LESSON 5: SIMPLE

INTEREST
 The nature of interest…
 Refersto the amount paid for the use of money or the
price paid for the use of credit
 Refers
to the amount received as a result of the
possession or ownership of a contractual obligation to
pay on the part of another.
 Servesas a mechanism of imposing penalty to a
borrower for not paying a matured financial obligation
at a specified time
There are two parties in a transaction involving payment of
interest:
 Lender or creditor
 Refers to the party lending money or extending credit
 Expects to earn income from the transaction
 Borrower or debtor
 Refers
to the party using the money or credit, who
expects future expenses as the cost of using the money
 Example:
1. Mr. A borrows money from Premier Bank.
 Mr.
A is the borrower and the Premier Bank serves as the
lender.

2. On March 1, 2016, Ms. D bought a set of home appliances

from Zamboanga Appliance Center, which is payable after 6
months.
 Ms.D is the debtor and the Zamboanga Appliances Center
serves as the creditor.
 Elements of Interest Computation
The amount of interest that a lender receives or a borrower pays is
computer using the following elements:
1. Principal
 Refers to the amount of money extended for credit or the money
deposited in the bank for safekeeping
2. Interest Rate
 Refers to the changed amount for using the money over a certain
period
3. Time
 Refers to the period covered from the time that the money (principal)
is borrowed until its due date (maturity date)
 Example
On March 1, 2016, Mr. A borrowed P5, 000, 000 from First
Commercial Bank at 8% interest, payable on March 1, 2018, to
finance the construction of her manufacturing plant.

Based on the data

 Principal – P 5, 000, 000
 Interest Rate – 8% or 0.08
 Time – 2 years (from March 1, 2016 to March 1, 2018)
 Simple Interest
Simple interest refers to an interest that is computed
only once from the time the amount is borrowed until it is
paid.

FORMULA: Interest = Principal x Rate x Time

𝐼 = 𝑃𝑟𝑡
 Example
1. On April 01, 2016, Angela borrowed P300, 000 for additional
working capital from Premier Lending at 7 % interest, payable
in 1 year.
Required: Find the simple interest.
Answer and Analysis: It can be observed that the interest of
7% is payable only once from the time of borrowing up to
maturity date; hence, the interest is called simple interest.
In this case,
𝑃 = 𝑃300,000 𝑟 = 7% 𝑜𝑟 0.07 𝑡 = 1 𝑦𝑒𝑎𝑟 𝐼 =?

