SIMPLE INTEREST

GENERAL MATHEMATICS LESSON 1

GROUP 1
The formula for Simple Interest is:

Simple Interest= (Principal + Interest)

In other words, it can be written as;
A=P(1+rt) or A=P x (1+r t)
Where:
• A = Total Accrued Amount (Principal + Interest)
• P = Principal Amount
• I = Interest Amount
• r = Rate of Interest per year (r=)
• R = Rate of Interest per year as a percent; R =r 100
• t = Tenure (the time period in months or year)
Simple Interest

• Understanding and application on how banks, lending institutions,

and credit companies compute loan interest.

• Aids in the calculation or the computation of interest income of bank

deposits or investment accounts.

• Covers the analysis of time value concepts such as maturity value, and
present value.
Before We Proceed

Do you still remember the Rule of Converting Percentage to Decimal?

If yes good! And if no, Lets have a recap!

A percent is the ratio of a number to 100; dividing a number by 100 is

the same as moving the decimal points to places to the left.

When the number of the percent is a whole number, the decimal point
is understood to be stated at the right of the last digit.
For Example;

• To convert 12% to decimal, drop the sign and move the decimal point

two places to the left to get 0.12.

• To convert ½% to decimal, convert first into decimal (=0.5), and then

follow the rule in converting percent into decimal to get ½

%=0.5%=0.005
Percent problems are often solved using the
formula:

p= r b

Where p is the portion, r is the rate, and b is the base ( the

entire amount or the total ) . In the statement “25% of 120 is

30” 25% is the rate, 120 is the base, and 30 is the portion.
Definition of Terms:
Lender or creditor - person (or institution) who invest the
money or makes the funds available.
Borrower or Debt – 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.
Principal (P) – amount of money borrowed or invested on the origin date
Rate (r) – annual rate, usually in percent, changed by the lender, or rate of the
increase of 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 (CI) – interest is computed on the principal and also 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.
What is Interest?
Interest – is a fraction or percentage being imputed to a sum of money.
One might wonder why there is a need to charge interest to a sum of
money. The answer is simple: borrowing money entails cost – just like
renting a house, using utilities, or riding a bus. The sum of money that
someone borrows or lends is called the principal amount. The interest
rate is a percentage of the principal amount which represent the cost
or fee for borrowing or lending money. The time or loan period is the
agreed date or time when the loan will be paid in full. When you
borrow from someone, you need to pay more than the principal
amount you loaned depending on the interest rate and time you both
have agreed on.
Formula for Finding the Interest is;

I=P r t

Where I is interest, P is the principal amount, r is the interest rate, and

t is the time or loan period.

Simple interest

- Is only charged on the loan amount called the principal.

- Thus, interest on the interest previously earned is not included.

- Calculated by multiplying the principal by the rate of interest by the

number of payment periods in a year.

Formula
SIMPLE INTEREST I = Prt

P=r= t=

where I=Interest, P= Principal, r= rate of interest,

and t= time or term in years or fraction of a year.

Formula
MATURITY VALUE (AMOUNT OR BALANCE)

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

A = Maturity Value P = Principal I= Interest

The Principal P of a Loan is also called the face value or

the present value of the loan.

Example 1

Teressa borrowed ₱ 120,000.00 from her uncle. If Teresa agreed to pay

an 8% annual interest rate, calculate the amount of interest she must
pay if the loan period is (a) 1 year, (b) 9 months, (c) 18 months.

SOLUTION
a. We are given P = ₱120 000, r = 8 or 0.08, and t = 1 year. Thus
I = Prt
I = 120 000 x 0.08 x 1
I = ₱9 600
b. We are given P = ₱ 120,000, r = 8 or 0.08, and t = 9 months or year.

Thus,

I = Prt

I = 120,000 × 0.08 ×

I = ₱ 7,200
c. We are given P = ₱ 120,000, r = 8 or 0.08, and t = 18 months or years.

