(Lesson !

)
Mathematics of Investment
Topic 1

Simple Interest

Is the cost of borrowing money, where the borrower pays a fee to the lender of the loan. Simple
interest is based on the principal amount of a loan or deposit. It is paid at the end of the interest
period.

Interest is charged for the use of that money over a certain period of time. The amount of interest charged
depends on the amount of money borrowed, the interest rate and the length of time for which the money is
borrowed.

Simple Interest Formula:

Interest = fee paid for the use of one’s money

Principal = original amount loaned
Maturity value = final amount or total amount the borrower will pay back
Rate = interest rate (r), it is expressed as a decimal number or fraction
Accumulate = is to find F or maturity value
Time = expressed in years but if the time is given in months or days, it can be converted to year using:

1. t = no. of months
12
2. t = no. of days
360

Derived Formula:

 I = Prt simple interest

 P=I principal
rt

 r=I interest rate per period

Pt

 t=I time
Pr

 I= F- P or Interest
 P = F- I or Present Value or P= F
1 + rt

 F=P+I Future Value or F = P(1+rt)