MYK – Finance & Accountancy Training Level 3 - ABC

Chapter (1)
Interest
Simple Interest

Interest amount ( I )
p.a
Time period ( T ) = Number of years
eg. T = 5 years,
three year and half = 3.5 years
Six months = 6/12 = 0.5 years
Nine months = 9/12 = 0.75 years
Three months = 3/12 = 0.25 year

I=P*R*T

Interest amount (I) = Principle (P) x interest Rate(R) x Time period (T)
= $ xxx

R = I / (P * T )

Principle (P)

P = I / ( R* T)

= $ xx

Amount after/end the period = Principle + Interest amount

A=P+I
I = A- P
Principle (P) P=A-I

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 MYK – Finance & Accountancy Training Level 3 - ABC

Compound Interest
Number of years
Amount after the period (A) = Principle x ( 1 + Rate)

A=P+I
I = A- P

Question (1)
Calculate the simple interest(I=?) over 5 years (T) , of £ 12,500 (P) is loaned at the rate
of 8 ½ percent (R)per annum. Calculate also the amount owing at the end of the period
(A) =?.
Answer:
Interest amount = 12500 * 8.5% * 5
= £ 5312.5
Amount owing at the end of the period = 12500 + 5312.5 = £ 17812.5

Question (2)
A woman borrowed £ 7,400 (P) for four and a half 4.5 years (T) . The amount owing at
the end of the period was £ 9,731 (A) . What was the rate of simple interest on the loan?

Answer:
Interest amount = 9731 – 7400 = £ 2331
Interest rate = 2331 / (7400 * 4.5 )
= 0.07
=7 % per annum

Question (3)
An investor buys a bill of exchange for £ 95,000 (P) and six months (0.5 years)
later(after) it matures for £ 100,000 (A). Calculate the rate of interest per annum.

Answer:
Interest amount = 100000 – 95000 =£ 5000
Interest rate = 5000 / (95000 * 0.5 )
= 0.1053
= 10.53 % per annum

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Question (4)
An investor tenders £ 198,050 (P) for a £ 200,000 (A)Treasury bill which is to be
redeemed at par after 3 months (0.25 year) . Calculate the rate of simple interest per
annum.

Answer:
Interest amount = 200000 – 198050 =£ 1950
Interest rate = 1950 / (198050 * 0.25 )
= 0.394
= 3.94 % per annum

Notes :

Cash book Bank statement

Cash at bank Dr Cr
Bank overdraft Cr Dr

B kS m ဘ
Date Particular Debit Credit Balance

Withdraw / Saving / xxxx

Charges / Deposit
overdraft

 Interest payable to person = ဘ person ဘ

 payable to earned % saving %

 Credit balance > earned %

 Interest payable by person = person ဘ ဘ

 payable by charged % ဘ

 Debit balance > charged %

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 MYK – Finance & Accountancy Training Level 3 - ABC

Using Product method ,

Balance Dr/Cr No.of days Product

£ £

B
=Balance x No.of days Dr/Cr
-
date

Question (5)
Miss Clarke has a bank account on which simple interest is earned at 3 ¼ percent per
annum on credit balances. Simple interest is charged by the bank at 11 percent per
annum on debit balances. Interest is calculated daily on all balances and paid/earned at
the end of the month.
The bank statement account of August is shown below.

Date Details Debit Credit Balance

£ £ £
1 Aug Balance b/d 1,403.64Cr
2 Aug Cheque 350.00 1053.64 Cr
19 Aug Cheque 1,195.00 141.36 Dr
29 Aug Deposit 2,122.83 1,981.47Cr

The balance at the August, before interest and charges is £ 1,981.47 in credit.

(a) Give your answer to the nearest penny, calculate the interest payable to, or by,
Miss Clarke on 31 August.

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Answer :
Balance Dr/Cr No.of days Product

£ £
1403.64 Cr 1 1403.64 Cr
1053.64 Cr 17 17911.88 Cr
141.36 Dr 10 1413.6 Dr
1981.47 Cr 3 5944.41 Cr

Total Credit = 1403.64+17911.88+5944.41 =£ 25259.93

Total Debit = £ 1413.6
£

Interest payable to Miss Clarke 2.25 Cr

=25259.93 x 3.25% / 365
Interest payable by Miss Clarke 0.43 Dr
= 1413.6 x 11% /365
Interest payable to Miss Clarke = 1.82 Cr

(b) The bank charges £ 20 for a letter to Miss Clarke telling her she is more than £ 100
overdrawn. Calculate the final balance figure.

