INTEREST RATES
SIMPLE INTEREST
I = (P)(R)(T)
A=P+I
I = total interest earned or paid at the
end of the term
P = the amount of money invested
R = yearly rate of interest
T = time - the term measured years
A = amount of principal and interest
at the end of the term
P = the amount of money invested
I = total interest earned or paid
Example: You invest $10,000 at 4.45% for 72 days.
a) How much interest will you earn in 72 days?
I = (P)(R)(T)
= ($10,000.00)(4.45%)(72/365)
= ($10,000.00)(0.0445)(72/365)
= $87.78
b) How much money is in the bank at the
end of the term (i.e. after 72 days)?
A=P+I
= $10,000.00 + $87.78
= $10,087.78
COMPOUND INTEREST
A = P (1+ i )n
I=A–P
A = amount of principal and interest
at the end of the term
P = the amount of money invested
i = interest rate per compounded period
n = total number of payments over the
term.
I = total interest earned or paid
A = amount of principal and interest
at the end of the term
P = the amount of money invested
Example: You invest $10,000 at 4.45% for six years, compounded annually.
a) How much money is in the bank at the
end of the term? (i.e. after 6 years?)
A = P (1+ i )n
= ($10,000)(1+ 0.0445)6
1
= ($10,000)(1.0445)6
= ($10,000)(1.298526)
= $12,985.26
b) How much total interest will you earn
over the term? (i.e. after 6 years?)
I=A–P
= $12,985.26 - $10,000.00
= $2,985.26
BBI2O1: SIMPLE INTEREST EXERCISES
1. Daniel got a loan for $4,500 from his parents. His loan is for 3 years and he is being charged 5.5%
simple interest.
a) Calculate the interest he would have to pay at the end of three years.
b) What is the total amount of the cheque Daniel would write to his parents at the end of the 3 year
loan?
2. Sam loaned $2,200 to Kelly for 6 months at a rate of 6.75%
a) How much in simple interest would Kelly have to pay back at the end of six months?
b) How much money does Kelly have to repay Sam at the end of the term?
3. Hillary got a three month loan from bank for $8,500. He is being charged 8.9% simple interest.
a) For what amount is the cheque Hillary writes to the bank at the end of three months?
b) How much in interest would he have to pay back at the end of 3 months?
BBI2O1: COMPOUND INTEREST EXERCISES
A. You invest $20,000 at 4.2% for 4 years with compounding done annually.
i) Calculate the amount of money (both principle and interest) in your bank account at the end of the
term.
ii) Calculate the compound interest you earn over the term.
B. If you invest $20,000 at 4.2% for 4 years compounded semi-annually, calculate the total compound
interest you earn.
C. You invest $20,000 at 4.2% for 4 years, compounded quarterly.
i) Calculate the amount of money in your account at the end of the term.
ii) Calculate the compound interest you would earn.
If you are the investor, which is the best option above, and why?
If you are the banker, which is the best option above, and why?
A,
A,
B or C?
B or C?
BBI2O1: INTEREST ASSIGNMENT
___________
36 App
Date: ______________________
Name: _________________________________
1. Mary wanted to buy a new car and was short $12,500. Rather than obtaining a bank loan which
with compounded interest payments, she approached her parents. They agreed to loan her the full
amount for 6 years at 4.5% simple interest.
a. Calculate the interest she would have to pay at the end of six years. [5 marks]
b. Calculate the total amount she owes her parents at the end of the six-year period. [4 marks]
2. You invest $20,000 at 3.8% for 5 years with compounding done quarterly. Calculate
the compound interest you would earn over the 5 year period. [10 marks]
3. Olivia needs to borrow $5,000 for her new business venture. Emma will give her a loan
at 8.3% (simple interest) for three years. Eugene is willing to give her a loan for 7.1%
compounded semi-annually for three years. Which person will give her a cheaper loan?
Calculate and compare. [14 marks]
EMMA’S LOAN
EUGENE’S LOAN*
Which person will give Olivia the cheaper loan? Refer to your calculation above. [3 marks]
COMPOUND INTEREST QUESTIONS
4. If you invest $20,000 at 4.2% for 4 years with compounding done annually, calculate the compound
interest you get.
5.
If you invest $20,000 at 4.2% for 4 years with compounding done semi-annually, calculate the
compound interest you get.
6. If you invest $20,000 at 4.2% for 4 years with compounding done quarterly, calculate the compound
interest you get.
Introduction to Business
Quiz on Simple Interest and Compound Interest
Name:
Marks:
/20
1. Needra needs to borrow $5,000 for his business. Cecilia will give her a loan at 8% (simple
interest) for three years. Eugene is willing to give her a loan for 7.1% compounded semi
annually for three years. Which person will give him a cheaper loan? Calculate and compare.
(7 marks)
2. Marisa just hit the jackpot. She has $25,000 available to invest. She wants to split her money
equally and invest in 2 banks. The Royal Bank is offering 10% (simple interest) per year.
However, TD Canada Trust is offering 8% per year compounded monthly. Which bank will
give her a more interest at the end of the year? Calculate and Compare. (7 marks)
3. Max is borrowing $2,000 from Adrian at 7%. He will have to pay him back in 5 years. How
much in interest will he owe? (3 marks)
4. If Janice puts $8,000 at 6% for 3 years at the Bank of Montreal with a compounding done
semi-annually, calculate the interest she will make. (3 marks)