Thus,

I = Prt

I = 120,000 × 0.08 ×

I = ₱14,400
Example 2

To buy the school supplies for the upcoming school year, you get a

summer job at a resort. Suppose you save ₱ 4,200.00 of your salary and

deposit it into an account that earns simple interest. After 9 months,

the balance is ₱ 4,263.00. What is the annual interest rate?

Solution 1
Use the formula r = where P = ₱ 4,200.00
t = 9 months or or year, and
I = ₱ 4,263.00 - ₱ 63.00

r = = 0.02 or 2%

The annual interest rate is 2%

Solution 2
Use the formula A = P ( 1 + rt )
Where A = ₱ 4,263.00 , P = ₱ 4,200.00 and t =
Solve for after substituting values for A, P, and t.
4,263 = 4,200 [ 1 + r (]
4,263 = 4,200 + 3,150r • Apply Distributive Property
63 = 3,150r • Subtract 4,200 from each
0.02 = r
side.
The annual interest rate is 2%
• Divide each side by 3,150.
Example 3
If ₱ 10,000.00 is invested at 4.5% simple interest, how long will
it take to grow to ₱ 11,800.00?
Solution
Use the t = = ₱10,000.00 , r = 4.5% or 0.045 and
I = ₱11,800.00 - ₱10,000.00
I = ₱1,800.00
t=
t=4
It will take 4 years.
Example 4

Suppose you want to borrow money from your friend to buy a concert
ticket for your favorite band. Since you prefer a front row seat, the cost of
your concert ticket you need to buy is ₱10,000. your friend agreed to lend
you ₱10,000 payable in 12 months and with an interest rate of 5% per
annum supported by a promissory note. How much is the total amount
you have to pay your friend at the end of the 12 month period?
Solution

Applying the formula I = Prt

I = ₱10,000

I = ₱500

This amount represents your interest expense.

Hence, the total amount to be paid to your friend after 12 months

is ₱10,000 + ₱500 = ₱10,500
Example 5 You are the lender

Suppose you have savings. Your friend approached you and asked if you

can lend him ₱10,000 for his tuition fee payment. He said he is willing

to pay 5% interest per annum payable in 6 months. You agreed with the

terms. How much interest should your friend pay you after 6 months?

How much is the total amount you should receive after 6 months?
Solution
Applying the formula I = Prt

I = ₱10,000

I = ₱250

This amount represents your interest income.

Hence, the total amount to be paid to your friend after 6 months is

₱10,000 + ₱250 = ₱10,250
Note:

Most Philippine banks use the 360-day year period or ordinary

interest for time deposit and other deposit account computations.

Other banks and lending institutions use the 365-day or 366-day

period or exact interest depending on whether it is leap year or not.

Maturity Value

• The value to be paid to the holder of financial

obligation at the obligation’s maturity.

• Used for insurance or bonds

Future Value

• The sum to which today’s investment will grow by specific future date, when compounded at a

given interest rate.

• can also be defined as the sum on a specific future date that will result in today’s investment if

discounted at a given discount rate.

• Term mostly used for investment and deposits

Technically speaking,
Future value and
Maturity Value are
the same.
Present Value

• The value today for an amount of money in

the future
Example 6

Find the Present Value of ₱86,000.00 at 8% simple interest for

3 years.

Given: P = ₱86,000, r = 8% or 0.08, and t = 3 years

Solution

P=

P=

P = ₱69,354.84
Definition

• Ordinary Interest or Banker’s Interest – interest based

on 360-day year.

• Exact interest – interest based on 365-day year.

Example 7

You get a 180-day ₱200,000.00 loan from a bank at a

10.5% interest. Calculate the interest using (a) 360-day

and (b) 365-day.

Solution

a. 360-day year:

I = Prt where, P = ₱200,000, r = 10.5% and t = or

I = 200,000

I = ₱10,500.00
Solution

b. 365-day year: I = Prt where, P = ₱200,000, r = 10.5% and t =

I = ₱10,356.16
Note:

A 360-day year is favorable for the lender while

the 365-day year is favorable for the borrower.

Exercise

Charr wala na, kalma ugma na

ang test no stress for now
mwuah! Thanks for listening!