Mathematics of

Investment

Simple Interest
 Objective:
By the end of this lesson, students will be
able to define and calculate simple
interest, understand its implications in
real-life scenarios
Students will also learn how to determine
time period
 2 Common Types of
Loans
Consumer loan - given to retail customers
or individuals for personal purposes
Business loan - lent to companies or
business enterprises to finance their
businesses operating costs like corporate
loans, commercial loans and small-and-
medium enterprise loans.
 A. Types of Loan
1. Secured and Unsecured Loans
Secured Loan is a loan in which the
borrower pledges some assets, like a
car or property as collateral. If you
default on this loan, the bank will get its
money back by seizing the collateral.
 A. Types of Loan
1. Secured and Unsecured Loans
Unsecured Loan is a monetary loan that is
not secured against the borrower's assets.
It is generally sent out to cover items like
credit card debt, bank overdrafts, lines of
credit, some corporate bonds, and
personal loans.
 A. Types of Loan
2. Open-ended and Closed-ended Loans

An Open-ended Loan is a loan that can be borrowed over and

over. Credit cards and lines of credit are common types of
open-ended loans. These loans have a credit limit and each
time a borrower makes a purchase, the available credit
decreases. Each payment made also makes the available
credit limit increase, allowing the borrower to use the same
credit over and over. It is also called a revolving loan.
 A. Types of Loan
2. Open-ended and Closed-ended Loans

A Closed-ended Loan is a type of loan that cannot be borrowed

once they've been repaid. As the borrower makes payments,
the balance of the loan goes down and the borrower will not
have any available credit, he/she can use it on closed-ended
loans. If the borrower needs more money, he/she needs to
apply for another loan. Common types of closed-ended loans
include mortgage loans, auto loans, and student loans.
 A. Types of Loan
3. Mortgage

a very common type of debt instrument, used by many

individuals to purchase housing. In this agreement, the
money is used to purchase the property. The borrower
pays a small down payment based on the price of the
property. In return, the borrower pays off the loan for the
cost of the property plus interest. If the borrower failed to
pay his debts on the loan, the bank has the right to seize
the property
 A. Types of Loan
4. Student Loan

a loan provided to students to help defray the costs

of a college education. It is generally paid off after
graduation. They can either be subsidized or
unsubsidized. Unsubsidized loans do not earn
interest while the student is in college.
 A. Types of Loan
5. Personal Loan (or signature loan)
a loan granted to an individual.

6. Demand Loan
is an unconventional loan unusual for a very short
time, typically less than 180 days. It does not have
fixed dates for repayment, and it carries a floating
interest rate. It can be either secured or unsecured.
B. Five C's of Credit
Credit score is a measure of factors that may affect
the borrower's ability to repay credit. It's a complex
formula that considers how the borrower repaid
previous loans, any outstanding debt, and the current
salary.
it is dynamic and can change positively or
negatively depending on how much debt the
borrowers accrue and how they manage his/ her
bills.
B. Five C's of Credit
1. Character is based on the borrrower's credit history,
the lender attempts to determine if he/she possess
the honesty and reliability to repay the debt, which
includes past payment experience, review a credit
bureau report, educational background, and/or
experience in the business.
B. Five C's of Credit
2. Capacity refers to the borrower's ability to repay the
debt. The lender will consider if he/she has been working
regularly in an occupation that is likely to provide enough
income to support his/her credit use.
3. Capital is determined by the lender if the borrower has
any valuable assets such as real estate, personal
property like an automobile, or savings and investments
that could be used to repay credit debts in the absence
of income.
 B. Five C's of Credit
4. Collateral is a form of security for the lender. The
collateral represents assets that the individual/company
pledges as an alternate repayment source for the loan. It is
usually a type of insurance in case a borrower cannot
repay a loan.
5. Condition is the national and local economic condition on
which the intended purpose of the loan depends (e.g. working
capital, equipment, new offices, etc). It also depends on
economic situation and industry level of the company.
 Basic Concepts on
Simple Interest
Borrowing and lending are two sides of the
same transaction.
To a lender, a loan represents an
investment in a debt obligation.
The interest charged provides income from
the investment. (ex. income from credit card
transaction)
 Simple Interest
Amount earned for one year calculated by
multiplying the principal by the interest rate
and the time in years.
is paid at the end of the loan period
It is often used for short-term loans,
savings accounts, and other financial
situations where the interest does not
compound, meaning it does not earn
interest on itself.
 Interest:
From the investor's standpoint,
interest is income from invested
capital.
From the debtor's viewpoint, interest
is money paid for the use of money.
 Interest
Fee or rent that lenders charge to borrowers
for the temporary use of the borrowed
money.

