SIMPLE & COMPOUND

INTEREST
Business Finance
Time Value of Money
• concept that the money you have now is
worth more than the identical sum in the future
due to its potential earning capacity.
• This core principle of finance holds that
provided money can earn interest, any
amount of money is worth more the sooner it is
received. (Investopedia)
Time Value of Money
• People invest their money to receive returns in
the future.
• The time value concept helps individuals or
businesses to analyze what will be the value of
money in the present and in the future.
Time Value of Money
• The present value is the original amount
borrowed,
• The future value is the principal plus the total
interest earned over a stated period, the
interest is the amount of money paid for the
use of borrowed money.
Time Value of Money
• Present value and future value are both
involved in the time value of money.
• Both consider three factors:
• principal,
• interest rate, and
• time.
Time Value of Money
You invested Php 20,000.00 for three
years at a 5% simple interest rate. How
much will you get after three years?

a. Principal _________________
b. Interest Rate _________________
c. Time _________________
Debt vs Equity Financing
DEBT FINANCING
EQUITY FINANCING
Interest and
principal Both provide Dividends are paid
are paid to the funds for the to the investors.
lender (creditor) business
by the borrower The shareholders
(debtor) Both have have “voting
financing cost. rights” (common
Lender has no stocks)
“voting rights” in
the business
Debt vs Equity Financing
Lenders (creditors) earn money through interest
(debts) or dividends (equity) that the borrowers
(debtors) pay because of using the lenders’
money.
Simple Interest
Simple interest is computed based on the principal
amount (original amount) and based on the annual
time. It is computed by multiplying together the
principal, rate, and time.

I = Prt
where: I = simple interest
P = principal
r = interest rate
t = time
Simple Interest
To find the future value (maturity value) at the end of
the term, add the principal amount and the interest
earned.

Future Value (FV) = Principal + Interest

Future Value (FV) = P (1+rt)
Simple Interest
Example 1:
You invested Php 20,000 for three years at 5% simple
interest rate. How much will you get after three years?

I = Php 20,000 x 0.05 x 3

= Php 3,000

FV = Php 20,000 + Php 3,000

= Php 23,000
Simple Interest
Example 1:
You invested Php 20,000.00 for three years at 5%
simple interest rate. How much will you get after three
years?

FV = Php 20,000 + Php 3,000

= Php 23,000

0 1 2 3
P20,000 P23,000
Simple Interest
Example 2:
Alex paid Php 1,537.50 with a loan made 3 months
before at 10% simple interest. Find the principal
amount of the loan and the interest generated.
Simple Interest
Example 2:
Alex paid Php 1,537.50 with a loan made 3 months
before at 10% simple interest. Find the principal
amount of the loan and the interest generated.

Given: FV = 1,537.50
r = 10% or 0.1
t = 3 months = 3/12 = 0.25
Simple Interest
Example 2:
Given: FV = 1,537.50
r = 10% or 0.1
t = 3 months = 3/12 = 0.25

!
P = I = FV – P
"#$%
"&'(.&* = 1,537.50 – 1,500
=
"#[ ." (.-&)] = Php 37.50
= Php 1,500
Simple Interest
Example 3:
The interest on a loan of Php 20,000.00 is Php 3,200.00.
If the rate is 8%, when is the loan due?
Simple Interest
Example 3:
The interest on a loan of Php 20,000.00 is Php 3,200.00.
If the rate is 8%, when is the loan due?

Given: P = 20,000
r = 8% or 0.08
I = 3,200
Simple Interest
Example 3:
Given: P = 20,000 0
t =
r = 8% or 0.08 1$
I = 3,200 =
',-**
(-*,***)(*.*3)

= 2 years
Simple Interest
Example 4:
Determine the simple interest rate if an investment of
Php 25,000.00 accumulates Php 27,625.00 in 18
months.
Simple Interest
Example 4:
Determine the simple interest rate if an investment of
Php 25,000.00 accumulates to Php 27,625.00 in 18
months.

