SIMPLE INTEREST

INTEREST – IS THE AMOUNT PAID FOR BORROWING MONEY

SIMPLE INTEREST – IS AN INTEREST WHICH IS BASED ONLY ON THE ORIGINAL
CAPITAL OR PRINCIPAL
Period Principal Interest Future Amount
1 P Pi P + Pi
2 P Pi P + P(2)
3 P Pi P + P(3)
Etc… … … …
n P Pi P + (Pi)(n)
Let: I = total interest earned after n interest periods
I=
Pin worth
P = principal or capital or present
i = annual interest rate
n = number of interest periods (based in number of years)

Let: F = total amount or future amount after n interest periods

F = P + Pin  F = P(1 + in)

• ORDINARY SIMPLE INTEREST – PERIOD IS BASED ON ONE BANKER YEAR WHICH
IS ASSUMED TO BE 360 DAYS PER YEAR. WHERE EACH MONTH CONTAINS 30 DAYS

n= = =

Example:

1. A woman deposits $725 into a saving account that pays 2.3% simple annual interest. How much
interest will be earn after 18 months.

I = Pin
= $725 ( 2.3%) ( )
I = $25.0125

2. Determine the ordinary simple interest on $10,000 for 9 months and 10 days if the interest is 12%.

I = Pin
= $10,000 ( 12%) ()
= $933.33
Example:
3. If you borrow $10,000 from your friend and agrees to pay at the end of 90
days under 8% simple interest. What is the required amount?
F = P(1 + in)
= $10,000 (1 + 0.08())
= $10200
EXACT SIMPLE INTEREST – PERIOD IS BASED ON ACTUAL DAYS IN A
PARTICULAR YEAR. 365 DAYS FOR AN ORDINARY YEAR OR 366 DAYS
FOR A LEAP YEAR.
MONTH NUMBER OF n= or
DAYS
JANUARY 31
FEBRUARY 28 or 29 Note: the leap year are those years which are divisible by 4.
However if it is a century year (ending with two zeros like
MARCH 31
1900, 2000, etc), the year must be divisible by 400.
APRIL 30
MAY 31
JUNE 30
JULY 31
AUGUST 31
SEPTEMBE 30
R
OCTOBER 31
NOVEMBE 30
R
DECEMBER 31
Example:
4. Determine whether years 1982, 1996, 2000 is a leap year or just an ordinary
year.
1. 3.
2. 4.

5. Determine the exact simple interest on $1200 for the period from January 16
to November 26, 1992, if the rate of interest is 24%.

I = Pin
= 1200(0.24)()
=$247.87
6. Find the total amount on $10,500 invested at 5% for 75 days using exact
interest.
F = P (1 + Pin)
= 10,500 (1 + 0.05())
= $10,607.87
COMPOUND INTEREST
Compound interest – is an interest which is based on the current account or on
the original capital plus the accumulated interest.
Period Principal Interest Future amount
1 P Pi P + Pi = P(1+i)
2 P(1+i) P(1+i) I
3 i
Etc.. … … …
n … …

Let: F = total amount or future amount after n interest periods

𝑛
𝐹 = 𝑃 (1+𝑖)

P = principal or capital or present worth

i = interest rate period
n = total number of interest periods
Nominal Rate of Interest (NR) – is the basic
annual rate of interest. The nominal rate is
divided into how many interest periods per year
in order to get the interest rate per period.
MODE OF m
Example: If the interest rate is 12% compounded COMPOUND
INTEREST
monthly, determine the nominal rate and interest
Annually 1
rate per period.
Semi-annually 2
Nominal Rate of Interest: NR = 12% Quarterly 4
Semi-Quarterly 8
Interest Per Period: i = = 1%  interest per
Monthly 12
month Semi-Monthly 24
i = ; n = mN Bi-monthly 6
Daily 360
m = number of interest periods per year (period)
n = total number of interest periods
N = number of years
Example:
7. Find the amount of $1000 for 6 years at 4% compounded quarterly.
i=
(4% is the interest annually, but since it is
= 1000 compounded quarterly the interest is divided in 4
period in a year. )
=$1269.73
SEAT WORK
1. Find the present value of $1,100 which is due at the end of 2 ½ years, if money can be
invested at 4%.
2. Determine the exact simple interest on $5,000 for the period from January 15 to November
28, 1992, if interest is 22%
3. The yearly interest payable on a deposit of $250 at 5.5% simple interest is ____?
4. A man borrowed $5,000 from a bank and agreed to pay the load at the end of 9 months. The
bank deducted the interest and gave him $4000 in cash. What was the rate of simple interest
charged to the man?
5. If you borrow $10,000 from your friend and agrees to pay at the end of 90 days under 8%
simple interest rate. What is the required amount?
6. Find the present value of $1250 due in 4 years, the rate of interest being 3% compounded
semiannually.
7. An advertisement of an investment firm state that if you invest $500 in their firm today you
will get $1,000 at the end of 4 ½ years. What nominal rate is implied if interest is
compounded quarterly?
SEATWORK ANS:
1. $1000
2. $955.74
3. $13.75
4. 33.33%
5. $10,200
6. $1109.63
7. 15.704%
8. 12.2%