Business Mathematics Brief 12th Edition by Stanley Salzman ,Gary Clendenen, Charles Miller

Exercise 37

Explain the difference between exact interest and ordinary, or banker's, interest. (See Objective.)
Find exact and ordinary interest. A simple interest rate is given as an annual rate, such as 7, per year. Since the rate is per year, time must also be given in years or fraction of a year when using I = PRT. If time is given in number of days, first change it to a fraction of a year.

Exact interest calculations require the use of the exact number of days in the year, 365 or 366 if a leap year. Ordinary interest , or banker's interest , calculations require the use of 360 days. Banks commonly used 360 days in a year for interest calculations before calculators and computers became widely available. Today, many institutions, the government, and the Federal Reserve Bank use the exact number of days in a year in interest calculations. However, some banks and financial institutions still use 360 days. You need to be able to use both.

Example shows that ordinary interest produces more interest for the lending institution than does exact interest.