University of Caloocan City

College of Liberal Arts & Sciences

Mathematics Department

MATH IN THE MODERN WORLD

Learning Module #7

Topic SIMPLE INTEREST & SIMPLE DISCOUNT

Duration 3 hours
Lesson
Proper I. Simple Interest
 In financial transactions, an interest is the amount paid by a borrower to
a lender for the use of money over a period.
 Interest that is paid as a percent of amount borrowed or invested is
called simple interest.
 The formula for simple interest is given by the following:
𝐼 = 𝑃𝑟𝑡
where:
𝐼 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 (𝑜𝑤𝑒𝑑)
𝑃 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 (𝑜𝑟 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑)
𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑡 = 𝑡𝑒𝑟𝑚 𝑜𝑟 𝑡𝑖𝑚𝑒 𝑓𝑟𝑎𝑚𝑒 𝑖𝑛 years

Example 1. Suppose Kiko wanted to invest an amount 𝑃ℎ𝑝 50,000.00

for 2 years at a financial institution that gives a simple interest
of 3% per year. The interest rate was given to Kiko by the
financial institution on the assumption that he cannot withdraw
the investment within the 2-year period.
How much is Kiko’s earning on the investment after the 2-year
period?
Solution:
The following can be obtained from the problem:
Given: P  50,000, r  0.03, t  2.
Required: Earning on the investment, I
Formula: I  Prt
 50,0000.032
 Php 3,000 Amount earned on the investment
After 2 years.
Future Value
 Interest can be viewed as a lender or a borrower. Sometimes if we are
the investor, we consider the value of our investment after a given
period. In this case we introduce the concept of future values or
accumulated values or maturity value.

𝐹=𝑃+𝐼
but 𝐼 = 𝑃𝑟𝑡 𝐹 = 𝑃 + 𝑃𝑟𝑡
Then 𝐹 = 𝑃 (1 + 𝑟𝑡)

Example 2. April wants to borrow 𝑃ℎ𝑝40, 000.00 from a bank that gives an
annual interest rate of 4.5%. However, she only wants to borrow the fund
for a 9-month period and will be able to pay the bank immediately after 9
months. How much interest is she going to pay from borrowing the amount
of money? What is the accumulated value of the amount borrowed after
the 9-month period?

Solution:
Given: P = 40,000, r= 0.045, t= 0.75 (since she only borrowed the fund for
9-months which is ¾ of a year.)
Required: 𝐼 and 𝐹
Formula: 𝐼 = 𝑃𝑟𝑡 = 40,000(.045) (.75)
= 𝑷𝒉𝒑𝟏,𝟑𝟓𝟎. 𝟎𝟎
𝐹 = 𝑃 + 𝐼 (the sum of the principal amount or the amount
borrowed and the interest.)
Thus, after nine months, April will pay the bank 𝑷𝒉𝒑 𝟒𝟏, 𝟑𝟓𝟎. 𝟎𝟎

Different ways of expressing time/term of a loan or investment.

 Sometimes the term of investment is not given in years. The term or time
frame given in certain problems maybe stated in days or months.
 In cases where the time is expressed in months it is easy to express it in
years.
 But when the term/time is given in days we use a time factor such as the
following:
Example 3. Find the actual and approximate time from May 1, 1983 to
September 15, 1983.

Solve for Example 4.

Find the actual and approximate time from April 15, 2008 to December 21,
2008 (Actual Time = 250 days; Approximate Time =246 days)
II. SIMPLE DISCOUNT
 In commercial transaction, discount refers to a reduction in the cost of a
bill of goods in return for prompt payment in place of an allowable
deferred payment; The trade discount in a transaction is the percentage
of the face value of the bill.
 The word discount as a verb means to find the present value P of the
amount F; When discount is used a noun, it is a reduction on the amount
of F or the difference between F and P which is I.
 To discount a full amount F for a certain number of years means to
determine the present value P of the amount F on a day which is t years
before F is due.
 Thus, the discount on F is F – P
Since F = P + I, then I = F – P
The symbol for I for interest can be of two meanings:
a) I = the interest on the Present value P
b) I = the discount on the Amount F
 Formula to discount an amount F for t years:
𝑭
𝑷= (𝟏+𝒓𝒕)

Example 5. Mr. Antonio buys a bill of goods requiring payment of Php 10,200
at the end of 120 days. Mr. Antonio was offered 5% discount for cash in
30 days. To take advantage of the discount, what interest rate will he pay
to borrow money to avail of the 90 days optional dates?

Given: 1. Cash payment within 30 days

2. Discount offered is 5% of 10,200 = 510
Required: r

Solution:
1. 10,200 – 510 = 9,690 (the discounted amount or the present value
of 10,200 which Mr. Antonio need.
Here are his options: To pay a) 10,200 at the end of 120 days
b) 9,690 at the end of 30 days

2. From the equation 𝐼 = 𝑃𝑟𝑡 then

𝑰 𝟓𝟏𝟎
𝒓= = 𝟗𝟎
𝑷𝒕 𝟗,𝟔𝟗𝟎(𝟑𝟔𝟎)
The interest rate is 0.21 or 21%
  Another way of representing Discount
𝑫 = 𝑭𝒅𝒕 where: 𝑫 is the discount
𝑭 is the given amount
𝒅 is the discount rate
t is the time or term

Example 6: Discount the amount F = 1,000 for ½ year at 4%

Given: F = 1,000, t= ½ year, r=.04
Solution: 𝑫 = 𝑭𝒅𝒕 = 1,000(.04)(1/2) = Php 20
𝑷 = 𝑭 − 𝑫 = 1,000 – 20 = Php 980

Example 7: How much must Ms. Santos get in pawning her jewelry at 5%
Simple interest per month if she needs to pay Php 5,000 after a month?
Given: F = 5,000, t= 1 month, r=.05
Solution: 𝑫 = 𝑭𝒅𝒕 = 5,000(.05)(1) = Php 250
From: 𝐹 = 𝑃 + 𝐼
𝑷 = 𝑭 − 𝑰 (I becomes D )
𝑷 = 𝑭−𝑫
The amount that Ms. Santos gets is
𝑷 = 𝟓, 𝟎𝟎𝟎 − 𝟐𝟓𝟎 = 𝑷𝒉𝒑 𝟒, 𝟕𝟓𝟎