MODULE 2: SIMPLE INTEREST AND SIMPLE DISCOUNT

OVERVIEW

In this modern and challenging world, the role of effectively handling one’s finances is vital to one’s
financial survival. People work to earn a living. They need money to buy food to eat, clothes to wear,
houses to stay. In all activities, there is a need to manage finances intelligently. As part of managing
finances, individuals are involved in lending and borrowing activities. The module discusses simple
interest and simple discount which is vital to properly manage finances.

OBJECTIVES

At the end of this module, you should be able:

REFERENCE BOOKS
 Elements of Business Mathematics Bacani, Balatbat, Julian
 Investment Mathematics Made Easy Win Ballada
 Mathematics of Investment Made Simple (2011).Young, Felina C. Quezon City: Rex Printing
Company, Inc

INTRODUCTION

In this modern and challenging world, the role of effectively handling one’s finances is vital to
one’s financial survival. People work to earn a living. They need money to buy food to eat, clothes to
wear, houses to stay. In all activities, there is a need to manage finances intelligently.

More particularly, people believe in saving money. They can tuck them safely in their houses or
they may choose to deposit them in financial institutions. Depositing in a financial institution is a form of
lending which bank or financial institutions, in turn, may use such funds to invest or lend to other parties.

On the other hand, individuals, whether engaged in business or not, occasionally find themselves
in need of funds for worthwhile purposes. One recourse they usually resort to have immediate cash is
borrowing.

Both the depositor or lender and borrower can receive benefits from activities of lending and
borrowing. These activities can be undertaken not only by banks but also by individuals, organizations
and agencies.
 The lender expects a sum in addition to what he has lent. This sum is called interest which is the
payment of the borrower for the use of money. The interest may either be simple interest or compound
interest.

SIMPLE INTEREST

Simple interest is computed on the amount borrowed at the time of the loan and is added to that amount
when loan becomes due. Thus, simple interest is computed only once for the entire time period of the
loan.

The computation of simple interest depends on three variables: principal, rate of interest and time.

PRINCIPAL – the amount of money deposited or lent or borrowed

INTEREST RATE – the percentage charge or earned from the principal. It is expressed in percentage
but converted to decimal for computation purposes. Unless otherwise stated, simple interest rate is annual
rate.

TIME – length of time for which the money is deposited or lent or borrowed. The time expressed in
years or fractional part of a year is the period between the loan date, date when loan is obtained and
maturity date, the date when loan becomes due.

If the time is not exact or not expressed in years, it has to be expressed in year; say six months should be
expressed as 6/12 or 1/2 year because for every year, there are 6 months. For computation purpose, the
time should be expressed in decimal. ½ year is expressed as 0.50 year.

For example, Lin Clara borrowed P280,000 at a simple interest rate of 5% for one year.

Principal = P280, 000

SIMPLE INTEREST FORMULA

ACTIVITY 2.1 DERIVE FORMULA

From the formula of interest above, derive the formula in finding the principal, interest rate and time.

ILLUSTRATIVE EXAMPLES OF SIMPLE INTEREST FORMULA

1. Venus deposited P5,000 in a bank at 6.5% simple interest for 2 years. How much will she earn after 2
years, assuming no withdrawals were made?
Solution:
I =?
P = P5, 000
r = 6.5% or .065
t = 2 years

I = Prt
= (5,000)(0.065)(2)
= P 650

2. Vincent borrowed P35, 000 from a bank at 12.5% simple interest for 5 years. How much interest will
she pay after 5 years?
Solution:
I =?
P = P35, 000
r = 12.5% or .125
t = 5 years

I = Prt
= (35,000)(0.125)(5)
= P 21, 875

ACTIVITY 2.1: Check your answer!

Use this triangle as a guide!

3. Christian invested P30, 000 in the stock market which guaranteed an interest of P5, 600 after 3 years.
At what rate would her investment earn?
Solution:
I = P5, 600
P = P30, 000
r=?
t = 3 years
I 5,600
r= = = 0.0622 𝑜𝑟 6.22%
Pt (30,000)(3)

4. Lina borrowed P10,000 from a bank charging 12% simple interest with a promise that she would pay
the principal and interest at the end of the agreed term. If she paid P4,500 interest at the end of the
specified term, how long did she use the money?

