1

SIMPLE INTEREST AND SIMPLE DISCOUNT

SIMPLE INTEREST AND SIMPLE

DISCOUNT

Lesson 1 Simple Interest

Lesson 2 Ordinary and Exact

Interest

Lesson 3 Approximate and Exact

Time

Lesson 4 Simple Discount

Prepared by: Frederick M. Manuel, PhD

 2
SIMPLE INTEREST AND SIMPLE DISCOUNT

Lesson 1

 Simple Interest

Simple Interest

Interest is rent paid for the use of money. As investors, people rent
their money for use by banks, credit unions, large corporations and other
financial institutions. As borrowers, people and business firms rent money
from these banks, credit unions, and the like to purchase homes, cars and
furniture or acquire commercial loans. People and business firms also acquire
goods and services on credit (use now, pay later). The money paid for the use
of this money and credit is called interest. Computing interest is similar to
finding percentage, with time as an additional factor, where percentage is
the interest, the base is the principal and rate of interest. This leads to the
simple interest formula.

I = Prt

Where I - simple interest

P - principal (in pesos)
r - interest rate per period of time, expressed as percent or a
fraction
t - time (in years) between the date the loan is made and the
date it matures or becomes repayable to the lender

The maturity value, F, the total amount the borrower would need to
pay back, is given by the formula F = P + I.

Also F = P + Prt, leading to F = P(1 + rt)

Interest is charged as a percent of the principal for a definite period

of time. Rates are stated in terms of one year unless otherwise specified. A
stated rate of 15% means 15% of the principal for one year.

Examples:

1. Find the interest on a loan of P1,000 for one year if the interest rate is
15%.

Solution:
P = P1,000 r = 15% = .15 t = 1 year
I = Prt
= (P1,000) (.15) (I year)
= P150

Prepared by: Frederick M. Manuel, PhD

 3
SIMPLE INTEREST AND SIMPLE DISCOUNT

If the term is 2 years, then the interest is:

P = P1,000 r = 15% = .15 t = 2 years
I = Prt
= (P1,000) (.15) (2 years)
= P300

2. GSIS has issued a 2-year loan of P50,000 to a government employee at a

rate of 12%. What amount will be repaid at the end of the second year?

Solution:
P = P50,000 r = 12% = .12 t = 2 years
I = Prt
= (P50,000) (.12) (2 years)
= P12,000

The amount to be repaid is the principal plus the interest.

F = P+I
= P50,000 + P12,000
= P62,000

Or since the problem is asking for the amount, we can go immediately

to solving for F and not anymore solving for I. Using P = P50,000, r = 12%,
t = 2 years, we have

F = P(1 + rt)
= 50,000 [1 + (.12) (2)]
= 50,000 (1 + .24)
= 50,000 (1.24)
= P62,000

3. A P5,000 savings account earned P1,000 interest in 2 ½ years. What was

the rate of interest given?

Solution:
P = P5,000 I = P1,000 t = 2 ½ years

From I = Prt, we have

𝐼
r= 𝑃𝑡

1,000
= 1
(5,000)( 𝑦𝑒𝑎𝑟𝑠)
2

= .08 or 8%

Prepared by: Frederick M. Manuel, PhD

 4
SIMPLE INTEREST AND SIMPLE DISCOUNT

4. At the end of 2 years, P36,000 in interest was paid on an 18% simple interest
loan. How much was borrowed?

Solution:
I = P36,000 r = 18% or .18 t = 2 years

From I = Prt

𝐼
P = 𝑟𝑡

36,000
= (.18)( 2 𝑦𝑒𝑎𝑟𝑠)

36,000
= .36

= P100,000

5. James needs P20,000 to buy office furniture in his new office in Paranaque.
He wants to limit the interest he will pay when he borrows the amount in a
bank to P3,900 only. If the bank charges 13% interest, after how long must he
pay his obligation?

