Professional Documents
Culture Documents
Lecture:
SIMPLE INTEREST
When people need to secure funds for some purposes, one of the ways they
usually resort to is borrowing. On the other hand, the person or institution, which lends
the money would also wish to get something in return for the use of money.
Debtor/Maker – the person who borrows money for any purpose
Lender – the person or institution which loans the money
Interest – the payment for the use of borrowed money is called interest
Principal – the capital or sum of money invested, the original amount borrowed.
Rate of Interest – The fractional part of the principal that is paid on the loan and is
usually expressed as percent.
Time or term of the loan – is the number of units (days, months, years) of the time for
which the money borrowed and for which interest is calculated.
Final Amount/ Maturity Value – the sum of the principal and the interest which is
accumulated at a certain time
Present Value/Proceeds - The amount received by the borrower
Types of Interest
Simple Interest – interest in which only the original principal bears interest for the entire
term of the loan. Here, the principal and present value is equal.
Compound Interest – interest added to the principal at the end of a certain period of
time after which the interest is computed on the new principal and this process is
repeated until the end of the term of the loan is reached.
Simple Interest
Defined as the product of principal, rate and time
I=Pxrxt
Where:
I = simple interest
P = principal
r = rate of interest
t = time (may be expressed in years, months or days)
Other formulas can be derived from the formula:
I I I
P= r= t=
rt Pt Pr
Final amount formula:
F=P+I ;I=F-P
F = P + Prt
F = P (1 + rt)
*** When the time is expressed in number of years, our formula will be:
I = P x r x number of years
***When the time is expressed in number of month (s)
number of month(s)
I=Pxrx
12
***When the time is expressed in number of days, there are two (2) ways of computing
interest:
a. Ordinary Interest = (IO)
number of days
IO = P x r x
360
b. Exact Interest = (Ie)
number of days
Ie = P x r x
365
Illustrative Examples:
Activity No. 1
1. Find the interest and amount on P8000 at 6 ½ % simple interest for 5 years
Given:
P = P8,000.00
r = 6 ½ % or .065
t = 5 years
Solution:
I = Prt
= P8,000.00 x .065 x 5
= P2,600.00
F=P+I
= P8,000.00+ 2,600.00
= P10,600.00
Or
F = P [1 + (rt)]
= P8,000.00 [1 + (.065 x 5)]
= P8,000.00 (1.325)
= P 10,600.00
2. Find the interest and amount of P9,000.00 at 7 ¼ % simple interest for 9 months
Given:
P = P9,000.00
r = .0725
t = 9/12 or .75
I = Prt
= P9,000 x .0725 x .75
= P489.38
F=P+I
= P9,000.00 + P489.38
= P9,489.38
Or
F = P [1 + (rt)]
= P9,000.00 [ 1 + (.0725 x .75)]
= P9,000.00 (1.054375)
= P 9, 489.38
3. If a principal of P25,000.00 earns interest of P1,850.00 in 3 years and 3 months,
what interest rate is in effect?
Given:
P = P25,000.00
I = P1,850.00
t = 3 3/12 or 3.25
I
r=
Pt
P1,850.00
r=
P 25,000 x 3.25
x 100
P 1,850.00
=
P 81,250
x 100
= .0228 x 100
= 2.28%
I
t=
Pr
P2,400.00
t=
P 8,000 x .065
P 2,400.00
= P 520.00
= 4.62 yrs
Quiz 1
1. Pilo borrowed P45,000.00 for 2 years and 8 months and paid P3,750.00 interest.
What was the simple interest rate?
Given:
P = P45,000.00
8
t =2 or 2.66666667
12
I = P3,750.00
r=?
I
r=
Pt
x 100
P 3,750.00
=
P 45,000(2.66666667)
x 100
P 3,750.00
=
P 120,000.00
x 100
= .0313 x 100
= 3.13%
5
2. Pam loans P18,500.00 at 9 % simple interest, how long will it take her to get
6
P6,800 interest?
