SAS 14: SIMPLE AND DISCOUNT INTEREST

SIMPLE INTEREST

➔ When the money is loaned out, the person who borrows the money generally pays a fixed

rate of interest on the principal for the time period he keeps the money.

➔ INTEREST: The RENT one pays for the use of money

➔ FORMULA:

Is = Prt

WHERE:

P = PRINCIPAL AMOUNT (The amount of money that is BEING BORROWED or loaned)

r = INTEREST RATE (% form, but converted into DECIMAL form for computation)

t = TIME/PERIOD (in YEARS, if the no. of MONTHS is given, then divide it by 12)

➔ FUTURE VALUE: the total amount due AT THE END of a loan

◆ FORMULA:

F = P + Is OR F = P(1 + rt)

WHERE:

P = PRINCIPAL AMOUNT

Is = SIMPLE INTEREST

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HOW DID F = P + Is TURN INTO F = P(1 + rt) ?

A=P+I

= P + Prt

A = P(1 + rt)

EXAMPLES OF PROBLEMS INVOLVING SIMPLE INTEREST

1. Ursula borrows $600 for 5 months at a simple interest rate of 15% per year. Find the

interest, and the total amount she is obligated to pay?

➔ WHAT IS ASKED? SIMPLE INTEREST AND FUTURE VALUE

◆ (WHY FUTURE VALUE? Future value means the total amount due AT

THE END of a loan. It is stated that we need to also find the TOTAL

AMOUNT SHE IS NEEDED TO PAY. )

GIVEN : P = $600 r = 15% or 0.15 t = 5/12

FORMULA/S THAT WILL BE USED: I = Prt & F=P+I

SOLUTION : Interest = multiply the principal (P) with the interest rate (r) and the time (t).

I = Prt F=P+I

= $600(.15) = $600 + $37.50

I = $37.50 F = $637.50

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Incidentally, the total amount (F) can be computed directly as

F = P(1 + rt)

= $600[1 + (.15)(5/12)]

F = $637.50

2. Jose deposited $2500 in an account that pays 6% simple interest. How much money

will he have at the end of 3 years?

➔ WHAT IS ASKED? FUTURE VALUE

◆ (WHY FUTURE VALUE? Future value means the total amount due AT THE

END of a loan. Clue word: “AT THE END”, It is stated that he needs to know

the money that he will have at the end of 3 years, which means THE TOTAL

AMOUNT OF MONEY AT THE END OF 3 YEARS)

GIVEN : P = $250 r = 6% or 0.06 t=3

FORMULA/S THAT WILL BE USED:

I = Prt & F=P+I OR use F = P(1 + rt) directly

SOLUTION :

F = P(1 + rt)

= $2500[1 + (.06)(3)]

F = $2950

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3. Darnel owes a total of $3060 which includes 12% interest for the three years he

borrowed the money. How much did he originally borrow?

➔ WHAT IS ASKED? PRINCIPAL AMOUNT

◆ (WHY THE PRINCIPAL AMOUNT? A principal amount refers to The amount of

money that is BEING BORROWED or loaned. Clue word/s: ORIGINALLY

BORROWED, it means that the missing one here is the INITIAL AMOUNT/

THE ORIGINAL AMOUNT OF MONEY THAT HE BORROWED)

GIVEN : F = $3060 r = 12% or 0.12 t=3

FORMULA/S THAT WILL BE USED:

F = P(1 + rt) OR P = F / ( 1 + rt )

SOLUTION :

This time we are asked to compute the principal P.

F = P(1 + rt)

$3060 = P[1 + (.12)(3)]

$3060 = P(1.36)

$2250 = P

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DISCOUNT INTEREST (Id)

➔ Banks often DEDUCT the simple interest from the loan amount at the time that the loan

is made. When this happens, we say the loan has been DISCOUNTED.

➔ DISCOUNT: interest that is deducted

➔ FORMULA:

Id = Fdt

WHERE:

F = FUTURE VALUE (the total amount due AT THE END of a loan)

d = DISCOUNT RATE (% form, but converted into DECIMAL form for computation)

t = TIME/PERIOD (in YEARS, if the no. of MONTHS is given, then divide it by 12)

➔ PROCEEDS/LOAN PROCEEDS: the actual amount being borrowed

Lp = F – Id OR Lp = F(1 – Id)

HOW DID Lp = F – Id TURN INTO Lp = F(1 – Id) ?

