COURSE CODE : BM 211

COURSE DESCRIPTION : Mathematics of Investment

TARGET POPULATION : All 2nd year Students of Business Administration
COURSE FACILITATOR : MS. ANGELUS M. SANCHEZ

WEEK 2

CHAPTER 1. SIMPLE INTEREST AND DISCOUNT

Learning Objective:

Upon completion of this module, the students are expected to:

1. Compare and contrast ordinary and exact simple interest
2. Show how to solve ordinary and exact interest for approximate time and exact
time
3. Compare and contrast simple interest and discount
Lesson 6. Exact and Ordinary Interest, For Exact and Approximate Time
In a loan transaction, there are two important dates concerned, the date of the loan and the
date of payment. If these two dates are given, interest can be computed using the approximate
time and the exact time. In determining the approximate time, we consider each month as having
30 days while in computing the exact time, we add the actual number of days between the two
dates, excluding the date of the loan but including the date of payment.

Example:
Determine the time from May 16, 2009 to September 22, 2009.
a) To compute the approximate time subtract serial numbers of the first date from the last
date.

Year Month Day

Sept. 22, 2009 2009 9 22
May 16, 2009 2009 5 16
4 6

Approximately, there are 4 months and 6 days between the two given dates. To express the time
in days, multiply the number of months by 30 days and add the result to the number of days.
Thus,

Approximate time = 4 (30) + 6

= 126 days

b) To determine the exact time, there are two methods used.

1) Using Table I, subtract the serial numbers of the 2 dates,
Sept. 22 = 265th day of the year
May 16 = 136th day of the year
Exact number of days = 129 day

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 2) Determine the number of days from month to month
May (17-31) 15
June 30
July 31
August 31
Sept. 22
Total 129 days

With the concept of approximate time and exact time, exact simple interest and ordinary simple
interest, four types of simple interest can be computed on a principal given the date of the loan
and the date of payment. These are: (a) ordinary simple interest for exact time; (b) ordinary
simple interest for approximate time; (c) exact simple interest for approximate time; and (d) exact
simple interest for approximate time.

Example:
Find all four types of simple interest on ₱9,500 at 7 ½ % from August 31, 2009 to April 8,
2010.

Solution:
Computing the Approximate time,

Year Month Day

9 3+12=15
April 8, 2010 2010 4 8 30+8=38
August 31, 2009 2009 8 31
7 7
Approximate time is 7 months and 7 days
ta = 7(30) + 7
= 217 days

a) Ordinary Simple interest for exact time (IOE)

IOE = Prt

9,500(0.075)(220)
IOE =
360

IOE = ₱435.42

b) Ordinary simple interest for approximate time (IOA)

9,500(0.075)(217)
IOA =
360
IOA = ₱429.48

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 c) Exact simple interest for exact time (IEE)
9,500(0.075)(220)
IEE =
365
IEE = ₱429.45

d) Exact simple interest for approximate time (IEA)

9,500(0.075)(217)
IEA =
365
IEA = ₱423.60

Notice that among the four types of interest, ordinary interest for exact number of days yields the
highest interest. This is known as the Banker’s Rule. Hence, unless otherwise stipulated which
one to use, we shall use ordinary interest for exact number of days. Also, when given two dates,
we shall use the exact number of days between those two dates. If the year is a leap year add 1
day for the month of February. However, there is an exception to this. When finding the time from
a certain date in one month to the same date in another month, we shall consider the time as a
whole month. For example, time from March 15 to November 15 is 8 months. Use Table 1 to
solve the Exact and Ordinary Interest, for Exact and Approximate Time.

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 TABLE 1. The Number of Each Day of the Year

Days of Month Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec.

