Lesson 1: Simple Interest

Definition 1.1: Principal refers to the amount of money M-P+1 M = 200 + 12 M = 212000
extended for credit or the amount of money deposited in
a bank for safekeeping. Therefore, Angela needs to pay P212,000 after 3 years.

Definition 1.2: Interest rate refers to the charged amount By expanding the basic simple interest formula, the
for using the money over a certain period. It is maturity value may be computed using the following
commonly expressed in percent, but is converted to alternative formula:
decimal.
M-P+I
Definition 1.3: Time refers to the period covered from the
time that the money (principal) is borrowed until its due M-P+(Prt)
date. The due date of the payment of the principal is
known as the maturity date. M = P(1 + rt)

Definition 1.4: Simple interest refers to an interest that is Definition of maturity value Substitution of 1 - Prt
computed on the original principal during the whole Distributive property
period or time of borrowing.
Try It Yourself!
I= Prt Michael borrowed P450,000 from the bank to finance a
new business venture. If the bank charged him a simple
Where I is the interest, P is the principal, r is the interest interest of 3%, how much will Michael have to pay after
rate, and t is the time. 5 years?

Example 1: On April 1, 2017, Angela borrowed P200,000 Example 3: Russel borrowed $15,000 which is payable
for additional working capital from Prime Lending at 2% after 2 years and 9 months with a simple interest of 8%.
interest payable in 1 year. Find the simple interest. Determine the amount or maturity value of the loan.

Solution: Simple interest is computed as the product of Solution:

principal, rate, and time. Prt 1 200,000 (0.02) (1) 14000 Step 1: Interest is usually stated as an annual or yearly
Hence, Angela must pay an additional 4,000 as interest rate. Thus, you need to convert the time to number of
for the loan. years in fraction or decimal form..

2 years and 9 months 2 years

Try It Yourself!
Find the annual simple interest earned on a 180,000 2 years and 9 months-2-years 2 years and 9 months
deposit if the bank rate is 1.5%. 2.75 years

Maturity value or amount refers to the sum of the Step 2: Find the maturity value.
principal and interest. It is the future value of the
principal amount expressed in the following formula: M = P(1 + rt) M = 15000[1 + (0)(2.75)] M = 15000(1 +
0.22) M = 15000(1.22) M = 18, 300
M=P+1
Therefore. Russel needs to repay the bank 18,300 in 2
where M is the maturity value, P is the principal, and I is years and 9 months.
the interest.
Try It Yourself!
Therefore, in the previous example, the maturity value How much will a P24,000-investment be after 8 years
would be: and 7 months if the rate of return is 15% per year?

MP+1 M = 200000 + 4000 M = 204000 Angela must pay Example 4: JM has P45,000 which he wants to invest. He
P204,000 after one year. has two options: a 5%, 2-year portfolio and a 4%, 21-
month portfolio. If the rates given are on an annual
Example 2: Using the same scenario in Example 1, if basis, which portfolio should he invest in?
Angela wishes to pay in 3 years, how much would she
pay? Solution:
Step 1: Calculate the maturity value of the first option.
Solution:
Step 1: Find the interest. M = P(1 + rt) M = 45000[1 + (0.05)(2)] M = 45000(1.1)
M = 49, 500
1= Prt I = 200000(0.02)(3) I = 12000
Step 2 Calculate the maturity value of the second option.
Step 2: Add the interest to the principal amount.
M-P(1+rt) M = 45000[1 + (0.04)(21/12)] M =
45000(1.07) M = 48.15 (0.08) (2.25)

Step 3: Compare the two values. Step 3 Simplify.

49,500 48 150 Option 1 Option 2 P = (3, 240)/((0)(2.25))

Hence, JM must put his money on the 5%, 2-year P = 3240/0.1 k = 30 F = 10

portfolio because it will generate a greater maturity
value. Therefore, Edwin borrowed P18,000 2 years and 3
months ago
Try It Yourself
Marco would like to borrow P750,000 from the bank. Try It Yourself!
Bank A offers him the amount at 6% simple annual How much was the original loan if it incurred P7,020 on
interest payable in (3 1/2)! years. Meanwhile, Bank B interests over the course of four and a half years if the
offers the same at 5.5% payable in 4 years. Where terms provide for 6% simple interest per year?
should he borrow the money from?
Example 3: Arien wishes to have P7,000 but he currently
Lesson 2: Solving Problems Involving Simple Interest t has only P6,000. To do so, he deposited his money to a
I represents the interest, P is the principal, r is the rate, bank account that earns 8%. How long will it take before
and t is the time. he can withdraw his desired amount?