Solution:
I = P4,500
P = P10,000
r = 12% or 0.12
t = ? years
I 4,500
t= = = 3.75 𝑦𝑒𝑎𝑟𝑠
Pr (10,000)(0.12)
5. Rachelle paid P7,400 interest at 14.5% for a four year loan. What was the original loan?
Solution:
I = P7,400
P=?
r = 14.5% or 0.145
t = 4 years
I 7,400
P= = = P12, 758.62
rt (0.145)(4)

ACTIVITY 2.2: Answer the following problems. Show your solutions. No solution, no credit policy!
Note: Round off your final answer to 2 decimal places. For example, 1.56 years, 16.67% and P45,698.86.
Be honest! Committing mistake is part of the learning process.

1. Find the simple interest and amount on P16,300 loan at 14% for three years.
2. If Mary paid an interest amounting to P3,400 for a loan payable in 1 1/2 years at 15% per annum, what
was the original loan?
3. Regine borrowed P120,000 from a bank. He paid a P9,500 interest for 9 months. At what rate was
interest charged?
4. Geena obtained a loan of P48,000 from the rural cooperative at 9.5% interest rate. On the due date, she
paid P12,000 interest. When was the loan due?
5. Jun deposited P17,000 in a bank at 14% interest per annum. How much will he expect to earn as
interest at the end of 2 ½ years?
6. Ginger borrowed P95,000 and agreed to pay P15,000 interest at the end of 2 years. At what interest
charged?
7. How much was deposited by Arlyn Lopez in a bank that paid P9,000 interest at the end of 1 year at
15%?
8. How much interest is charged on a P33,000 loan from a cooperative for 4 years at 9% simple interest?
9. How long will it take for P7,800 to earn P1,500 interest if the interest rate is 16.5%?
10. Mr. Lontok has P100,000 in the money market. If the present interest rate is 20%, how much will he
earn after 1 ½ years?

GOOD JOB! You just finished the activity. Check your answer. If you commit mistake, know why you are wrong
and solve it again. Practice More is the key.
1. P6,846
2. P15,111.11
3. 10.56%
4. 2.63 years
5. P5,950
6. 7.89%
7. P60,000
8. P11,880
9.1.17 years
10. P30,000
CONCEPT OT TIME

Time is the period from the loan date to maturity date. If the time is given in months and only the loan
date is stated, the maturity date shall coincide with the loan date. Thus, a loan obtained on June 13, 2020
payable in 4 months will mature on October 13, 2020.

In addition, if either the loan date or maturity date does not make mention of the year, it shall be assumed
that these dates fall on the same year. For example, a loan that was granted on February 20, 2020 and to
mature September 20 would mature on September 20, 2020.

There are also cases when the time is stated as a certain dates. In counting the number of days, we can
consider two reference points. The actual time where there are 365 days in a year or 366 days in leap
year and actual number of days in months like for January is 31 days, for February is 28 days or 29 days
if leap year and so on. On the other hand, approximate time assumes that every month has 30 days and
there are 360 days in a year.

Note that in counting days, the date of origin is EXCLUDED. Always note if there is leap year!
For example, determine the number of days from September 16, 2020 to November 25, 2020.

Actual Time:
Month Number of Days
September 14 (30-16) September has 30 days
October 31
November 25
Total 70 days

Approximate Time:
Month Number of Days
September 14 (30-16) September has 30 days
October 30 (Assume 30 days per month)
November 25
Total 69 days

Activity 2.3: Answer the following problems. Show your solutions same as above.
1. Find the actual and approximate number of days between the following dates:
a. December 23, 2016 to March 18, 2017
b. October 4, 2020 to January 13, 2021
c. February 6, 2020 to July 28, 2020
d. May 12, 2019 to May 12, 2020

GOOD JOB! You just finished the activity. Check your answer. If you commit mistake, know why you are wrong
and solve it again. Practice More is the key.
a. Actual: 85 days Approximate: 85 days
b. Actual: 101 days Approximate: 99 days
EXACT INTEREST and ORDINARY INTERES
c. Actual: 173 days Approximate: 172 days
d. Actual: 366 days Approximate: 360 days
Earlier, we learned how to count number of days using actual and approximate days. Also, we learned
previously that time should be expressed in year. So if time is expressed in days, it should be divided by
the number of days in a year to express it as a year.

