Business Mathematics 10

Simple Interest
Interest – is the cost of using somebody else’s money.
To compensate the lender for the risk of lending you and their inability to use the money
anywhere else while you use it, you need to repay more than you borrowed and that is interest.

Principal Amount – The sum of money that someone borrows or lends.

You borrowed 100 pesos to your classmate, 100 pesos is the principal amount.

Interest Rate – A percentage of the principal amount which represents the cost of fee for
borrowing or lending money.
You borrowed 25,000 pesos in a lending company, the lending company impose an interest rate
of 3% to your loan. Then 3% is the interest rate.

Time or loan period – The agreed date or time when the loan will be paid in full.
Future Value – The sum of money to which today’s investment will grow by a specific future
date at a given interest rate.
You borrowed 10,000 pesos to your friend and your friend ask 500 pesos interest for using his
money. And to get the future value, you need to add 10,000 pesos which is the principal amount
and 500 pesos which is the interest. Therefore 10,500 pesos is the future value. Meaning to
say, you need to pay 10,500 pesos to your friend.

Simple Interest – Interest computed on the original principal for any time period or length of time
money is borrowed or lent/invested.
I =Prt
Where:
I = interest
P = principal amount
r = rate of your interest (in decimal)
t = time in years
I I I
Principal Amount: P= Interest rate: r = Time or loan period: t=
rt Pt Pr
Example #1 Solution:
Given: I = Prt
P = P500,000 I = (500,000)(0.02)(3)
t = 3 years I = P3,000
r = 2% or 0.02
I=? FV = P+I
FV = ? FV = 500,000+30,000
FV = P530,000

Example #2
Solution:
Given:
I
P=
I = P100,000 rt
t = 2 years 100,000
P=
r = 4% or 0.04 ( 0.04)(2)

P=? P = P1,250,000

Example #3 Solution:

Given: I
r=
Pt
I = P20,000
20,000
t = 4 years r=
(150,000)( 4)
P = P150,000
r = 0.3333
r=?
r = 0.0333 x 100
r = 3.33%
Example #4
Given: Solution:
I = P400 I
t=
Pr
P = P14,000
r = 2.5% or 0.025
400
t=
(14,000)(0.025)
t=?
t = 1.14
t = 0.14 x 12 months
t = 1.68
t = 1 year and 1 month

Example #5
Erwin invests in a company that returns
8.5% simple interest every year. He Solution:
invested P300,000 for 5 years. How much I = Prt
did he earn?
I = (300,000)(.0.085)(5)
Given:
I = P127,500
r = 8.5% or 0.085
P = P300,000
t = 5 years
I=?

Example #6
Stephanie borrowed ₱ 648 000 and paid a Solution:
total of ₱ 772 200 after 3 years and 4 I = FV-P
months. What was the simple interest rate
applied in this term of loan? I = 772,200 – 648,000

Given: I = P124,200

P = P648,000 I
r=
Pt
FV = P772,200
124,200
4 r=
t = 3 years and 4 months or 3 4
12 (648,000)( 3 )
12
r=?
r = 0.0575
r = 0.0575 x 100
r = 5.75%
 Compound Interest
Compound Interest – Interest calculated on the initial principal and also on the accumulated
interest of previous periods of a deposit or loan.

Conversion Period (m) – refers to how often the interest is calculated over the term of the
loan or investment. It can be annually, semi-annually, quarterly, or monthly.

Compound Annually – the interest is calculated once a year. Then it adds the computed
interest to form the adjusted principal. m = 1

Compound Semi-Annually – the interest is calculated every 6 months or every half of a year.
m=2

Compound Quarterly – the interest is calculated every 3 months. m = 4

Compound Monthly – the interest is calculated every month. m = 12
Formulas in Compound Interest
FV = P ¿

r = m¿

P=
FV
¿¿
 Exact and Approximate Time
Leap Year
 A normal year has 365 days
 A leap year has 366 days (the extra day is the 29th of February)

Knuckle Method
One form of the mnemonic is done by counting on the knuckles of one’s hand to remember the
number of days in each month.
Count knuckles as 31 days, depressions between knuckles as 30 (or 28/29) days.
Difference between Exact and Approximate Time
 Exact Time – in using the exact time, the correct number of days for each month is used.
Thus, the total number of days in a year is 365 or 366 if it is a leap year.
 Approximate Time – we assume each month have 30 days even if it is leap year, even if
that month does no actually have 30 days. Thus, each month from January to December
has 30 days and the total number of days in a year is 360 days.
Example #1
Find the exact and approximate time between January 8, 2005 and February 15, 2007
Approximate Time
(30 days each month/360 every year)
Jan 8, 2005 – Jan 8, 2006 ----- 360 days
Jan 8, 2006 – Jan 8, 2007 ----- 360 days
Jan 8, 2007 to Jan 30, 2007 (30 – 8) ----- 15 days
Jan 8, 2005 – Feb 15, 2007 ----- 360+360+22+15 = 757 days
Exact Time
(28/29/30/31 days each month and 365/366 every year)
Jan 8, 2005 – Jan 8, 2006 ----- 365 days
Jan 8, 2006 – Jan 8, 2007 ----- 365 days
Jan 8, 2007 to Jan 31, 2007 (31 – 8) ----- 23 days
Feb 15, 2007 ----- 15 days
Jan 8, 2005 – Feb 15, 2007 ----- 365+365+23+15 = 768 days
Example #2
Find the exact and approximate time between November 1, 2002 and April 25, 2005.
Approximate Time
Nov 1, 2002 – Nov 1, 2003 ----- 360 days
Nov 1, 2003 – Nov 1, 2004 ----- 360 days
Nov 1, 2004 – Nov 30, 2004 (30-1) ----- 29 days
Dec 2004 ----- 30 days
Jan 2005 ----- 30 days
Feb 2005 ----- 30 days
March 2005 ----- 30 days
April 25, 2005 ----- 25 days
Nov 1, 2002 – Apr 25, 2005 ----- 360+360+29+30+30+30+30+25 = 894 days

Exact Time
Nov 1, 2002 – Nov 1, 2003 ----- 365 days
Nov 1, 2003 – Nov 1, 2004 ----- 365 days
Nov 1, 2004 – Nov 30, 2004 (30-1) ----- 29 days
Dec 2004 ----- 31 days
Jan 2005 ----- 31 days
Feb 2005 ----- 28 days
March 2005 ----- 31 days
April 25, 2005 ----- 25 days
Nov 1, 2002 – Apr 25, 2005 ----- 365+365+29+31+31+28+31+25 = 906 days

Ordinary Interest

Ordinary Interest – is calculated on the basis of a 360-day year or a 30-day month (time in days
divided by 360)
 Exact Interest
Calculated on the basis of a 365-day year (Time in days divided by 365 even if it is a leap year)