What Is And How To Calculate The Maturity Value For A Simple Interest Loan (Or Note) Explained
In this video we discuss what is maturity value for simple interest and how to calculate the maturity value for a simple interest loan. We go through a few examples showing all of the steps involved
Transcript/notes
The maturity value for a simple interest loan is the total amount that must be repaid, that is the principal, or the amount borrowed, plus interest.
So, the formula for maturity value is, maturity value equals principal plus interest. In order to calculate the maturity value for simple interest, you must first calculate the amount of interest. And the formula for simple interest is interest equals, the principal times the rate of interest, times time.
As an example, if someone borrows $1000, the simple rate of interest is 11% per year and the loan is for 2 years, what is the maturity value of the loan?
Using our formula, we have maturity value equals the principal, which in this case is $1000, plus the interest. So, to answer this we first have to calculate the amount of interest.
Using the simple interest formula, we have interest equals, $1000, the principal, times 11%, which we must convert to a decimal by dropping the percent sign and moving the decimal 2 places to the left to get .11, times 2, for 2 years. And doing the calculation, we get interest equals $220.
Now we can plug in, and we have maturity value equals $1000 plus $220, which equals $1220 as the maturity value of the loan.
We can actually modify the formula for maturity value formula by plugging in the simple interest formula, which I have done on the screen, and we have maturity value equals principal times the quantity 1 plus, rate times time.
Here are 2 more examples using the modified formula, and these are a little more complex in that in the first problem the loan is for 6 months and in the second problem the loan is for 100 days. So, both of those times need to be converted into years, which is 6 over 12 months, and 100 over 365 days.
Chapters/Timestamps
0:00 What is the maturity value of a loan?
0:10 Formula for maturity value
0:26 Example calculation for maturity value
1:17 Formula modification for maturity value
1:30 More examples