Example 1: If you invested P20,000 in the bank that Solution: Since the given data is the maturity value, use
earns 8% simple interest, how much will you earn in 3 the formula for maturity value to derive an equation that
years and 9 months? computes the time.

Solution: Since the problem is asking for earning which is Step 1: Write the formula for the maturity value. MP
the additional payment to the principal invested, the
problem is looking for the interest. M-P+Pre

Step 1: Write the formula to be used. Given: P =P20,000 Step 2: Apply the Subtraction Property of Equality.
r = 8% or 0.08 t = 3 years 9 months of 3.75 years
Step 3: Apply the Division Property of Equality MP
I = Prt
Step 4 Substitute the given values into the formula.
Step 2: Substitute the given values to the formula.
Given: M = 7000 6.000 r = 8% * or * 0.08
I = (20000)(0.08)(3.75)
(7000 - 6000)/((6)(0.08)) = x
Step 3: Solve. I = 6000 Hence, you will earn P6,000 after
3 years and 9 months. Step 5: Simplify.

Try It Yourself! aligned 7.000-1600 (1.033)(1) ) =1\\ 1.000 400 =1\\

How much will be charged on a P30,000 loan if the 1.000 x =1 aligned Thus, Arien should wait for a little
ongoing rate is 6.5% simple interest, and the loan will be over 2 years before his P6000 become 7,000
repaid in 2 years and 8 months?
Try It Yourself!
Example 2: How much was borrowed by Edwin if, after 2 How long will P26,000 amount to P30,000 if the simple
years and 3 months, he paid an 8% simple interest of interest rate is at 10% per annum?
P3,240.00?
Try It Yourself!
Solution: You may use the interest formula to determine How long will P26,000 amount to P30,000 if the simple
an equation that solves for the principal. interest rate is at 10% per annum?

Step 1: Write the formula for finding the principal Example 4: Mr. Winston wants to start a lending
amount. corporation. He wants to determine what interest rate
should he offer to earn P140 in just two months if the
Step 2: Substitute the given values into the formula. customer borrows P8,000.

Given: I = 3.24 r = 8% * or * 0.08 -2 years 3 months or Solution: You may use the interest formula to determine
2.25 years an equation that solves for the rate

3,240 Step 1: Write the formula for finding the rate.

Step 3: Simplify.
Step 2: Substitute the given values into the formula. Solution
The problem is asking for the final amount paid, which is
Given: I = 140 the compound amount. Thus, we use the formula for the
compounded amount
r = 140/((8000)(1/6))
C = P * (1 + v/m) ^ (mb)
r = 140/(1, 333.33) r = 0.105
Given: 10,000 r = 1296or * 0.12 4, since compounding is
P = 8000 quarterly 1 year

months or year tau = 2 Substituting the given, we have the following solution.

r = 140/((9000)(z/h)) C = P * (1 + r/m) ^ m C = 10000 * (1 + 0.12/4) ^ (4(4))

C = 10 * (1.03) ^ 4 C = 11.255 * 0.99
Hence, Mr. Winston should offer 0.105 or 10.5% simple
interest rate. Therefore, the total amount to be paid by Luis is
P11,255.09.
Try It Yourself!
Johnny deposited P12,000 in the bank 6 years and 8 Try It Yourself!
months ago. He did not know that the bank pays simple How much will a P40,000 deposit be after one year if it
interest for all kinds of deposits. When he returned to the earns 6% compounded monthly?
bank, he found out that his money had grown to
P15,840. What was the bank's interest rate? Example 2: How much interest is earned on an
investment worth P120,000 after 4 years if it is to
INTEREST receive 9% interest compounded semiannually?

Lesson 3: Compound Interest Solution

Definition 3.1: Compound interest refers to the sum of Step 1: To find the interest, the compound amount must
interests of prior periods computed on the original or first be calculated.
principal amount and each of the successive periods on
both the principal and the interest. C = P * (1 + r/m) ^ (mr)

Definition 3.2: A period is a time interval it takes for the Giver: 120,000 9% or 0.09 m = 2 since compounding is
money to be converted or to earn interest in a year. semiannually 14 years

Definition 3.3: Nominal rate refers to the rate of Substituting the given, we obtain the following solution:
borrowing and is quoted as an annual interest rate.
c = p * (1 + r/m) ^ (mr) C=120,000 (1 + 0.09/2) ^ 3(81
Definition 3.4: Periodic rate is called the interest rate per C = 170.652 * 0.07
compounding period. It is equal to the nominal rate
divided by the compounding period in a year. Step 2 Next, we deduct the principal from the compound
amount
Definition 3.5: Compound amount is the accumulated
value of the principal and all interest amounts of prior 1-C-P I = 170.672 * 0.07 120,000 I = 50.652 * 0.07
periods. It is typically calculated first before determining
the net interest on the original loan or investment. Therefore, the investment will earn P50,652.07 in
interests after 4 years.
The formula for the compound amount, C, is mt C=P(1+)
Try It Yourself!
where P is the principal, is the nominal rate, m is the How much interest is paid for a P500,000 loan if the
number of compounding periods per year, and t is the lending company charges 8% compounded quarterly for
time in years. 3 years?

