MATH 0

(Mathematics Review)

Module 4 (Part 1)
Week 13-14

Simple Interest

Simple interest is a method to calculate the amount of interest charged on a sum at a given rate and
for a given period of time. In simple interest, the principal amount is always the same, unlike
compound interest where we add the interest to the principal to find the principal for the new
principal for the next year.

In this lesson, you will be introduced to the concept of borrowing money and the simple interest that is
derived from borrowing. You will also be introduced to terms such as principal, amount, rate of
interest, and time period. Through these terms, you can calculate simple interest using the simple
interest formula.

Simple Interest Formula

Simple interest is calculated with the following formula: S.I. = (P × R × T), where P = Principal, R = Rate
of Interest in % per annum, and T = Time, usually calculated as the number of years. The rate of
interest is in percentage R% (and is to be written as R/100,

 Principal: The principal is the amount that was initially borrowed (loan) from the bank or invested. The
principal is denoted by P.
 Rate: Rate is the rate of interest at which the principal amount is given to someone for a certain time,
the rate of interest can be 5%, 10%, or 13%, etc. The rate of interest is denoted by R.
 Time: Time is the duration for which the principal amount is given to someone. Time is denoted by T.

The above formula can be further solved for any variable, P, R, or T. For example, by dividing both sides
of the SI formula S.I. = (P × R × T) by R × T, we get P = ( S.I.)/(R × T). Similarly, we can solve for either R
or T.

Simple Interest Formula

P x Rx T S. I . S. I . S. I .
S.I. = ❑
, P = P x T , R = P x T , T= p x R
 Amount = Principal (P) + Simple Interest (S.I.)

Sometimes, the simple interest formula is written as just SI = PRT where R is the rate of interest as a
decimal. i.e., if the rate of interest is 5% then R can be written as 5/100 = 0.05.

Amount: When a person takes a loan from a bank, he/she has to return the principal borrowed plus
the interest amount, and this total returned is called the Amount.

Amount = Principal + Simple Interest

A = P + S.I.

A = P + PRT

A = P(1 + RT)

How to Find Simple Interest?

Simple interest is found by using the formula SI = (PRT) where P is the principal, R is the rate of interest,
and T is the duration. The values of P, R, and T have to be substituted in this formula to calculate the
simple interest. Here is an example to understand the process better for same P and R values but for
different T values.

Example 1:
Find the interest earned after 3 years if ₱12,000.00 is deposited in a savings account which earns 5%
simple interest.
Given: P = ₱12,000
t = 3 years
r = 5% = 0.05
Required: t = ?
Solution:
I = Prt
= 12,000 (0.05)(3)
= ₱1,800.00

Example 2:
A 5 year investment has a maturity value of ₱27,500.00. If the applied rate is 7.5% simple interest,
what is the original principal?
Given: A = ₱27,500.00
r = 7.5% = 0.075
t = 5 years
Required: P
Solution:
A = P(1 + rt)
A
P= (by cross multiplication principle)
1+ rt

27,500 27,500
= = = ₱20,000.00
1+(0.075)(5) 1.375

Example 3:
At what simple interest rate is ₱16,500.00 invested if it earns an interest of ₱1,620 just after 1.5 years?
Given: P = ₱16,500.00
I = 1,620
t = 1.5 years
Required: r=?
I 1,620 1,620
r= = = =0.0654 x 100 %
Pt ( 16,500 ) (1.5 ) 24,750
= 6.54%

Example 4:
How long will it take a ₱30,000.00 debt to earn an interest of ₱4,500.00 if the simple interest
being charge is 9%.
Given: P = ₱30,000.00
I = 4,500.00
r = 9% = 0.09
Required: t=?
Solution:
I = Prt

I 4,500 4,500
t= = = =1.67 years
Pr (30,000)(0.09) 2,700
 Math 0
Mathematics Review

Module 4 (Part 2)
Week 15-16
APPROXIMATE TIME AND EXACT TIME

Actual time uses the exact number of days in each month and year, while approximate time assumes
each month has 30 days. Three examples show calculating the actual and approximate number of days
between two given dates.
An approximate number, time, or position is close to the correct number, time, or position, but is not
exact.
Ordinary interest is calculated on the basis of a 360-day year or a 30-day month; exact interest is
calculated on a 365-day year. The interest formulas for both ordinary and exact interest are actually
the same, with time slightly differing when given as number of days.

interest computed on a 360-day year, using 12 months of 30 days, instead of a 365-day year. For
instance, Treasury bill yields are quoted on a 360-day year. Corporate bonds, mortgages, and consumer
installment loans with precomputed interest earn ordinary interest.
Exact of 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.
Approximate time – this method considers that there are 30 days in each month or 360 days in one
year.
Ordinary simple interest
Assumes that there are 360 days in a year
number of days
I =P r
360

Exact simple interest, Assumes 365 days

number of days
I =Pr
365
 What is the exact interest?
Exact interest. Interest paid based on the basis of a 365-day/year schedule by a bank or other financial-
institution as opposed to a 360-day basis (ordinary interest). Difference can be material when large principal
sums of money are involved.

Why is the "ordinary" method for calculating simple interest even a thing?

Calculating simple interest via the "ordinary" method uses the exact same formula as exact simple interest, A
= Prt, however t uses 360 days in a year rather than 365.

E.g., if I want to calculate simple interest on a ₱20,000 principle at 2.1% interest over 100 days, I would do

A = 20000(0.021)(100/360) = ₱116.67.

This is juxtaposed against exact simple interest, which is

A = 20000(0.021)(100/365) = ₱115.07.

What is the promissory note?

A promissory note is a documented promise to repay borrowed money. Promissory notes are binding legal
documents used to protect both the lender and the borrower. The promissory note is paper evidence of the debt
that the borrower has incurred.

Promissory note
A written promise to pay a sum of money, to a specified individual or organization, at a specified time in the future,
and that is not always supported by a guarantee.

What type of money is a promissory note?

A banknote is frequently referred to as a promissory note, as it is made by a bank and payable to bearer on
demand. Mortgage notes are another prominent example. Promissory note is said to be negotiable
instrument when it contains an unconditional promise.

When the promissory note is discounted, the interest is taken off the principal amount at the beginning of the
loan. The borrower pays back the entire amount, even though he only received the principal minus the interest.