MODULE 1: SIMPLE INTEREST

Illustrative Problem 2:
THE NATURE OF INTEREST On February 1, 2012, Princess borrowed at
Interest – refers to the amount paid for the use of 8% interest from ABC Lending, which is payable
money or the price paid for the use of credit. after 6 months.
Example: Jenny borrows money from Premier Bank,
she will be charged with interest by the ban, on Required: Find the simple interest
account of the borrowed money. Answer and analysis: It can be observed that the
Note: Interest may also be viewed as income. term of the loan is less than 1 year. It is
SIMPLE INTEREST COMPUTATION emphasized that the term “time” in the interest
Simple Interest – refers to an interest that is formula is expressed in units of years or 12
computed only once from the time the amount is months. Thus, if the time involved in a given
borrowed until it is paid. situation is less than or more than 1 year, it should
- There is only one interest payment made be expressed in terms of 1 year or 12 months.
during the entire period of borrowing.
Note: Under the concept of simple interest, the
amount of interest is usually paid at the maturity
If the time given is expressed in months or
date or due date. days, convvert this to year using these
formulas:
FORMULA: Interest = Principal x Rate x Time 1. t = no. of months 2. t = no. of days
I = PRT 3. t = no. of days
Where:
12 months 360 days 365 days
I = Interest
P = Principal NOTE: if not specified, 360 days is used in all
R = Interest Rate simple interest computations
T = Time
In this case:
Illustrative Problem 1: P = 400,000
On April 1, 2012, Angel borrowed P 300,000 for R
additional working capital from Premier Lending at
7% interest, payable in 1 year. =
Required: Find the simple interest.
Answer and analysis: It can be observed that the 8
interest of 7% is payable only once from the time %
of borrowing up to maturity date; hence, the
interest is called simple interest.
o
r
In this case:
P = 300,000 0
R = 7% or 0.07 .
T 0
8
=
T
1
=
y
e
6
a
/
r
1
2
I

= o
r
?
½

Substituting the above values in the formula, the y

amount of simple interest is computed above: e
I = PRT a
= 300,000 x 0.07 x 1 r
I = 21,000
I
 basic formula of interest computation, the rate is
= computed by dividing the interest by the product of
principal and time:
?
In this case:
P = 400,000
Substituting the above values in the formula, the
amount of simple interest is computed above:
I = PRT I
= 400,000 x 0.08 x ½
I = 16,000 =

FINDING THE PRINCIPAL 9

The principal is computed as follows: 6
,
0
P= RTI 0
0

Illustrative Problem 1.1

On May 1, 2012, Hyzel borrowed a sum of money T
from Community Bank, payable for 2 years at 8%
simple interest. She paid 6,000 for the interest of her =
loan.
Required: Find how much was borrowed by Hyzel. 3
Answer and analysis. The unknown in the problem is
the principal amount. By manipulating the basic y
formula for simple interest, the principal amount may e
be determined. a
r
In this case: s
I = 6,000
R = 8% or 0.08
T = 2 years R
P=?
=
Substituting the above values in the formula, the
principal amount is computed as follows: ?

I
Substituting the
P= above values in
RT the formula, the
rate is computed
= 6,000
0.08 x 2 as follows: R
P = 37,500 = PT I
T = 2 years
FINDING THE RATE
MATURUTY VALUE OR AMOUNT
I Maturity value or amount – refers to the sum of the
R= PT sum of the principal and interest. It is the future value
of the principal amount.
F
Illustrative Problem 1.2 O
On July 1, 2012, Izzy deposited 400,000 at R
Northern Bank. The deposit earned simple interest of M
96,000 for 3 years. U
L
Required: Compute the rate of simple interest on A:
deposit.
Answer and analysis: The unknown in the given
problem is the rate of interest. By manipulating the M
= 1. If the time stated in the problem is expressed in
P number of days, the year should like wise be
+ measured in days. There are two methods of
I measuring the year in terms of the number of
w days. These are: a. Ordinary interest
h b. Exact interest
er 2. Unless otherwise specified, it is assumed that both
e: the loan date and the maturity date are on the
M = Maturity Value same year. For example, Josephine borrowed
10,000 on January 2, and the loan matures on
May 30, 2012. Since the loan date did not mention
P the year, it is assumed that January 2 refers to
January 2, 2012.
= 3. If the loan date is given and the maturity period is
expressed in months, the maturity period date
P shall coincide with the loan date, regardless of the
r number of days in each month.
i For example, Mr. Montaser borrowed 15,00 on
n May 15, 2012, payable after6 months. The due
c date of the loan will be on November 15,2012,
i 6 months after the loan date, notwithstanding
p the number of days in a particular month
a between May to November.
l 4. If the loan date and due date are given in the
problem, the number of days between the two
given dates are computed using the exact time
I method and approximate time method.
= Ordinary and Exact Interest Method

I Ordinary and exact method interest methods are the

n two methods used to determine the interest when the
t time given in the problem is expressed in number of
e days but the interest rate is expressed in percent per
r year.
e 1. Ordinary Interest Method – which uses 360 days
s as the time denominator.
t 2. Exact Interest Method – which uses 365 days as
the time denominator. But in a leap year, it uses
366 days as the time denominator.
By expanding the basic simple interest
formula, the maturity value is computed using the
following formula:

M = P + PRT
By the process of factoring, maturity value can be
expressed as:

M = P (1 +
RT)

Illustrative Problem:
Kayle borrowed 12,000 which is payable after
3 years and 8 months with simple interest of 12%.

Required: Determine the amount or maturity values of

the loan.
Answer and analysis: The maturity value of the
M = 17,280

Guidelines in Measuring Time

The following simple guideline may be observed in
measuring time: