SIMPLE INTEREST AND COMPOUND INTEREST

 Lender or creditor – person (or institution) who invests the money or makes the funds available
 Borrower or debtor – person (or institution) who owes the money or avails of the funds from the
lender
 Origin or loan date – date on which money is received by the borrower
 Repayment date or maturity date – date on which the money borrowed or loan is to be completely
repaid
 Time or term (t) – amount of time in years the money is borrowed or invested; length of time between
the origin and maturity dates
 Principal (P) – amount of money borrowed or invested on the origin date
 Rate(r) – annual rate, usually in percent, charged by the lender, or rate of increase of the investment
 Interest (I) – amount paid or earned for the use of money
 Simple Interest (Is) – interest that is computed on the principal and then added to it
 Compound Interest (Ic) –interest is computed on the principal and also on the accumulated past
interests
 Maturity value or future value (F) – amount after t years that the lender receives from the borrower on
the maturity date

Illustration of Simple and Compound Interest

“Suppose you won 10,000 pesos and you plan to invest it for 5 years. A cooperative group offers 2% simple
interest rate per year. A bank offers 2% compounded annually. Which will you choose and why?”

Simple Interest
 Learning Outcome(s): At the end of the lesson, the learner is able to compute interest, maturity value,
and present value in simple interest environment, and solve problems involving simple interest
 Lesson Outline:
1. Compute simple interest
2. Compute maturity value
3. Compute unknown principal, rate, or time

Annual Simple Interest

Is = Prt
where
Is = simple interest
P = principal, or the amount invested or borrowed
r = simple interest rate
t = term or time in years

Example 1: A bank offers 0.25% annual simple interest rate for a particular deposit. How much interest will be
earned if 1 million pesos is deposited in this savings account for 1 year?

Example 2: How much interest is charged when P50, 000 is borrowed for 9 months at an annual interest
rate of 10%?
Example 3: Complete the table below by finding the unknown.

Principal (P) Rate ( r ) Time (t) Interest

(a) 2.5% 4 1,500
36,000 (b) 1.5 4,860
250,000 0.5% (c) 275
500,000 12.5% 10 (d)
Example 4: When invested at an annual interest rate of 7%, the amount earned P11, 200 of simple interest in
two years. How much money was originally invested?

Example 5: If an entrepreneur applies for a loan amounting to P500,000 in a bank, the simple interest of which
is P 157,500 for 3 years, what interest rate is being charged?

Example 6: How long will a principal earn an interest equal to half of it at 5% simple interest?

Maturity (Future) Value

F = P + Is
where
F = maturity (future) value
P = principal
Is = simple interest

or
F = P(1 + rt)
where
F = maturity (future) value
P = principal
r = interest rate
t = term/ time in years

Example 7: Find the maturity value if 1 million pesos is deposited in a bank at an annual simple interest rate of
0.25% after (a) 1 year (b) 5 years?

Compound Interest
 Learning Outcome(s): At the end of the lesson, the learner is able to compute interest, maturity value,
and present value in compound interest environment, and solve problems involving compound interest

 Lesson Outline:
1. Maturity value
2. 2. Present Value
Example 1. Find the maturity value and the compound interest if P10, 000 is compounded annually at an interest
rate of 2% in 5 years.

Example 2. Find the maturity value and interest if P 50,000 is invested at 5% compounded annually for 8 years

Example 3.Suppose your father deposited in your bank account P10,000 at an annual interest rate of 0.5%
compounded yearly when you graduate from kindergarten and did not get the amount until you finish Grade 12.
How much will you have in your bank account after 12 years?

Example 5.How much money should a student place in a time deposit in a bank that pays 1.1% compounded
annually so that he will have P200,000 after 6 years?
Compounding More than Once a Year
 Learning Outcome(s): At the end of the lesson, the learner is able to compute maturity value, interest,
and present value, and solve problems involving compound interest when compound interest is computed
more than once a year
 Lesson Outline:
1. Compounding more than once a year
2. Maturity value, interest, and present value when compound interest is computed more than once a year

Example 1. Given a principal of Php 10,000, which of the following options will yield greater interest after 5
years:
OPTION A: Earn an annual interest rate of 2% at the end of the year, or
OPTION B: Earn an annual interest rate of 2% in two portions—1% after 6 months, and 1% after another
6 months?
Example 2. Find the maturity value and interest if P10, 000 is deposited in a bank at 2% compounded
quarterly for 5 years.

Example 3. Find the maturity value and interest if P10, 000 is deposited in a bank at 2% compounded monthly
for 5 years.

Example 4. Cris borrows P50, 000 and promises to pay the principal and interest at 12% compounded
monthly. How much must he repay after 6 years?

Example 5. Find the present value of P50, 000 due in 4 years if money is invested at 12% compounded semi-
annually.

Example 6. What is the present value of P25, 000 due in 2 years and 6 months if money is worth 10%
compounded quarterly?
Finding Interest Rate and Time in Compound Interest
 Learning Outcome(s): At the end of the lesson, the learner is able to solve problems involving rate of
interest and time in compound interest

 Lesson Outline:
1. Interest and time in compound interest
2. Equivalent interest rate

Example 1. How long will it take P3, 000 pesos to accumulate to P3, 500 in a bank savings account at 0.25%
compounded monthly?

Example 2. How long will it take P1, 000 to earn P300 if the interest is 12% compounded semi-annually?

Example 3. At what nominal rate compounded semi-annually will P10, 000 accumulate to P15, 000 in 10
years?

Example 4. At what interest rate compounded quarterly will money double itself in 10 years?

Simple Annuity
 Learning Outcome(s): At the end of the lesson, the learner is able to illustrate simple and general
annuities, distinguish between simple and general annuities, find the future and present values of
simple annuities, computes the periodic payment of a simple annuity
 Lesson Outline:
1. Definition of Terms
2. 2. Time Diagrams
3. 3. Future Value of a Simple Annuity
4. 4. Present Value of a Simple Annuity
5. 5. Periodic Payment of a Simple Annuity

Definition of Terms:

ANNUITY– a sequence of payments made at equal (fixed) intervals or periods of time