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SIMPLEINTEREST
1.1.
INTRODUCTION
Moneyisalegalinstrumentforexchange.Indailylife,everypersonneedsmoneyto
financehis/herbasicneeds,suchasclothes,food,houses,etc.Whenwedonothave
enoughmoneytobuysomethingortopayourliabilities,wecanborrowthemoney
from other parties, e.g. brothers, friends, neighbors, loan sharks, or financial
institutions(banks,nonbanks,pawnshops,cooperatives,etc).Ontheotherhand,when
wehaveexcessmoneywewilllookforinvestmentalternativesandchoosethemost
profitablealternative.
1.2.
Ifyouarefacingtwooptions,e.g.receivingmoneyofRp.1milliontodayorRp.1
millionsixmonthsfromtodaywiththesamelevelofcertainty,whichoptionwillyou
choose?Obviously,youwillchoosetoreceiveRp.1milliontodayinsteadofreceiving
thatamountsixmonthsfromtoday.Why?
Onemayanswer,Becausethereiscertaintywhenreceivingthatamounttoday;
ontheotherhand,therewillbeuncertaintywhenreceivingthatamountsixmonthfrom
today.Ofcoursethisisnottheexpectedanswer.Toavoidthisanswer,theabove
mentioned option stated that there is the same level of certainty for both options.
Anyone who has learned economics or finance will provide the reason easily, i.e.
because of the interest factor due to time difference or known as time value of
money.
Withtheassumptionthatthehumanbeingisrational,theoptionthatshouldbe
chosenistoreceiveRp.1milliontodaycomparedwithreceivingitsixmonthsfrom
today,becauseRp1milliontodaywillgenerateinterestforsixmonths,dependingon
theinterestrate,henceitsvaluewillbemorethanRp1millionatthattime(future
value approach). We can also use the present value approach, i.e. by calculating
todaysvalueoftheamountRp.1millionwhichwillbereceivedsixmonthsfrom
todayandcompareitwiththeamountRp1milliontoday.bothapproachesshould
suggestthesamedecision.
Thesimpleexampleabovecanbecontinuedwithotheroptions.Forexample,how
ifwecompareRp.1milliontodaywithRp.1.1millionsixmonthsfromtoday;orRp.
1milliontodaywithRp.90000receiveeverymonthforoneyearstartingfromtoday.
Byunderstandingfinancialmathematics,wewillbeabletosolvethosesimple
problem,orevenformorecomplicatedproblems.inthenextdiscussionandexamples
inthisbook,theassumptionsthathumanbeingisrationalandthelevelofcertaintyis
thesame,arealwaysapplicableimplicitly.
Continuingourfirstexample,thevalueofRp.1millionsixmonthsfromtodaycan
bedeterminedifwearegiventheinformationabouttheinterestrateandwhetheritis
simpleinterest(SI)orcompoundinterest(CI).Ifweusecompoundinterest,westill
needinformationregardingthecompoundperiodorinterestcalculationperiod.That
topicwillbecompletelydiscussedinChapter4.
Ifweusethesimpleinterestconcept,theamountofinterestiscalculatedfromthe
principal(P)timestheinterestrate(r)andthetime(t).Thecalculationoftheinterestis
doneonlyonce,i.e.attheendoftheperiodoronthepaymentdate.Mathematically,
thiscanbeexpressedinthefollowingequation:
SI=Prt
(1)
Where:SI=simpleinterest
P=Principal
r=interestratep.a.
t=time
Sincetheunitoftisoneyear,thefollowingequationmustbeusedifthetisinmonths:
t=
number of months
12
Whereas,ifthetisindays,therearetwomethodswhichcanbeusedindetermining
thevalueoft,i.e.
number of days
365
number of days
2. OrdinaryInterestMethodorSIowhere t =
360
1. ExactInterestMethodorSIewhere t =
Theuseofordinaryinterestmethodwillbenefittheinterestrecipientanddetriment
theinterestpayer.Ontheotherhand,theuseofexactinterestmethodwillbenefitthe
interest payer and detriment the interest recipient. Therefore, in terms of loans
(credits),thebanksprefertheordinaryinterestmethod,whileforsavingsanddeposits,
theyprefertheexactinterestmethodincalculatingtheamountofinterest.
Theordinaryinterestisusedinmoneymarket(discussedinChapter3).Inallparts
ofthisbook,exceptmentionedotherwise,theexactinterestisusedintheexamplesand
problemsgiven,andtheinterestrategivenshouldbereadasinterestrateperannum
p.a.