The number of days to be divided depends if it is exact interest method or ordinary method. In exact
interest method, 365 days or 366 days if leap year is used while in ordinary interest method, 360 days is
used.

Putting all the variables in the concept of time, we can come with the following:
Actual Time/365
Exact Interest
Approximate/365
Actual Time/360
Ordinary Interest
Approximate/360

Unless specified in the problem, we used the Banker’s rule in which we use actual time over or with
respect to 360 days.

EXAMPLE:
1. On March 23, 2019, Mary Ann applied for a P48,000 loan at 9.5% simple interest. She promised to pay
on July 12, 2019. Compute for the interest using:
a. Actual time, exact interest
b. Approximate time, exact interest
c. Actual time, ordinary interest
d. Approximate time, ordinary interest

Solution:
a. I = Prt = (48,000)(.095)(111/365) = P1,386.74
b. I = Prt = (48,000)(.095)(109/365) = P1,361.75
c. I = Prt = (48,000)(.095)(111/360) = P1,405.99
d. I = Prt = (48,000)(.095)(109/360) = P1,380.67

REMEMBER!

1. If the day of the origin date and the day when the loan is due are the same, say, February 8, 2020 to
August 8, 2020, count the number of months between them. In this case, the time to be used is 6 months.

2. If the month and day are the same for both the origin date and maturity date, say, April 14, 2020 and
April 14, 2025, count the number of years between these dates. In this case, the time to be used is 5 years.

3. If the origin date is given and we are asked to get the due date of the loan or deposit in days, months
and years, count the exact number of days, exact number of months and exact number of years. A five
year, 3 month loan made on July 6, 2020 is due on October 6, 2025.
ACTIVITY 2.4: Answer the following problems. Show your solutions. No solution, no credit policy!
Note: Round off your final answer to 2 decimal places. For example, 1.56 years, 16.67% and P45,698.86.
Be honest! Committing mistake is part of the learning process.

1. If P30,000 is invested at 12.5% simple interest rate for 150 days, find the exact interest and ordinary
interest.
2. Jack borrowed P80,000 from Mark at 15% simple interest rate. He promised to pay the principal and
interest on May 12, 2020. If the loan was made on May 12, 2015. How much is the exact interest?
Ordinary interest?
3. On May 5, P30,000 was borrowed and repaid on August 19. Given an interest rate of 11.67%, how
much simple interest was earned using the following:
a. Actual time, exact interest
b. Approximate time, exact interest
c. Actual time, ordinary interest
d. Approximate time, ordinary interest
4. Using the banker’s rule, how much must be deposited now at 16.5% simple interest rate in order to
have P10,000 interest from May 23, 2020 to December 3, 2020.

ACCUMULATING AND DISCOUNTING

When interest is added to the principal at the end of the stipulated length of time, the total sum is called
the amount or maturity value or future amount which is to be expressed as F in the discussion. Its
formula is as follows:
F = Principal + Interest or
F = P + I or
F = P + Prt
Factoring P, we have
F = P (1+ rt)
We can also derive, the principal formula as:
F
P=
(1+𝑟𝑡)

While answering different problems, you might encounter the terms to accumulate and to discount. To
accumulate is to find the amount or maturity value of the loan. To discount is to find the present value or
the principal amount.