Lp = F – Id

Lp = F – Fdt

Lp = F(1 – dt)

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EXAMPLES OF PROBLEMS INVOLVING DISCOUNT INTEREST

1. Francisco borrows $1100 for 10 months at a simple interest rate of 15% per year.

Determine the discount and the proceeds.

➔ WHAT IS ASKED? DISCOUNT INTEREST AND PROCEEDS

GIVEN : F = $1100 d = 15% or 0.15 t = 10/12

FORMULA/S THAT WILL BE USED: Id = Fdt

SOLUTION :

Id = Fdt

= (1100)(0.15) (10/12)

Id = $137.5

SAS 15: SIMPLE ORDINARY AND EXACT INTEREST

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ORDINARY INTEREST

➔ 360 days in a year.

➔ FORMULA:

𝑑𝑎𝑦𝑠
I= Pr ( 360
)

EXAMPLES OF PROBLEMS INVOLVING ORDINARY INTEREST

1. Janna borrowed Php 2 500.00 at 12% interest. How much would be the (ordinary)

interest after 803 days?

➔ WHAT IS ASKED? ORDINARY INTEREST

GIVEN : F = Php2500 d = 12% or 0.12 t = 803/360

𝑑𝑎𝑦𝑠
FORMULA/S THAT WILL BE USED: I = Pr ( 360
)

SOLUTION :

𝑑𝑎𝑦𝑠
I = Pr ( 360
)

803
= (2500) (0.12) ( 360 )

I = Php 669.17

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EXACT INTEREST

➔ 365 days in a year.

➔ FORMULA:

𝑑𝑎𝑦𝑠
I= Pr ( 365
)

EXAMPLES OF PROBLEMS INVOLVING EXACT INTEREST

1. Find out how much interest would Allen give after 200 days if she borrowed Php 11

000.00 at 10% interest rate given that she agreed to use exact interest.

➔ WHAT IS ASKED? EXACT INTEREST

GIVEN : F = Php 11 000 d = 10% or 0.1 t = 200/365

𝑑𝑎𝑦𝑠
FORMULA/S THAT WILL BE USED: I = Pr ( 365
)

SOLUTION :

𝑑𝑎𝑦𝑠
I = Pr ( 365
)

200
= (11000) (0.1) ( 365 )

I = Php 602.74

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 SAS 16: COMPOUND INTEREST

COMPOUND INTEREST

➔ When the money is loaned or borrowed for a LONGER time period, if the interest is paid

(or charged) not only on the principal, but also on the PAST INTEREST.

➔ EXAMPLE OF COMPOUND INTEREST

◆ Suppose we deposit $200 in an account that pays 8% (0.08) interest.

● YEAR 1 = $200 + $200(.08) = $216.

● YEAR 2 = $216 + $216(.08) = $233.28.

● The process will continue each year…

➔ FORMULA:

Ic= F − P

WHERE:

F = FUTURE VALUE (the total amount due AT THE END of a loan)

P = PRINCIPAL AMOUNT ((The amount of money that is BEING BORROWED or loaned)

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➔ MATURITY VALUE: the total amount due AT THE END of a loan

WHERE:

P = PRINCIPAL AMOUNT ((The amount of money that is BEING BORROWED or loaned)

r = INTEREST RATE (% form, but converted into DECIMAL form for computation)

t = TIME/PERIOD (in YEARS)

m = FREQUENCY OF INTEREST PAYMENT PER YEAR

➔ PERIODS (n): An amount is compounded every period, meaning after every period, the

investment earned is added to the principal.

◆ FORMULA: n= mt

WHERE:

m = FREQUENCY OF INTEREST PAYMENT PER YEAR

t = DURATION OF THE INVESTMENT IN YEARS

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 Interest Period Length of Period Frequency of interest
payment per year (m) =
(LENGTH OF PERIOD/12)

ANNUALLY (1) 1 year (12 months) 1

SEMIANNUALLY (1/2) 6 months 2

QUARTERLY (1/4) 3 months 4

BIMONTHLY ( 2 months) 2 months 6

MONTHLY (1 month) 1 month 12

➔ PERIODIC RATE (i): Interest rates are usually stated as an annual rate, we need to

convert them to periodic rate.

