INTEREST

• a fee for borrowing money.

• 2 types: simple and compound

– Simple Interest
– interest charged on the entire principal for the entire length of the loan.
– formula:

Interest = Principal × Rate × time

I = PRT
I - interest charged
P - principal / loan amount
R - rate of interest (in decimal or fraction) eg. 12% = 12 100 = 0.12
T - time in years, if in months/week/days - convert to a fraction of a year
3 16
eg. 3 months = , 16 months =
12 12
 Example 1
• A loan of RM 60,000 is made for 1 year 6
months at 6% per year. Find the simple
interest.

P  RM 60,000, R  6%, T  1 year 6 months

I  PRT
 60, 000  0.06  1.5
 RM 5, 400
 Example 2
• Calculate the interest on a loan of RM 25,000
at 6% for two months.

I  PRT
2
=RM 25,000  6% 
12
 RM 250
 Exercises
• 1. P  RM 60,000, R  12%, T  9 months, I  ?
• 2. P  RM 60, 000, R  6.5%, T  1 year 3 months, I  ?
• 3. Johari borrowed RM 5,500 for one year at a rate of 6%. How much interest must
Johari needs to pay?

• 4. Billion Shoping Complex borrowed RM 550,000 for three years at a rate of 9.5%.
Find the interest that will be paid.

• 5. Century shop borrowed RM35,000 for one year at 7.5% rate. Find the interest
that will be paid.

• 6. Calculate the interest on a loan of RM27,000 at 5% for 48 months.

• 7. Calculate the interest that will be paid on a note of RM450,000 at 10% for two
months.
 Maturity Value
• total amount to be repaid to the lender when
the loan is due.
• formula:
Maturity value = Principal + Interest
M PI
M - maturity value
P - principal (amount borrowed)
I - interest
 Example 3
• Find the maturity value of a RM 60,000 note
at 6% for three months.
• First, calculate the Interest.
I  PRT
3
 RM 60,000  0.06   RM 900
12

• Then, calculate the Maturity Value

M  RM 60,000  RM 900
 RM 60,900
 Exercises
• RM 278 at 11% for 6 months. M=?

• RM5,500 at 8% for 9 months. M=?

• RM 800 at 6% for 2.5 years. M=?

• Jaya needs to borrow RM8,200 to upgrade her clinic. She borrows the
funds from her aunty for 25 months at an interest rate of 7.25%. Find
the interest due on the loan and the maturity value at the end of 25
months.

• RM25,000 is invested for 3 years 5 months in a bank earning a simple

interest rate of 10% per annum. Find the maturity value at the end of
the investment period.

• Rohan invests RM8,000 in an investment fund for four years. At the

end of the investment period, his investment will be worth RM10,125.
Find the interest rate.
Determine the numbers of days from one date to another using table.

– it is common for loans to be given in number of days, or a loan may be

due in 90 days or in 120 days or it may be due on February 24.
– to find number of days from one date to another, look at the table to
find the number of days from one date to another by subtracting as
below.

• Example 4
– Find the number of days from .
Feb 2 to Aug 25
Aug 25 is day 237
Feb 2 is day - 33
204days
 Example 5
• Find the number of days from Nov 11 to July 5 of the following year.

Dec 31 is day 365

Nov 11 is day 315
50 days left
Jan1 to July 5  186
236 days

• *note: since Dec 1 is one year and July 5 is in the next year, first find the
number of days left from Dec 1 to the end of the year, then add it to the
number of days from Jan 1 to July 5 of the next year.
 Exercises.
• Find the number of days from:
• 1. June 30 to Nov 3
• 2. April 17 to August 20
• 3. March 24 to July 24
• 4. Oct 13 to May 20 of the following year.
• 5. Sept 22 to April 14 of the following year.
• 6. December 24 to August 6 of the following year.
 Find the due date of a loan.
• Example 6
• Date loan was made: March 12, Term of loan: 220 days, Date loan is
due?
March 12 71 days
+220 days
291 days of the year
• Ans: Oct 18

• Exercises.
1. Date loan was made: Jan 3, Term of loan: 100 days, Date loan is
due?
2. Date loan was made: Nov 10, Term of loan: 180 days, Date loan is
due?
3.Date loan was made: July 14, Term of loan: 90 days, Date loan is
due?
4. Date loan was made: Dec 7, Term of loan: 280 days, Date loan is
due?
 Exact and ordinary interest
– to be used when time period is in days (instead of year or months)
– 2 types: exact interest (uses 365 as the number of days in a year) and
ordinary interest or banker’s interest (uses 360 as the number of days
in a year)
– financial institution usually uses ordinary interest as it produces more
interest
– formulas:

number of days in a loan period

Exact T
365

number of days in a loan period

Ordinary T 
360
 Example 7

• Find the interest earned of RM 61,000 for 150 days

investment made by Reena at 12% interest. Exact
interest? Ordinary interest?
RM 61,000 at 12% for 150 days, E? O?