Using the formula,

𝐼 = 𝑃𝑟𝑡 = 300, 000 × 0.07 × 1 = 𝑷𝟐𝟏, 𝟎𝟎𝟎
2. On February 1, 2016, Princess borrowed P400, 000 at 8%
interest from ABC Lending which is payable after 6
months.
Required: Find the simple interest.
Answer and analysis: It can be observed that the term of
the loan is less than 1 year. It is emphasized that the term
“time” in the interest formula is expressed in units of years
or 12 months. Thus, if the time involved in a given situation
is less than or more than 1 year, it should be expressed in
terms of 1 year or 12 months.
In this case,
𝟔 𝟏
𝑷 = 𝑷𝟒𝟎𝟎, 𝟎𝟎𝟎 𝒓 = 𝟖% 𝒐𝒓 𝟎. 𝟎𝟖 𝒕 = 𝒐𝒓 𝒚𝒆𝒂𝒓 𝑰 =?
𝟏𝟐 𝟐
Substituting the above values in the formula, the amount
of simple interest is computed as follows:
1
𝐼 = 𝑃𝑟𝑡 = 400,000 × 0.08 × = 𝑷𝟏𝟔, 𝟎𝟎𝟎
2
3. Find the simple interest of P200, 000 at 6% for 2 years
and 6 months.
Required: Find the simple interest.
Answer and analysis: In the given problem, the time
involved is more than 1 year; hence, it should be
expressed in a ratio or fraction of 1 year or 12 months.
In this case,
𝟔 𝟏
𝑷 = 𝑷𝟐𝟎𝟎, 𝟎𝟎𝟎 𝒓 = 𝟔% 𝟎. 𝟎𝟔 𝒕 = 𝟐 𝒐𝒓 𝟐 𝒐𝒓 𝟐. 𝟓 𝑰 =?
𝟏𝟐 𝟐
Substituting the values in the formula, the amount of
simple interest is computed as follows:
𝐼 = 𝑃𝑟𝑡 = 200,000 × 0.06 × 2.5 = 𝑃30,000
In some instances, the simple interest (I), the rate (R), and
the time (T) are given, but the principal amount (P) is
unknown. The principal amount can be determined by
simply manipulating the basic formula.
The principal is computed as follows:
𝐼
𝑃=
𝑟𝑡
4. On May 1, 2016, Hyzel borrowed a sum of money from
Community Bank, payable for 2 years at 8% simple
interest. She paid P6,000 for the interest of her loan.
Required: How much was borrowed by Hyzel.
Answer and analysis: The unknown in the problem is the
principal amount. By manipulating the basic formula for
simple interest, the principal amount may be determined.
In this case,
𝑰 = 𝑷𝟔, 𝟎𝟎𝟎 𝒓 = 𝟖% 𝟎. 𝟎𝟖 𝒕 = 𝟐 𝒚𝒆𝒂𝒓𝒔 𝑷 =?
Substituting the values in the formula, the principal
amount is computed as follows:
𝐼 6,000
𝑃= = = 𝑃37, 500
𝑟𝑡 0.08 × 2
In some instances, the simple interest (I), the In the case
the rate (r) is not given in simple interest computation and
the data on the principal (P), the interest (I), and the time
(t) are provided, the rate of interest is computed as
follows:
𝐼
r=
𝑃𝑡
5. On July 1, 2016, Izzy deposited P400, 000 at Northern
Bank. The deposit earned simple interest of P96, 000 for 3
years.
Required: Compute the rate of simple interest on deposit.
Answer and analysis: The unknown in the problem is the
rate of interest. By manipulating the basic formula of
interest computation, the rate is computed by dividing
the interest by the product of principal and time.
In this case,
𝑷 = 𝑷𝟒𝟎𝟎, 𝟎𝟎𝟎 𝑰 = 𝑷𝟗𝟔, 𝟎𝟎𝟎 𝒕 = 𝟑 𝒚𝒆𝒂𝒓𝒔 𝒓 =?
Substituting the values in the formula, the rate is
computed as follows:
𝐼 96,000
r= = = 0.08 𝑜𝑟 8%
𝑃𝑡 400,000×3
When time (t) is unknown and the principal (P), the rate
(r), and the interest (I) are provided, the time (t) is
computed as follows:
𝐼
t=
𝑃𝑟
6. Winston borrowed P150, 000 from his organization’s fund
where he was charged with 10% simple interest. He paid
P30, 000 as interest upon payment of the principal on the
maturity date.
Required: Determine how long it took him to pay the
money in full.
Answer and analysis: The problem requires the time
involved from borrowing up to payment. This is computed
by dividing the amount of interest with the product of
principal and interest rate.
In this case,
𝑷 = 𝑷𝟏𝟓𝟎, 𝟎𝟎𝟎 𝑰 = 𝟑𝟎, 𝟎𝟎𝟎 𝒓 = 𝟏𝟎% 𝒐𝒓 𝟎. 𝟏𝟎 𝒕 =?
Substituting the above values in the formula, time is
computed as follows:
𝐼 30,000
t= = = 2 𝑦𝑒𝑎𝑟𝑠
𝑃𝑟 150,000×0.10
7. Lee borrowed P20,500.00 from his friend that charged
him 2% per quarter, payable in 18 months. How much is
the simple interest?
Required: Compute for the simple interest.
Answer and analysis: The problem indicates that the
interest rate is quarterly. Thus, the term or time should be
also expressed in quarters.
In this case,
1 𝑞𝑢𝑎𝑟𝑡𝑒𝑟
t= 18 𝑚𝑜𝑛𝑡ℎ𝑠 𝑥 = 6 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑠
3 𝑚𝑜𝑛𝑡ℎ𝑠
Substituting the above values in the formula, time is
computed as follows:
0.02
𝐼 = 𝑃𝑟𝑡 = 20,500 𝑥 𝑥 6 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑠 = 𝑃2,460.00
𝑞𝑢𝑎𝑟𝑡𝑒𝑟
 Maturity Value or Amount
Maturity value or amount refers to the sum of the
principal and interest. It is the future value of the principal
amount, expressed in the following formula:
𝐹 =𝑃+𝐼
By expanding the basic simple interest formula, the
maturity value is computed using the formula
𝐹 = 𝑃 + 𝑃𝑟𝑡
By the process of factoring, maturity value can be
expressed as: 𝑭 = 𝑷(𝟏 + 𝒓𝒕)
 Examples:
1. Kayle borrowed P12, 000 which is payable after 3 years
and 8 months with simple interest of 12%.
Required: Determine the amount or maturity value of the
loan.
Answer and Analysis: The maturity value of the loan may
be determined by computing the simple interest first and
then adding it to the principal. Hence, the maturity value
is computed as follows:
 8
𝐹 = 𝑃 + 𝑃𝑟𝑡 = 12,000 + 12,000 × 0.12 × 3
12
= 12,000 + 5, 280 = 𝑃17, 280.
Using the other formula, maturity value is computed as
follows:
8
𝐹 = 𝑃 1 + 𝑟𝑡 = 12,000 1 + 0.12 3 = 12,000 1 + 0.44
12
= 12,000 1.44 = 𝑃17,280
Therefore, Kayle will need to pay P17,280 after 3 years and
8 months.
Exercises:
1. Tessa borrowed P2,000.00 at 12% interest for 2 years. Find the
interest (I) and the maturity value (F).
F = P2480.00 Interest = P480.00
1. Eunice lent P3000.00 at 14% for 6 months. How much will she get
at the end of the term? How much interest did she earn? F=
P3210.00 Interest= P210.00
2. Nora invested P1,800.00 for 9 months at 1% per month. How
much will she get upon maturity? How much interest did she
earn? F = P1962.00 Interest = P162.00
3. Connie lent P600.00 to Yoly at 1% per month for 2 years. Find the
interest and the maturity value.
F = P744.00 Interest = P144.00
1. Accumulate P1,200.00 for 2 years at 3% per quarter simple
interest. P = P967.74