Principal - amount borrowed

rate of interest - percentage of the principal that

will be charged for a specified period (daily,
weekly, monthly, yearly, etc.
 Formula
Interest = Principal x Interest rate x Time
I=Pxrxt
where:
I = Simple Interest
P = Principal or amount invested or borrowed
r = simple interest rate
t = term of time in years
 Formula
Simple Interest = Principal x Interest rate x Time
I=Pxrxt

P = _I_ r= I t= I F =P+I
rt Pt Pr F = P (1 + rt)
where F = maturity value of the loan invested
final amount resulting from the investment
of 1 Peso for t years at the rate r.
Formula

Pxrxt
Promissory Note:
 Terms:
Promissory Note - a legal document in which a person
or firm agrees to pay a certain amount of money, on a
specified date to another person or firm.

Maker (payer) - of the note is the person borrowing the

money.

Payee - the person who loaned the money, and who will
receive the payment
 Terms:
Repayment date or maturity date - date on which
the money borrowed or loan is to be completely repaid

Time or term (t) - amount of time in years the money is

borrowed or invested; length of time between the origin and
maturity dates

Principal (face value)- amount of money borrowed or invested

on the origin date
 Terms:
Collateral - the maker must pledge assets such as real
estate, stock, or cars that are of equal or greater value
to the amount of the loan

In the case of nonpayment, the bank will take the

collateral and liquidate or sell it. The bank then uses
the proceeds to pay off the note - any excess in the
amount liquidated in the collateral will be returned
to the maker of the note.
 Problem 1
Samantha borrowed P1,500 from her friend at
an interest rate of 8% per year. She plans to
repay the loan in 3 years. Calculate the simple
interest she will have to pay.
Using the formula:
I=Pxrxt
=1,500 x .08 x 3
= 360

Samantha will have to pay

P360 in simple interest.
 Problem 2
James invested P2,000 in a
savings account that earns an
annual interest rate of 5%. How
much interest will he earn after 2
years?
 Solution
Given : Principal amount = P2,000
Interest rate (r) = 5% or 0.05 (as decimal)
Time (t) = 2 years
Using the formula: I = P x r t
= 2000 x 0.05 x 2
= 200
James will earn P200 in interest after 2 years.
 Determining the
Time Period
To find the due date, we must determine the
number of days in each month. Then we simply
compute month by month, the number of days
from one date to another.
The loan date is the first day of a loan and the due date (or
maturity date) is the last day of the loan. Then these two
dates are known, the number of days of the loan can be
calculated by using the days in each month as reflected in
Table 1.1 and Table 1.2.
 One way of determining due dates and
days between two dates is easier to
compute if we have access to a table for
the days in a year as shown in Table 1.2.
We must know the date of the note and
the length of the note, determine the day
of the year the note is dated, and add the
number of days in the note. The sum will
be the day of the year the note will
become due.
A. Determining the Number of Days
in Each Month

Each knuckle corresponds to a month with 31

days and each space corresponds to a short
month.
Steps in Solving the Number of Days of a Loan

1. Identify the number of days remaining in

the first month by subtracting the loan date
from the number of days in that month.
2. Write the number of days in each month.
3. Write the number of days in the last month.
4. Add the days from the first month to the
last month.
Example 1: A note dated February 28 is due to be paid in
August 1. How many days will the note run?

Solution:
Using table 1.2 we can verify that February 28 is the 59th
day of the year, while August 1 is the 213th day of the year.
Thus,

August 1 = 213th day

February 28 = 59th day
154 days
The note will run for 154 days.
Example 2: Determine the due date of a 130-day note
dated July 7.

Solution:
Using table 1.2 we can verify that July 7 is the is the 188th
day of the year, and the note is due 130 days later.

July 7 = 253rd day

= + 130 days
318th day ---> November 14
The note falls due on the 318th day of the year,
which is November 14.
 Example 3: Find the actual time and
approximate time from March 3, 2022 to
September 10, 2022.

Solution:
 An alternate solution in determining the
actual time is using able 1.2:

Solution:
 Example 4: Find the actual and approximate
time from November 18, 2023 to May 9, 2024.

Solution: Since
2024 is a leap year,
the month of
February contains
29 days in the
actual time. Thus,
the solution will be
An alternative solution in determining the
actual time using Table 1.2.
 Exact and Ordinary Interest
Exact Interest is computed in 365 days in a year as the time factor
denominator.

Ordinary interest is a type of interest wherein the number of days

is computed based on 360 days in a year.
Banks and most other institutions use ordinary interest because
it yields a somewhat higher interest as compared to the exact
interest method.
If the type of interest is not specified in any problem, the
problem will be solved using the Banker’s Rule or ordinary
interest in actual time.
 C. Exact and Ordinary
Interest

Exact Interest

Ordinary Interest
Note: Rate must be converted to a decimal or
fraction before substituting to any formula.