Given:
P = P18,500.00
5
r =9 or .09833333
6
I = P6,800.00
I
t =
Pr
P 6,800.00
t=
P 18,500(.098333333)
P 6,800.00
=
P 1,819.17
= 3.74 yrs
3
3. Find the final amount due if P12,200.00 was invested @ 12 for 125 days using:
8
a. Ordinary interest
b. Exact interest
c. How much would be the gain for a and b
Given:
P = P12,200.00
r = .12375
t = 125/360
a. F = P [1+(rt)]
F = P12,200.00 [1 +(.12375 x 125/360)]
= P12,200.00 (1.04296875)
= P12, 724.22
b. F = P [1+(rt)]
F = P12,200.00 [1 +(.12375 x 125/365)]
= P12,200.00 (1.042380137)
= P12, 717.04
c. gains for
a:
I=F–P
I = P12,724.22 – P12,200.00
I = P524.22
gains for
b:
I=F–P
I = P12,717.04 – P12,200.00
I = P517.04
4
4. Find the final amount due if P14,400.00 was invested @ 15 for 250 days using:
5
d. Ordinary interest
e. Exact interest
f. How much would be the gain for a and b
Given:
P = P14,400.00
r = .158
t = 250/360
a. F = P [1+(rt)]
F = P14,400.00 [1 +(.158 x 250/360)]
= P14,400.00 (1.109722222)
= P15,979.68
b. F = P [1+(rt)]
F = P14,400.00 [1 +(.158 x 250/365)]
= P14,400.00 (1.108219178))
= P15,958.36
c. gains for
a:
I=F–P
I = P15,979.68 – P14,400.00
I = P1,579.68
gains for
b:
I=F–P
I = P15,958.36 – P14,400.00
I = P1,558.36
5. What final amount and interest should be paid on the maturity date to settle a
120 day loan if the present value is P40,000 at 9 ½ % simple interest?
Given:
P = P40,000.00
r = .095
t = 120/360
F = P [1+(rt)]
F = P40,000.00 [1 +(.095 x 120/360)]
= P40,000.00(1.0317)
= P41,266.67
I=F–P
I = P41,266.67 - P40,000.00
I = P1,266.67
6. An investment of P60,000 will amount to how much after 310 days if the rate is
1
13 % simple interest? How much was the interest gained?
3
Given:
P = P60,000.00
r = .133333333
t = 310/360
F = P [1+(rt)]
F = P60,000.00 [1 +(.13333333 x 310/360)]
= P60,000.00(1.114814812)
= P66,888.89 or P66,887.17
I=F–P
I = P66,888.89 – P60,000.00
= P6,888.89 or P6,887.17
Illustrative Example:
Find the actual and approximate time from March 23, 2005 to October 16, 2005:
Actual Time:
March (31-23) = 8 days
April = 30 days
May = 31 days
June = 30 days
July = 31 days
August = 31 days
September = 30 days
October = 16 days
Total = 207 days
Approximate:
March (30-23) = 7days
April = 30 days
May = 30 days
June = 30 days
July = 30 days
August = 30 days
September = 30 days
October = 16 days
Total = 203 days
Or
Year Month Day
2005 10 9 16 + 30 = 46
2005 3 23 ________
6 x 30 23
180 + 23 = 203 days
Illustrative Example:
1. Find the interest using the four methods on P8,000 at 11 ½ % from August 2,
2006 to November 27, 2006.
Given:
P = P8,000.00
r = .115
t = August 2, 2006 – November 27, 2006
Actual time:
August (31 -2) = 29 days
September = 30 days
October = 31 days
November = 27 days
117 days
Approximate time:
Year Month Day
2006 11 27
2006 8 2 ________
3 x 30 25
90 + 25 = 115 days
a. Io - Actual
Io = P8,000.00 x .115 x 117/360
= P299.00
b. Io - Approximate
Io = P8,000.00 x .115 x 115/360
= P293.89
c. Ie - Actual
Ie = P8,000.00 x .115 x 117/365
= P294.90
d. Io - Approximate
Io = P8,000.00 x .115 x 117/365
= P289.86
Activity No. 2
1. Using the four methods, find the interest on P9,500 from October 29, 2007 to
March 18, 2008 at 10 ¼ % simple interest.
