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In this lesson we look at Six Monthly, Quarterly, Monthly, and Daily Simple Interest.
In particular we look at Simple Interest Calculated on Bank Accounts.
It is recommended that you have done our previous Part 1 lesson, (at the link below), before attempting this lesson.
Basic Simple Interest Calculations
Simple Interest Formula
The following is the mathematical formula we use for all Simple Interest calculations:
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When Six Monthly (or “Half Yearly”), Quarterly, Monthly, or Daily Simple Interest are involved we need to use the fractions shown below.
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This is because Time must always be in Years when we use the I = PRT formula.
Example One – Half Yearly Interest
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Tahli borrows $2000 to buy a new TV at 18.5% pa Simple Interest charged 6 monthly, to be paid back over 2 years.
In this example Interest is calculated twice a year, or every six months.
This means the first thing we have to do is calculate how many dollars there are in one lot of six monthly interest.
The calculation is as shown below.
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Now that we know what the Interest is every 6 months, all we need to do is work out how many lots of six months there are in the loan term of 2 years.
We can then multiply out and calculate the Total Interest to be paid over the loan as shown below.
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Note that we can also calculate this same Total Interest value, using I = PRT and substitute the total time of 2 years:
I = PRT = 2000 x 0.185 x 2 = $740
It is an excellent idea to do this quick calculation as a check of the work we have done getting our previous answer of $740
The Total Amount to be paid back is always the Total Interest plus the original Loan Amount:
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Example Two – Quarterly Interest
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Alexandra borrows $20 000 to set up a Beautician business at 16% pa Simple Interest charged Quarterly, to be paid back over 5 years and 3 months.
Because the Interest is paid Quarterly, the first step is to calculate the Interest each Quarter as shown below:
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The next step is to now multiply out the Quarterly Interest over the full term of the Loan.
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Finally we calculate the Total Cost of the Loan by adding together the Total Interest plus the original Loan Amount.
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Example Three – Monthly Interest
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Joyce Deposits $2 000 into an Internet Saver Account that gives her 5.4% pa Interest paid Monthly.
She leaves the money there for 2 ½ years.
Because the Interest is paid Monthly, the first step is to calculate the Interest for one Month as shown below:
( There are 12 months in a year, so one month = 1/12 th of a Year. )
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We now need to work out how many Months there are in the 2 and one half year loan.
Each year = 12 months, and one half of a year = 6 months.
So in 2 and 1/2 years we have 12 months + 12 months + 6 months = 30 months,
We now multiply this 30 months x the Interest for one month, as shown below:
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Finally we calculate the Total Cost of the Loan by adding together the Total Interest plus the original Loan Amount.
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Example 4 – Minimum Monthly Balance
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Some Bank Accounts give Daily Interest fr the total days in a month, by taking the Account’s lowest monthly balance as the Principal $ value to use in I = PRT
The following example shows a very simple Bank Statement:
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Once we have located the Minimum Balance value, and realise that June is a 30 day month, the Interest Calculation is quite straight forward:
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Example 5 – Daily Interest on Bank Accounts
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In the previous example we saw how Bank Interest is calculated on some Bank Account using the “Minimum Monthly Balance” method.
It is much better to have a Bank Account which calculates Interest based on the Daily Balance in the account. This will type of account will pay far more interest money than a Minimum Monthly Balance account.
Calculating Daily Interest that is paid at the end of each month is a bit more complicated as shown in the example below.
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The first step is to add a “Number of Days” Column onto our table, and work out how many days the account was at each of the balances.
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Once we have our Days column worked out, we can calculate the I = PRT interest for each of the balances, and then add them up to get the total interest for the month.
This is shown below:
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Compound Interest
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Although not covered in this lesson, Compound Interest is the most powerful way of getting money to grow in value.
With Compound Interest, the Interest money is left in the account to also earn extra ongoing interest.
Unlike Simple Interest where the interest money is paid out at the end of each accumulation.
Here is a video about the Power of Compounding Interest.
Related Items
Basic Simple Interest Calculations
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