SIMPLE

AND
COMPOUND
INTEREST
Since this section involves what can
happen to your money, it should be of
INTEREST to you!
 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
 DEFINITION OF TERMS
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
Compound Interest (Ic) - interest is computed on the principal
and on the accumulated past interests
Maturity value or future value (F) - amount after t years; that
the lender receives from the borrower on the maturity date
 SIMPLE INTEREST
FORMULA

Interest paid Annual interest rate

I = PRT Time (in years)

Principal
(Amount of
money invested
100
or borrowed)
 If you invested P20000.00 in an account that paid
simple interest, find how long you’d need to
leave it in at 4% interest to make P1000.00.

enter in formula I = PRT

as a decimal
100
1000 = (20000)(0.04)T
𝑇 =1.25 𝑦 𝑒𝑎𝑟𝑠
 

Typically, interest is NOT simple interest but is paid semi-

annually (twice a year), quarterly (4 times per year), monthly
(12 times per year), or even daily (365 times per year).
 COMPOUND INTEREST
FORMULA
annual interest
Principal rate
(amount (as a decimal)
at start)
time
𝑚𝑡
amount at
 
𝑟 (in years)
the end 𝐹=𝑃 1+
𝑚 ( )
number of times per
year that interest in
compounded
 Find the amount that results from P50000 invested at
8% compounded quarterly after a period of 2 years.
(2)
  .08 4
50000
4
  𝐴=𝑃 585 82.97
Effective rate of interest is the equivalent annual simple rate of
interest that would yield the same amount as that made
compounding. This is found by finding the interest made when
compounded and subbing that in the simple interest formula and
solving for rate.
Find the effective rate of interest for the problem above.
The interest made was P8582.97.
Use the simple interest formula and I = Prt 8582.97=(50000)r(2)
solve for r to get the effective rate
r = .08583 = 8.583%
of interest.
 • Simple interest is charged only
Simple on the loan amount called the
Interest principal. Thus, interest on the
interest previously earned is not
included.
• Simple interest is calculated by
multiplying the principal by the
rate of interest by the number of
payment periods in a year.
Simple Interest Formula
I = Prt
I I I
(a) P  (b) r  (c) t
rt Pt Pr
Where:
I = interest,
P = principal,
r = rate of interest, and
t = time or term in years or fraction of a year
To find the maturity value, simply add interest to the principal.
Maturity Value or (Amount or Balance)
Formula

F=P+I or F = P + Prt or F = P(I + rt)

F = Maturity value
P = Principal
I = Interest
 Example

A working student at one of the biggest fast-food

restaurants in Lucena City wants to save for the
upcoming school year. He wants to deposit his money
to a Filipino owned bank so that even in a simple way
he can help his fellow Filipino. Supposed his monthly
salary is ₱10,000.00, and it was deposited to an
account that earns a simple interest of 2.75% per
annum. Find the simple interest after 6 months, one
year, and 18 months.
 Example

To buy the school supplies for the coming school

year, you get a summer job at a resort. Suppose you
save ₱4200.00 of your salary and deposit it into an
account that earns simple interest. After 9 months,
the balance is ₱4263.00. What is the annual interest
rate?
Solution 1 to Sample 1
I
r
Use
•   the formula Pt where P= ₱4 200.00,
9 3
12 4
t = 9 months or or year and,
Solution 2 to Sample 1

  the formula F = P(1 + rt) where F =

•Use
₱4263.00, P = ₱4200.00, and t = 3/4 year. Solve
for r after substituting values for F, P, and t.

  3 
1  r  4 
  
Example 2
Mhel has ₱6000 invested at 6% and at 5%. How much
would she had to invest at each rate so that her total
interest per year would be equal to ₱320?

Solution:
Let: x = amount invested at 6%
6000 – x = amount invested at 5%

 𝐼 𝑡𝑜𝑡𝑎𝑙 = 𝑃𝑟𝑡 𝑎𝑡 6 % + 𝑃𝑟𝑡 𝑎𝑡 5 %

 

₱ 2000 invested at 6%
and
₱ 4000 invested at 5%
Ordinary Interest or Banker's Interest –
interest based on a 360-day year.

 
Exact Interest – interest based on a 365-day
year and 366 days for leap year (every 4 years)
1. You get a 180-day ₱200,000.00 loan from a bank at a
10.5% interest. Calculate interest using (a) 360-day
and (b) 365-day year.

•a.  360-day year:

I = Prt where, P = ₱200 000.00, r = 10.5%,

I = 200 000 × 0.105 × = ₱10 500.00

b. 365-day year: 180

I = Prt = 200 000 × 0.105 x =365
₱10 356.16

Note: A 360-day year is favorable for the lender while a 365-day

year is favorable for the borrower
2. What is the maturity date of a loan taken out on April 14 for
85 days?
STEP
•   1: Find the days remaining in the first month
 

STEP 2: Subtract remaining days in first month from

the
  days of the loan

STEP 3: Subtract succeeding whole months

 

Maturity date is on July

TIME BETWEEN DATES
1. Calculate the actual and the approximate time
a. March 16, 2013 – November 27, 2013
b. August 13, 2013 – December 26, 2013
  Time
•Actual # of Days Approximate Time # of Days
March 16 15 March 16 14
April 30 April 30
May 31 May 30
June 30 June 30
July 31 July 30
August 30
August 31
September 30
September 30
October 30
October 31
November 27 27
November 27 27
TOTAL 251 days
TOTAL 256 days
FOUR KINDS OF INTEREST
1. Find the four kinds of interest using the given below
Given: P = ₱10000, r = 0.08,
t = March 16, 2013 – November 27, 2013
actual time = 256 days; approximate time = 251 days

 
PARTIAL PAYMENTS
1. • Calculate interest on principal from date of loan to
 
date of first payment.
2. Remainder of the payment = Amount paid – Interest
Portion
3. New Balance = Previous Balance – Principals
remainder (portion) of payments
4. In cases of more than one partial payment, calculate
interest on new balance from date of previous
payment to date of next payment. Perform steps 2
and 3.
5. At maturity, calculate interest on last partial
payment. Add this to the new balance to compute
the total final payment due.
 Example

A loan of ₱200,000.00 was made from a bank

that charges 9% interest rate and should be
repaid after 60 days. If payment of ₱80,000.00
was made after 20 days and the balance on the
60th day,
a) calculate the amount of interest,
b) principal paid for each payment, and
c) the total amount paid.
Solutions for Partial Payments

Payment
•   on Day 20: P = ₱200,000.00, r = 9%, and

• step 1: Calculate interest on principal from date of loan to date

of first payment.

• step 2: Remainder of the payment = Amount paid – Interest

Portion

• step 3: New Balance = Previous Balance – Principals remainder

(portion) of payments
 Solutions: if more than one Partial Payments
•• Payment
  on Day 60: P = ₱121 000, r = 9%, and (60 days –
20 days = 40 days)

• Calculate interest on new balance from date of previous

payment to date of next payment. Perform steps 2 and
3.
 Note

  partial payment
•With

Without partial payment:

END OF
PRESENTATION

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