What Is It – Simple as it is

SIMPLE INTEREST
CHARMAINE A. MARQUINA
Introduction

When you deposit money into a savings at a bank you

expect the bank to pay you for the privilege of saving your
money with them. This is extra money is called interest.
Interest is also paid by a borrower to a lender for the
privilege of using money.
Interest is the amount paid or earned for the use of
money.
Introduction

In this chapter we study the methods of computing

interest.
Borrower or debtor is the person who owes the money
or avails of the funds from the lender.
Lender or creditor is the person or institution who
invest the money or makes the fund available.
Introduction

Principal (P) is amount of money borrowed or

invested.
Rate (r) is annual rate, usually in percent, charged by
the lender, or rate of increase of the investment. It must be
converted to decimal form before plugging it into formula.
Time or term(t) is the amount of time in years the
money is borrowed or invested; length of time between origin
and maturity dates. The time or term must be in years or
fraction of a year.
Introduction

Future value or maturity value is the amount after t

years that the lender receives from the borrower on the
maturity dates.
Origin or loan date is the date on which money is
received by the borrower.
Repayment date or maturity date is the date on which
the money borrowed or loan to be completely repaid.
Simple Interest
Simple interest is the interest computed only on the
principal. It is calculated by multiplying the principal, rate
and time. The formula in finding the simple interest
I = Prt
where
I is the simpleinterest
P is the principal
r is the simple interest rate
t is the time
 Four variables are involved in the simple
interest formula I = Prt which means that any
three can be known, requiring you to solve for
the fourth missing variable.
To reduce formula clutter, the triangle
technique illustrated here helps you remember
how to rearrange the formula as needed. Just

Principal rate time

P = __I__ r = __I__ t = __I__

Rt Pt Pr
Simple Interest
If the principal, rate or time is unknown,
the formula to be used is

Principal Rate Time

P =__I__ r =__I__ t =__I__
Rt Pt Pr
Simple Interest
Example 1. A bank offers 0.25% annual simple interest rate for a
particular deposit. How much interest will be earned if 1 million
pesos is deposited in this savings account for 1 year?
Solution:
Given: P = 1,000,000 r = 0.25% or 0.0025 t = 1 year
Find the I.
By substitution and solving
I = Prt
I = (1,000,000)(0.0025)(1)
I = 2,500
Answer: The simple interest earned is Php 2,500.
Simple Interest
Example 2. How much interest is charged when Php 50,000 is
borrowed for 9 months at an annual simple interest rate of 10%?

Solution:
Given: P = 50,000 r = 10% or 0.10 t = 9/12 or 0.75 year
Find the I.
By substitution and solving
I = Prt
I = (50,000)(0.10)(9/12)
I = (50,000)(0.10)(0.75)
I = 3,750
Answer: The simple interest charged is Php 3,750.
Simple Interest
Example 3.
Complete the table below by finding the unknown.

Principal Rate Time Interest Solution:

a. 2.5% 4 1,500 a. The unknown principal
(P) can be
𝐼
obtained by
36,000 b. 1.5 4,860 𝑃=
𝑟𝑡
250,000 0.5% c. 275 1,500
𝑃=
500,000 12.5% 10 d. 0.025)(4
𝑃 = 15,000
Answer: The principal is Php 15,000.
Simple Interest
Example 3.
Complete the table below by finding the unknown.

Principal Rate Time Interest Solution:

a. 2.5% 4 1,500 b. The unknown rate (r)
can be obtained by
36,000 b. 1.5 4,860 𝐼
𝑟=
𝑃𝑡
250,000 0.5% c. 275 4,860
𝑟=
500,000 12.5% 10 d. 36,000)(1.5
𝑟 = 0.09 𝑜𝑟 9%
Answer: The rate is 9%.
Simple Interest
Example 3.
Complete the table below by finding the unknown.

Principal Rate Time Interest Solution:

a. 2.5% 4 1,500 c. The unknown time (t)
can be obtained by
36,000 b. 1.5 4,860 𝐼
𝑡=
250,000 0.5% c. 275 𝑃𝑟
275
𝑡=
500,000 12.5% 10 d. 250,000)(0.005
𝑡 = 0.22 𝑦𝑒𝑎𝑟𝑠
Answer: The time is 0.22 years.
Simple Interest
Example 3.
Complete the table below by finding the unknown.

