9/6/2021
Bicol University College of Engineering
Civil Engineering Department
BY:
ENGR. JEFFERSON M. CIPRIANO, MET
Assistant Professor II
Definition:
– the time-dependent value of money
stemming both from changes in the
purchasing power of money (inflation or
deflation) and from the real earning
potential of alternative investments over
time.
– the expected interest rate that capital
- should or will earn.
– The owner of the money must defer its
use. Thus, the person using the money
must pay for deferring the benefits.
– An alternative use of the money could
have generated other benefits, e.g.
interests.
CAPITAL- wealth in the form of money or property
that can be used to produce more wealth.
EQUITY CAPITAL is that owned by individuals
who have invested their money or property in a
business project or venture in the hope of
receiving a profit.
DEBT CAPITAL often called borrowed capital, is
obtained from lenders (e.g., through the sale of
bonds) for investment.
– We use an interest rate, so that the effect
of time is proportional to the total amount
of money involved and positively related
with the length of time.
– Since money has the ability to earn
interest, its value increases with time. For
instance, $100 today is equivalent to
$140.26 five years later.
INTEREST – the fee that a borrower pays
to a lender for the use of his or her
money.
INTEREST RATE – the percentage of
money being borrowed that is paid to the
lender on some time basis.
1

SIMPLE INTEREST – if the interest to be
paid is directly proportional to the length
of time the amount or principal is
borrowed.
Principal – amount of money borrowed
Rate of Interest – amount earned by one
unit of principal during a unit of time.
FORMULA
I = Pin
Where:
I = total interest earned by the principal
P = amount of the principal
i = rate of interest expressed in decimal
form
n = number of interest periods
ORDINARY SIMPLE INTEREST – computed
on the basis of one bankers’s year which is
equal to 360 days.
EXACT SIMPLE INTEREST – based on the
exact number of days, 365 for ordinary year
& 366 for a leap year. Leap years are
exactly divisible by 4, but excluding the
century years i.e. 1900, 2000
9/6/2021
FORMULA
If d is the number of days in the interest
period, then
Ordinary Simple Interest = Pi(d/360)
Exact Simple Interest = Pi(d/365) – for ord.
yr.
= Pi(d/366) – for leap
yr
COMPOUND INTEREST – the interest
earned by the principal is not paid at the
end of each interest period, but is
considered as added to the principal, and
therefore will earn interest for the
succeeding periods.
FORMULA
F = P(1 + i)n
Where:
P = amount of the principal
i = rate of interest expressed in decimal
form
n = number of interest periods
(1 + i)n = “single payment compound amt
factor” designated as (F/P, i%, n)