𝑗
◆ FORMULA: i= 𝑚

WHERE:

m = FREQUENCY OF INTEREST PAYMENT PER YEAR

j = ANNUAL INTEREST RATE

EXAMPLES OF PROBLEMS INVOLVING COMPOUND INTEREST

1. Find how many periods are there if an investment is compounded quarterly for

5 years.

➔ WHAT IS ASKED? NUMBER OF PERIODS (n)

GIVEN : t=5 m = 4 (quarterly, refer to the table above)

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 FORMULA/S THAT WILL BE USED: n= mt

SOLUTION:

n=4×5

n = 20

2. An amount is compounded quarterly for 5 years at 12% annual rate. Find the

periodic rate.

➔ WHAT IS ASKED? PERIODIC RATE (i)

GIVEN : j = 12 % or 0.12 m = 4 (quarterly, refer to the table on p. 11)

𝑗
FORMULA/S THAT WILL BE USED: i= 𝑚

SOLUTION:

𝑗 0.12
i= 𝑚
= 4
= i = 0.03

3. Cris borrows Php 50, 000 and promises to pay the principal and interest at 12%

compounded monthly. How much must he repay after 6 years?

➔ WHAT IS ASKED? FUTURE VALUE

◆ (WHY FUTURE VALUE? Future value means the total amount due AT

THE END of a loan. It is stated that we need to find the amount that Cris

needs to pay AFTER 6 years. )

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 GIVEN : P = Php 50 000 d = 12% or 0.12 t=6

m = 12 (monthly, refer to the table on page 11 )

FORMULA/S THAT WILL BE USED:

SOLUTION:

A = Php 102,354.97

4. Find the maturity value and the compound interest of Php 10,000 compounded

annually at an interest rate of 2% in 5 years.

➔ WHAT IS ASKED? MATURITY VALUE AND COMPOUND INTEREST

GIVEN : P = Php 10 000 d = 2% or 0.02 t=5

m = 1 (annually, refer to the table on page 11 )

FORMULA/S THAT WILL BE USED:

SOLUTION:

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 SAS 18: ACTUAL TIME AND APPROXIMATE TIME

APPROXIMATE TIME

➔ Assuming that every month is equivalent to 30 days (even though in real life

its not)

➔ ORDINARY SIMPLE INTEREST USING APPROXIMATE TIME

➔ EXACT SIMPLE INTEREST USING APPROXIMATE TIME

ACTUAL TIME

➔ Uses precise number of days for time of the investment or loan. (some

months are 31 days, some are 30 days, and for february, its either 28 or 29).

◆ JANUARY= 31 days
◆ FEBRUARY = 28 days (if leap year, or if the year is divisible by 4,
then this month will be 29 days, NOT 28)
◆ MARCH = 31 days
◆ APRIL = 30 days
◆ MAY = 31
◆ JUNE = 30 days

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 ◆ JULY= 31 days
◆ AUGUST= 31 days
◆ SEPTEMBER= 30 days
◆ OCTOBER= 31 days
◆ NOVEMBER= 30 days
◆ DECEMBER= 31 days

➔ ORDINARY SIMPLE INTEREST USING ACTUAL TIME

➔ EXACT SIMPLE INTEREST USING ACTUAL TIME

THE DIFFERENCE BETWEEN APPROXIMATE & ACTUAL TIME

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EXAMPLES OF PROBLEMS INVOLVING APPROPRIATE & ACTUAL TIME

1. Les borrowed P 8, 600.00 on Mar. 2, 2011 which is to be repaid on May 21, 2011

at 16.2% simple interest. look for…

GIVEN : P = Php 8 600 d = 16.2% or 0.162

t = March 2011 - May 21 2011

FORMULA/S THAT WILL BE USED:

CALCULATING FOR THE ACTUAL TIME:

MARCH (31-2) = 29

APRIL (30) = 30

MAY (21) = 21

80 DAYS

CALCULATING FOR THE APPROXIMATE TIME:

MARCH (30-2) = 28

APRIL (30) = 30

MAY (21) = 21

79 DAYS

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(a) exact simple interest using actual time,

(b) exact simple interest using approximate time,

(c) ordinary simple interest using actual time, and

(d) ordinary simple interest using approximate time.

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