INTEREST and DISCOUNT

INTEREST – the amount of money paid for the use of

. borrowed capital (borrower’s viewpoint)
- the income produced by the money which he
. has lent. (lender’s viewpoint)
Charging of the interest is justified from the standpoint of the
lender to:
a) forego the use of his money during the time it is borrowed.

b) compensate him also for the risk that he has to take in lending
his money.
Principal (P) - the amount of money borrowed and
. on which interest is charged.
Rate of Interest – the amount earned by one unit of
. principal during a unit of time.
Simple Interest – the interest to be paid is directly
. proportional to the length of time the
. amount of principal is borrowed
Formula: I = Pin

where I = total interest earned by the principal

P = amount of the principal
i = rate of interest expressed in decimal form
n = number of interest periods
Future Cost (F)
- amount repaid which is equal to the sum of the
principal and the total interest.

F = P + I = P + Pin
= P ( 1 + in)
Two (2) types of Simple Interests:
1. Ordinary Simple Interest (OSI) – computed on the basis of
. one banker’s year, which is:
1 banker’s year = 12 months, each consisting of 30 days

OSI = P i (d/360)

where d = number of days the money is borrowed

2. Exact Simple Interest (ESI) – based on the exact number .
of days,
For ordinary days: 365 days

ESI = Pi (d/365)

For leap year (years divisible by 4): 366 days

ESI = Pi (d/366)
  PROBLEM: Determine the ordinary simple
interest on P10,000 for 9 months and 10 days if
the rate of interest is 12%.
 GIVEN: P = P10, 000 REQ’D: OSI
i = 12%
 SOLUTION:
EXAMPLES ON
Based on a banker’s year:
SIMPLE
INTEREST d= 9(30) + 10 days = 280 days
d 280
OSI = Pi = (10,000)(0.12)( )
360 360
OSI = P933.33
 EXAMPLES ON SIMPLE INTEREST
 PROBLEM: Determine the ordinary and exact simple interests on P5,000
for the period from January 15 to June 20, 1993, if the rate of simple
interest is 14%.
 GIVEN: P = P5,OOO REQ’D: OSI, ESI
i = 14%
SOLUTION:
January 15-31 = 16 days (excluding Jan.15)
February = 28
March = 31
April = 30
May = 31
June 1 – 20 = 20 (including June 20)
= 156 days
 d
OSI = Pi
360
156
= (5, 000)(0.14)( )
360
= P303.33
 d d
ESI = Pi or Pi ?
365 366
d
ESI = Pi
365
156
= (5, 000)(0.14)( )
365
 = P299.18
 Problem on Simple Interest
1. A businessman plans to extend his business by offering
more services thus he also needs additional capital. He
opted to borrow from a lending firm offering a 10%
simple interest payable in 1 year. If he wants ₱ 50,000
now, how much will he pay at the end of one year?
Given: P = ₱ 50,000.00; n = 1 year; Sol’n: I = Pin
i = 10% Required: F = 50,000(.1)(1)
Solution: F = P ( 1 + in) = Ҏ5,000.00
=₱50,000 [1 + (0.1)1] F = P + I = 50,000 + 5000
F = ₱ 55,000.00 F = ₱ 55,000.00
Compound Interest
- the amount where the interest earned by the
principal is not paid at the end of each interest period
but is considered as added amount to the principal,
and there-fore will also earn interest for the succeeding
periods.
Formula for the total amount due after n
periods is:
F = P (1 + i)n

where the factor

(1 + i) n = (F/P,i%,n)
is called the
“Single Payment Compound Amount
Factor”
 Rate of Future cost
PERIOD (n) Principal, P interest (i) Interest I F = P + I
1 P i Pi P+Pi = P(1+i)

2 P(1+i) i P(1+i) (i) P(1+i) + P(1+i)(i) =

P(1+i)(1+i) = P(1+i)2

3 P(1+i)2 i P(1+i)2 (i) P(1+i)2 + P(1+i)2 (i) =

P(1+i)2 (1+i) = P(1+i)3

n P(1+i)n-1 i P(1+i)n-1 (i) P(1+i)n-1 + P(1+i)n-1 (i) =

P(1+i)n-1 (1+i)1
F = P(1+i)n
Problem on Compound Interest

A person borrows a certain amount that would be

paid 3 years after amounting to ₱ 10,500. How
much was the borrowed amount if the rate of
interest is 10% compounded semi-annually?
Given:
F = ₱ 10,500 Solution
n = 3 years x 2 (s.a)/yr P = F (1+i) –n
= 6 s.a. = 10,500 (1.05) –6
i = 10% /2 = 5% = ₱7,835.26
= .05
Required: P
Nominal Rate of Interest (NRI)
– interest usually quoted for compound
interest which specifies the rate of interest and
the number of interest periods per year.
𝒓
𝒊=
𝒎
Where:
i = rate of interest per interest period
r = nominal interest rate
m = number of compounding periods per year
NRI

Thus: a nominal interest of 8%

compounded quarterly means
that there are 4 interest
periods each year, the rate per
period being 8/4 = 2%.
Effective Rate
of Interest  ERI = F1 – 1 = (1 + i)n -1
(ERI)
– the actual
rate of Where F1 = the amount
interest on the P1.00 becomes after 1
principal for year
one year.
ERI = NRI if interest is compounded annually
ERI > NRI if interest is compounded semi-annually,
quarterly or monthly.
Period NRI ERI
ANNUALLY i i

SEMI- i/2 i
ANNUALLY

QUARTERLY i/4 i

MONTHLY i/12 i

DAILY i/365 i
Present Value, P
- principal amount
- the amount which when invested now
will become F after n years of investment

P = F (1 + i)-n
𝐅
=
(1 + i)n
Discount on a negotiable paper
– the difference between what it is
. worth in the future and its present worth.
Discount = Future value – Present value
The rate of discount, d
– the discount on one unit of principal per unit
. of time.

𝟏 𝐢
d=1- =
𝟏+𝐢 𝟏+𝐢
Problem on Discount:
1. At Barbie’s Furniture Store, a wine table was bought at a
wholesale price of ₱25,000.00. The owner is trying to
figure out how much to charge for this new item. Barbie’s
Furniture Store marks up all furniture by 15%, percent.
How much will be the selling price?

Given: Original price = ₱25,000.00

Mark up = 15%

Solution: New price = ₱25,000.00 + 0.15(25,000)

= ₱ 28,750.00

Discount = Future value- present value

= 28,750 – 25,000 = 3750.00