Teacher Education Department

MATH 16
Mathematics of
Investment

John Clyde C. Goc-ong

 MATH 16
DAVAO DEL NORTE STATE COLLEGE
Mathematics of Investment

CHAPTER 1:
SIMPLE
INTEREST
 Simple Interest
• Simple Interest is a percentage of a sum of money
that is paid only once. It is quick and simple way to
figure out how much money you owe on a loan. The
daily interest rate is multiplied by the principal by the
number of days between payments to calculate simple
interest.

• This type of interest is most commonly associated with

car loans or short-term loans, while it is also used in
some mortgages.

• Simple interest is interest charged on the entire

principal for the entire length of the loan.
Definition of Terms
• Interest (I) is the fee charged for the use of money.
• Principal (P) is the amount of money borrowed or placed into
savings account.
• Rate is the percent of the principal paid for having money loaned
or earned for investing money. Unless indicated otherwise, rates
are given as a percent of for a term of 1 year.
• Time (t) or term is the length of time that the money is being
borrowed or invested. When the rate is given as a percent per year,
time has to be written in years.
• Future Value (A/FV) is the amount of the loan or investment plus
the interest paid or earned.
• Maturity date or due date is the date the loan must be paid off
with interest.
 Formula for Simple Interest

Simple Interest = Principal Rate Time

 To compute simple , we use , where r is the rate expressed as a
decimal and t is the time expressed in years. If the time is expressed in
months, assuming that a year consists of 12 equal months.
If the time is given in days, say D days, two varieties of simple
interest are in use: ordinary interest, where the year is taken in 360 days;
exact interest, where the year is taken as 365 days. Thus, when term of
investment is D days, gives the following result:

Exact interest for D days:

Ordinary Interest for D days:

 Formula for Future Amount
The amount that must be repaid when the
loan is due is the future amount or maturity
value of the loan. Find this value by adding
principal and interest.

, or
, or
 Finding Principal, Rate, and Time
• The principal (P) is found by dividing both sides of the simple interest
equation I = PRT by RT.

The various forms of the simple interest equation can be remembered using
the circle sketch shown above. In the sketch, I (interest) is in the top half of
the circle, with P (principal), R (rate), and T (time) in the bottom half of the
circle. Find the formula for any one variable by covering the letter in the
circle and then reading the remaining letters, noticing their position. For
example, cover P and you are left with .
Formula in Finding Principal

or
 Finding Principal, Rate, and
Time
Solve the formula I = PRT for rate (R) by dividing both
sides of the equation by PT. The rate found in this manner will
be the annual interest rate.

or
Finding Principal, Rate, and Time
The time (T) is found by dividing both sides of
the simple interest equation I = PRT by PR. Note that
time will be in years, or fraction of a year.

or
 Calculation of the Time Between Dates
• Times between dates is counted under the assumption that each month has 30 days; we
shall call the result approximate time. Usually, it is less than the actual time.
• Approximate time
• Actual time
• In computing the interest, we include the last day but not the first day in counting the
time between two dates.
Two other ways of remembering the number of days in each month
are the rhyme method and the knuckle method, as seen below.
Example 1: Find the number of days from:
(a) June 3 to August 14
(b) November 4 to February 21.

(a) June 3 to August 14

Approximate Time Month Actual Time

27 June 27

30 July 31

14 August 14

71 days TOTAL 72 days

Example 1: Find the number of days from:
(a) June 3 to August 14
(b) November 4 to February 21.
(b) November 4 to February 21.

Approximate Time Month Actual Time

26 November 26

30 December 31

30 January 31

21 February 21

107 days TOTAL 109 days

Example 2: Find the actual and the approximate time between February 13, 2017, to June 23, 2017
February 13, 2017, to June 23, 2017

Approximate Time Month Actual Time

17 February 15

30 March 31

30 April 30

30 May 31

23 June 23

130 days TOTAL 130 days

Example 3: Find the actual and the approximate time between August 23, 2020, to December 15, 2020.
August 23, 2020, to December 15, 2020.

Approximate Time Month Actual Time

7 August 8

30 September 30

30 October 31

30 November 30

15 December 15

112 days TOTAL 114 days

In finding simple interest between dates, we have four types of Interest available.

I. Ordinary interest for the actual number of days. (Banker’s

Method/Rule)
II. Exact interest for the actual number of days
III. Ordinary interest for the approximate number of days
IV. Exact interest for the approximate number of days
Example 1: Find the interest at 8% on Php 1000 from June 23, 2017, December 3, 2017, using
the following:
1. Ordinary interest for the actual number of days.
2. Exact interest for the actual number of days
3. Ordinary interest for the approximate number of days
4. Exact interest for the approximate number of days
Example 1: Find the interest at 8% on Php 1000 from June 23, 2017, December 3, 2017, using
the following:
June 23, 2017, December 3, 2017
Approximate Time Month Actual Time

7 June 7

30 July 31

30 August 31

30 September 30

30 October 31

30 November 30

3 December 3

160 days TOTAL 163 days

Example 1: Find the interest at 8% on Php 1000 from June 23, 2017, December 3, 2017, using
the following:
1. Ordinary interest for the actual number of days.
2. Exact interest for the actual number of days
3. Ordinary interest for the approximate number of days
4. Exact interest for the approximate number of days