Note: The time period is computed in terms of

years. This means that time expressed in months
or days must be converted to a fraction of a year
before being substituted into the formula for t
unless stated otherwise.
 Example 1:
Find the ordinary and the exact interest at 5% on
P5,000 and the corresponding amounts at the end of
59 days.
 Analysis:
In Example 1, we illustrated the fact that ordinary
interest for D days is greater than exact interest
for D days. This is due to the fact that the
denominator 365 is larger than 360.
 Example 2:
Find the interest on P28,700 at 7.3% from March
14, 2022 to August 16, 2022 using the following:
a. ordinary interest using actual time,
b. ordinary interest using approximate time,
c. exact interest using actual time, and
d. exact interest using approximate time?
 Example 2:
Solution:
Given: P = P28,700 r = 7.3% = 0.073 t = ?

The first step is to determine the approximate

time and actual time of the term, then compute
the ordinary interest and exact interest.
Solution:
 Thus, ordinary
interest using
actual time or the
Solution:
Banker’s Rule
provides the
highest interest,
while the lowest
generated interest
is exact interest
using approximate
time.
 Example 3:
Whitney paid P9,250 on a loan made 6 months before at 12%
simple interest. Find the interest generated.
Solution:
Given: F = P9,250 r = 12% or 0.12 t = 6 months = 0.50 year

We will solve F = P(1 + rt) in terms of P, thus

F = P(1 +rt) P = __F__ P = ___9,250______ P = 9,250__ = P8,726.42
1 + rt 1 + (0.12) (0.50) 1+0.06
After obtaining the value of the principal (P), we shall then compute
interest I. F=P+I
I = F - P = 9,250 - 8,726.42
I = P523.58 The interest will amount to P523.58.
 Exercises:
1. Ray borrowed P23,000 and after 3 years,
paid back the loan with 8% interest. How
much was the interest paid?
2. Find the interest paid by Selena on P35,000
that he borrowed for 2 years at 15% simple
interest.
 Computing the Present
Value
In this section, we will examine the use of
the simple interet formula in computing
the value of the principal amount. Now
let us examine the examples below.
 Example 1:
If a nine-month term deposit at a bank has a
simple interest rate of 9% per annum, how much
will have to be deposited to earn P225 of interest?
Solution:
Given: I = P225 r = 9% or 0.09
t = 9 mos. or 0.75 year
P = __I_ = ____225___ P = __225_ P = P3,333.33
rt (0.09)(0.75) 0.0675
 Example 2:
What is the present value of P5,275 due in 6
months if 11% interest paid?
Solution:
Given: F = P5,275 r = 11% or 0.11
t = 6 mos. or 0.5 year
We solve for P.
F = P(1+rt) P= ___F__ P = ___5,275_______ = 5,275
1+rt 1+(0.11)(0.50) 1+0.055

P = P5,000 --> present value is P5,000.

 Computing the Simple
Interest Rate
Example 1 : Interest of P1,904 was charged on a
loan of P6,800 for 4 years. What simple annual
rate of interest was charged on the loan?
Solution:
Given: P = P6,800 r = ?
t = 4 years I = P1,904.00
We solve for r.
r= __I_ r = ___1,904_ = _1,904_ r = 0.07 or 7%
Pt (6,800)(4) 27,200
An interest rate of 7% was charged on the loan
 Computing the Simple Interest Rate

Example 2: A P2,300 note with interest is repaid

after 90 days with a check for P2,374.75. What was
the interest rate?
Solution:
Given: F = P2,374.75 r = ?
P = P2,300 t = 90/360 years
We solve for r.
r= __I_ r = __F-P_ = 2,374.75-2,300 =74.75 r=0.13%
Pt Pt (2,300)(90/360) 575
An interest rate of 13% was charged on the loan
 Computing the Term of the Loan

Example 1: The interest earned on a P8,000 term

deposit was P1,200. How long was the term if the
interest rate was 6% per annum?
Solution:
Given: t = ? I = P1,200
P = P8,000 r = 6% or 0.06
We solve for t.
t= __I_ = _____1,200 __ = 1,200 t=2.5 years
Pr (8,000)(0.06) 480
The duration of the term deposit was 2 years and 6
months.
 Computing the Term of the Loan

Example 2: How many days will it take an

investment of P3,000 earnng 8% per annum to
grow to P3,144?
Solution:
Given: t = ? F = P3,,144
P = P3,000 r = 8% or 0.08
To compute the time, we shall replace I by F-P, thus
the forula would be.
t= __I_ = _3,144-3000_ = 144 t= 0.06 years
Pr (3,000)(0.08) 240
 Computing the Term of the
Loan

Since we are interested to get the number of days,

we shall multiply the result by 360/1 year to get the
number of days in 0.60 year. Thus, the solution
would be:
0.60 year x 360 days = 216 days
1 year

It will take 216 days for P3,000 to grow to P3,144.

 Supplementary Exercises

1. If P40,000, lent out at 6% annual interest,

earned P50,000 interest, how long had it
been lent?
2. How long will it take P15,200 to accumulate
to P20,000 at 16% simple interest?
Thank you!