Answer : £

Balance before interest and charges 1981.47 Cr

Interest payable to Miss Clarke 1.82 Cr
Bank charges 20 Dr
Final balance figure = 1963.29 Cr

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 MYK – Finance & Accountancy Training Level 3 - ABC

Compounded Interest
Eg:
Year 1 10000 x10% = 1000 ( interest )
Year 2 11000 x 10% = 1100 (interest )
Year 3 12100 x 10 % = 1210 (interest)

compounded annually ,
N
Amount after the period = A = P x ( 1 + R% )

N
Principle (P) P = A /( 1 + R% )

Interest rate % R% =( √ – 1 ) X 100

Question (7)
A man invests £ 5,600 at 8 % compound interest per annum. How much is the investment
worth after two years?

2
Amount after two years = 5600 x ( 1 + 8%)
=
£ 6531.84

Question (8)
A couple borrows £ 85,000 at a fixed rate of 4.25 percent compound interest per annum,
to be repaid in full after 25 years. Find the amount of the final repayment.

25
Amount of final payment = 85000 x ( 1 + 4.25% )
=£ 240613.8

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 MYK – Finance & Accountancy Training Level 3 - ABC

Question (9)
An investment account of £ 14,950 attracts 6.25 percent compound interest per annum.
How much will be in the account after 7 years if the interest is compounded annually?
How much of this is interest?

7
Amount after 7 years = 14950 x ( 1 + 6.25% )

= £ 22853.03

Interest = 22853.03 – 14950 = £ 7903.03

How much more interest would have been earned if the interest had been compounded
six-monthly?

compounded annually ,
N
A = P x (1+R)

m m
2N
m A = P x (1+R/2)

2N
m A = P x (1+R)

Compounded six monthly ,

2x7=14
Amount after 7 years = 14950 x ( 1 + 6.25%/2 )
= £ 23000.47
Interest = 23000.47 – 14950 = £ 8050.47

More interest earned = £ 8050.47 - £ 7903.03 =£ 147.44

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Homework:
Question (6)
M Farooq has a bank account on which simple interest is earned at 3¾ percent per
annum on credit balances. Simple interest is charged by the bank at 9 percent per annum
on debit balances.
Interest is calculated daily on all balances and paid /earned at the end of the month.
The bank statement for April is shown below
Date Details Debit Credit Balance
£ £ £

31 March Balance c/d 8,384.51Cr

6 Apr Cheque 3,350.00 5,034.51Cr
19 Apr Cheque 5,100.00 65.49 Dr
27 Apr Deposit 2,530.37 2,464.88Cr

The balance at the end of April, before interest and charges, is £ 2,464.88 in credit. M
Farooq uses the products method to check the interest he receives from the bank.

(a) Complete Table

Balance Credit or Debit Number of Days Product
£

8,384.51 Credit 5 41922.55

5,034.51 ? 13 ?
? Debit ? 523.92
? Credit 4 ?
Total debit = ?
Total credit = ?

(b) Giving your answer to the nearest penny, calculate the interest payable to M Farooq on 30
April.

(c) Calculate the final balance figure.

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 MYK – Finance & Accountancy Training Level 3 - ABC

NO. 6 Answer: (a,b)

Balance Dr/Cr Days Product

£ £
8,384.51 Cr 5 41922.55
5,034.51 Cr 13 65448.63
65.49 Dr 8 523.92
2,464.88 Cr 4 9859.52

Total debit 523.92

Total credit 117230.7
£
Interest payable to M Farooq 12.04 Cr
=117230.7x 3.75% / 365
Interest payable by Miss Clarke 0.13 Dr
= 523.92 x 9% /365
Interest payable to M Farooq = 11.91 Cr

(c) : £

Balance before interest and charges 2,464.88 Cr

Interest payable to M Farooq 11.91 Cr
Final balance figure = 2476.79 Cr

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 MYK – Finance & Accountancy Training Level 3 - ABC

Old Questions:
1. Miss Marshall has a bank account on which simple interest is earned at 1.5% per
annum on credit balances (Cr). The bank charges simple interest at 8% per annum on
debit balances (Dr).
Interest is calculated at the end of each day on the current balance at a daily rate of
interest that is 1/365 of the annual rate, and credited or debited to the account at the
end of the month.
The account for September is shown below.

