Simple Interest

S.Y.Tan
1.1  Simple Interest
• Interest (I)– a benefit in the form of a fee that
lender received for letting borrower use of his
money
• Origin date (O.D.) – the date on which the
borrowed money is received by the borrower
• Maturity date (M.D.) or repayment date – the
date on which the loan (borrowed money) is
completely repaid.
• Term of the loan (t) – the length of time from
the origin date to the maturity date

S.Y.Tan
1.1  Simple Interest
• SIMPLE INTEREST (I) - INTEREST that is
computed based ONLY on the original amount
of money received by the borrower on the
origin date and is added to this amount on
maturity date.
• Simple Interest is dependent on 3 factors:
1) principal (P) – the amount of money
borrowed or sum received by borrower on
O.D. (in currency)
2) simple interest rate (r) – agreed annual
rate of interest (in percentage %)
(divide by 100 to convert to decimal)
S.Y.Tan
1.1  Simple Interest
 3) term of loan (t)– time in years
Simple interest – a type of interest wherein only
the original principal earns interest for the
duration of the term
• Formula for simple interest I :
I  Prt
P - principal (in any currency)
r - rate per year (in decimal form)
t - term (in years)

S.Y.Tan
1.1  Simple Interest
• Maturity value or Final amount (F)– the
amount of money received by the lender at
the end of the term; the sum of the principal
(P) and the simple interest (I) earned.

FPI

F  P  Pr t
F  P(1  rt)

S.Y.Tan
1.1  Simple Interest
Principal P Maturity value F

Origin date Maturity date

Term

S.Y.Tan
1.1  Simple Interest
Ex 1. Find the amount if P800,000 is invested
for 2 years at simple interest rate of 14.4% per
year. What is the interest earned?
P= 800,000 t = 2 years r = 14.4%= 0.144
F=? I=?
F= 800,000 (1 + 0.144(2))
F = 1,030,400
I = F – P = 230,400 or I = Prt

S.Y.Tan
1.1  Simple Interest
Ex 2. In how much time will P28,000 amount to
P29,134 at 16.2% simple interest rate?
P= 28,000 F = 29,134 r = 16.2%= 0.162
t=? F 
  1
P  t
F = P (1 + r t) r
29134 = 28000 (1 + (0.162)t)
 29134 
  1
 28000   t
0.162
t = 0.25 year = 3 months

S.Y.Tan
1.1  Simple Interest
Ex 3. At what simple interest rate will a sum
double itself in 15 years?
P F = 2P t = 15 years
r=? F 
  1
P  r
F = P (1 + r t) t
2P = P (1 + r (15))
 2P 
  1
 P t
15
r = 0.0667 = 6.67%

S.Y.Tan
1.1  Simple Interest
Ex 4. What principal will amount to P16,856.10
in 2 years at 10.8% simple interest rate?
F = 16856.10 t = 2 years r = 0.108
P=? F
P
F = P (1 + r t) (1  rt)
16856.10 = P (1 + 0.108 (2))
16856.10
P
(1  0.108(2))

P = 13,861.92

S.Y.Tan
1.1  Simple Interest
If time t is given in months, then it has to be
converted to years.
t = ( months)(1 yr /12months)= years
Ex 5. Find the amount if P10,000 is invested for
10 months at 5.04% simple interest rate?
P= 10000 t = 10 /12 = 5/6 yr r = 0.0504
F = P (1 + r t) F  10000 (1  (0.0504)( 1012 ))
F = 10,420

S.Y.Tan
1.1  Simple Interest
If time t is given in days D, then it has to be
converted to years and this leads to 2 types of
interest.
t = (D/360) years gives ordinary interest (default)
t = (D/365) years gives exact interest
Ex 6. Find the amount if P8,000 is invested for
250 days at 14% simple interest rate by using
a. ordinary interest b. exact interest
P= 8000 t = 250 days r = 0.14
a. F  8000 (1  ( 0 . 14 )( 360 ))  8777.78
250

F  8000 (1  (0.14)( 365 250

))  8767.12
b.
S.Y.Tan
1.1  Simple Interest
If term is given in terms of origin date and
maturity date, then we get Actual time.
That is, we count everyday within the term of
the loan except the origin date.
Jan, Mar, May, Jul, Aug, Oct, Dec – 31 days

Apr, Jun, Sep, Nov – 30 days

Feb – 28 days ; 29 days for leap year

S.Y.Tan
1.1  Simple Interest
 Note that February has 29 days
if it falls on a leap year and a
leap year is a year divisible
by 4.

Dec
Oct
We can use our knuckles Mar
May

as guide in remembering Nov

the number of days for Sep Apr Jun
the different months Feb Jul
of the year. Aug
Jan
Months that fall on knuckles
have 31 days while months
that fall in between knuckles
have 30 days except February
which has 28 days.
1.1  Simple Interest
S.Y.Tan
2 possible time factors:
1) t = (actual time/360) ordinary interest
BANKER’S RULE (default)
2) t = (actual time/365) exact interest

If the day of the dates (O.D. & M.D.) coincide

with one another or are the same, then we
count in MONTHS.