Compound interest is calculated as the difference Example 3: Jenny deposited her P10,000 at 15% for 5
between the compound amount and the original or years. How much more will she earn if the bank
principal amount. It is calculated as: compounds on a monthly basis than if it does on a
semiannual basis?
1-C-P
Solution
Example 1: On January 1, Luis borrowed P10,000 at 12% Step 1: Calculate the interest earned if the bank
compounded quarterly for a year. Determine the compounds monthly
repayment amount at the end of the loan term.
Given: P = 10 r = 15 * 0 * r * 0.15 m = 12 since interest compounded every 4 months. Which investment
compounding is monthly -5 years C = P * (1 + r/n) ^ (nr) earns more after 4 years?
C = 10000 * (1 * 0.15/12) ^ 2 C-2107181 IC-P I = 21.071
* 0.01 - 10000 1-11,07181 K/S

Step 2: Calculate the interest earned if the bank Vo

compounds semiannually.
Lesson 4: Solving Problems Involving Compound Interest
Given: 10,000 Example 1: Jocelyn plans to raise P300,000 in 3 years.
How much should she save to have the desired amount
r = 15% * or * 0.15 2, since compounding is if she deposits it in a bank account that pays 12%
semiannually 1-5 years c = \mathfrak{r} * (1 + r/m) ^ compounded quarterly?
(mr) C = 10000 * (k + 0.15/2) ^ 1081 C = 10000 *
(1075) ^ 2 C = 28, 810.32 1-C-P 120.610.32-10,000 - Solution:
10.610.32 Step 1: List the given.

Step 3: Find the difference of the interests earned. c = 300000 r = 12% * or * 0.12 m = 4 since
compounding is quarterly t = 3 years
11,071.81-10,610.32461.49
Step 3: Substitute the values in the formula for
Thus, Jenny will earn P461.49 more if the bank compound amount.
compounds on a monthly basis than if it does on a
semiannual basis. C = p * (1 + r/m) ^ (mt) 300000 = P * (1 + 0.12/4) ^
((4)(2)) 300000 = P * (1.03) ^ 12 300000/((1.03) ^ 12)
Try It Yourself! = P 210 414 = P Hence, Jocelyn should save P210,414
In a year, how much more does a P300,000 investment now for her to have 300,000 in 3 years.
earn if given a 12% rate, compounded monthly, than if it
were given a 10% rate, compounded semiannumonthl Try It Yourself!
How much does Christine have now if she invests her
Example 4: An investor has P240,000 which he intends money at 5% compounded quarterly that will amount to
to invest equally in two portfolios. One earns a 15% P200,000 in 2 years?
interest compounded semiannually, while the other
earns 9% interest compounded monthly. How much will Example 2: At what rate compounded semiannually
his money be after 2 years? should Rhianna invest her money so that her P50,000
will accumulate to P65,000 in 4 years?
Solution:
Solution: Solution:
Step 1: List the given, 65,000 P = 50000 m = 2, since
Step 1: Calculate the maturity value of the money compounding is semiannually 14 years
invested in the first portfolio. Step 2: Substitute the values in the formula for
computing the compound amount.
Given: P = 240000 + 2 = 120000 r = 154 or 0.15 m = 2
since compounding is semiannually C = P * (1 + r/m) ^ C = p * (1 + r/m) ^ (mr) 65000 = 50000 * (1 + r/2) ^
(mr) C = 120000 * (1 + 0.15/2) ^ (3(4)) C = 120000 * ((2)(4)) 65000/50000 = ((2 + r)/2) ^ 0
(1.075) ^ 4 c = 160, 256.3
Step 2: Calculate the maturity value of the money 1.3 * 1/8 = ((2 + r)/2) ^ (8(1/8)) 1.0333 = (2 + r)/2 - 2 =
invested in the second portfolio. r 0.0667 = r

Given: P = 240000 + 2 = 120000 9% or 0.09 m = 12 Therefore, Rhianna should invest her money at 6.67%.
since compounding period is monthly 1-2 years
Try It Yourself!
c = P * (1 + r/m) ^ (mt) C = 120000 * (1 + 0.09/12) ^ At what rate compounded quarterly should Miggy Invest
(12(2)) C = 120 * (1.0075) ^ 24 C = 143, 569.62 his P75,000 so that it will accumulate to P80,000 in 5
years?
Step 3: Add the maturity values of the 2 portfolios.
Example 3: How long should Rowell invest his money
160.256 * 0.3 + 143.569 * 0.62 = 303, 825.92 Hence, amounting to P100,000 so that this becomes P120,000
the investor's money will grow to P303,825.92. at 6% compounded semiannually?

