MODULE 1.

SIMPLE INTEREST AND SIMPLE DISCOUNT

1.1 Simple Interest

In financial transactions an interest is the amount paid by a borrower to a lender for the
use of money over a period. Interest that is paid as a percent of amount borrowed or invested is
called simple interest. The formula for simple interest is given by the following:

Simple Interest

𝐼 = 𝑃𝑟𝑡

Where,
𝐼𝑠 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 (𝑜𝑤𝑒𝑑)

𝑃 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 (𝑜𝑟 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑)

𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝑡 = 𝑡𝑒𝑟𝑚 𝑜𝑟 𝑡𝑖𝑚𝑒 𝑓𝑟𝑎𝑚𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠 ….

If the time is given in months or days, convert this to year using these formulas:
𝑛𝑜. 𝑜𝑓 𝑚𝑜𝑛𝑡ℎ𝑠
1. t =
12
𝑛𝑜. 𝑜𝑓 𝑑𝑎𝑦𝑠
2. t =
360

Note: Unless specified, 360 days is used in all simple interest computations.
Examples:
3 𝑚𝑜𝑛𝑡ℎ𝑠 1
1. 3 months = = year
12 𝑚𝑜𝑛𝑡ℎ𝑠/𝑦𝑒𝑎𝑟 4
200 𝑑𝑎𝑦𝑠 5
2. 200 days = = year
360 𝑑𝑎𝑦𝑠/𝑦𝑒𝑎𝑟 9

Interest can be viewed as a lender or a borrower. Sometimes if we are the investor, we

consider the value of our investment after a given period. In this case we introduce the concept
of future values or accumulated values or maturity value.
 Future Value

𝐹 = 𝑃 + 𝐼𝑠

𝐹 = 𝑃(1 + 𝑟𝑡)
Where,

𝐼𝑠 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 (𝑜𝑤𝑒𝑑)

𝑃 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑 (𝑜𝑟 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑑)

𝑟 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡

𝑡 = 𝑡𝑒𝑟𝑚 𝑜𝑟 𝑡𝑖𝑚𝑒 𝑓𝑟𝑎𝑚𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠

Derived Formulas:
𝐼
1. P = 𝑟𝑡
𝐼
2. r = 𝑃𝑡
𝐼
3. P = 𝑟𝑡
4. F = P + I
= P + Prt
F = P(1 + rt)
𝐹
5. P = 1+𝑟𝑡

Example 1:
If Php 1, 500 was borrowed at 8% simple interest, how much will the interest be for 2 years?
Given:
P = Php 1, 500
r = 8% or .08
t = 2 years
Find = I?
Solution:
I = Prt
I = 1,500(.08)(2)
I = Php 240
Example 2:
If Php 300 is the interest at 9% after 4 months, how much was borrowed?
Given:
 I = Php 300
r = 9% or .09
4 1
t = 12 or 3 year

Find = P?
Solution:
𝐼
P= 𝑟𝑡
300
P= 1
(.09)
3

P = Php 10,000
Example 3:
Accumulate Php 8,000 for 1 year and 6 months at 10% simple interest.
Given:
P = Php 8,000
t = 1.5 years
r = 10% or .1
Find = F?
Solution:
I = Prt
I = 8, 000(.10)(1.5)
I = Php 1,200
F = P+I
F = 8, 000 + 1,200
F = Php 9, 200
Or Alternate Solution:
F = P (1 + rt)
= 8, 000 (1 + (.1)(1.5))
= 8,000(1.15)
F = Php 9,200

1.2 EXACT AND ORDINARY INTEREST

When the time (t) is given in days, as previously illustrated, there are two different ways of
converting time in terms of years and these will result to two different methods of computing for the
interest.

1. Ordinary Interest
𝑑𝑎𝑦𝑠
Io = Pr
360
 2. Exact Interest
𝑑𝑎𝑦𝑠
Ie = Pr 365

Example 1:
Find the ordinary interest and exact interest at 9% on Php 15,000 for 45 days.
Given:
r = 9% or 0.9
P = Php 15,000
45 45
t= or
360 365
Find: a. Io
b. Ie
Solution:
𝐷
a. Io = Pr 360
45
= 15,000 (.09) 360

Io = Php 168.75
𝐷
b. Ie = Pr 365
45
= (15,000)(0.9) 365

Ie = Php 166.44

1.3 EXACT AND APPROXIMATE TIME

When the time (t) is given between two dates, there are two different methods of
computing for the time.

1. Exact or Actual Time

This is the actual number of days between two dates.

*General rule : Exclude the first day and include the last day in counting the exact number of
days.

2. Approximate Time

This method considered that there were 30 days in each month or 360 days in one
year.

Example 1:
Find the exact and approximate time between the following two given dates:
a. March 12 to September 20, 1993
b. August 6, 1990 to October 5, 1991
Solution:
 a. March 12 to September 20, 1993
Exact or Actual Time
1. By counting
March (12-31) 19 days
April 30 days
May 31 days
June 30 days
July 31 days
August 31 days
September 20 days
Total 192 days
Approximate Time
Year Month Day
1993 9 20
1993 3 12
6 8
6(30) + 8 = 188 days
Considering Exact and Approximate time in computing for the simple interest when time is
given between two dates, four methods of computing interest arise:
a. Ordinary Interest Using Exact Time
b. Ordinary Interest Using Approximate Time
c. Exact Interest Using Exact Time
d. Exact Interest Using Approximate Time
Among the four methods mentioned above, the most commonly used method is known as
the “Banker’s Rule” which is method (a)

The Bankers Rule or Ordinary Simple Interest is applied whenever a given Remark
problem does not specify the time factor to be used.

Note: If the problem is silent on which method to use always use the banker’s rule.
Example 1:
If Php 4,000 is invested at 8% from August 6, 1990 to October 5, 1991, compute for
the following:
a. Io using exact time
b. Io using approximate time
c. Ie using exact time
d. Ie using approximate time
Solution:
August 6, 1990 to October 5, 1991
Exact time = 425 days
Approximate time = 419 days
a. Io = Prt
425
= 4,000(.08)
360
Io = Php 377.78

b. Io = Prt
419
= 4,000(.08) 360
Io = Php 372.44

c. Ie = Prt
425
= 4,000(.08)( 365)
Ie = Php 372.60

d. Ie = Prt
419
= 4, 000(0.8) 365
Ie = Php 367. 34
 Activity no. 1

1. Suppose Kiko wanted to invest an amount 𝑃ℎ𝑝 50,000.00 for 2 years at a financial
institution that gives a simple interest of 3% per year. The interest rate was given to Kiko
by the financial institution on the assumption that he cannot withdraw the investment
within the 2-year period. How much is Kiko’s earning on the investment after the 2-year
period?
2. April wants to borrow 𝑃ℎ𝑝 40, 000.00 from a bank that gives an annual interest rate of
4.5%. However, she only wants to borrow the fund for a 9-month period and will be able
to pay the bank immediately after 9 months. How much interest is she going to pay from
borrowing the amount of money? What is the accumulated value of the amount
borrowed after the 9-month period?
3. The repayment on a loan was Php16,275. If the loan was for 15 months or 1.25 years at 6.8%
interest a year, how much was the principal?
4. Find the ordinary interest and the amount on Php 6,200 at 7% for 65 days?

5. Determine the Actual and Approximate number of days in the given origin and repayment
dates.
Origin Date Repayment Date Actual Time Approximate Time

A May 22, 1995 July 09, 1995

B January 06, 1997 November 06, 1997

C March 03, 2007 October 11, 2007

D February 04, 1990 November 05, 1992

E March 02, 2005 November 05, 2006