Given:
P = P9,500.00
r = .1025
t = October 29, 2007 – March 18, 2008
Actual time:
October (31-29) = 2 days
November = 30 days
December = 31 days
January = 31 days
February = 29 days
March = 18 days
141 days
Approximate time:
Year Month Day
20087 3 2 + 12 = 14 18 + 30 = 48 days
2007 10 29_______
4 x 30 19 days
12019 = 139 days
a. Io - Actual
Io = P9,500.00 x .1025 x 141/360
= P381.39
b. Io - Approximate
Io = P9,500.00 x .1025 x 139/360
= P375.98
c. Ie - Actual
Ie = P9,500.00 x .1025 x 141/365
= P376.16
d. Ie - Approximate
Ie = P9,500.00 x .1025 x 139/365
= P370.83
F = P (1 +rt)
= P9,900.00 [1 + (.0925 x 2)]
= P11,731.50
2. Discount P5,500 for 11 months at 14 ¼ % simple interest.
Given:
F = P5,500.00
r = .1425
t = 11/12 months
F
P=
(1+rt )
P 5,500.00
= 11
(
[1+ .1425 x
12 )
]
= P4,864.57
Quiz No. 2
1
1. Find the interest on P10,500 at 11 % from September 4, 2004 to February
8
14, 2005 using the four methods.
Given:
P = P10,500.00
r = .11125
t = September 4, 2004 – February 14, 2005
Actual time:
September (30-4) = 26 days
October = 31
November = 30 days
December = 31 days
January = 31 days
February = 14 days
163 days
Approximate time:
Year Month Day
2005 4 2 + 12 = 14 14
2004 9 4______
5 x 30 = 150 10 days
150 + 10 = 160 days
a. Io - Actual
Io = P10,500.00 x .11125 x 163/360
= P528.90
b. Io - Approximate
Io = P10,500.00 x .11125 x 160/360
= P519.17
c. Ie - Actual
Ie = P10,500.00 x .11125 x 163/365
= P521.66
d. Ie - Approximate
Ie = P10,500.00 x .11125 x 160/365
= P512.06
F = P (1 +rt)
= P20,500.00 [1 + (.11125 x 110/360)]
= P21,220.35
5
3. Discount P18,800 for 2 years and 9 months at 9 % simple interest
8
Given:
F = P18,800.00
r = .09625
9
t=2 or 2.75
12
F
P=
(1+rt )
P 18,800
=
[1+ ( .09625 x 2.75 ) ]
P18,800
= (1.2646875)
= P14,865.33
2
4. Find the interest rate on P11,100 at 11 % simple interest from December 19,
5
2008 to March 4, 2009 using the four methods.
Given:
P = P11,100.00
r = .114
t = December 19, 2008 – March 4, 2009
Actual time:
December (31-19) = 12 days
January = 31 days
February = 28 days
March = 4 days
75 days
Approximate time:
Year Month Day
2009 8 3 2+ 12 = 14 4 + 30 = 34
2008 12 19_____
2 x 30 = 60 15 days
60 15 = 75 days
a. Io - Actual
Io = P11,100.00 x .114 x 75/360
= P263.63
b. Io - Approximate
Io = P11,100.00 x .114 x 75/360
= P263.63
c. Ie - Actual
Ie = P11,100 x .114 x 75/365
= P260.01
d. Ie - Approximate
Ie = P10,500.00 x .114 x 75/365
= P260.01
2
5. Accumulate P22,700 for 115 days at 12 % simple interest
5
Given:
P = P22,700.00
r = .124
t = 115/360
F = P (1 +rt)
= P22,700.00 [1 + (.124 x 115/360)]
= P23,599.17
4
6. Discount P17,700 for 3 years and 3 months at 10 % simple interest
5
Given:
F = P17,700.00
r = .108
3
t=3 or 3.25
12
F
P=
(1+rt )
P 17,700.00
=
[1+ ( .108 x 3.25 ) ]
P 17,700.00
= (1.351)
= P13,101.41
Simple Discount
A discount is a deduction from the final amount F. A simple discount is often
called bank discount or interest in advance. The amount of money that the borrower
receives is called proceeds.