Solution:
P = P20,000 I = P3,900 r = 13% or .13

From I = Prt

𝐼
t = 𝑃𝑟

3,900
= (20,000)(.13)

= 1.5 years or 1 year and 6 months

6. Find the interest on a loan 0f P50,000 at 18% simple interest and which was
paid after 6 months.

Solution:

6 1
P = P50,000 r = 18% or .18 t = 6 months = =2
12

I = Prt

1
= (P50,000)(.18)( 2)

= P4,500

Prepared by: Frederick M. Manuel, PhD

 5
SIMPLE INTEREST AND SIMPLE DISCOUNT

 LEARNING ACTIVITY Exercises

1. A loan of P1,500 at 3% was repaid at the end of 2 years. How much interest
was paid?

2. An interest of P720 was paid on a P3,000 simple interest loan at the end of
two years. What was the rate of interest charged?

1
3. P17,000 is in an account paying 2 2% simple interest. How much is in the
account after two years?

4. A company has issued a 5 year loan of P750,000 to a new vice president to

finance a home improvement project. The terms of the loan are to be paid
back in full at the end of 5 years with simple interest at 16%. Determine the
interest which must be paid.

5. A mother has received a P150,000 loan from a relative in order to finance

her daughter’s 4 year college program. The terms are that the mother is to
repay her relative in full at the end of 5 years with simple interest at 2% per
year. How much should she repay her relative after 5 years?

Prepared by: Frederick M. Manuel, PhD

 6
SIMPLE INTEREST AND SIMPLE DISCOUNT

Lesson 2

 Ordinary and Exact

Interest

There are times when money is borrowed for a certain number of days
only. If the number of months is placed over 12 (12 months in one year), the
number of days is placed over 360 or 365, (360 days in one year for ordinary
interest, based on 12 months in one year; and 365 days in one year for exact
interest).

Unless otherwise specified, ordinary interest is computed when the

term of the loan is given in days; that is why, it is termed as commonly used
method.

𝐷
To compute ordinary interest, we use the formula Io = Pr (360) while to
𝐷
compute exact interest, we use Ie = Pr (365).

Examples:
1. Find the ordinary and exact interest on P15,000 if it is invested at 15% for
60 days.
a. Ordinary Interest
P = P15,000 r = 15% or .15% D = 60 days

Solution:

𝐷
Io = Pr (360)

60
= (P15,000)(.15) (360)

1
= (P15,000)(.15) (6)

= P375

b. Exact Interest
P = P15,000 r = 15% or .15% D = 60 days

Solution:

𝐷
Ie = Pr (365)

60
= (P15,000)(.15) (365)

= P369.86

Prepared by: Frederick M. Manuel, PhD

 7
SIMPLE INTEREST AND SIMPLE DISCOUNT

2. Mrs. Lorenzo made a loan of P248,000 to renovate a portion of her house

from a bank that charges 16% interest. How much did she pay the bank after
120 days using the ordinary interest?

P = P248,000 r = 16% or .16 t = 120 days

Solution:

𝐷
Io = Pr (360)

120
= (P248,000)(.16) (365)

1
= (P248,000)(.16) (3)

= P13,226.67

The amount Mrs. Lorenzo needed to pay the bank consisted of the
original amount of loan plus interest. Therefore, she needed to pay the final
amount, F. Thus,

F = P + Io
= P248,000 + P13,226.67
= P261,226.67

3. Find the maturity value of P4,250 at 9% for 90 days using exact interest
method.

P = P4,250 r = 9% or .09 t = 90 days

Solution: The maturity value is the value of F

𝐷
F = P[1 + r(365)]

90
= 4,250 [1 + .09(365)]

= 4,250(1.02219178)

= P4,344.32

Prepared by: Frederick M. Manuel, PhD

 8
SIMPLE INTEREST AND SIMPLE DISCOUNT

3
4. Find the interest on P8,000 if invested at 8 4% for 100 days.
3
P = P8,000 r = 8 4% = .0875 t = 100 days

Solution:

𝐷
Io = Pr(360 )

100
= (8,000)(.0875) (360 )

= P194.44

5. Find the time if the ordinary simple interest on P6,000 at 10% is P200.
P = 6,000 I = 200 r = 10% or .10

Solution:

𝐼
t = 𝑃𝑟

200
= (6,000)(.10)

