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LESSON 1: Simple Interest

TIME FRAME: 3 hours CODE:

LEARNING OUTCOME(S):
1. Explain the concept of interest.
2. Compute interest by using the simple interest formula and using the Banker’s Rule.
3. Explain and apply the concept of discount
4. Solve related problems involving simple interest and discount.

When you deposit money in a savings account on a bank, the bank can do whatever it
wants with that money. To reward you for that, the bank pays you. Or when you make a loan
from a lending institution, then a fee is charged for that borrowed money. The amount you
earn for that deposit or the amount of money paid for that borrowed money is called interest.
It is usually computed as a percentage (called the interest rate) of the principal (amount
invested/deposited or amount borrowed) over a given period of time (unless otherwise stated,
an annual rate).

Definition of Terms
Debtor or Maker. An individual or institution that borrows money for any purpose.
Lender. An individual or institution which loans money.
Interest. The payment for the use of borrowed money or the amount earned on invested
money .
Principal. The amount of money invested or borrowed.
Rate of Interest. This is a fractional part of the principal that paid on the loan or investment,
which is usually expressed in percent.
Time. The number of years for which the money is borrowed (or invested) and for which
interest is calculated.
Final Amount or Maturity Value. The sum composed of the principal and the interest
accumulated over a certain period.

Simple Interest. An interest that is charged (or paid) only on the amount borrowed (or
invested), and not on past interest.

Simple Interest (I) Formula: Let P= principal, r= rate of interest (in decimal form), and t= time
(expressed in years). Then, we have:

i) I = Prt
I
P=
ii) rt
I
r=
iii) Pt
I
t=
iv) Pr
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Notes:

 Interest rates are to be converted to decimal form before they are used in the formula.
 For converting the time in days into years, we always divide by 360 when interest is
ordinary and 365 when interest is exact, whether it is an ordinary year or a leap year.
 For converting the time in months into years, we always divide by 12.
 Short-term bank loans have terms, between two calendar dates, that is stated in days.
There are two ways to obtain the number of days between calendar dates.
i) Actual time refers to the exact number of days in a month on a regular calendar.
ii) Approximate time is simply assuming that each month has 30 days.
 When interest is not specified in the problem, it is assumed to use the Banker’s Rule
(ordinary interest and actual time)

Let us work on the following examples to illustrate the application of the above.
Example 1 You decided to deposit ₱2,500 into a savings account that pays 1.75% simple
interest. How much interest will it earn after 1 year? After 2 years? After 3 years?
Given:

Required:

Formula(s):
Computation:

Example 2 Dr. Dalisay issued a check for ₱12,500 to settle a loan of ₱10,500 he got two years
ago. How much simple interest rate was he charged?
Given:

Required:

Formula(s):
Computation:
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Example 3 Nine months after borrowing money, Mr. Anton Uy pays an interest of ₱350. How
1
4 %
much did he borrow if the simple interest rate is 2 ?
Given:

Required:

Formula(s):
Computation:

Example 4 Find the ordinary and exact interest on ₱3,700 for 180 days at 12% simple interest.
Given:

Required:

Formula(s):
Computation:

In some investment problems, calendar dates are specified. Here are four methods to
determine the interest between these dates.
i) Ordinary Interest for Actual time
ii) Ordinary Interest for Approximate Time
iii) Exact Interest for Actual Time
iv) Exact Interest for Approximate Time
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3
5 %
Example 5 Using the four method of determining interest, find the interest on ₱9,700 at 8
simple interest from July 12, 2015 to March 5, 2016.
Given:

Required:

Formula(s):
Computation:

If a principal P is borrowed at a rate r, then after t years the borrower will owe the
lender an amount F that will include the principal P plus the interest I. Since P is the amount
borrowed now and F is the amount that must be paid back in the future, P is often referred to
as the present value and F as the future value. When loans are involved, the future value is
often called the maturity value of the loan. Here are formulas relating F, P, and I.

F = P + I  F = P + Prt  F = P  1+ rt 

F = P  1+ rt 
Other formulas that can be derived from
F F -P F -P
P= r= t=
1+ rt Pt Pr

Let us work on the following examples to illustrate the formulas above.

Example 6 Margaux invested ₱20,500 at 10.5% simple interest for 7 years. Using Banker’s Rule,
what is the interest and the amount of the investment after 7 years?
Given:

Required:

Formula(s):
Computation:
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Example 7 How much should Miguel deposit in a bank, which pays 2.75% simple interest in
order to have ₱100,000 in 10 years and 3 months?
Given:

Required:

Formula(s):
Computation:

Example 8 Tristan borrows ₱8,000 from her aunt and agrees to pay her ₱10,000 after 18
months. What interest rate was she paying?
Given:

Required:

Formula(s):
Computation:
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Worksheet 1: Solve the following problems.

