CHAPTER SIX

SIMPLE INTEREST

Learning Objectives:

At the end of this chapter, the students are expected to:

 Compute the amount of interest in a specified time;
 Calculate the principal, rate, time or interest when three of the quantities are given;
 Develop and use the more common formulas in finding simple interest;
 Differentiate interest at exact and approximate time;
 compute the exact number of days between dates;
 compute the approximate number of days between dates;
 compute ordinary and exact interests;
 differentiate the different methods in computing simple interests;
 be acquainted with the so-called Banker’s Rule in computing simple interests;
 find the amount due on maturity; and
 solve problems involving interest-bearing note.

Interest is the amount paid for use of another person’s money. It is an expense to
the borrower and an income to the lender.

Interest can also be taken as a rental fee for the use of money. When we lend or
loan money to others, we charge them interest, and when we borrow money from
lending institutions or from individuals, we repay the borrowed amount plus interest. The
principal is the amount borrowed or loaned. The rate is a percent of the principal, and
time is the number of years (or fraction thereof) that the money is to be rented or
borrowed (Altares et al, 2008, p. 246).

To solve for interest (I), we multiply the price (P) by the rate (r) by the time (t).

Hence, the basic equation is: I = Prt. The element of time is so significant in terms
of investment, such that special terminology on finance can be accommodated.

1
Example 1. Find the interest of P 2,000 if invested at 8% for 2 years.
2

Solution: I = Prt
= (P 2,000)(0.08)(2.5)
I = P 400

At the end of the term stated, the amount invested must be returned together
with the interest earned. So that the amount at the end of the term is the so-called final
amount (F) and we obtain it by merely adding the interest earned to the principal.

89
 So: F = P + I. Therefore referring to the above example, the final amount (F) is:
F = P 2,000 + P 400
F = P 2,400

When the term of a loan involves a fraction of a year, for example:

If P = P 1,000; r = 7%; t = 8 months

(convert months to year by dividing it by 12 since 1 year = 12 months)

8
Solution: I = (P1,000)(0.07)  
 12 
I = P 46.67

If the term is given in number of days, there are two ways for calculating simple
interest. It’s either:
number of days
1. Ordinary Interest (Io) = 360 days per year =
360
number of days
2. Exact Interest (Ie) = 365 days per year =
365

Note: unless specified otherwise, always use the ordinary interest.

Section 37. DERIVED SIMPLE INTEREST FORMULA

Considering the basic equation I = Prt, we can derive the other three equations by
the use of the axiom of division. Such that:
If P is unknown, the formula is P = I ÷ rt;
If r is unknown, the formula is r = I ÷ Pt;
If t is unknown, the formula is t = I ÷ Pr.

Example 1. Cherry paid the bank P 194.80 interest at 9.5% for 90 days. How much did
Cherry borrow?

Given: I = P 194.80 Solution:

r = 9.5% = 0.095 P = I ÷ rt
90  90 
t = 90 days = = P 194.80 ÷ (0.095)  
360  360 
Required: P P = P 8,202.11

90
Example 2. Cherry borrowed P 8,202.11 from a bank. If Cherry’s interest is P 194.80 for
90 days, what rate of interest was charged?

Given: P = P 8,202.11 Solution:

I = P 194.80 r = I ÷ Pt
90  90 
t = 90 days = r = P 194.80 ÷ (P 8,202.11)  
360  360 
Required: r r = 0.095 or 9.5%

Example 3. Cherry borrowed P 8,202.11 from a bank. If Cherry’s interest is P194.80 at

9.5%. How much time does Cherry have to repay the loan?

Given: P = P 8,202.11 Solution:

I = P 194.80 t = I ÷ Pr
r = 9.5% t = P 194.80 ÷ (P 8,202.11)(0.095)
Required: t t = 0.25 year

In days, 0.25 x 360 = 90 days

Example 4.

Given: P = P 5,000 Solution:

t = 45 days Io = Prt
 45 
r = 7.5% = (P 5,000)(0.075)  
 360 
Required: Io Io = P 46.88
Ie

Ie = Prt
 45 
= (P 5,000)(0.075)  
 360 
Ie = P 46.23

To determine the principal when the final amount, rate and time are given, one
would have to relate the formula I = Prt and F = P + I

If I = Prt, then: F = P + I
F = P + Prt
Equation 1: F = P(1 + rt)
F
Equation 2: P 
1  rt

91
 1
Example 1. Virgie paid P 2,445 on a loan made 180 days before at 7 % simple
2
interest. Find the total loan made.
Given: F = P 2,445 Solution:
F
t = 180 days P =
1  rt
P 2,445
r = 7.5% =
 180 
1  0.075  
 360 
Required: P P = P 2,356.63

Example 2.