Example1.1
CalculatetheexactinterestandtheordinaryinterestofacreditofRp.20.000.000
borrowedfor60dayswith8%interestrate.
Answer:
P=Rp.20.000.000
r=8%
t=60days
SI=Prt
60
ExactInterest(SIe) =Rp.20.000.000 8%
=Rp.263.013,70
365
Ordinaryinterest(SIo)=Rp.20.000.000 8%
60
=Rp.266.666,67
360
Example1.2
Mr.AmirsaveshismoneyinBankABCofRp.1.000.000forthreemonthswith12%
interestrate.Calculatetheinterestthathewillreceive.
Answer:
p=1.000.000
r=12%
t=3/12=0.25
SI =Prt
=Rp.1.000.000 12% 0.25
=Rp.30.000
Example1.3
CalculatetheinterestpaidfromabondwithanominalvalueofRp.100.000.000and
15%interestrate,iftheinterestpaymentismadeverysixmonths.
Answer:
P=1.000.000
r=15%
6
t=
=0.5
12
SI =Prt
=Rp.100.000.000 15% 0.5
=Rp.7.500.000
Example1.4
AnewlywedcoupleappliesforahousingcreditofRp.100.000.000withtheeffective
interest rate of 15% p.a., the monthly installment is Rp. 2.000.000. For the first
installment,howmuchistheinterestandtheprincipalwhichshouldbepaid?
Answer:
P=Rp.100.000.000
Installment=Rp.2.000.000
r=15%
1
t=
12
SI =Prt
1
=Rp.100.000.000 15%
12
=Rp.1.250.000
Therefore,theprincipalpaymentforthefirstinstallmentisRp.750.000.
1.3.
MANIPULATIONOFTHESIMPLEINTERESTEQUATION
ByusingEquation(1),wecanalsocalculatetheamountofprincipal,interestrate,or
time,iftheothervariablesareknown.IfSI=Prt,thus:
SI
RT
SI
r=
Pt
P=
And t =
(2)
(3)
SI
Pr
(4)
Example1.5
Afterborrowingsomemoneyfor73days,Mrs.TinasettlesthecreditinterestofRp.
2.880.000.HowmuchwastheamountofMrs.Tinascreditifthesimpleinterestrate
is18%p.a.?
Answer:
r=18%
73
t=
365
SI=Rp.2.880.000
SI
P=
RT
Rp.2.880.000
= Rp.80.000.000
73
=
18%
365
Example1.6
AloansharkoffersacreditofRp.1.000.000thatshouldbesettledwithinonemonthof
Rp.1.250.000.Howmuchistheannualsimpleinterestratesetonthatcredit?
Answer:
P=Rp.1.000.000
SI=Rp.1.250.000Rp.1.000.000=Rp.250.000
1
t=
12
SI
r=
Pt
Rp.250.000
=
1
Rp.1.000.000
12
=3or300%p.a.
Example1.7
IfAntodepositsRp.20.000.000inabankthatgivessimpleinterestrateof15%p.a.,
howlongwillittaketoresultinaninterestofRp.1.000.000?
Answer:
P=Rp.20.000.000
SI=Rp.1.000.000
r=15%
SI
t=
Pr
=
Rp.1.000.000
Rp.20.000.000 15%
1
yearor4months
3
IfSisthefinalvalueortotalofprincipalandinterestamount,then:
S=P+I
S=P+Prt
S=P(1+rt)
(5)
IsS,randtgivenandPisthequestion,then:
P=
S
(1 + rt )
P = S (1 + rt )
(6)
Factor (1 + rt ) 1 intheaboveequationisalsoknownasthediscountfactorbyusing
simpleinterest,andtheprocessincalculatingthePiswidelyusedinpromissorynotes,
NonnegotiableCertificatesofDeposits,CertificatesofBankofIndonesia(SBI)and
knownasdiscountedsimpleinterest.
Example1.8
Mr.KartadepositsRp.3.000.000inasavingsaccountpaying12%simpleinterest.
Howmuchisthebalanceofhisaccountafterthreemonths?
Answer:
P=Rp.3.000.000
r=12%
3
t=
= 0.25
12
S=P(1+rt)
=Rp.3.000.000(1+12% 0.25)
=Rp.3.090.000
Example1.9.
