Name: Mariela Vidad

Course & Section: BSAIS-2D

Simple interest is a quick and easy method of calculating the interest charge on a loan. Simple interest is determined by
multiplying the daily interest rate by the principal by the number of days that elapse between payments. When you
make a payment on a simple interest loan, the payment first goes toward that month’s interest, and the remainder goes
toward the principal. Each month’s interest is paid in full so it never accrues. To understand how simple interest works,
there is an example below.

The Simple Interest rule is:

I=Prt

Where:
I = Simple Interest
P = Principal
R = Rate
T = No. of periods

EXAMPLE:

Shawn borrows 3,000,000 for 3 years, at 10% simple interest. How much is the interest earned in 3 years?

SOLUTION:

I=Prt
I= ?
P = 3,000,000
R = 10%
T=3

I = (3,000,000) (5%) (3)

I= (150,000) (3)
I = P450,000
Compound Interest is when the interest is added to the principal at regular intervals. Compound interest (or
compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of
previous periods of a deposit or loan. Thought to have originated in 17th century Italy, compound interest can be
thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated
only on the principal amount.

The interest is said to be compounded.

The Compound Interest rule is:

A=P(1+r)n

Where:

A = amount after investment time period

P = principal or amount invested
r = interest rate (when the interest is compounded or added to the bank account; as a decimal)
n = number of times that the interest is compounded or added to the account)

EXAMPLE:

If an amount of P50,000 is deposited into a savings account at an annual interest rate of 8%, compounded annually, the
value of the investment after 3 years can be calculated as follows...

Solution: (LONG METHOD USE)

Interest after 1st year

= Principal × Rate × Time
= 50,000× 8% × 1yr
= 50,000 × 0.08 × 1
= P4,000

Amount after 1st year

= 50,000 + 4,000
= P54,000

Interest after 2nd year

= 54,000× 8% × 1yr
= P4,320

Amount after 2nd year

= 54,000 + 4,320
= P58,320

Interest after 3rd year

= 58,320× 8% × 1yr
= P4665.6
Amount after 3rd year
= 58,320 + 4665.6
= P62,985.6

Solution : (SHORT METHOD WITH THE RULE)

P = 50,000
r = 8% = 0.08
n = 3 yr

A=P×(1+r)n

A = 50,000 × ( 1 + 0.08 ) 3

A = P62,985.6