SIMPLE

INTEREST

Finals
LEARNING COMPETENCIES:

After studying this section, the learners are expected to:

1. Define terms involving simple interest and bank discount.
2. Find the simple interest, maturity value, bank discount and
proceeds.
3. Distinguish and apply in problem solving the concepts of time.
4. Manipulate the simple interest formula when principal, rate or
time is unknown.
5. Compute for the effective rate of a bank discount note.
6. Solve discounting problems on simple interest note and bank
discount note before maturity.
Simple interest
It is an interest computed on the amount the borrower received at the
time the loan is obtained and is added to that amount when the loan
becomes due. Thus, simple interest is computed only once for the entire
period of the loan. At the end of the time period, borrower repays the
amount originally owed plus interest.

Compound Interest
On the other hand, means that interest is computed more than once
during the time period of the loan. Compound interest loans are generally
for time periods of a year or longer.
The computation of simple interest considers three factors:

Principal, Rate and Time.

Principal
Is the amount of deposit make by a depositor or the face
amount lent to the borrower on the loan date.

The simple interest rate

Expressed as a percentage, is converted to a decimal for
computation purposes.
Time
Is the length of time for which the money is borrowed or lent.
The time expressed in years or fractional part of the year is the
period between the:

• Loan date
The date when the loan was obtained

• Maturity date
The date when the loan becomes due.
Finding the simple interest
Simple interest is the product of the principal, rate and time; or stated
as a formula,

Interest = Principal x Rate x Time

or
I = PRT

Example: Luz Clarita borrowed P280,000 at a simple interest rate of

9% for one year. Compute for the simple interest and maturity value of
the loan.
 The simple interest may be now computed using the
formula I=PRT. Substituting the givens in the illustrations,

Interest = Principal x Rate x Time

= 280,000 x 0.09 x 1
= P25,200

Thus a loan for one year at simple interest of 9% will cost

Luz Clarita P25,200 in interest.
Example:

P = P12,550 Solution:
I=PxRxT
R = 10%
= P12,550 x .10 x 3
T = 3 years
I=? = P3,765
Example:

P = P8,700 Solution:
I=PxRxT
R=3½%
= P8,700 x .035 x 18/12
T = 18 months
I=? = P456.75
Finding the maturity value
Example:
After one year, Luz Clarita`s loan matures and she is obligated to pay the
maturity value of the loan. This is the sum of the principal she received on loan date
and the interest formula,

Maturity Value = Principal + Interest

MV = P + I
The maturity value is solved as,
Maturity Value = Principal + Interest
= 280,00 + 25,200
= P305,200

Hence on maturity date, in addition to the principal of P280,000 that

Luz Clarita received when she obtained the loan, she is to pay P25,200
in interest; or a total of P305,200
Example: Solution:
I=PxRxT
P = P12,550 = P12,550 x .10 x 3
R = 10% = P3,765
T = 3 years
I=? MV = P + I
MV = ? = P12,500 + P3,765
= P16,265
Example: Solution:
I=PxRxT
P = P500,000 = P500,000 x .12 x 66/12
R = 12% = P330,000
T = 5 years
and 6 months MV = P + I
I=? = P500,000 + P330,000
MV = ? = P830,000
The Concept of Time
There are also some cases when the time T is stated as a
certain number of days. It follow that the year should be
likewise be measured in terms of the number of days.
Two methods are at had; First the Exact interest method,
which uses 365 days as the time denominator; and Second,
the Ordinary interest method, which uses 360 days.

Note that the exact interest method uses 366 days in a leap
year.
Example:
If Esperanza borrowed P140,00 at 7% interest for 64 days, how much would the
interest be using the exact and ordinary interest method?

Exact Interest Method

Interest = Principal x Rate x Time
= 140,000 x 0.07 x 64/365
= P1,718.36
Ordinary Interest Method
Interest = Principal x Rate x Time
= 140,000 x.07 x 64/360
= 1,742.22

Note that the ordinary interest method yielded a higher interest.

Example:
Ariel takes a loan of P8,000 to buy a used truck at the
rate of 9 % simple interest. Calculate the exact interest to
be paid 80 days after the loan date.

Solution:
P = P8,000 I=PxRxT
R = 9% = P8,000 x 0.09 x 80/365
T = 80 days = P157.81
I=?
Example:
Find the ordinary and exact interest on P15,000 if it is
invested at 15% for 60 days.

Exact Interest:
I=PxRxT Ordinary Interest:
= P15,000 x 0.15 x 60/365 I = P x R x T
= P369.86 = P15,000 x 0.15 x 60/360
= P375
MANIPULATING THE
SIMPLE INTEREST
FORMULA
 Principal is unknown.
A bank loaned Mr. Enriquez money at
8% simple interest for 90 days. If the
amount of interest was P4,000 use the
ordinary interest method to find the
 amount of principal borrowed.

Formula :
Principal =
Solution:
Interest
_________
Principal =
Rate x Time
= P4,000
_________
0.08 x 90/360
= P4,000
_________
0.02
= P200,000
Example: Solution:
Interest
_________
Principal =
I = P375 Rate x Time
R = 2.50% = P375
_________
T = 3 years 0.025x 3
P=? P375
_________
=
0.075
= P5,000
•Rate
  is unknown
If Ana’s Fashion Boutique applies for a P175,000 loan
in a bank the interest of which is P5,810 for 90 days,
what interest rate is being charged? Use the ordinary
interest method.

Formula :
Rate =
Solution:
Rate = Interest
_________
Principal x Time
= P5,810
_________
P175,000 x 90/360
= 5,810
_________
43,750
= 0.1328 x 100
= 13.28%
Example: ( Exact) Solution:
Interest
Rate = _________
I = P20,034.25 Principal x Time
P = P75,000 = P20,034.25
_____________
T = 150 days P75,000 x 150/365
R=? P20,034.25
_________
=
P30,821.92
= 0.65 x 100
= 65%
•Time
  is unknown
What would be the time period of Anakarenina
Fashion Boutique`s loan for P300,000, at 25% ordinary
interest, if the amount of interest is P25,000?

Formula:
Time =
Solution:
Time = Interest
_________
Principal x Rate
= P25,000
_________
P300,000 x .25
= P25,000
_________
75,000
= 0.3333 x 360
= 119.988 or 120 days
Example: Solution:
Interest
Time = _________
I = P94,500 Principal x Rate
P = P180,000 = P94,500
_____________
R = 15% P180,000 x .15
T=? P94,500
_________
=
P27,000
= 3.5 years
BANK DISCOUNT
Bank discount – It is an interest computed on the
maturity value of the loan and is deducted from that
amount at loan date to determine the net amount to be
received by the borrower. It is an another way of
lending that collects interest in advance.

Proceeds – refers to the net amount received by the

borrower.
Bank Discount = Maturity Value x Rate x Time
= MV x R x T

Proceeds = Maturity Value – Bank Discount

= MV - BD
Maturity Value - is the amount applied for the borrower on
loan date. This is the same amount that the debtor is supposed
to pay at maturity date. Simply stated, the amount of loan
applied for at loan date is the maturity value of the loan.

Bank discount rate - expressed as a percentage, is converted

to a decimal for computation purposes.

Time – expressed in years or fractional part of a year, is the

period between the loan and maturity value.
Example:
Mirasol availed of a P245,000 loan at 14% discount rate for 9
months. Find the bank discount and proceeds of the loan.

BD = MV x DR x T
= 245,000 x .14 x .75
= P25,725
Proceeds = MV – BD
= P245,000 – P25,725
= P219,275
END OF FINALS