EXAMPLES:
1. Accumulate P75,000 at 8% simple interest for 15 years
Solution:
P = P75,000
r = 8% or .08
t = 15 years
F=?
F = P (1+ rt)
= 75,000 (1 + (0.08)(15))
= P165,000

2. Compute for the amount if P24,000 is invested at 9.5% for 5 years.

3. If the money is worth 12% simple interest, what must be invested now to have P69,000 at the end of
4.5 years?
Solution:
P=?
r = 12% or .12
t = 4.5 years
F = P69,000
F P69,000
P= = = P44,805.19
(1+𝑟𝑡) (1+(.12)(4.5))

4. What is the present value of P45,000 at 11.25% simple interest at the end of 240 days?
Solution:
P=?
r = 11.25% or .1125
t = 240 days (Banker’s rule if silent)
F = P45,000
F P45,000
P= = = P41, 186.44
(1+𝑟𝑡) (1+(.1125)(240/360))

ACTIVITY 2.5: Answer the following problems. Show your solutions. No solution, no credit policy!
Note: Round off your final answer to 2 decimal places. For example, 1.56 years, 16.67% and P45,698.86.
Be honest! Committing mistake is part of the learning process.

1. If money is worth 16% simple interest, what is the amount of a P150,000 loan due at the end of 5
years?
2. Accumulate P50,000 at 10.75% simple interest for one year and 6 months.
3. Discount P25,800 at 18% simple interest for 180 days.’
4. What is the present value of a P89,000 loan due at the end of 3 years, if money is worth 15% simple
interest?
5. What sum will accumulate to P72,000 in 8 years at 12.5% simple interest?
6. Accumulate P222,000 at 10.75% simple interest for three years and 3 months.
7. Accumulate P92,500 from August 14 to February 17 of the next year at 8.5% simple interest.
8. How much will a P15,300 loan at the end of 250 days if the interest rate charged is 11.5%?
9. Find the maturity value of a P67,400 loan if the interest rate charged at 12.3% for 115 days.
10. Discount P50,000 for 145 days at 19.5% simple interest.

SIMPLE DISCOUNT

Individuals make loans. In borrowing money, interest is charged for the use of money. When deducted in
advances, this interest is referred to as simple discount. This means that the amount received today is
already deducted by the interest. Thus, the maturity value, F, due at the end of the term, t, is charged
interest in advance at a simple discount rate, d. For example, Ana promised to pay P100,000 after 5 years
with 10% interest deducted in advance. This means that Ana will receive P90,000 today as her proceeds.
The amount borrowed or promised to pay in simple discount is the amount of maturity value while the
amount received today after deducting interest in advance is the proceeds or present value.

With this, simple discount formula is expressed as:

D D D
d= t= F=
Ft Fd dt

Since F = P + D, it follows that P=F-D. The value, P, is what the borrower receives at the beginning of the
term. This value is called proceeds. Similarly, D= Fdt and P=F-D, then we can substitute these
relationships:
P=F–D
= F – Fdt
Factoring, we have
P = F (1- dt)
And solving for F,
P
F=
(1−𝑑𝑡)

The difference of this topic, aside from the formula, in the discounting topic in simple interest is that
simple discount is based on maturity value in which discount rate is multiplied to the maturity value while
simple interest is based on the present value/principal amount in which simple interest rate is multiplied
to the principal amount. This also means that the interest in simple interest is paid at maturity date while
interest in simple discount is immediately deducted.
In solving problems, take note also the rate given if the problem states discount rate or interest in advance
then use simple discount formula. But if states simple interest rate or no discount rate is stated, then use
simple interest formula.

EXAMPLES:
1. Discount P25,000 for 3 years and 6 months at 10% simple discount.

Solution:
F = P25,000
d = 10% or 0.10
t = 3.5 years (6 months/12months =0.50)
P=?

P = F (1 – dt)
= 25,000 (1 – (.10)(3.5))
= P16,250

2. On April 2, Mr. Crisostomo received P65,000 from a credit union and promised to pay P68,000 on
October 2 on the same year. If the interest is deducted in advance, what was the discount rate?
Solution
F = P68,000
d=?
t = 6 months or 0.50 year
P = P65, 000
D = F – P = P68,000 – P65,000 = P3,000

D 3,000
d= =(68,000)(0.50) = 8.82%
Ft