Simple Interest

Simple
Interest
Objective
➢ Compute simple interest,

maturity value and unknown
principal, rate or time.
Definition of Terms
Lender or creditor – person (or institution) who invests the money or
makes the funds available
Borrower or debtor – person (or institution) who owes the money or avails
of the funds from the lender
Origin or loan date – date on which money is received by the borrower
Repayment date or maturity date – date on which the money borrowed or loan is to be
completely repaid
Time or term (t) – amount of time in years the money is borrowed or
invested; length of time between the origin and maturity
dates
Annual Simple Interest
𝐼𝑠 = 𝑃𝑟𝑡
where,
𝐼𝑠 = simple interest;
𝑃 = principal, or the amount invested or borrowed;
𝑟 = simple interest rate
𝑡 = term or time in years
Example 1: A bank offers 0.25% annual simple interest rate for
a particular deposit. How much interest will be earned if 1
million pesos is deposited in this savings account for 1 year?
Given: P = 1,000,000 r = 0.25% = 0.0025 t = 1 year

Find: Is
Solution: Is = Prt → Is = (1,000,000)(0.0025)(1) → Is = 2,500
Answer: The interest earned is P 2,500.

Example 2:
How much interest is charged when P50,000 is borrowed
for 9 months at an annual interest rate of 10%?
9
Given: P = 50,000 r = 10% = 0.10 t= year = 0.75 year
12
Find: Is
Note: When the term (t) is expressed in months (M), it

𝑀
should be converted in years by: 𝑡 = .
12
Solution: Is = Prt
9
Is = (50,000)(0.10)( )
12
Is = (50,000)(0.10)( 0.75)
Is = 3,750
Answer: The simple interest charged is P 3,750.

Example 3:
Complete the table below by finding the unknown.
Principal Rate (r) Time (t) Interest (Is)
(P)
(a) 2.5% 4 1,500
36,000 (b) 1.5 4,860
250,000 0.5% (c) 275
500,000 12.5% 10 (d)

Solution:
𝐼𝑠
a.) The unknown principal can be obtained by: 𝑃 =
𝑟𝑡
𝐼𝑠 1,500
𝑃= →𝑃= → 𝑃 = 15,000
𝑟𝑡 (0.025)(4)
𝐼𝑠
b.) The unknown rate can be computed by: 𝑟 =
𝑃𝑡
𝐼𝑠 4,860
𝑟= →𝑟= → 𝑟 = 0.09 = 9%
𝑃𝑡 (36,000)(1.5)
𝐼𝑠
c.) The unknown time can be calculated by: 𝑡 =
𝑃𝑟
𝐼𝑠 275
𝑡= →𝑡= → 𝑡 = 0.22 years
𝑃𝑟 (250,000)(0.005)
d.) The unknown simple interest is given by: 𝐼𝑠 = 𝑃𝑟𝑡

𝐼𝑠 = 𝑃𝑟𝑡 → 𝐼𝑠 = 500,000 0.125 10 → 𝐼𝑠 = 625,000
Example 4:
When invested at an annual interest rate of 7%, the amount
earned P11,200 of simple interest in two years. How much
money was originally invested?
Given: r = 7% = 0.07 t = 2 years IS = 11,200
Find: Amount invested or principal P

Solution:
𝐼𝑠
𝑃=
𝑟𝑡
11,200
𝑃=
0.07 2
𝑃 = 80,000
Answer: The amount invested is P 80,000.

Example 5:
If an entrepreneur applies for a loan amounting to P500,000 in a
bank, the simple interest of which is P 157,500 for 3 years, what
interest rate is being charged?
Given: P = 500,000 Is = 157,500 t = 3 years
Find: r
Solution:
𝐼𝑠
𝑟=
𝑃𝑡
157,500
𝑟=
500,000 3
𝑟 = 0.105 = 10.5%
Answer: The bank charged an annual simple interest rate of 10.5%.

Example 6:
How long will a principal earn an interest equal to
half of it at 5% simple interest?
1
Given: P = P r = 5% = 0.05 Is = P = 0.5P
2
Find: t
Solution:
𝐼𝑠
𝑡=
𝑃𝑟
0.5𝑃
𝑡=
𝑃 0.05
𝑡 = 10 years
Answer: It will take 10 years for a principal to earn of its value

at 5% simple annual interest rate.
Pre-Test
1. If a businessman applies for a loan
amounting to P700,000 in a bank, the simple
interest of which is P 160,300 for 4 years, what
interest rate is being charged?
2. When invested at an annual interest rate of

8%, the amount earned P12,000 of simple
interest in 3 years. How much money was
originally invested?
Maturity (Future) Value
𝐹 = 𝑃 + 𝐼𝑠 or 𝐹 = 𝑃(1 + 𝑟𝑡)
where,
𝐹 = maturity value
𝐼𝑠 = simple interest
𝑃 = principal
𝑟 = interest rate
𝑡 = term or time in years
Example 7:
Find the maturity value if 1 million pesos is deposited
in a bank at an annual simple interest rate of 0.25%
after (a) 1 year (b) 5 years?
Given: P = 1,000,000 r = 0.25% = 0.0025
Find: (a) maturity or future value F after 1 year

(b) maturity or future value F after 5 years
Solution:
(a) When t = 1, the simple interest is given by
Method 1:
Is = Prt →Is = (1,000,000)(0.0025)(1) → Is = 2, 500
The maturity or future value is given by

F = P + Is
F = 1,000,000 + 2,500
F = 1,002,500
Method 2: To directly solve the future value F,
F = P(1 + rt)
F = (1,000,000)(1 + 0.0025(1))
F = 1,002,500
Answer: The future or maturity value after 1 year is P1,002,500.