1
= 3 year or 120 days (360 day year)

6. What is the interest rate at which P4,260 is invested if it earned an exact

simple interest of P94.54 after 90 days?
P = P4,260 I = P94.54 D = 90 days
Solution:

𝐼
r= 𝐷
𝑃( )
365

94.54
= 90
(𝑃4,260)( )
365

= .09 or 9%

Prepared by: Frederick M. Manuel, PhD

 9
SIMPLE INTEREST AND SIMPLE DISCOUNT

Lesson 3

 Approximate and
Exact Time

Approximate and Exact Time

There are two ways of finding time between the two dates given. One
method is to find approximate time and the other is to find actual time.

Examples:
1. On May 4, 2002, Julie borrowed P22,000 at 10% interest. Interest and
principal were due on September 6, 2002. What was the total amount paid by
her on that date?
P = 22,000 r = 10% or .10 t = May 4 to September 6, 2002
Solution:
To find the interest due on September 6, 2002, we will first find the time
between May 4 and September 6, 2002.

a. Approximate time:
Year Month Day
2002 9 6
2002 5 4
4 2

This means 4 months and 2 days. To find the number of days: (4 x 30

days) + 2 days = 120 + 2 days = 122. (Note: we consider 1 month = 30 days).

Using approximate time, the total amount paid by Julie on September

6, 2002 can be obtained by the following solution:

𝐷
F = P[1 + r(360)

122
= 22,000[1 + (.10) ( )
360

= 22,000(1.033888889)

= P22,745.56

b. Actual Time
The actual number of days between May 4 and September 6, 2002 can
be obtained by the following solution:
May (31 – 4) 27
June 30
July 31
August 31
September 6

Prepared by: Frederick M. Manuel, PhD

 10
SIMPLE INTEREST AND SIMPLE DISCOUNT

125 days
To find the total amount paid by Julie on September 6, 2002, using
actual time, we have

𝐷
F = P[1 + r(360)]

125
= 22,000[1 + (.10) (360 )

= 22,000(1.034722222)

= P22,763.89

2. Find the number of days from February 24, 2001 to June 14, 2001

a. Approximate Time:
Year Month Day We cannot subtract 24 from 14, so
2001 6 14 we need to borrow 1 month from 6
2001 2 24 months. One month = 30 days, so
we add 30 to 14.
Solution:
Year Month Day
2001 5 44
2001 2 24
3 months 20 days
x 30
90 days + 20 days = 110 days

b. Actual Time
Solution:

February (28 – 24) = 4

March 31
April 30
May 31
June 14
110 days

3. Find the number of days from April 12, 2002 to October 25, 2003

a. Approximate Time
Solution:

Year Month Day

2003 10 25
2002 4 12

Prepared by: Frederick M. Manuel, PhD

 11
SIMPLE INTEREST AND SIMPLE DISCOUNT

1 year 6 months 13 days

x 360 days x 30 days
360 180 13 533 days
b. Actual Time
Solution:

April (30-12) 2002 18

May 31
June 30
July 31
August 31
September 30
October 31
November 30
December 31
January 2003 31
February 28
March 31
April 30
May 31
June 30
July 31
August 31
September 30
October 25
561 days

4. Find the actual time between November 10, 1999 to March 15, 2000
Solution:

November (30-10) 1999 20

December 31
January 2000 31
February 29 (because year 2000 is a leap year)
March 15
126 days

Prepared by: Frederick M. Manuel, PhD

 12
SIMPLE INTEREST AND SIMPLE DISCOUNT

Exercises:
Approximate and Actual Time

Approximate Actual
Date of investment to date of maturity number of number of
Days Days
1. September 4, 2002 to February 12, 2003
2. August 22, 2001 to March 25, 2002
3. September 18, 2003 to December 12, 2004
4. May 14, 2000 to October 10, 2002
5. November 30, 2003 to March 31, 2004

Application Problems:
Ordinary and Exact Interest
Approximate and Actual Time

1. Find the ordinary and exact interest if P16,500 is borrowed at 24% for 90
days.

2. Allan Castro borrowed P7,500 from a friend and promised to repay him in
90 days plus 6% interest. How much will he pay when the loan matures using
exact interest?

