SIMPLE INTEREST

1.1 The Nature of Interest 1.5 ORDINARY and EXACT INTEREST

Interest: When the time is given in days and the interest rate is in
 Amount paid for the use of money or the price percent per year, two kinds of interest may be used:
paid for the use of credit. a. Ordinary Interest (Io) - is used when interest is
 Viewed as income (the amount received as a computed on the basis of an assumed 30-
result of the possession or ownership of a contractual day/month or 360 day/ year
𝑃𝑟𝑡
obligation to pay on the part of another). I0 =
360
 Serve as a mechanism of imposing penalty to a
borrower for not paying a matured financial b. Exact Interest (Ie) – is used when interest is
obligation at a specified time. computed on the basis of 365 days a year or 366
 Emanates from certain transactions which are days in leap year
𝑃𝑟𝑡
economic or financial in character (there is monetary Ie =
365
involved in the exchange). 𝑰𝒆 𝑰𝒐
𝑰𝒐 = 𝑰𝒆 + ; 𝑰𝒆 = 𝑰𝒐 −
𝟕𝟐 𝟕𝟑

1.2 Two parties involved:

 Lender or creditor – the party lending money or 1.6 Time between two dates:
exchanging credit.
APPROXIMATE and EXACT /ACTUAL TIME
 Borrower or Debtor – the party using the money
There are two ways to compute for the number of days
or credit; expects future expenses as the cost of using
between two given dates.
it.

EXACT TIME/ ACTUAL TIME- is found by adding the

1.3 Elements of Interest Computation
exact number of days in each month during the term of
 Principal – amount of money extended for credit the loan.
or the money deposited in the bank for safe keeping. Is the exact or actual number of days in any given
 Interest Rate – charged amount for using the month.
money over a certain period. Expressed in percent.
 Time – period covered from the time that the APPROXIMATE TIME- the time between two dates is
money (principal) is borrowed until its due date counted under the assumption that each month has 30
(maturity date). days.

1.4 Simple interest Computation: METHODS of COMPUTING INTEREST

Simple interest is a type of fee that is charged (or paid) There are four ways to compute simple interest when
only on the amount borrowed (or invested), the time is determined by two given dates.
Simple interest is given by following formula: a. Ordinary interest for exact number of days
𝑰 = 𝑷𝒓𝒕 (Banker’s Rule)
𝑒𝑥𝑎𝑐𝑡 𝑡𝑖𝑚𝑒
Io = P x r x
360
I
b. Ordinary Interest for approximate number of
r days
P t 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
Io = P x r x
360

Where: P is the principal or the amount invested c. Exact Interest for exact number of days
𝑒𝑥𝑎𝑐𝑡 𝑡𝑖𝑚𝑒
(borrowed) Ie = P x r x
365
d. Exact Interest for approximate number of days
𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
Rate (r) is the percent of principal that is paid for Ie = P x r x
365

Term (t) length of time from the origin date to the “Banker’s rule” is the common commercial practice and
maturity date (in years) is the most favorable of all the methods to the creditor
since ordinary interest is greater than exact interest and
Accumulated Value (M) - the amount due at the end of t exact time is greater than approximate time.
years

𝑴 = 𝑷 + 𝑰 or 𝑴 = 𝑷 (𝟏 + 𝒓 𝒕)