(b) When t = 5,
To directly solve the future value F,
F = P(1 + rt)
F = (1,000,000)(1 + 0.0025(5))
F = 1,012,500
Answer: The future or maturity value after 5 years is P1,012,500.

SUMMARY:
Time or term (t) – amount of time in years the money is borrowed or
invested; length of time between the origin and maturity dates
Principal (P) – amount of money borrowed or invested on the origin date
Rate(r) – annual rate, usually in percent, charged by the lender, or rate of
increase of the investment
Interest (I) – amount paid or earned for the use of money
Simple Interest (Is) – interest that is computed on the principal and then
added to it
Maturity value or future value (F) –amount after t years that the lender
receives from the borrower on the maturity date
Formula of Annual Simple Interest: 𝐼𝑠 = 𝑃𝑟𝑡
Formula of Maturity (Future) Value: 𝐹 = 𝑃 + 𝐼𝑠 or 𝐹 = 𝑃(1 + 𝑟𝑡)
o Illustrate compound interest, compute interest,
maturity value, and present value in compound
interest environment, and solve problems
involving compound interest.
Compound Interest (Ic)
ointerest is computed on the principal and
also on the accumulated past interests.
The following table shows the amount at the end of
each year if principal P is invested at an annual
interest rate r compounded annually. Computations
for the particular example P = P100,000 and r = 5%
are also included.
Year (t) Principal = P Principal = P 100,000
Int. rate = r, compounded Int. rate = 5%, compounded
annually annually
Amount at the end of the year Amount at the end of the year
1 P x (1 + r) = P(1 + r) 100,000 x 1.05 = 105,000
2 P (1 + r) x (1 + r) = P(1 + r)2 105,000 x 1.05 = 110,250
3 P (1 + r)2 x (1 + r) = P(1 + r)3 110,250 x 1.05 = 121,550.63
4 P (1 + r)3 x (1 + r) = P(1 + r)4 121,550.63 x 1.05 = 127,628.16
Maturity (Future) Value and Compound Interest:
𝐹 = 𝑃(1 + 𝑟)𝑡
where:
P = principal, or present value
r = interest rate
t = term or time in years
F = maturity (future) value at the end of the term
The compound interest Ic is given by: 𝐼𝑐 = 𝐹 − 𝑃

Example 1. Find the maturity value and the compound interest
if P10,000 is compounded annually at an interest rate of 2% in 5
years.
Given: P = 10,000 r = 2% = 0.02 t = 5 years
Find: (a) maturity value F (b) compound interest Ic

Solution:
(a) F= P(1+r)t → F = (10,000)( 1 + 0.02)5 → F = 11,040. 081
( b ) Ic = F – P → Ic = 11,040.81 – 10,000 → Ic = 1,040.81
Answer: The future value F is P11,040.81 and the

compound interest is P1,040.81.
Example 2. Find the maturity value and interest if P 50,000 is
invested at 5% compounded annually for 8 years.
Given: P = 50,000 r = 5% = 0.05 t = 8 years
Find: (a) maturity value F (b) compound interest Ic

Solution:
( a ) F= P(1+r)t → F = (50,000)( 1 + 0.05)8 → F = 73,872.77
( b ) Ic = F – P → Ic = 73,872.77 – 50,000 → Ic = 23,872.77
Answer: The maturity value F is P73,872.77 and the

compound interest is P23,872.77.
Example 3.Suppose your father deposited in your bank
account P10,000 at an annual interest rate of 0.5%
compounded yearly when you graduate from kindergarten
and did not get the amount until you finish Grade 12. How
much will you have in your bank account after 12 years?

Simple Interest

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Simple

➢ Compute simple interest,

Given: P = 1,000,000 r = 0.25% = 0.0025 t = 1 year

Answer: The interest earned is P 2,500.

Note: When the term (t) is expressed in months (M), it

Answer: The simple interest charged is P 3,750.

(a) 2.5% 4 1,500

36,000 (b) 1.5 4,860

250,000 0.5% (c) 275

500,000 12.5% 10 (d)

d.) The unknown simple interest is given by: 𝐼𝑠 = 𝑃𝑟𝑡

Given: r = 7% = 0.07 t = 2 years IS = 11,200

Find: Amount invested or principal P

Answer: The amount invested is P 80,000.

Given: P = 500,000 Is = 157,500 t = 3 years

Answer: The bank charged an annual simple interest rate of 10.5%.

Answer: It will take 10 years for a principal to earn of its value

2. When invested at an annual interest rate of

Given: P = 1,000,000 r = 0.25% = 0.0025

Find: (a) maturity or future value F after 1 year

The maturity or future value is given by

Answer: The future or maturity value after 1 year is P1,002,500.

Answer: The future or maturity value after 5 years is P1,012,500.

The compound interest Ic is given by: 𝐼𝑐 = 𝐹 − 𝑃

Given: P = 10,000 r = 2% = 0.02 t = 5 years

Find: (a) maturity value F (b) compound interest Ic

( b ) Ic = F – P → Ic = 11,040.81 – 10,000 → Ic = 1,040.81

Answer: The future value F is P11,040.81 and the

Given: P = 50,000 r = 5% = 0.05 t = 8 years

Find: (a) maturity value F (b) compound interest Ic

( b ) Ic = F – P → Ic = 73,872.77 – 50,000 → Ic = 23,872.77

Answer: The maturity value F is P73,872.77 and the

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