Finance

Simple
interest
When taking out a loan or
making an investment, simple
interest is always calculated on
the original (principal) amount of
the loan/investment.

The interest (a constant amount)

is added per year. You will see
the abbreviation p.a. which
means per annum, or per year.
Example 1
Marcy invested 𝑅1000 into a savings account which earned interest at a simple interest rate of 5% 𝑝. 𝑎.

2.1) How much money will she have in the account at the end of 3 years?

2.2) How much interest will Marcy have earned over a period of 3 years?
Example 2
Rakeel took out a loan of 𝑅6000.

The interest on the loan is 10% 𝑝. 𝑎. simple interest.

If he took out the loan for 5 years, how much will he have to pay back at the end of 5 years?

*When paying back a loan, you have to pay back the principal amount of the loan AND interest.
Exercise
1. Determine the amount that I will have if I invest R8 000 for 5 years at an interest rate of 11% simple interest per annum.

2. Joanne loans R4 800 from a bank to buy a washing machine. The loan is for 3 years at an interest rate of 16,5% simple
interest per annum.

a) What will the total amount be that she owes the bank?

b) How much interest did she pay?

3. Calculate the simple interest rate if R827,00 interest was earned on an investment of R6 240 for 5 years.

R6240 5 years R7247

R827

6240 x i / 100 x 5 = 7247

i/100 =
Simple interest worksheet
HIRE PURCHASE
If you want to buy an item but you don’t have the full amount in cash, some shops let you take out a
hire purchase agreement.

What this means is that you will:

1.) Possibly pay a deposit (which is usually some % of the SP of the item)

2.) Pay the outstanding balance (amount of money you still owe) WITH interest, via monthly
instalments of the exact same amount over a set period of time

Hire purchase agreements always charge simple interest on the outstanding balance.
Sometimes you need an item but do not have enough money to pay the full amount immediately. One
option is to buy the item on hire purchase (HP). You will have to pay a deposit and sign an agreement
in which you undertake to pay monthly instalments until you have paid the full amount. Therefore:

HP price = deposit + total of instalments

The difference between the HP price and the cash price is the interest that the dealer charges you for
allowing you to pay off the item over a period of time.
You ended up paying 𝑅3888 more than the cash price of the cell phone. It is better to wait till you can
pay the whole amount because you will always end up paying more than the original price. In a hire
purchase agreement, you are considered to be “hiring” the item until your final monthly instalment has
been paid. If you fail to make a payment, it can be repossessed.

EXERCISE FOR HIRE PURCHASE

 When making an investment on which compound interest is
charged, compound interest is always calculated on the current

Compound interest amount of money in the account/investment at the point in time

when interest is earned. We say that compound interest earns
“interest on interest”.
Worked Example 2:

Ethan invests 𝑅2000 into a savings account.

The interest is 8% 𝑝. 𝑎. compounded annually.

12.1) If he invests his money for 3 years, how much will his investment be worth at the end of 3 years?

12.2) How much interest will Ethan have earned over a period of 3 years?
Solving for 𝑷,𝒊 and 𝒏:
Instead of just using the Simple Interest and Compound Interest formulae to work out the value of 𝐴,
we can also rearrange our formulae to solve for 𝑃, 𝑖 in both or for 𝑛 in the simple interest formula. So
we’re going back to equations, but instead of solving for 𝑥, you will be solving for one of the other 3
variables.
Worked Example 3:

A sum of money was invested for a period of 10 years. If the simple interest rate was 7% 𝑝. 𝑎. and the
investment grew to a value of 𝑅8840, determine how much money was invested.

Worked Example 4:

An investment of 𝑅6450 grew to an accumulated amount of 𝑅11094 over a period of 9 years. Calculate the
simple interest rate.

Worked Example 5:

𝑅19000 was put in a savings account where interest was calculated at 5,5% 𝑝. 𝑎. simple interest. After a period
of time, there was 𝑅23180 in the savings account. How long was the 𝑅19000 in the savings account for?
Worked Example 6:

An investment of 𝑅𝑥 grew to 𝑅4014,68 after 5 years. If the interest was 6% 𝑝. 𝑎. compound interest,
determine the value of 𝑥.

Worked Example 7:

11 years ago, a loaf of bread cost 10,15 . If the same loaf of bread costs 𝑅18,50 today, calculate the
average rate of inflation over the last 11 years. (Inflation is a form of compound interest).
Exercise
Question 1: A sum of money was invested for a period of 8 years. If the simple interest rate was 6,4%
𝑝. 𝑎. and the investment grew to a value of 𝑅11340, determine how much money was invested.

Question 2: A sum of money was invested for a period of 5 years. If the compound interest rate was
5% 𝑝. 𝑎. and the investment grew to a value of 𝑅7785,32, determine how much money was invested.

Questions 3: An investment of 𝑅10500 grew to an accumulated amount of 𝑅15918 over a period of 12

years. Calculate the simple interest rate.

Question 4: An investment of 𝑅4000 grew to an accumulated amount of 𝑅6173,20 over a period of 6

years. Calculate the compound interest rate.

Question 5: 𝑅5800 was invested in a savings account and grew to 𝑅12064 after a period of 𝑛 years. If the
interest rate offered was 10,8% 𝑝. 𝑎. simple interest, determine the value of 𝑛.