AisyahborrowsRp.10.000.000for146daysat15%simpleinterest.Howmuchshould
shepayattheendoftheperiod?
Answer:
P=Rp.10.000.000
r=15%
t=146days
S=P(1+rt)
=Rp.10.000.000(1+15%
146
)=Rp.10.600.000
365
Example1.10.
Anamountofmoneydepositedwith9%simpleinterestwillbecomeRp.5.000.000
aftersixmonths.Whatistheoriginalamount?
Answer:
S=Rp.5.000.000
r=9%
6
t=
= 0.5
12
S
P=
(1 + rt )
Rp.5.000.000
=
(1 + ( 9% 0.5) )
=Rp.4.784.689
1.4.
CALCULATINGTHENUMBEROFDAYS
Therearetwomethodsthatcanbeusedincalculatingthenumberofdaysbetweentwo
calendardates.Thefirstmethodisbycalculatingthetotaldayspermonthandthen
sumupthetotalamount.
Example1.11
Calculatethenumberofdaysbetween11Juneand3November.
Answer:
Thetotalremainingdaysin June =19days(3011)
July =31
August =31
Sept =30
Oct
=31
Nov =3
Total =145days
Example1.12
Calculatethenumberofdaysbetween15Januaryand22June.
Answer:
Thetotalremainingdaysin January
=16days(3115)
February
=28*
March
=31
April
=30
May
=31
June
=22
Total
=158days
*ThenumberofdaysforFebruaryis29daysinaleapyear,i.e.ayearwhichcanbe
dividedby4.
Example1.13
Apromissorynotewithperiodof90daysisissuedon1March2004.Whatisthedue
dateofthatpromissorynote?
Answer:
Thetotalremainingdaysin March =30(311)
April =30
May =30
Total =90
Therefore,theduedateis30May2004.
Table1.1.DaySequenceNumber
Date Jan
Feb
Mar
Apr
Oct
Nov
Dec Date
1
2
3
4
5
1
2
3
4
5
32
33
34
35
36
60
61
62
63
64
91
92
93
94
95
121
122
123
124
125
152
153
154
155
156
182
183
184
185
186
213
214
215
216
217
244
245
246
247
248
274
275
276
277
278
305
306
307
308
309
335
336
337
338
339
1
2
3
4
5
6
7
8
9
10
6
7
8
9
10
37
38
39
40
41
65
66
67
68
69
96
97
98
99
100
126
127
128
129
130
157
158
159
160
161
187
188
189
190
191
218
219
220
221
222
249
250
251
252
253
279
280
281
282
283
310
311
312
313
314
340
341
342
343
344
6
7
8
9
10
11
12
13
14
15
11
12
13
14
15
42
43
44
45
46
70
71
72
73
74
101
102
103
104
105
131
132
133
134
135
162
163
164
165
166
192
193
194
195
196
223
224
225
226
227
254
255
256
257
258
284
285
286
287
288
315
316
317
318
319
345
346
347
348
349
11
12
13
14
15
16
17
18
19
20
16
17
18
19
20
47
48
49
50
51
75
76
77
78
79
106
107
108
109
110
136
137
138
139
140
167
168
169
170
171
197
198
199
200
201
228
229
230
231
232
259
260
261
262
263
289
290
291
292
293
320
321
322
323
324
350
351
352
353
354
16
17
18
19
20
21
22
23
24
25
21
22
23
24
25
52
53
54
55
56
80
81
82
83
84
111
112
113
114
115
141
142
143
144
145
172
173
174
175
176
202
203
204
205
206
233
234
235
236
237
264
265
266
267
268
294
295
296
297
298
325
326
327
328
329
355
356
357
358
359
21
22
23
24
25
26
27
26
27
57
58
85
86
116
117
146
147
177
178
207
208
238
239
269
270
299
300
330
331
360
361
26
27
28
29
30
28
29
30
59
*
87
88
89
118
119
120
148
149
150
179
180
181
209
210
211
240
241
242
271
272
273
301
302
303
332
333
334
362
363
364
28
29
30
31
31
90
151
212
243
304
365
31
*Itisthe60 dayinaleapyear
th
ThesecondmethodisbyusingadaysequencenumbertableasshowninTable1.1.
Foraleapyear,donotforgettoadd1foralldatesfrom1Marchuntil31December
sincealeapyearincludes 29Februaryandhasasequencenumberof60.Thus,1
Marchbecomethe61stday,2Marchisthe62nddayandsoon.Therefore,December31
becomesthe366th.
