.72 = $1 894.72 • The fortnightly repayment = 1 894.72 ÷ 52 = 36.44 • Fortnightly repayment = $36.44

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