Solution:

1. Ordinary interest for the actual number of days.

2. Exact interest for the actual number of days

Example 1: Find the interest at 8% on Php 1000 from June 23, 2017, December 3, 2017, using
the following:
1. Ordinary interest for the actual number of days.
2. Exact interest for the actual number of days
3. Ordinary interest for the approximate number of days
4. Exact interest for the approximate number of days

Solution:

3. Ordinary interest for the approximate number of

days

4. Exact interest for the approximate number of days

 Accumulating and Discounting at Simple
Interest
The principal (or present value), P, or the sum of money on the origin date is said to
accumulate to the value of the amount, F, at the end of t years. Likewise, the amount
F, is discounted to the present value, P.
Accumulation – it is the process of determining the amount F of a given principal due
at a specified time t.
To accumulate for principal P for t years means to solve for the final amount F by applying the
formula:

Discounting - it is the process of determining the present value P of any amount due in
the future.
To discount the amount F for t years, means to solve for P applying the form
Example 1: Accumulates $2000 for 3 years at 7% simple interest.
Example 2: Harry finally received a matured amount of $3000 from the bank that he
deposited 5 years ago with an annual rate of 10%. How much did he deposit?

Solution
Given:

To look for the present value, we have:

Example 3: Luffy finally received the matured amount of $6000 from the bank, which have
earned her an interest amount of $250. How much was the principal?

Solution
Given:

To look for the principal amount, we have:

 Simple Discount
• Simple interest involves principal (face value or loan amount),
interest rate, time, interest, and maturity value.
• Simple discount involves proceeds (loan amount), discount
rate, time, bank discount (interest), and face value (or
maturity value).
• Face value in a simple interest is the amount loaned to the borrower,
but it is the maturity value in a simple discount.
• Simple discount are also called interest-in-advance, since
interest is subtracted before funds are given to the borrower.
• A basic difference between the simple interest and simple
discount is that simple interest is calculated based on principal,
whereas simple discount is calculated based on maturity
value.
 The Simple Discount Formula

• Mentioned earlier, “to discount” or “discounting”, this

means to determine the present value P. Thus, the
discount F is given by the formula:

• I is called the “interest in advance”. In borrowing

money, interest is charged for the use of money. When
deducted in advance, this interest is referred as “simple
discount”.
Simple Discount Formula:
Formula for Proceeds and Future Amount
(Simple Discount)

Proceeds:

Future Amount:
Comparison of Simple Interest and Simple Discount

Simple Interest Simple Discount

Simple Discount
Simple Interest

Principal (Present Proceeds (Pr)

Value)
Maturity Value
Amount
Example 1: What are the proceeds and the discount on Php 4,000 for two years at 10%
simple discount?
Solution
Given:

To look for the proceeds and discount, we have:

Simple Discount

Proceeds
Example 2: Discount Php 25, 000 for 3 years and 6 months at 10% simple discount
Solution
Given:

To look for the discount, we have:

Simple Discount
Example 3: If Php 12, 300 is due at the end of five years at 8% simple discount, find the
proceeds and simple discount
Solution
Given:

To look for the proceeds and discount, we have:

Simple Discount

Proceeds
Promissory Notes and
Discounting
• A promissory note is a legal document promising to
pay back at some future date a sum of money that has
been borrowed. It is a signed contract between two
parties. There are two kinds of promissory notes:
interest bearing and non-interest bearing.
• When a note is interest bearing, the person
borrowing the money must not only pay back
the amount of money borrowed but must also
pay back any interest accumulated according to
the terms of the note. When the note is
noninterest bearing, the person pays back only
the amount of money borrowed.
 Promissory Notes and
•
Discounting
The maker is the person, company, or institution that has borrowed the
money and is obliged to pay the money back.
• The payee is the person who loaned the money and who will receive the
payment.
• The face value of a note is the amount of money that has been borrowed.
• The term of a note is the time period of the note or length of time until
the note is due
• The maturity value of a note is the face value plus the interest, if any.
• The maturity date is the date the money is to be repaid.
• Computation for promissory notes uses the basic interest formulas;
however, the principal is known as the face value of a note.
Promissory Notes and
Discounting
 Promissory Notes and
Discounting
• If a person or business (payee) is holding a note and needs the cash before
the maturity date of the note, then that person or business can sell or
cash in the note to a third party.
• The third party, however, may charge the payee a sum of money for
purchasing the note. When this occurs, it is called discounting the note.
• The third party keeps the note until the maturity date, and the third party
receives the maturity value of the note from the maker.
• The time from when the note is cashed until the maturity date is called
the discount period. The amount of money that is paid to the original
payee is called the proceeds, which is the maturity value of the note
minus the fee charged to cash the note. The fee is called the discount
or discount amount.
Example: Suppose that John loans Paul $20,000 for 1 year at 8% simple interest. Three months
later, John sells the note to Ringo at a simple discount rate of 7 ¾%. How much does Ringo pay for the
note?
Solution:
1. Original loan. Find the maturity value of the original loan. (The original loan was made from simple
interest)
2. Secondary sale. The secondary sale was made using simple discount. Since 3-month of the original loan
1-year loan have already expired, the remaining term is

Subtracting the discount from the maturity value gives a price of -.