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 SIMPLE INTEREST

Examples:
1. To buy furniture for a new apartment, Megan 7. Determine the actual and approximate time from
borrowed ₱4000 at 8% simple interest for 11 April 11 to August 16 of the same year.
months. How much interest will she pay? Actual Months Approximate
Unknown: I 𝐼 = 𝑃𝑟𝑡 (30 − 11) = 19 April (30 − 11) = 19
Given: 𝑷 = ₱4000 11 31 May 30
𝒓 = 8% 𝐼 = (4000)(0.08) ( ) 30 June 30
12
𝒕 = 11 𝑚𝑜𝑛𝑡ℎ𝑠 𝑰 = ₱𝟐𝟗𝟑. 𝟑𝟑 31 July 30
16 August 16
2. A principal earns interest of ₱385 in 2 years and 9 125 approximate
127 actual days TOTAL
months at a simple interest rate of 8%. Find the days
principal invested. 𝐼
Unknown: 𝑃 𝑃= 8. An amount of ₱2300 was invested at 8% simple
𝑟𝑡
Given: 𝑰 = ₱385.00 385 interest on May 25, 2018. How much shall be the
𝑃=
𝒓 = 8% 9 amount of interest earned on Oct. 12, 2019 using the
(0.08) (2 )
𝒕 = 2 years and 9 months 12 four methods?
Unknown: 𝐼𝑜 𝑢𝑠𝑖𝑛𝑔 𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒
𝑷 = ₱1750.00
𝐼𝑜 𝑢𝑠𝑖𝑛𝑔 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
3. Find the maturity value for a loan of ₱2000 to be 𝐼𝑒 𝑢𝑠𝑖𝑛𝑔 𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒
repaid in 6 months with interest of 9.4%. 𝐼𝑒 𝑢𝑠𝑖𝑛𝑔 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
Unknown: M 𝑴 = 𝑷(𝟏 + 𝒓𝒕) Given: 𝑷 = ₱2300
Given: 𝑷 = ₱2000 6 𝒓 = 8%
𝒓 = 9.4% 𝑴 = 2000 [1 + (. 094) ( )] 𝒕 = May 25, 2018 − Oct. 12, 2019
12
𝒕 = 6 𝑚𝑜𝑛𝑡ℎ𝑠 𝑴 = ₱2094 𝒕 = 140 𝑎𝑐𝑡𝑢𝑎𝑙 𝑑𝑎𝑦𝑠
𝒕 = 137 𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑑𝑎𝑦𝑠
4. Find the ordinary and the exact interest at 5% on Actual Month Approximate
₱5000 for 59 days. 31 − 25 = 6 May 30 − 25 = 5
Unknown: 𝐼𝑜 ; 𝐼𝑒 30 June 30
Given: 𝑷 = ₱5000 31 July 30
𝒓 = 5% 31 August 30
𝒕 = 59 𝑑𝑎𝑦𝑠 30 September 30
𝐼𝑜 = 𝑃𝑟𝑡 𝐼𝑒 = 𝑃𝑟𝑡 12 October 12
59 59 140 TOTAL 137
𝐼𝑜 = (5000)(0.05) ( ) 𝐼𝑒 = (5000)(0.05) ( )
360 365
𝑰𝒐 = ₱𝟒𝟎. 𝟗𝟕 𝑰𝒆 = ₱𝟒𝟎. 𝟒𝟏 Banker’s Rule

5. Pam loans ₱18500 at 8% simple interest, how long 𝑰𝒐 𝒖𝒔𝒊𝒏𝒈 𝒂𝒄𝒕𝒖𝒂𝒍 𝒕𝒊𝒎𝒆
will it take her to get ₱7400 interest? 𝑡(𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒)
𝑰𝒐 = 𝑃𝑟
Unknown: 𝒕 360
Given: 𝑰 = ₱7,400 𝐼 140
𝑰𝒐 = (2300)(0.08) ( ) 𝐼𝑜 = ₱71.56
𝑡= 360
𝑷 = ₱18,500 𝑃𝑟
7400 𝑰𝒐 𝒖𝒔𝒊𝒏𝒈 𝒂𝒑𝒑𝒓𝒐𝒙𝒊𝒎𝒂𝒕𝒆 𝒕𝒊𝒎𝒆
𝒓 = 8% 𝑡= 𝑡(𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒)
(18500)(0.08) 𝑰𝒐 = 𝑃𝑟
360
137
𝒕 = 𝟓 𝒚𝒆𝒂𝒓𝒔 𝑰𝒐 = (2300)(0.08) 𝐼𝑜 = ₱70.02
360
𝑰𝒆 𝒖𝒔𝒊𝒏𝒈 𝒂𝒄𝒕𝒖𝒂𝒍 𝒕𝒊𝒎𝒆
6. Genevieve borrowed ₱8,000.00 at 4% simple
𝑡(𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒)
interest per month. Find the total payment 𝐼𝑒 = 𝑃𝑟
365
obligation if she intends to pay at the end of 6 140
𝐼𝑒 = (2300)(0.08) 𝐼𝑒 = ₱70.58
months. 365