I E  PRT I O  PRT
150 150
 RM 61,000  0.12   RM 61,000  0.12 
365 360
 RM 3,008.22  RM 3,050
 Exercises
• Ana Maria borrows RM5,000 for 75 days at 8% exact interest. Find how much interest
she must pay on the loan and how much will be due at maturity.

• Malle signs a promissory note for RM3,500 for 150 days at 9 ½% exact interest. Find the
interest he must pay and the total amount due at maturity.

• Use the exact interest method to find the interest on a RM 36,500, 9% note dated April 19
and due September 16.

• Kimi borrowed RM9,600 note at 12% ordinary interest for 180 days. Find the interest and
amount due she will pay when the note is due.

• On May 6, Sarah signed a promissory note for RM4,000 at 9% ordinary interest and is due
in 4 months. Find the interest and amount due that Sarah must pay at maturity.

• Find the maturity value of a RM 30,000 loan at 8% ordinary interest for 60 days.

• Ahmad from Puchong borrows RM 2,000,000 at 9 ¼ % from a bank to expand his business
after his business skyrocketed when one Maharani likes his burger and ordered his burger
everyday for the consumption of the whole workers in her palace. Given that the loan is
for 9 months, find (a) interest and (b) maturity value.
 Promissory note

– loan contract between lender and borrower and

it’s legal.
– Some promissory notes are non-interest-bearing.
The borrower pays back only the amount
borrowed at maturity.
– However, most notes are interest bearing. Next is
an example of an interest-bearing note.
 Example 8
PROMISSORY NOTE

Bangi, Selangor , May 8, 2006

Two years after date, I promise to pay to the order of Masyitah / RM16,500.00
Sixteen thousand five hundred ringgit with interest at 10% per year,payable at
Mybank Parit Buntar, Perak.

Due May 8, 2008 Mastura Tajudin

– maker/payer: Mastura Tajudin
– payee: Masyitah
– face value: principal (amount borrowed) RM 16,500
– term: length of time until the note is due, 2 years
– maturity value: face value + interest

I  PRT M PI
 RM 16,500  0.10  2  RM 16,500  RM 3,300
 RM 3,300  RM 19,800
 Exercise.
PROMISSORY NOTE

Puchong, Selangor, October 27, 2005

Ninety days after date,I promise to pay to the order of Umar Mohammed/ RM750.00
Seven hundred fifty Ringgit with interest at 12% per year payable at CIMB,Kelana Jaya.

Due ­_January 25, 2006_ Asma’Abu Bakar

• Questions: Identify each of the following from the promissory note shown.
1. Maker : ________________________
2. Payer : ______________________
3. Payee : ______________________
4. Face value : ________________________
5. Term of loan : ________________________
6. Date loan was made : ______________________
7. Date loan is due : ______________________
8. Maturity value : ______________________
 Simple Discount Notes
• interest deducted in advance from the face value.
• borrower will receive face value less interest, which is called the proceeds.
• interest charged is called bank discount.
• Formula
B  MDT
B – bank discount
M – face value (maturity value/amount to be
repaid at the end of a loan period)
D – discount rate
T – time in years.

PM B
P - Proceeds (loan amount)
M - face Value/Principal

B - Bank discount
 The differences between simple interest and simple discount notes.

• Example
Two notes exist: One is a 60-day note for RM20,000 discounted at 9%,
and the other is a 60-day note for RM20,000 with a 9% simple interest
rate. Find the following:
1. Interest owed on each note.
2. Amount received by the borrower for each note.
3. Maturity value of each note.

Solution:
Step 1. Interest(discount) owed:
Simple discount note Simple Interest Note
B  MDT I  PRT
60 60
 RM 20,000  9%   RM 20,000  9% 
360 360
 RM 300
 RM 300
Step 2:
Amount received by the borrower for each note:
PM B Pr incipal  Face Value
 RM 20,000  300  RM 20,000
 RM 19,700

Step 3:
Maturity Value of each note:
Maturity value  Face Value M PI
 RM 20,000  RM 20,000  300
 RM 20,300
 Example 9
• Alisa signs a simple discount note with a face value of RM
10,500. The banker discounts the 180 days note at 10 ½ %.
Find the amount of bank discount and the proceeds.