Example1.14.
Calculatethenumberofdaysbetween11June2004and3November2004.
Answer:
3November2004hasasequencenumberof
307
11June2004hasasequencenumberof
162
145days
Example1.15.
Calculatethenumberofdaysbetween15January2004and22June2004.
Answer:
22June2004hasasequencenumberof
174(173+1)
15January2004hasasequencenumberof
15
159days
*Year2004isaleapyear,therefore,thesequencenumbershouldbeaddedby1.
Example1.17.
Calculatethenumberofdaysbetween15January2005and22June2005.
Answer:
22June2005hasasequencenumberof
173
15January2005hasasequencenumberof
15
158days
1.5.
PAYMENTWITHINSTALLMENT
Example1.17.
AmerchantsellsatelevisionofRp.10.000.000toMr.Abdi.Mr.Abdipaysadown
paymentofRp.2.000.000andpromisestopaytherestoverfivemonthswiththesame
amountofinstallmentattheendofeachmonthandat10%simpleinterest.Calculate
theamountofeachinstallment.
Answer:
P=Rp.8.000.000(Rp.10.000.000Rp.2.000.000)
r=10%=0.1
5
t=
12
S=P(1+rt)
5
= Rp.8.000.0001 + 0.1
12
=Rp.8.333.333,33
Theamountofinstallmentforeachmonthis:
S
Rp.8.333.333,33
=
= Rp.1.666.666,67
5
5
Example1.18.
Mrs.SiskaborrowsRp.70.000.000fromParamitaBank.Shepromisestopaybackthe
loanwithin20monthsbypayingtheinstallmentofRp.3.850.000eachmonth.Whatis
thesimpleinterestrateforthisloan?
Answer:
Totalpayment
=20 Rp.3.850.000 =Rp.77.000.000
Totalcredit
=
=Rp.70.000.000
Totalinterestexpense=
=Rp.7.000.000
P=Rp.70.000.000
SI=Rp.7.000.000
20 5
t=
=
12 3
SI
r=
Pt
Rp.7.000.000
5
=
Rp.70.000.000
3
=6%p.a.
CHAPTER1EXERCISES
1.
Calculatethenumberdaysbetween19Septemberand4October2005.
2.
Calculatetheexactinterest(SIe)andtheordinaryinterest(SIo)ofcreditofRp.
1.400.000for90dayswith7%simpleinterest.
3.
CalculatetheSimpleInterest(SI)foracreditofRp.4.000.000for3yearswith
8%simpleinterest.
4.
HowlongdoyouhavetoleaveRp.1.200.000inanaccountinordertohavean
interestofRp.240.000,ifthesimpleinterestrteis5%p.a.?
5.
HowmuchshouldyouinvesttodaytobecomeRp.30.000.000within5yearsif
thesimpleinterestrateis12%p.a.?
6.
AmerchantoffersacreitofRp.5.000.000whichshouldbesettledwithintwo
monthsofRp.6.500.000.Whatistheannualsimpleinterestrateappliedonthat
credit?
7.
Mr.AditiabuysaSamsonsthreedoorrefrigeratorfromanelectronicstoreat
Rp.14.500.000.HepaysadownpaymentofRp.2.500.000andpromisestopaythe
restoverfivemonthswiththesameamountofinstallmentattheendofeachmonth
andat12%simpleinterest.Calculatetheamountofeachinstallment.
8.
Afterborrowingsomemoneyfor30days,AdipaysbackthecreditofRp.
2.000.000.Iftheinterestrateis9%p.a.andtheamountofRp.2.000.000already
includestheinterest,howmuchistheprincipalandwhatistheinterestrate?
9.
Whenanamountofmoneyisinvestedwiththesimpleinterestrateof8%p.a.,
itwillbecomeRp.90.000.000.Ifthesimpleinterestrateis10%p.a.,themoney
willbecomeRp.105.000.000.
a. Howmuchistheinvestment?
b. Howlongistheinvestmentperiod?
10.
Mrs. Timon has two deposit accounts. The first deposit account is Rp.
7.200.000withthesimpleinterestrateof9%p.a.,andtheseconddepositaccount
isRp.7.800.000withthesimpleinterestrateof7%.Calculatetheaverage
interestratereceivedbyMrs.Timonfrombothdepositaccountsaftersavingthe
moneyforoneyear.
10