Unknown: 𝑴 𝑰𝒆 𝒖𝒔𝒊𝒏𝒈 𝒂𝒑𝒑𝒓𝒐𝒙𝒊𝒎𝒂𝒕𝒆 𝒕𝒊𝒎𝒆

𝑀 = 𝑃(1 + 𝑟𝑡)
𝑡(𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒)
Given: 𝑷 = ₱8,000 𝑀 = 8000[1 + (0.04)(6)] 𝐼𝑒 = 𝑃𝑟
𝒓 = 4% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ 365
137
𝒕 = 6 𝑚𝑜𝑛𝑡ℎ𝑠 𝐼𝑒 = (2300)(0.08) 𝐼𝑒 = ₱69.06
𝑴 = ₱𝟗𝟗𝟐𝟎 365

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 SIMPLE INTEREST

Practice Exercises: mutual fund paid 6% annually. There was $2000

more invested in the mutual fund than in bonds.
1. If you want to earn an annual rate of 15% on your Find the amount that Moira invested in each
investments, how much (to the nearest cent) should category.
you pay for a note that will be worth $6,000 in 8
months?

9. Tisha is having difficulty in deciding as to which

2. The exact interest on a certain principal for a certain investment firm she will choose: Bugal Ventures,
number of days is ₱60.45. Find the ordinary interest which offers 11 ¼ % simple exact interest; or Vidad
for the same period of time. 7
Financing offering 10 % simple ordinary interest. If
8
she is to invest ₱20,000 for 120 days which
investment firm will you recommend?
3. Use the Banker’s rule to solve the following. Mrs.
Garcia borrows ₱15,600 from Mr. Tobias on August
24, 2015 and promised to pay the principal and
simple interest at 12% to discharge the debt on July
15, 2016. How much interest did Mrs. Garcia pay? 10. Ely has ₱150,000 and is investing 45% of this at
1
11 % simple interest for three years and six
4
3
months. If she invests the rest at 12 % simple
5

4. Find the ordinary and exact interest on $1750 at 5% interest for the same period of time, which of the
from April 3, 2016, to October 13, 2016, using the two investments will yield the higher final amount?
exact number of days. And by how much?

5. (a) Find the ordinary and exact interest in problem 11. What amount should be paid on the maturity date to
9, using the approximate number of days. (b) Which settle a one-hundred-twenty-day loan dated March
of the four methods of problems 9 and 10 is the most 19, 2016, if the present value is ₱15,600 at 13 ¼ %
favorable to a creditor? simple interest?

6. In what time will ₱4850 double itself at a rate of 12. Find the interest and amount at 11% on March 11,
1 2016, which accumulated, to ₱27,500 on November
9 % simple interest?
8 7, 2016? Use the Banker’s Rule.

7. Ms. Corpuz has ₱120,000 and is investing 30% of

this at 13 ½ % simple interest for 5 years. If she 13. Two years and two months ago, Nicole borrowed
1
invests the balance at 15 % simple interest for the ₱25,000 from Stefanie with the promise that Nicole
5
same period of time, which of the two investments pays Stefanie the principal plus accumulated
5
will yield the bigger amount? By how much? interest at 9 % simple interest now. What amount
8
is due?

8. Moira inherited $15,000 and invested part of it in a

money market account, part in municipal bonds, and 14. Find the semi – annual interest rate if an investor
part in a mutual fund. After 1 year, she received a earned ₱4,800 on ₱20,000 for four semi – annual
total of $730 in simple interest from the three periods.
investments. The money market account paid 4%
annually, the bonds paid 5% annually, and the
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