1 1 32 60 91 121 152 182 213 244 274 305 335

2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8 8 39 67 98 128 159 189 220 251 281 312 342
9 9 40 68 99 129 160 190 221 252 282 313 343
10 10 41 69 100 130 161 191 222 253 283 314 344
11 11 42 70 101 131 162 192 223 254 284 315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14 14 45 73 104 134 165 195 226 257 287 318 348
15 15 46 74 105 135 166 196 227 258 288 319 349
16 16 47 75 106 136 167 197 228 259 289 320 350
17 17 48 76 107 137 168 198 229 260 290 321 351
18 18 49 77 108 138 169 199 230 261 291 322 352
19 19 50 78 109 139 170 200 231 262 292 323 353
20 20 51 79 110 140 171 201 232 263 293 324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 238 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
31 31 90 151 212 243 304 365

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Lesson 7. The Final Amount
The final amount (S) is the amount due from the investment of the principal (P) for a given
period of time (t) at a given interest rate (r). It is an accumulated amount which represents the
principal plus the interest earned. By definition,

S=P+I

S = P + Prt

S = P(1 + rt)

Example:
Mrs. Melissa Cruz loaned from Mrs. Laura Santos the sum of ₱5, 500 and promised to
pay the sum plus interest at the end of 9 months. If money is worth 12%, how much will Mrs.
Melissa Cruz pay Mrs. Laura Santos at the end of the term.

Solution:
P = ₱5,500 r = 12% t = 9 mos. = 9/12 years

a) Method A (Solve for I first then solve for S)

I = Prt
= ₱5,500(.12)(9/12)
I = ₱495

S = P+I
= ₱5,500 + ₱495
S = ₱5,995

b) Method B (Using the formula)

S = P(1 + rt)
= ₱5,500 [ 1+.12(9/12)]
S = ₱5,995

Lesson 8. The Present Value

If the sum of money is invested at a given interest rate (r) for a given period of time (t) in
order to accumulate to S, then this sum is called the present value (P) if the Final Amount (S). To
discount S means to find its present value (P). To compute the present value (P) at simple
interest value (P) at simple interest, the formula,

S = P(1+rt) is modified

Hence,
S
P=
1 + rt

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Example:
Find the present value of ₱5, 100 due on 210 days if it is invested at 8% simple interest.
Solution:
P = ₱5, 100 r = 8% t = 210 days = 210/360
S
P=
1 + rt
5, 100
=
1 + .08 (210/360)

P = ₱4, 872.61

Lesson 9. Discount
Banks and credit associations give loans to private individuals or businessmen. When loans
are approved the bank discounts the amount, hence the person who applied for the loan receives
the discounted value. The bank deducts the interest in advance which is called the bank of
discount or simply discount (D). The amount of the loan to be discounted is the total amount (S).
To find the amount of discount (D) multiply the total amount (S) by the given rate of discount per
annum (d) by the given term of discount in years (t). By definition,

D = Sdt

Example:
Discount ₱10, 000 for 90 days at 10% simple discount.
Solution:
S = ₱10, 000 d = 10% t = 90 days = 90/360 yr.
D = Sdt
= ₱10, 000(.10)(90/360)
D = ₱250

If ₱10, 000 is an amount of a loan, then ₱250 is the interest – in – advance or the discount
and is deducted from the loan. Thus, the borrower actually receives ₱9750. This sum received is
called the present value (P) of the total amount (S). Therefore,
P=S–D Thus,
= ₱10, 000 - ₱250 P = ₱10, 000[1 – (0.10)(90/360)]
P = ₱9,750 P = ₱9, 750
Since D = Sdt,
P=S–D
= S – Sdt
P = S(1 – dt)

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Lesson 10. The Discount Rate (d)
From the formula for discount, D = Sdt, divide both sides of the equality by the product of the
final amount (S) and thee term of discount (t). Hence,

D
d=
St

Example:
Find the rate of discount if ₱5, 000 is given a discount of ₱300 for 240 days.
Solution:
S = ₱5, 000 D = ₱300 t = 240 days
D
d=
St
300
=
5, 000 (240/360)

= 9%

Reference:

Corazon J. Andrada, et. al, 2015, Mathematics of Investment, 2015 edition, MaxCor Publishing
House Inc
.

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