3. On what day will P8,000 earn P180 interest when invested o April 25, 2002
at 19% simple interest? Use ordinary interest and actual time.

4. On September 12, 2002, Jody San Juan went to ABC Bank to borrow
P230,000 at 18% interest. Jody repaid the loan on January 27, 2003. Assume
the loan is on exact time, ordinary interest. How much did Jody repay in the
maturity date?

Prepared by: Frederick M. Manuel, PhD

 13
SIMPLE INTEREST AND SIMPLE DISCOUNT

Lesson 4

 Simple Discount

If interest (I) is calculated on the principal (P) at the start of the

interest period, discount (D) is calculated on the amount (F) at the end of the
period.

Discount (D) is the deduction from the maturity amount (F) of an

obligation allowed for paying it currently. The formula is

D = Fdt where D = discount

F = amount of maturity

d = discount rate

t = time or term of discount

To find P, use P = F – D or

P = F(1 – dt)

Derived Formulas are:

𝐷 𝐷 𝐷
d = 𝐹𝑡 ; t = 𝐹𝑑 ; and F= 𝑑𝑡

Example 1:
Find the present value of P2,000 which is due at the end of 90 days at 5%
simple discount

Given:
F = P2,000

90 𝑑𝑎𝑦𝑠 1
t= = 4 year
360

d = .05

Solution:
D = Fdt

1
= P2,000(.05)( )
4

Prepared by: Frederick M. Manuel, PhD

 14
SIMPLE INTEREST AND SIMPLE DISCOUNT

= P25
P=F–D

= P2,000 – P25

= P1,975

Alternative Solution:

P = F(1 – dt)

1
= P2,000[1 – (.05)( 4)]

= P1,975

Example 2:
Find the amount due at the end of 9 months whose present value is P3,000
at 6% simple discount.

Given:
P = P3,000

d = .06

9 𝑚𝑜𝑛𝑡ℎ𝑠 3
t= = 4 year
12

Solution:

𝑃
F= 1−𝑑𝑡

𝑃3,000
= 3
1−(.06)( )
4

= P3,141.36

Example 3:
1
How long will P3,000 accumulate to P3,050 if the discount rate is 4 2%?

Given:
P = P3,000

F = P3,050

d = .045

Prepared by: Frederick M. Manuel, PhD

 15
SIMPLE INTEREST AND SIMPLE DISCOUNT

Solution:

𝐷
t = 𝐹𝑑

(𝑃3,050−𝑃3,000)
= 𝑃3,050(.045)

𝑃50
= 𝑃137.25

= .36 years

Example 4:
If A loan of P3,500 will be paid with P3,750 at the end of one year and 3
months, what is the simple discount rate?

Given:

P = P3,500

F = P3,50

1
t = 14

Solution:

𝐷
d = 𝐹𝑡

(𝑃3,750−𝑃3,500)
= 1
𝑃3,750(1 )
4

= 0.533 or 5.33%

Example 5:
1
Accumulate P4,200 for 2 years and 3 months at 62% simple discount.

Given:

P = P4,200

1
t = 24 years

d = .065

Prepared by: Frederick M. Manuel, PhD

 16
SIMPLE INTEREST AND SIMPLE DISCOUNT

Solution:

𝑃
F=
1−𝑑𝑡

𝑃4,200
= 1
1−(.065)(2 )
4

= P4,919.47

Example 6:
Discount P8,000 for 1 year and 2 months at 7% simple discount.

Given:

F = P8,000

d = .07

1 7
t=1 =6
6

Solution:

P = F(1 –dt)

7
= P8,000[1 – (.07)( 6)]

= P7,346.60

 LEARNING ACTIVITY Exercises

1. Find the present value of P5,000 due at the end of 6 months if the discount
3
rate is 5 4%.

1
2. Discount P6,500 for 120 days at 4 2% simple discount.

1
3. Discount P4,250 for 1 year and 2 months at 7 % simple discount.
2

Prepared by: Frederick M. Manuel, PhD