INTEREST

 is a percentage of some amount of money. It could be

the amount of money you pay someone for having lent
you money or it could be the amount of money you
received from somebody because you allowed him/her
to use your money.

 how much is paid for the use of money (as a percent, or an amount)
Example: Borrow $1,000 from the Bank

Alex wants to borrow $1,000. The local

bank says “10% Interest”. So to borrow
the $1,000 for 1 year will cost: $1,000 x 10%(0.1) = $100

Today Next Year

$1,000 $1,000

Alex Bank Alex Bank

Interest
$100

Alex borrows $1,000,but has to pay back $1,100.

 WORDS
 There are special words used when borrowing money, as shown here:

Today Next Year

Principal
$1,000 $1,000

Borrower Alex Bank Alex Bank

Interest
Lender $100 10% - Rate of interest

The Loan The Repayment

Principal is the original amount borrowed, deposited or invested.

Borrower is the one who borrows the money from a lender.

Lender is the one who lends money to the borrower.

Loan is when money is given to another party in exchange for repayment

of the loan principal amount plus interest
 SIMPLE INTEREST
 This is the interest in which only the original principal
bears interest for the entire term of the loan.

 Is the interest earned at the end of the allotted time

between the lender and the borrower.

 Is a quick and easy method of calculating the

interest charge on a loan.

 Doesn’t compound
 FORMULA OF SIMPLE INTEREST:

I= Prt

Where: I= simple interest

P= principal
r= rate of interest
t= time
Example 1:
A 2-year loan of $500 is made with 4% simple interest.
Find the interest earned.

Given: I= Prt
t=2 = (500)(0.04)(2)
I= 40
P=500

r= 0.04
Answer: The interest is $40.
 MATURITY VALUE

 Is the total amount when the principal is added to the interest.

FORMULA:
M= P + I = P( 1 +rt)

Where: M= maturity value

P= principal
I= simple interest
 Example 2:
An electric company charges their customers 9% simple
interest for late payments. You receive a bill of 8,000
Php. If you pay the bill one month past the due date,
find; a. the amount of penalty.
b. how much you owe the electric company
Given: a. The penalty to be paid is the interest earned by 8,000 Php for
t=1/12 one month based on a simple interest 9% a year.
P=8,000 I= Prt
= (8,000)(0.09)(1/12)
r= 0.09
I= 60 Php
b. You must pay the company a total of
M= P + I = 8,000 + 60 = 8,060 Php
M= P ( 1 + rt ) = 8,000( 1 + (0.09)(1/12) = 8,060 Php
SUMMARY

Simple interest is a basic tool to compute for the extra amount every time
money is invented, deposited or borrowed
 COMPOUND INTEREST
 Is the procedure in which interest is periodically calculated and added to the
principal and this new sum is used as the new principal for a certain number
of periods. The time interval between succeeding interest calculations is called
the conversion period (or compounding period or interval period).

 It is when you earn interest on both the money you’ve saved and the interest
you earn.
 DIFFERENCE BETWEEN SIMPLE
INTEREST AND COMPOUND INTEREST

Simple interest computes the interest based on principal only.

Compound interest computes interest based on principal and previously
earned interest.
 COMPOUND or CONVERSION PERIOD

The time between the successive interest computations

Let m- number of conversion periods for one year
n- total number of conversion periods for the whole investment term

Conversion periods: Total number of conversion periods from the whole term:

m= 1 n= time x number of conversion periods m

Annually
Semi - annually n= t x m
m= 2
Quarterly m= 4
Monthly m= 12

Daily m= 365
 Example: Let the term be 4 years
n= t x m

Compounded annually (m=1): 4x1 n= 4

Compounded semi-annually (m=2): 4x2 n= 8

Compounded quarterly (m=4): 4x4 n=16

Compounded monthly (m=12): 4 x 12 n= 48

Compounded Daily (m= 365): 4 x 365 n=1,460

Interest rate (r). It is commonly used as an annual or yearly rate,
and must be changed to the interest rate per conversion period
(periodic rate: i ) and can be found from the relation:

i= interest rate (r)

conversion period per year (m)

i= r
m
 FORMULA OF COMPOUND INTEREST:

F= P(1+ i)^n I= F-P

Where: F= final or compound amount

P= original principal
i= r
i= periodic rate ( )
m
n=total number of conversion periods for the whole term ( n= tm)

I= compound interest
Example 1:

Compute the amount or maturity value of a note at the end

of 3 years, if the principal or face value is P80,000 and the
interest rate is 6% compounded semi-annually.

F= P(1 + i )^n n=tm

P= P80,000.00
=(80,000)[1 + 6%/2]^(3)(2)
m= 2
r= 0.06 F = P95,524.18
Example 2:
On January 23,2017, a man borrowed P150,000 and
promised to pay the principal and interest at 9%
compounded annually on January 23,2019.How much
did he pay in total?
P= P150,000.00 F= P(1 + i )^n n=tm
t= 2 years =(150,000)[1 + 0.09/1]^(2)(1)
r= 9% or 0.09 F= P178,215.00
m= 1
SUMMARY

Compound interest gives higher interest than simple interest.

REFERENCES:
 https://www.mathsisfun.com/money/interest.html
 https://www.investopedia.com/terms/l/loan.asp

 https://www.idfcfirstbank.com/finfirst-blogs/personal-loan/what-is-simple-interest

 https://www.investopedia.com/terms/s/simple_interest.asp#:~:
text=Investopedia%20%2F%20Nez%20Riaz,What%20Is%20Simple%20Interest%3F,da
ys%20that%20elapse%20between%20payments
.
 https://www.consumerfinance.gov/ask-cfpb/i-want-to-teach-my-11-year-old-about-compo
und-interest-is-there-an-easy-way-to-illustrate-it-en-1683/

 MMW book by Esmeralda A. Manlulu & Liza Marie M. Hipolito