Given: P = P 6,000 Solution:

r = 5% = 0.05 F = P(I + rt)
t = 3 years = (P 6,000)[(1 + (0.05 )(3)]
Required: F F = P 6,900

1
Example 3. A man signed a note for P 9,800 at 8 % simple interest payable at the end
2
of 160 days. How much shall he pay at the end of the period?
Solution:
Given: P = P 9,800 Solution:
1
r = 8 % F = P(I + rt)
2

t = 160 days = P9,800 1  0.085  160 

  360 
Required: F F = P 10,170.44

92
 EXERCISE 35

Name:_____________________________________________________Date:__________Score:_____
Course and Year:________________________________________Schedule:___________________

Problems:

1. For a principal borrowed at 9 % simple interest, P 15,000 was paid as interest at the
end of 60 days. How much was borrowed?

2. What rate of interest was charged if P 450 was paid as interest after 240 days for
P30,000?

3. The interest on a loan of P 10,000 is P 3,000. If the rate of interest is 8%, when is the
loan due?

1
4. At the end of 150 days, Mrs. Pepito paid a total of P 37,125 on a loan of 7 % .
2
How much was the loan?

1
5. Find the interest and the amount due on P 240,000 for 4 % years at 12% ?
2

93
Section 38. CALCULATING THE TIME BETWEEN DATES AND THE BANKER’S RULE

In the previous example problems shown on simple interest, the time is specified in
terms of a year, month or days. Sometimes, problems may not give the exact or
specified term but only available dates. So in this case, you are to compute either the
approximate time (approximate number of days) and the actual/exact time (actual
number of days).

Example 1. Compute the a) approximate time and b) exact/actual time

between:

a. June 18, 1999 to March 12, 2000 and

b. December 17, 1999 to May 17, 2000

Solution: a) Approximate number of days

June 18, 1999 = 12 days left in the month of June 1999

8 months x 30 days/month = 240 days from July to February
March 12, 2000 = 12 days covered in the of March 2000
---------------------------------------------------------
Total Number of Days = 264 days

b) Actual number of days

June -12 days left (number of days for June – date started)
July -31
August -31
September -30
October -31
November -30
December -31
January -31
February -29
March -12 (due date)
268 days

Practice solving number 2.

Example 1. A loan of P 10,000 made on January 13, 1999 and was repaid on
December 17, 1999 having a rate of 9%. Solve for:
a) ordinary interest at actual/exact time
b) ordinary interest at approximate time
c) exact interest at actual/exact time
d) exact interest at approximate time

94
Solution: Actual time Approximate Time

January -18 days left Number of days left in January (30 -13) = 17
February -28
March -31 Number of months between (10 x 30) = 300
April -30 January and December x 30 days
May -31
June -30 Number of days covered in December = 17
July -31 __________
August -31 Total: 334 days
September -30
October -31
November -30
December -17 due date
338 days

a) ordinary interest at actual/exact time

Io = Prt
 338 
Io = (P 10,000)(0.09)   = P 845
 360 

b) ordinary interest at approximate time

Io = Prt
 334 
Io = (P 10,000)(0.09)   = P 835
 360 
c) exact interest at actual/exact time
Ie = Prt
 338 
Ie = (P 10,000)(0.09)   = P 833.42
 365 

d) exact interest at approximate time

Ie = Prt
 334 
Ie = (P 10,000)(0.09)   = P 823.56
 365 
To summarize the answers of the problem:

P 845 ordinary interest at actual/exact time

P 835 ordinary interest at approximate time
P 833.42 exact interest at actual/exact time
P 823.56 exact interest at approximate time

It can be seen that by using “ordinary interest at actual/exact time” gives the
greatest interest and this method is called the “Banker’s Rule”. This is referred to as the
Banker’s rule since this is commonly used by banks in computing for the interest because
this gives them a bigger income compared to the other three methods in computing for
the interest.