B  MDT PM B
180  RM 10,500  RM 551.25
 RM 10,500  0.105 
360 = RM 9,948.75
 RM 551.25
 Example 10
• On November 3, Mr. Amjal signed a RM2,500 note discounted
at 8% and is due on March 18. Find the Time, Bank discount
and Proceeds of the note.
M  RM 2, 500, D  8%, Date made  Nov 3, Maturity date  March 18, T ? B ? P ?
Maturity date  March 18 B  MDT
Dec 31 365 135
 RM 2,500  0.08   RM 75
Nov 3 307 360
58 days left
Mac 18 77 PM B
135 days = RM 2,500  RM 75
 RM 2, 425
 Exercises.
1. M  RM 45, 000, D  8 14 %, T  200days, B ? P ?
2. An Amway employee borrowed RM5,000 from RHB Bank to purchase a boat. He plans to pay
the loan with end of the year bonus he is to receive in 150 days. If he borrowed the money
at a discount rate of 12%, find the bank discount and proceeds.
3. Jamalia signs a simple discount note with a face value of RM40,000 so that she can purchase a
truck with plow for she snow removal business. The banker discounts the 10-month note at
7%.
4. Louis signs a 6-month simple discount note with a face value of RM4,500, which paid one-half of
the out of her checking account. Find the proceeds to Louis if the discount rate is 10.5%.
5.
6. Find the maturity date and proceeds to the following:
M  RM 35, 750, D  12.5%, Date made = Dec 18, Maturity date  Feb 4, T ? B ? P ?

Face Value Discount Date Made Time (in Maturity Proceeds /

Rate days) Date Loan
amount
RM 5,550 9.5% 21 Mac 20
RM 6,800 12% 5 Oct 100
RM 22,000 10.25% 22 Nov 220
RM 11,500 7% 18 June 300
 Discounting a Note before Maturity
• sell promissory notes to a bank to get cash before the notes mature.
• bank gives the maturity value of the notes minus a fee charged by the bank
for the service
• the fee (interest charged before the number of days the bank will hold each
note before it is due) is called bank discount or discount.
• the process of finding the value for the note as of a specific date before it
matures is called discounting a note.
• proceeds: amount of cash received from the bank.
• Calculate the Proceeds when discounting a Simple Interest Note
• The process:
1. Find the maturity value of the original note, I  PRT , M  P  I
2. Find the discount period
3. Find the discount, B  MDT
4. Find the proceeds, P  M  B
 Example 10
Anis Jaya Holdings received a RM10,200, 7.5%, 165-day promissory note dated
June 15. The note was discounted on Oct 22 at CIMB bank. The bank discount
rate was 11%. Calculate:
1. The maturity value of the simple interest note
2. The discount period
3. The amount of the discount and
4. The proceeds
• Solution:
1. Maturity value 2. The discount period
I  PRT The maturity date of the
note is 165 found as follows.
 RM 10, 200  0.075  Day 166 (June 15) + 165
360
days = day 331 (27 Nov)
 RM 350.63
Nov 27 331
M PI Oct 22 - 295
 RM 10,550.63 Disc period 36 days
3.The amount of the discount 4. The proceeds

B  MDT PM B
36  RM 10,550.63  RM 116.06
 RM 10,550.63  0.11 
360  RM 10,434.57
 RM 116.06
 Exercises
1. On March 27, Aim Finance loans Aidil RM9,200 for 150 days at 11% simple
interest. The finance company sells the note to a private investor on April 24.
Find the proceeds to Aim Finance if the note is sold at a discount rate of 12%.

2. Razi received a RM48,000, 6.5%, 230-day promissory note dated May 12. The
note was discounted on July 20. The discount rate was 12.5%. Calculate the
maturity value, Discount period, the amount of discount and the proceeds.

3. To pay for the construction of a new greenhouse, Ahmad signed a RM78,000

simple interest mote at for 150 days with Union Bank on November 20. On
February 6, Union Bank sold all their notes to National Bank. Calculate the
proceeds to Union Bank given a discount rate of 13.5%.

4. A RM350,000, 5 ¾ %, 180-day promissory note was discounted 50 days after it

was signed and dated at a discount rate of 8%. Calculate the amount of the
discount and the proceeds.

5. Syukri Electric company accepted an RM18,000, 4.5%, 120-day promissory note

dated September 3. The note was discounted on October 13. The discount rate
was 9.2%. Calculate the amount of the discount and the proceeds.