The balance at the end of September (length 30 days), before interest, is £2,810.78 in
credit.

(a) Calculate the:

(i) opening balance carried forward from 31 August (1)

opening balance carried forward = 2823.28 + 2580 =£ 5403.28

(ii) amount of the deposit made on 26 September. (1)

Amount of deposit = 2810.78 + 176.72 =

(b) Show that the interest earned from the 26 September deposit to the end of
September is £0.58, and provide a more accurate figure. (4)

Amount of interest earned for last 5 days = 2810.78 x 1.5% /365 x 5 days
= 0.57756
= £ 0.578

(c) Calculate the interest charged for the period in September when the account was in
debit. (2)

Amount of interest charged = 176.72 x 8% /365 x 14 days = £ 0.542

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The interest earned for the first 3 days of September is £0.666

(d) Calculate the balance at the end of September (length 30 days) after interest is paid
and charged. (3)

Amount of interest earned 4 Sep to 11 Sep =£ 2823.28 x 1.5% / 365 x 8 days

= £ 0.928
Balance at end of September after interest earned and charged
= £ 2810.78 +£ 0.666 + £ 0.928 – £ 0.542 + £ 0.578
= £ 2812 .41

The bank charges £30 for writing a letter to Miss Marshall (on 1 October) telling her that
she has been overdrawn.

(e) Calculate this charge as a multiple of the interest charged for the period in September
when the account was in debit. (2)

Bank charges as a multiple of the interest charged = 30 / 0.542 =55.35

(Total for April 2015 = 13 marks)

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2. Martin uses the products method to check the interest on his savings account. He
calculates that he is receiving interest at the rate of 0.0096% per day.

Calculate the:

(a) annual rate of simple interest paid to Martin (2)

Annual rate = 0.0096 % x 365

= 3.504 % per annum

(b) interest earned on a balance of £25,000

(i) for 3 days (2)

Interest earned for 3 days = 25000 x 0.0096% x 3 days

= £ 7.2
(ii) for 3 years. (2)

Interest earned for 3 years = 25000 x 3.504% x 3 years

= £ 2628

F m1J 2000 1J 201 , v fM ’ se increased from

£200,000 to £380,000.

(c) Calculate the rate of increase per annum based on simple interest. (3)

Principle = £ 200000 Amount after 15 year = £ 380000

Interest = 380000 – 200000 = £ 180000

Interest rate = 180000 / (200000 x 15 )

= 0.06

= 6 % p.a

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 MYK – Finance & Accountancy Training Level 3 - ABC

Martin believes that the increase is approximately 4.4% per annum based on compound
interest.

(d) Provide a calculation to show if Martin is correct. (3)

15
Amount after 15 year = 200000 x ( 1 +rate )
15
380000 = 20000 x (1 + rate )

Rate = √ -1

= 0.0437 ( accurate figure)

=0.044
=4.4%
Martin is correct

(e) State whether the true rate of compound interest per annum is exactly 4.4%, more
than 4.4%, or less than 4.4%. (1)

True rate is Less than 4.4 %

(Total for Question June 2015= 13 marks)

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Simple int

Annual rate  Daily rate ÷ 365

Monthly rate ÷ 12
Six monthly ÷2
Weekly ÷ 52
rate ÷

Daily rate  Annual rate x 365

Monthly rate x 12
Six monthly x2
Weekly x 52
rate

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 MYK – Finance & Accountancy Training Level 3 - ABC

3. Investor A invests £170,000 in Investment Account B and receives interest,

compounded six-monthly, at a rate of 3% per six months.

(a) Calculate the:

(i) amount in the account after four years (3)

2x4=8
Amount after 4 years = 170000 x ( 1+3%)
= £ 215350.91

(ii) portion of this amount that is interest, expressed as a percentage of the investment(3)

Interest = 215350.91 – 170000 =£ 45350.91

Interest percentage = interest x 100
Investment
= 45350.91 x 100
170000
= 26.67 %

(iii) annual rate of simple interest that would produce the same amount of interest over
this period. (2)

Annual rate = 26.67% / 4 = 6.67% per annum

A bank successfully tenders $484,000 for a $500,000 Treasury bill that runs for six
months and is to be redeemed at par.