Given: P = 25,000
FV = 27,625
t = 18 months = 1.5 years
Simple Interest
Example 4:
Given: P = 25,000
FV = 27,625
t = 18 months = 1.5 years
0
r =
I = FV – P 1%
-,4-&
= 27,625 – 25,000 = (-&,***)(".&)
= Php 2,625
= 0.07 = 7%
Compound Interest
Compound interest is is simply earning interest on
interest. it means that the interest earned is added to
the principal and the new principal draws interest.

FV = P(1+r)t
where: FV = future value
P = principal
r = interest rate
t = time
Compound vs Simple Interest
Compound Interest
Example 5:
You invested Php 20,000 for three years at 5%
compound interest rate. How much will you get after
three years?
Compound Interest
Example 5:
You invested Php 20,000 for three years at 5%
compound interest rate. How much will you get after
three years?

Given P = 20,000
r = 5% or 0.05
t = 3 years
Compound Interest
Example 5:

Given P = 20,000
r = 5% or 0.05
t = 3 years

FV = 20,000 (1+.05)3
= 20,000.00 (1.05)3
= 20,000.00 (1.157625)
= Php 23,152.50
Compound Interest
Example 5:

FV = 20,000 (1+.05)3
= 20,000.00 (1.05)3 The Future Value Interest
= 20,000.00 (1.157625) Factor (FVIF) can be taken
from the FVIF table…

= Php 23,152.50

0 1 2 3
P20,000 P ???
Compound Interest
Example 6:
Your father paid Php 176,234.17 with a loan made 5
years ago at 12% compound interest. What is the
principal amount of the loan and the interest
generated?
Compound Interest
Example 6:
Your father paid Php 176,234.17 with a loan made 5
years ago at 12% compound interest. What is the
principal amount of the loan and the interest
generated?

Given FV = 176,234.17
r = 12% or 0.12
t = 5 years
Compound Interest
Example 6:
!5
Given FV = 176,234.17 P = ("#$)!
r = 12% or 0.12 "(4,-'6."(
t = 5 years = ("#*."-)"

= Php 100,000
Compound Interest
Example 6:
!5
P = ("#$)!
"
= 176,234.17 x ("#*."-)"
The Present Value Interest Factor (PVIF)
= 176,234.17 x 0.567427 can be taken from the PVIF table…

= Php 100,000
0 1 2 3
P??? P 176,234.17
Compounding Frequency
Compounding frequency (m) in the number of times
an interest is computed on a certain principal in one
year. The conversion period per year could be
annually, semi-annually, quarterly, or monthly.

7
The equation is 𝑗 =8
where: j = nominal rate
I = interest rate
m = frequency of compounding
Compound Interest
Example 7:
Find the maturity value and interest if Php 15,000.00 is
deposited in a bank at 3% interest compounded
quarterly for five years.
Compound Interest
Example 7:
Find the maturity value and interest if Php 15,000.00 is
deposited in a bank at 3% interest compounded
quarterly for five years.

Given P = 15,000
r = 12% or 0.12
t = 5 years
m=4
Compound Interest
Example 7:
7 *."-
Given P = 15,000 j = = = .03
8 6
r = 12% or 0.12
n = 𝑚𝑡 = 4 5 = 20
t = 5 years
m=4
Thus, 20 compounding
periods at 3% per period
Compound Interest
Example 7:

Given P = 15,000 FV = 𝑃 (1 + 𝑗)9

r = 12% or 0.12 = 15,000(1 + .03)-*
t = 5 years = Php 27,091.67
m=4
I = FV – P
7 *."-
j = = = .03 = 27,091.67 – 15,000
8 6
= 12,091.67
n = 𝑚𝑡 = 4 5 = 20
Compound Interest
Example 7:
FV = 𝑃 (1 + 𝑗)9
= 15,000(1 + .03)-*
From the FVIF Table,
= 15,000 x 1.80611 using 3%, 20 periods
= Php 27,091.67

0 1 2 3
P15,000 P ???
Simple vs Compound Interest
Year Simple Interest Compound Interest
Principal Interest Future Principal Interest Future
(5%) Value (5%) Value
1 20,000 1,000 10,500 20,000 1,000.00 21,000.00
2 20,000 1,000 11,000 21,000 1,050.00 22,050.00
3 20,000 1,000 11,500 22,050 1,102.50 23,152.50
Total 3,000 3,152.50