Bank discount or interest in advance can be computed by means of the formula:
Id = Fdt
Where:
Id = simple discount
F = final amount
d = discount rate
t = time or term of discount
Other formulas that can be derived from above:
I I I
d= t= F=
Ft Fd dt
Present value formula : P = F – Id or P = F (1-dt)
P
Final amount formula : F =
(1−dt)
Illustrative Example:
1
1. Mr. Patdu borrowed P15,800 for 9 months from Ms. Jawo who charged 11 %
8
simple discount. How much money did Mr. Patdu receive?
Given:
F = P15,800.00
d = .11125
t = 9/12 or .75
Id = Fdt
= P15,800.00 x .11125 x .75
= P 1,318.31
P = F - Id
= P15,800 – P 1,318.31
= P 14,481.69
2. How much loan should Mr. Kamlon ask for, if he needs P12,500 cash which will
4
be repaid in two years and three months with 10 % simple discount?
5
Given:
P = P12,500.00
r = .108
3
t=2 or 2.25
12
P
F=
(1−dt)
12,500
=
[1−( .108 x 2.25 ) ]
= P16,512.55
SIMPLE ANNUITIES
Classification of Annuities
Annuity Certain – an annuity whose term is fixed, that is, the term starts and
ends on definite dates. Monthly payment on installment purchases is an annuity certain
since the payment starts on a definite date and continue regularly until the last payment.
Contingent Annuity - an annuity whose term depends on some uncertain
events. Many life insurance policies are examples of contingent annuity
Perpetuity - an annuity whose payments continue forever
A=¿
Illustrative Examples:
1. Find the present value of an annuity of P2,500.00 for 22 years and 9 months
at 12% compounded quarterly
Given: R = P 2,500.00
j = 12% or .12
m=4
t = 22 years and 9 months
= 22.75
n = 4 x 22.75
= 91
i = .12/4 = .03 (3%)
Find
A: =Ran i
= P2,500.00 (a 91 3%)
= P2,500.00 (31.07029820) from table V
= P 77,675.75
A = P2,500.00 ¿
= P2,500.00 (31.0702982)
= P 77,675.75
Given: R = P250,000.00
j = 8% or .08
m =1
t = 5 years
n=1x5=5
i = .08 / 1 = .08
Find
A: =Ran i
= P250,000.00 (a 5 8%)
= P250,000.00 (3.99271) from table V
= P 998, 177.50
Using Scientific Calculator:
A = P250,000 ¿
= P2,500.00 (3.99271)
= P 998,177.50
S=¿
Illustrative Examples:
1. Find the amount of an annuity of P1,200 at the end of each 6 months for 4
years at 16% converted semi-annually.
Given: R = P 1,200
j = 16% or .16
m=2
t=4
n = 2x4
=8
i = .16/2 = .08 (8%)
Find S =Rsn i
= P1,200.00 (s 8 8%)
= P1200.00 (10.6366276) from Table VI
= P12, 763.95
S = P1,200.00 ¿
= P1,200.00 (10.6366276)
= P 12,763.95
2. A father deposits P1,000.00 every 3 months for 5 years in a bank that pays
12% compounded quarterly. Assuming that no withdrawals are made, how
much would be in his account at the end of 5 years?
Given: R = P 1,000.00
j = 12% or .12
m=4
t=5
n = 4x5
= 20
i = .12/4 = .03 (3%)
Find S =Rsn i
= P1,000.00 (s20 3%)
= P1,000.00 (26.8703745) from Table VI
= P26,870.37
Illustrative Examples:
1. If money is worth 12% compounded monthly, how much must a man save
monthly to accumulate P200,000 in 2 years?
Given: S = P200,000.00
j = 12% or .12
m = 12
t = 2 years
n = 2 x 12 = 24
i = .12/12 = .01 (1%)
S
Find R =
s n┐i
P 200,000.00
=
s 24 ┐ 1%
P 200,000.00
= from Table VI
26.973465
= P7,414.69
Given: A = P350,000.00
j = 15% or .15
m = 12
t = 8 years
n = 12 x 8 = 96
i = .15/12 = .0125 (1.25%)
A
Find R =
a n ┐i
P 350,000.00
=
a 96 ┐ 1.25 %
P 350,000.00
= from Table V
55.72457
= P6,280.89