(b) Calculate the rate of simple interest per annum received on this investment. (4)

Principle = $ 484000

Amount after six month = $ 500000

Interest amount = 500000 – 484000 = $ 16000

Interest rate = 16000

484000 x 0.5
=0.066
= 6.6%
(Total for Question Nov 2015 = 12 marks)
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 MYK – Finance & Accountancy Training Level 3 - ABC

4. Eugene calculates the interest credited to his bank account for 5 days in May, when the
rate of simple interest was 2.25% per annum (assume 1 year = 365 days).

He calculates that the interest for this period is £2.97

(a) Calculate the balance in the account during this period, based on this figure. (2)

Interest amount = Balance x 2.25% /365 x 5 days

2.97 = Balance x 2.25% / 365 x 5

Balance this period = 2.97 x 365

2.25% x 5
=£ 9636

A more accurate figure for the interest for this period is £2.969439

(b) Calculate the actual balance in the account during this period. (2)

Actual Balance = 2.969439 x 365

2.25% x 5
=£ 9634.1798
= £ 9634.18

Eugene is charged 8.9% per annum simple interest on debit balances.

(c) Calculate the amount of interest charged daily on a debit balance of £550. (2)

Interest charged = 550 x 8.9% /365 = £ 0.1341

(d) Calculate the principle that will earn £41,603.68 interest, when invested at 3.3%
compound interest per annum for four years. (4)

Interest = 41603.68 , Amount after 4 year = 41603.68 + Principle

4
Amount after 4 year = Principle x ( 1+3.3%)
4
41603.68 + Principle = principle x ( 1+3.3%)
4
41603.68 = principle x [ ( 1+3.3%) -1 ]
4
Principle = 41603.68 / [ ( 1+3.3%) -1 ]
= 299999.9987
= £ 300000

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 MYK – Finance & Accountancy Training Level 3 - ABC

(e) Calculate the compound interest rate per annum that will give interest of £1,099.80
after one year on an investment of £56,400. (2)

Amount after one year = 56400 + 1099.80

=£ 57499.8
1
Amount after one year = 56400 x ( 1+ Rate )

57499.8 = 56400 x (1+ Rate )

Rate = 57499.8 / 56400 – 1

Rate = 0.0195

=1.95 %
(Total for Question April 2016= 12 marks)
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Compound interest

Annual rate  Daily rate √

√ Monthly rate √
Six monthly √
Weekly √
 rate root
 compounded 1+

eg: 5% per annum to convert daily rate

1+daily rate = √
1+daily rate = 1.000133681
Daily rate = 0.000133681
=0.013368 %

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Daily rate  Annual rate

Monthly rate

Six monthly
Weekly

rate power

Eg. Daily rate 0.012% to convert annual rate

1 + annual rate =

1 + annual rate = 1.04478

Annual rate = 0.04478

Annual rate = 4.478%

5. A v €19,000 4.6 compound interest per annum.

(a) Calculate the balance in the account after 3 years. (2)

3
Balance after 3 year = 19000 x (1+4.65%)

= € 21775.66

Taking a year as 365 days, Adnan calculates that the annual percentage rate of compound
interest is equivalent to a rate of 0.012% compound interest per day.

(b) Calculate:

(i) a more accurate figure for the rate of compound interest per day (2)

1 + daily rate = √
1 + daily rate = 1.0001245

Daily rate = 1.0001245 -1

= 0.0001245

= 0.01245%

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 MYK – Finance & Accountancy Training Level 3 - ABC

(ii) the annual percentage rate of interest equivalent to a rate of 0.012% compound
interest per day

1 + annual rate =

1 + annual rate = 1.04478

Annual rate = 0.04478

Annual rate = 4.478%

(iii) the inte €19,000 f 300 , f 0.012 compound interest

per day (3)
300
Amount after 300 days = €19,000 x (1+0.012%)
=
€ 19696.4185

Interest = € 19696.4185 - €19,000

= € 696.4185

v €19,000 f 300 , f 0.012 simple interest per

day. (2)

Interest = € 19,000 x 0.012% x 300

= € 684

(Total for Question June 2016 = 11 marks)

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