Principal Rate Time Interest Solution:

a. 2.5% 4 1,500 d. The unknown interest (I)
can be obtained by
36,000 b. 1.5 4,860
𝐼 = 𝑃𝑟𝑡
250,000 0.5% c. 275
𝐼 = 500,000 0.125 10
500,000 12.5% 10 d. 𝐼 = 625,000
Answer: The interest is Php 625,000.
Simple Interest
Example 4. When invested at an annual interest rate of 7%, an
amount earned Php 11,200 of simple interest in two years. How
much was originally invested?
Solution:
Given: r = 7% or 0.07, t = 2 years, I = 11,200
Find P.
By substitution and solving
𝐼 11,200
𝑃= =
𝑟𝑡 0.07)(2
𝑃 = 80,000
Answer: The amount invested is Php 80,000.
Simple Interest
Example 5. If an entrepreneur applies for a loan amounting
P500,000 in a bank, the simple interest of which is P157,500 for
3 years. What interest rate is being charged?
Solution:
Given: P=500,000, Is = 157,500, t = 3 years
Find r.
By substitution and solving
𝐼 157,000
𝑟 = =
𝑃𝑡 500,000)(3
𝑟 = 0.105 𝑜𝑟 10.5%
Answer: The bank charged an annual simple interest rate of 10.5%.
Simple Interest
Example 6. How long will a principal earn an interest equal to
half of it at 5% simple interest?

Solution:
Given P, r = 5% or 0.05, Is= 1/2P or 0.5P
Find t.
By substitution and solving
𝐼 0.5𝑃
𝑡 = =
𝑃𝑟 𝑃)(0.05
𝑡 = 10 𝑦𝑒𝑎𝑟𝑠
Answer: It will take 10 years for a principal to earn half of its value at 5% simple interest rate.
Future Value or Maturity Value
The future value or maturity value is the sum of the
principal and the simple interest.
The formula is
F=P+I
But if simple interest is not yet computed or given
F=P+I
F = P + Prt F by substitution of Is formula
= P (1 + rt) by factoring the common factor P
We can also use the formula F = P (1 + rt)
Future Value or Maturity Value

Note: There are two ways to solve the problem for finding the
future value or maturity value.

Method 1: Solve the simple interest I first and then add it P, that is

F=P+I
Method 2: Use the derived formula F = P(1 + rt)

F = P (1 + rt)
Simple Interest
Example 7. Find the maturity value if 1 million pesos is deposited
in a bank at an annual simple interest rate of 0.25% after
a. 1 year b. 5 years

Solution:
a. Given: P=1,000,000 r = 0.25% or 0.0025 t = 1 year
Method 1:
I = Prt = (1,000,000)(0.0025)(1) = 2,500
F = P + I = (1,000,000) + 2,500 = 1,002,500
Method 2:
F = P(1 + rt) = (1,000,000)(1+0.0025(1)) = 1,002,500
Answer: The maturity or future value after 1 year is Php 1,002,500.
Simple Interest
Example 7. Find the maturity value if 1 million pesos is deposited
in a bank at an annual simple interest rate of 0.25% after
a. 1 year b. 5 years

Solution:
b. Given: P=1,000,000 r = 0.25% or 0.0025 t = 5 years
Method 1:
I = Prt = (1,000,000)(0.0025)(5) = 12,500
F = P + Is = (1,000,000) + 2,500 = 1,012,500
Method 2:
F = P(1 + rt) = (1,000,000)(1+0.0025(5)) = 1,012,500
Answer: The maturity or future value after 5 year is Php 1,012,500.
Present Value
A sum of money that can be deposited today
to yield some larger amount in the future
is called present value of that future amount.
The present value is also the principal amount.

F = P (1 + rt) Recall the future value formula

F = P (1 + rt) By solving for P, divide both sides by (1+rt)
(1+rt) (1+rt)
F = P or P = F _ is the formula for the
(1+rt) (1+rt) present value.
Note: We use this formula for P, when the maturity/future value is given but the I is unknown.
Simple Interest
Example 8. Find the present value of Php 86,000 at 8% simple
interest for 3 years.

Solution:
Given: F=86,000 r = 8% or 0.08 t = 3 years

By substitution and solving

𝐹 86,000
𝑃 = =
(1 + 𝑟𝑡) 1) + (0.08)(3

𝑃 = 86,000 = 69, 354.84

1.24

Answer: The present value is Php 69, 354.84.