1. Joswe borrowed from a lending institution ₱8,250 for 120 days. What will be the interest and
amount at the end of the term if money is worth 6%?
Given: Computation:

Required:

Formula(s):

2. Find the interest on a loan of ₱4,700 at 4.5% from June 6, 2017 to November 5, 2017 using
the four methods of computing simple interest.
Given: Computation:

Required:

Formula(s):

3. Arielle borrowed ₱22,000 from SeaBank at 9.2% simple interest for 3 years and 9 months.
How much did Arielle pay back the bank at the end of the term?
Given: Computation:

Required:

Formula(s):

4. Lawrence borrows ₱13,000 from a friend and agrees to pay ₱15,500 in 18 months. What
interest rate was she paying?
Given: Computation:

Required:

Formula(s):
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Simple Discount
Another way to calculate interest is known as the discount method (also referred to as
the bank discount). This method, not used as much now as in the past, of computing interest is
based on the maturity value or final amount at the beginning of a specified period of time.
Thus, this interest D is paid in advance.
In this case, F is the amount of the loan. The proceeds P is the amount received by the
borrower after subtracting the interest on the loan. The amount subtracted by the lender is the
so-called bank discount or interest-in-advance D. The bank discount method uses a 360-day
year.
Bank Discount (D) Formula: Let F= maturity value or final amount, d= discount rate (in decimal
form), and t= time (expressed in years) or term of discount. Then, we have:
D = Fdt and Proceeds = F - D  P = F - D

Other formulas that can be derived from:

i) D = Fdt
D
F=
dt
D
d=
Ft
D
t=
Fd

ii) Proceeds = F - D  P = F - D

P F -P F -P
F= d= t=
1- dt Ft Fd

Let us work on the following examples to illustrate the formulas above.

Example 1 Mr. Jones borrowed ₱23,000 for 1 year and 6 months from Ms. Jane who charged
5.6% simple discount rate. How much money did Mr. Jones received?
Given:

Required:

Formula(s):
Computation:
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Example 2 How much loan should Juliene have to apply for if she needs ₱28,000 cash which will
be repaid in 8 months at a discount rate of 7%?
Given:

Required:

Formula(s):
Computation:

Example 3 Determine the discount rate if ₱9,600 is the proceeds of a loan of ₱13,500 due in 10
months.
Given:

Required:

Formula(s):
Computation:
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Worksheet 2: Solve the following problems.

1. Peppa wants to borrow ₱27,000 from a bank payable in 2 years and 3 months. If the bank
charges 7.6% interest-in-advance, what size of loan would Peppa apply for?
Given: Computation:

Required:

Formula(s):

2. Holly borrowed ₱100,000 from XYZ Credit Cooperative for a term of 4 years. The interest
charged is 10.5% simple discount rate. Find the proceeds of the loan.
Given: Computation:

Required:

Formula(s):

3. Find the amount of loan for 1 year and 8 months at 8.8% discount rate if the proceeds are
₱8,350.
Given: Computation:

Required:

Formula(s):

4. How long should ₱18,000 be discounted to have a proceeds of ₱14,700 at 6.5% discount
rate?
Given: Computation:

Required:

Formula(s):
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Exercises
Answer each of the following problems by identifying the given information, required unknown,
formula(s) to be used, and compute for the unknown.
1
4 %
1. How long will take for ₱2,500 to earn ₱300 if it is invested at 4 simple interest?
4
6 %
2. Find the interests and amounts due if ₱75,000 was invested at 5 for 180 days using:
a. ordinary interest
b. exact interest

3. A loan institution charges 10% simple interest for a 4-year, ₱75,000 loan. Find the
interest earned and the amount that must be paid at the end of the term?

4. Find the exact and approximate number of days between each set of dates:
a. February 10, 2016 to June 25, 2016 c. August 17, 2016 to March 21,
2017
b. May 29, 2015 to December 8, 2015

5. Agatha is investing an amount at 11% simple interest for 4 years and 9 months. If she
intends to have ₱83,700 at the end of the term, what must be her principal?

6. What amount should be paid on the maturity date to settle a one-hundred fifty day loan
dated October 25, if the present value is ₱12,300 at 7.2% simple interest?

7. A debtor owes ₱50,000 due at the end of 3 years. He ask his creditors for the privilege of
paying the debt immediately. At what simple interest rate, 4% or 5%, would the creditor
prefer to compute the required principal, and how much would he gain by the better
choice?

8. Erika needs ₱7,800 for her enrollment on June 5, 2016 and intends to settle her student
loan on October 15, 2016. How much student loan should she apply if it charges 2.5%
discount rate?

9. Determine the discount rate if ₱9,600 is the proceeds of a loan of ₱13,500 due in 10
months.

10. Mr. Moriah wants to borrow ₱57,000 from a bank payable in 5 years and 7 months. If
the bank charges
1
7 %
8 advance interest, what size of loan would he apply for?