Civil Engineering November 2020
Review Innovations Engineering Economy 1
Interest – amount of money earned by a given
capital.
Simple Interest – interest directly proportional
to the length of time and the amount of
principal borrowed.
Ordinary Simple Interest – computed on the
basis of one banker’s year.
1 banker’s year = 12 months ( 30 days each)
= 360 days
Exact Simple Interest – computed based on
exact no. of days.
1 year = 365 days ( ordinary year)
1 year = 366 days ( leap year)
Compound Interest – interest is computed every
end of each interest period and the interest
earned for that period is added to the
principal.
Nominal Rate of Interest – periodic interest rate
times the number of periods per year
Effective Rate of Interest – the actual rate of
interest on the principal for one year.
Simple Interest:
" = $(& + ())
where:
F = accumulated amount or future worth
P = principal amount or present worth
i = simple interest rate (per year)
n = number of interest period (in years)
Problem 3.
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of 9 months? How about at the end of 1 year and 6
moths?
Compound Interest:
5. A price tag of P150,000 is payable in 60 days. A 3%
" = $(& + ()! discount is offered if paid in 30 days. What is the rate
of simple interest?
$ = "(& + ()"!
6. A man borrowed from a bank under a promissory
" = $+#$ →for continuous note that he signed in the amount of P60,000 for a
compounding period of one year. He received only P50,150 after the
bank collected the advanced interest and an additional
where: amount of P850 for notarial and inspection fees. What
F = accumulated amount or future worth was the rate of simple interest that the bank collected
in advance?
P = principal amount or present worth
%
i =
&
Compound Interest
= interest rate per interest period 7. If the sum of P 12,000 is deposited in an account
n = mt earning interest rate of 9% compounded quarterly,
= total number of interest period for n-years what will it become after 1 year?
r = nominal interest rate 8. In the previous problem, what is the effective rate?
m = number of interest period per year
t = number of years of investment 9. What is then the equivalent nominal interest rate if
compounded monthly?
10. How many years are required for P 1,000 to increase
Effective Rate, ER: to P 2,000 if invested at 9% per year compounded
continuously?
$%&'(')& '+(%', $% -%' .'+(
!" = 11. What payment X ten years from now is equivalent to
/($%0$/+1 +& &2' 3'4$%%$%4 -5 &2' .'+(
a payment of P 1,000 six years from now, if interest is
0 ' 15% compounded monthly?
-. = /& + 2 −&
1 12. An investment of P3M earns interest of 9%
compounded continuously. What is the effective rate
-. = +# − & →for continuous compounding of interest?
Simple Interest
1. If a man borrowed money from his girlfriend with 13. What rate in percent compounded monthly is
simple interest rate of 12%, determine the present equivalent to 18% compounded semi-annually?
worth of P75, 000.00, which due at the end of seven
months.
14. When compounded bi-monthly, P150,000 becomes
2. Clara has invested P 1,000.00, part at 5% and the P223,183 after 5 years. What is the nominal rate of
remainder at 10% simple interest. How much is interest?
invested at higher rate if the total annual interest from
this investment is P 95.00?
3. Determine the accumulated amount using exact
simple interest on P 1,000.00 for the period from
January 20, 1990 to November 28 of the same year at
15% interest rate.
4. You owe P120,000 from a friend and promise to pay
6% simple interest. How much will you pay at the end
Civil Engineering November 2020 Review Innovations Engineering Economy 1

Notes:

Nominal rate vs Effective Rate:

- Nominal interest rates are not comparable unless their
compounding periods are the same; effective interest
rates correct for this by "converting" nominal rates
into annual compound interest. Effective interest
rate is the one which caters the compounding
periods during a payment plan. A nominal interest
rate for compounding periods less than a year is
always lower than the equivalent rate with annual
compounding.

Interest Rate Nominal or Compounding

Statement Effective period
Interest
15% per year Nominal Monthly
compounded
monthly
15% per year Effective Yearly
Effective 15% per Effective Monthly
year
compounded
monthly
20% per year Nominal Quarterly
compounded
quarterly
2% per month Effective Monthly
2% per month Effective Monthly
compounded
monthly
1% per week Nominal Continuously
comp.
continuously

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