S.Y.Tan
1.1  Simple Interest
Ex 7. Find the amount of P10,000 due on
December 15, 2015 if it was invested last
March 15, 2015 at 4.03% simple interest rate?
P = 10000 O.D. = 3/15/15 M.D.= 12/15/15
r = 0.0403 t = 9 months = 9/12 yr = 3/4 yr
F = P (1 + r t)
F  10000 (1  (0.0403)(129 ))

F = 10,302.25

S.Y.Tan
1.1  Simple Interest
Ex 8. Find the maturity value of P18,000 if it was
invested from Feb. 10, 2012 to Apr 16, 2013 at
15% simple interest rate using i) Banker’s rule
ii) exact interest .
P = 18000 O.D. = 2/10/12 M.D.= 4/16/13
r = 0.15 2012 is a leap year
2012 Feb (29-10) 19 Oct 31
Mar 31 Nov 30 actual time
Apr 30 Dec 31 431 days
May 31 2013 Jan 31
Jun 30 Feb 28
Jul 31 Mar 31
Aug 31 Apr 16
Sep 30 198
233

S.Y.Tan
1.1  Simple Interest
P = 18000 O.D. = 2/10/12 M.D.= 4/16/13
r = 0.15 2012 is a leap year
t = 431 days = (431/360) yrs
i) Using banker’s rule
F  18000 (1  (0.15) 360
431
)  21, 232.50

ii) Using exact interest: t = 431 days = (431/365) yrs

F  18000 (1  (0.15) 365
431
)  21188.21918  21,188.22

S.Y.Tan
1.1  Simple Interest
• Formula for the maturity value F:

FPI or F  P(1  rt)

• F is a future value, received at the end of the

term. In this context, we say that the principal
P is the current or present value of an amount
F that is due at some future date .
F
P
(1  rt )

S.Y.Tan
1.1  Simple Interest
Ex 1. A 5-year investment had a maturity value
of P27,500. If the applied rate was 7.5%
simple interest, what was its present value?
F = 27500 t = 5 years r = 0.075
P=?
F = P (1 + r t)
27500 = P (1 + 0.075 (5))
F 27,500
P 
1  rt 1  (.075)(5)
P  20,000

S.Y.Tan
1.1  Simple Interest
Ex 2. At 14% simple interest, find the present
value of P9112.50 due in 30 months.
F = 9112.50 t = 30/12 yrs r = 0.14
P=?
F = P (1 + r t)
9112.50 = P (1 + 0.14 (30/12))
F 9112.50
P 
1  rt 1  (.14)( 12
30
)

P  6750

S.Y.Tan
1.1  Simple Interest
Ex 3. To pay a debt, Pong offered Bert P1000 now or
P1100 three months from now. If saving account
interest is 10%, what offer will give greater return for
Bert?
Values of money can only be compared if they are on
the same date.
F = 1100 t = 3/12 yr r = 0.10
1100
P  1073.17 (value of P1100 now)
1  (.10)(12 )
3

Option 1 which gives P1000 now is less than

P1073.17 which is current value of Option 2. So
2nd offer is better.
S.Y.Tan
1.1  Simple Interest
Ex 4. Find the present value of P100,000, which
is an amount due in 200 days, if money's
worth is 10.5% simple interest.
F = 100,000 t = 200/360 yrs r = 0.105
P=?
F = P (1 + r t)
100,000 = P (1 + 0.105 (200/360))
F 100,000
P 
1 rt 1 (.105)200
360 

P  94,488.19

1.1  Simple Interest
 S.Y.Tan
Ex 5. Susan lends P50,000 to Jane on October 1,
2014. She expects Jane to pay the principal
and simple interest at 9% to fully settle the
debt on March 28, 2015. What amount does
Susan receive?
2014 Oct (31-1) 30
F  P(1  rt) Nov 30
Dec 31
F  50,0001  (.09)178
360
 2015 Jan 31
Feb 28

F  52,225 Mar 28
178

S.Y.Tan
1.1  Simple Interest
Ex 6. Accumulate Php85,000 for 20 months at a
simple interest rate of 12%.
(Note: To accumulate an amount means to find
its maturity value.)

F  P(1  rt)
F  85,0001  (.12)12
20

F  102,000

S.Y.Tan
1.1  Simple Interest
Ex 7. At what simple interest rate will P415,000
be the present value of P500,000 for a three
years and 4 months transaction?
t  3  124  3  13  103 years
P= 415,000 F = 500,000 r=?

FP I 500,000  415,000

r  
Pt Pt (415,000)(103 )
r  0.0614  6.14%

S.Y.Tan
1.1  Simple Interest
Ex 8. When will Php42,000 earn simple interest
of P8000 if it is invested at 11.4%?
P= 42,000 I = 8,000 r = 0.114 t = ?
I 8000
t 
Pr (42,000)(.114)

t  1.67 years  1 year and 8 months

S.Y.Tan
1.1  Simple Interest