95
 EXERCISE 36

Name:_____________________________________________________Date:__________Score:_____
Course and Year:________________________________________Schedule:___________________

Problems:

1. On September 12, 1999, V. Laput borrowed P23,000 at 9.5% interest. She plans to
repay the loan on January 27,2000. Assume the loan is on exact time, ordinary
interest, what interest will she pay at the end of the term? What is the total
amount V. Laput must repay at maturity?

2. A banker met V. Laput (problem 1) and suggested she considers the loan on
exact time, exact interest. Recalculate the loan under this assumption. What is
your recommendation to V. Laput?

2 n
3. Clarissa bought a personal computer which is worth P 25,000 with , terms.
10 60
Clarissa does not have the cash for the computer in 10 days. She borrowed
money from the bank at 11% and pay cash for the computer, taking advantage
of the cash discount. She doesn’t think the cash discount warrants taking out a
loan. What would you advice Clasrissa?

96
 EXERCISE 37

Name:______________________________________________Date:__________Score:_____
Course and Year:__________________________________Schedule:__________________

Problems: use banker’s rule

1. Find the interest due on a loan of P 82,500 at 6% taken out September 14 and
repaid on November 5.

2. Find the interest due on a loan of P 32,500 at 18% taken out on March 4 and
repaid on August 3.

3. Find the interest and amount due on P 10,000 from November 25, 1999 to January
1
30, 2000 at 8 % simple interest.
2

4. Find the interest at 22% and amount due on P 40,950 from March 1, 2000 to
November 1, 2000 of the same year.

97
Section 39. BORROWING ON A NOTE

When someone borrows money, he is usually required by the lender to sign a

promissory note. If the note specifies that the interest is to be paid, it is known as an
interest-bearing note (Altares et al, 2008, p. 279).

Finding the Amount Due at Maturity

Example 1. Mr. Despi Rado was a college student. On June 1, 2008, she borrowed from
his aunt, Thessa Ang, P 20,000 to finish his senior year. In exchange for the loan, he
signed the note.

P20,000 Cebu City, June 01, 2008

One year after date, I promise to pay the order of Thessa Ang, Twenty
Thousand Pesos payable at her home.

Value received with interest at 12%

No. ____________Due: June 01,2009 Sgd. Mr. Despi Rado

Interest-Bearing Note

In the above note, P 20,000 is the face value or principal. June 01,2008 is the date
of the note. One year is the time. Thessa Ang, to whom the note is payable, is the
payee. Mr. Despi Rado, who signed the note, is the maker. The due date or date of
maturity, is June 01, 2009 which is one year from June 01, 2008. The rate is 12%.

When the note is paid, the payee writes “Paid” across the face, followed by the
date and her signature and returns the note to the maker.

Solution: I = Prt
= (P 20,000)(0.12)(1)
I = P 2,400 interest for one year

F = P+I
= P 20,000 + P 2,400
F = P 22,400 amount to be paid on the date of maturity

The interest on the loan is in proportion to the time. If the time is given in months,
1 8
each month is of a year. Thus, interest for 8 months for example would be of the
12 12
interest for one year.

98
 EXERCISE 38

Name:_____________________________________________________Date:__________Score:_____
Course and Year:________________________________________Schedule:___________________

Problems:

1. Find the interest and the total amount due in each of the following:

Face of the note Time Rate Interest Total amount

due at maturity
a) P 14,000 2 years 6%

b) P 20,000 3 years 7%

c) P 45,000 1 5%
1 years
2

d) P 23,000 3 months 8%

e) P 15,000 4 months 9%

2. Nino Tan borrowed P 35,000 to start a television repair business. He repaid the
1
principal with 14% interest, 2 years later. How much did he repay?
2

3. In order to pay an emergency bill, Seth Uy borrowed P 6,750 at 10% from a

business associate. He repaid the loan 8 months later. How much did he have to
pay?

99
 EXERCISE 39

Name:______________________________________________Date:__________Score:_____
Course and Year:__________________________________Schedule:__________________

1. To pay his taxes on time and avoid penalty, Joe Ping borrows P 5,800 on 9-months note
1
bearing interest at 9 % . What total amount must he pay on the date of maturity?
2

2. Find the interest for 1 year and 6 months on P 80,000 at 18%.

3. How much interest is due on P 19,000 at 15% for 2 months.

100