Try It Yourself! Solution:

Step 1: List the given. 120,000 F = 100000 m = 2 ,sin
Investment portfolio A offers 10% interest compounded compounding is semiannually r = 6% or 0.06
semiannually, while investment portfolio B offers 8%
Step 2: Substitute the values in the formula for 3: Compare the two computed periods.
computing the compound amount.
3.24 <4.76
C = p * (1 + r/m) ^ (mr) 120 000 - 100 000 (1+0.06)
Thus, Andrea should put her money in Investment.
120.000 100000-(1.03) Vehicle A since she can obtain her desired interest in a
shorter period of time.
1.2 = (1.03) ^ (2t)
Try It Yourself!
log(1.2) = 2t * log(1.03) log1.2 Using the same scenario in Example 4, which investment
option, C or D, should Andrea choose if Investment
log1.03. Vehicle C earns an interest of 8% compounded quarterly
while Investment D makes an interest of 7%
21 compounded semiannually?

3.084-t
Wrap-up
Thus, Rowell should wait for 3.084 years for his money to
accumulate to P120,000 Simple Interest M=P(1+r)

Try It Yourself! Interest Maturity Value-Principal

How long will it take P75,000 to accumulate to P90,000
in a bank savings account at 5% compounded monthly? Compound interest

Lender or creditor refers to the party lending money or

Example 4: Andrea is comparing two investment vehicles extending credit. He or she expects money to earn
in which she will invest her money amounting to income from the transaction.
P90,000. She wants her savings to earn P30,000.
Investment vehicle A earns an interest of 9% Borrower or debtor, meanwhile, refers to the party using
compounded semiannually while Investment B makes an the money or credit, who expects future expenses at the
interest of 5% compounded monthly. In which cost of using it.
investment vehicle should Andrea put in her money so
that she obtains her desired interest in a shorter period Principal refers to the amount of money extended for
of time? IPI credit or the amount of money deposited in a bank for
safekeeping.
Solution: Since Andrea wanted her money to earn
P30,000, the maturity value is P90,000+30,000- Interest rate refers to the charged amount for using the
P120,000. money over a certain period. It is commonly expressed
in percent, but is converted to decimal.
Step 1: Calculate the time it takes for Andrea's money to
grow to P120 000 if invested in Investment Vehicle A Time refers to the period covered from the time that the
which earns an interest of 9% compounded money (principal) is borrowed until its due date. The due
semiannually. date of the payment of the principal is known as the
maturity date
Given: c = 120000 P = 90000 2, since compounding is
semiannually r = 9% or 0.09 Simple interest refers to an interest that is computed on
the original principal during the whole period or time of
C = P * (1 + r/m) ^ (mt) 120 000-90 000 (1+0.09 120 borrowing.
000 90 000 1.045 1.33 1.0452 8 * 1.33 = 2t * log(1.045)
log 1.045-2 3.24 = t Maturity value or amount refers to the sum of the
principal and interest. It is the future value of the
Step 2: Calculate the time it takes for Andrea's money to principal amount expressed by M - P + 1.
grow to P120,000 if invested in Investment Vehicle B
makes an interest of 6% compounded monthly. Compound interest refers to the sum of interests of prior
periods computed on the original or principal amount
Given: c = 120000 P = 90000 12, since compounding is and each of the successive periods on both the principal
monthly r = 6% or 0.06 and the interest.

c = P * (1 + r/m) ^ (mr) 12 120 000-90 000 (1+006) 12 A period is a time interval it takes for the money to be
120 000 90 000 -1.00542 1.33 = 1.005 ^ (12t) log 1.33 converted or to earn interest in a year.
= 12t * log(1.005) (log(1.33))/(log(1.005)) = 12t 4.76 = t
Step Nominal rate refers to the rate of borrowing and is
quoted as an annual interest rate.
Periodic rate is called the interest rate per compounding
period. It is equal to the nominal rate divided by the
compounding period in a year.

Compound amount is the accumulated value of the

principal and all interest amounts of prior periods. It is
typically calculated first before determining the net
interest on the original loan or investment.