Chapter 10
Simple Interest and Promissory Notes
Student Performance Objectives:
Section I Understanding and Computing Simple Interest
10-1 Computing Simple Interest for Loans with Terms of Years or Months
10-2 Calculating Simple Interest for Loans with Terms of Days By Using the Exact Interest
Section II Using the Simple Interest Formula
10-6 Solving for the Principal
Section III Understanding Promissory Notes and Discounting
10-10 Calculating Bank Discount and Proceeds for Simple Discount Notes
10-11 Calculating True or Effective Rate of Interest for a Simple Discount Note
Chapter Notes, Teaching Tips and Lecture Launchers
• Lecture Launcher: Here’s where we get to the fun part!
• Ask your students if they would like to know the secret to getting rich. Interest!
• Lecture Launcher: What is interest? Some religions historically were opposed to interest.
Discuss the concept of usury. Current business concepts view interest simply as the cost of
using someone else’s money.
• Spotlight: Chapter 10, Simple Interest, begins a very important 3-chapter section of the
textbook, (Chapters 10, 11 and 12), which relates to “The Time Value of Money.”
• Be sure students understand that money “today” is worth more than money in the
• The Business Decision, “Borrowing to Take Advantage of a Cash Discount,” on page 342,
illustrates an important business concept. Here, cash discounts, covered in Chapter 7, are
related to material from the current chapter.
• Spotlight: Students may not realize how much money a business can save by taking
• For easy reference, remind students that all of the formulas used in this chapter are listed in
the Chapter Summary.
• Spotlight: Invite a local banker to class to discuss the time value of money, loans, and
discounting.
Section I Understanding and Computing Simple Interest
• Be sure students understand, when using I = PRT, the time variable, T, is always stated in
years; or must be adjusted to a portion of a year.
• Months are divided by 12
• Even today, the banker’s rule is still used, since it yields slightly higher interest than
365 days. Have students work a problem both ways to see the difference.
• For example: Calculate the difference in the amount of interest paid on a loan
• Show students that the calculator sequence for solving I = PRT is a chain operation.
• It is not necessary to calculate the time, T, fraction first.
See Calculator Sequences in various examples in 10-2.
• Spotlight: Remind students, in order to calculate the number of days of a loan or the maturity
date of a loan, they must know how many days are in each month.
•
• Remind students not to count the first day of a loan, but to count the last. If you are using the
days-in-a-year calendar, when you subtract the number for the first day from the number for
the last, this is automatically the result.
• Point out to students that in business, due dates which fall on weekends or holidays are
Section II Using the Simple Interest Formula
• Point out to students, the simple interest formula, I = PRT, can be solved for P, R, and T by
using the methods learned in Chapter 5, Equations.
• Spotlight: In this case, an easy way to remember the other variations of the formula
• As with the percentage formula in Chapter 6, principal, rate, and time answers can be verified
by substituting the answer into the original formula, I = PRT.
• Be sure students understand that in some cases this verification will be “approximate”
due to rounding,
• Spotlight: When solving for principal, rate, and time, underscore the importance of
• Spotlight: In the calculation for time, T, tell students when multiplying the decimal by 360
or 365, always round up to next higher day, even if the portion is less than .5.
• For example, an answer of 188.2 days would round to 189 days.
• When covering Partial Payments, Performance Objective 10-9, page 319, point out that the
• Collaborative Learning Activity: Have students break into groups of two’s or three’s to write
and solve problems involving principle, rate, and time. Then have the groups exchange and
Section III Understanding Promissory Notes and Discounting
• Have students keep in mind that discounting notes is a common business practice
when companies extend credit to their customers and then desire payment earlier
than the maturity date of the loan.
• Point out to students that promissory notes are negotiable instruments, just like checks.
Discuss with them the difference between noninterest-bearing and interest-bearing notes.
• Discuss with students that discounting is used in the purchase of Government Treasury Bills.
Explain that, when people purchase these bills, they are actually loaning money to the United
• Spotlight: Be sure students understand that the true or effective interest rate of a simple
discount note is higher than the stated discount rate because the proceeds are less than the
face value of the note.
Simple Interest Notes
Noninterest-bearing Discount Notes
I = P x R x T
Discount = FV x RD x T
MV = P + I
MV = FV = P
Proceeds = P = FV
Proceeds = FV – Discount
• Collaborative Learning Activity: For homework, have students call or visit local banks to
research the types of loans that use simple interest or simple discount. Also have them find
the current rates, and the time periods, for loans on assets such as boats, cars, and furniture,
• Note that, in discounting a note before maturity, students often make the mistake of using the
wrong number for the discount period. Many times, they’ll just use the number of days in
• Collaborative Learning Activity: In groups, have students write and solve some word
problems involving promissory notes and discounting. Next, have the groups exchange and
solve the problems of another group, compare answers, and resolve any differences.
Questions Students Always Ask
“Why is T in the simple interest formula always a multiple or fraction of one year?”
• Because we’re dealing with annual (yearly) interest rates. If the interest on a $100 loan is
“Is the Banker’s Rule still used, even though financial institutions have computers to calculate
interest?”
• Yes, it is also known as the money market basis, and is used by the U.S. Treasury to
“Why would someone discount a note before maturity?”
• Walk your students through this by telling them a story.
“Let’s say you have a store in which you sell furniture. A couple comes in wanting to
“Isn’t it a rip-off for the bank to charge more interest for discounting a note before maturity?”
• While it’s important to charge an appropriate rate of interest on credit you extend to your