2 SIMPLE INTEREST

INTEREST

Is the amount of money or payment for the use of a borrowed money or capital.

ELEMENTS OF INTEREST
COMPUTATION
1 PRINCIPAL
Refers to the amount of money extended for credit or the money deposited
in the bank for safekeeping
INTEREST
2
RATE Refers to the charged amount for using the money over a certain period.
It is expressed in percent, but is usually converted to decimal for ease in the
computation process.
3 TIME
Refers to the period covered from the time that the money (principal) is
borrowed until its due date. The due date for the payment of the principal is
known as the maturity date.
2 SIMPLE INTEREST
SIMPLE INTEREST

Refers to an interest that is computed only once from the time the amount is
borrowed until it is paid. In other words, there is only one interest payment made
during the entire period of borrowing.

Under the concept of simple interest, the amount of interest is usually paid at the
maturity date or due date.

Where:I = Interest
I = PRT P = Principal
R = Rate
T = Time
EXAMPLE
Simple Interest Computation
1
QUESTION
:
On April 1, 2012, Angel borrowed ₱300,000 for additional working capital
from Premium Lending at 7% interest, payable in 1 year. Find the simple
interest.
ANALYSIS:
It can be observed that the interest of 7% is payable only once from the
time of borrowing up to maturity date; hence, the interest is called simple
interest.

GIVEN: SOLUTION
:
I =? I = PRT
P = ₱300,000
= 300,000(0.07)(1)
R = 7% or 0.07
I = ₱21,000
T = 1 year
EXAMPLE
Finding the Principal
2
QUESTION
:
On May 1, 2012, Hyzel borrowed a sum of money from Community Bank,
payable for 2 years at 8% simple interest. She paid ₱6,000 for the interest
of her loan. Find how much was borrowed by Hyzel.

GIVEN: SOLUTION
:
I = ₱6,000
P=? I = PRT
R = 8% or 0.08
P=
T = 2 years
P=

P = ₱37,500
EXAMPLE
Finding the Rate
3
QUESTION
:
On July 1, 2012, Izzy deposited ₱400,000 at Northern Bank. The deposit
earned simple interest of ₱96,000 for 3 years. Compute the rate of simple
interest on deposit.

GIVEN: SOLUTION
:
I = ₱96,000
P = ₱400,000 I = PRT
R=?
R=
T = 3 years
R=

R = 0.08 or 8%
EXAMPLE
Finding the Time
4
QUESTION
:
Winston borrowed ₱150,000 from his organization’s fund where he was
charged with 10% simple interest. He paid ₱30,000 as interest upon
payment of the principal on the maturity date.
Determine how long it took him to pay the money in full.

GIVEN: SOLUTION
:
I = ₱30,000
P = ₱150,000 I = PRT
R = 10%
T=
T =?
T=

T = 2 years
2 SIMPLE INTEREST
FUTURE WORTH or MATURITY
VALUE

Refers to the sum of the principal and interest. It is the future value of the
principal amount, expressed in the following formula:

Where:I = Interest
F=P+I P = Principal
F = P + PRT R = Rate
T = Time
F = P(1 + RT) F = Future worth
EXAMPLE
Finding the Future Worth or Maturity value
5
QUESTION
:
Kayle borrowed ₱12,000 which is payable after 3 years and 8 months with
simple interest of 12%. Determine the future worth of the loan.

GIVEN: SOLUTION
:
I =?
P = ₱12,000 F = P (1 + RT)
R = 12%
F = 12,000[1 + (0.12)(3 )]
T = 3y & 8m
F=? F = ₱17,280
2 SIMPLE INTEREST
Types of simple interest:
ORDINARY SIMPLE
1
INTEREST Is based on one banker’s year. A banker year is composed of
12 months of 30 days each which is equivalent to a total of 360 days in a year.

where: d = number of days the

T= principal was invested
EXACT SIMPLE
2
INTEREST
Is based on the exact number of days in a given year.

T= T=

for normal years. for leap years.

2 SIMPLE INTEREST
Determination of LEAP YEAR:

To determine a year whether a leap year or not, just divide the year by 4. If
exactly divisible by 4, then it is a leap year.

However years ending with two zeros or century years (i.e. 1900, 1800, etc.) must
be divided by 400 not 4. If exactly divisible by 400 it is a leap year otherwise its
not.
EXAMPLE
:
1) 1992 = Leap year
2) 2010 = Not a Leap year
3) 1900 = Not a Leap year
4) 2400 = Leap year
2 SIMPLE INTEREST
Methods of Computing Interest:

1 ORDINARY simple interest using EXACT or ACTUAL time: T=

2 ORDINARY simple interest using APPROXIMATE time: T=

3 EXACT simple interest using EXACT time: T=

4 EXACT simple interest using APPROXIMATE time: T=

EXAMPLE
Ordinary and Exact Simple Interest Computation
6
QUESTION
:
On May 15, 2013, Sol borrowed ₱50,000 from Community Bank at 10%
interest rate. The loan is payable on October 10, 2013. Compute the simple
interest using the four combinations.
EXACT APPROX.
TIME: TIME:

May = 16 days May = 15 days

June = 30 days June = 30 days
July = 31 days July = 30 days
August = 31 days August = 30 days
September = 30 days September = 30 days
October = 10 days October = 10 days
Exact time = 148 days Appr. time = 145 days
EXAMPLE
Ordinary and Exact Simple Interest Computation
6
SOLUTION: I = PRT
1 ORDINARY simple interest using EXACT or ACTUAL time:

I = 50,000(0.10)(148/360) = ₱2,055.56

2 ORDINARY simple interest using APPROXIMATE time:

I = 50,000(0.10)(145/360) = ₱2,013.89

3 EXACT simple interest using EXACT time:

I = 50,000(0.10)(148/365) = ₱2,027.40

4 EXACT simple interest using APPROXIMATE time:

I = 50,000(0.10)(145/365) = ₱1986.30
EXAMPLE
Converting Time
7
QUESTION
:
Lusille borrowed ₱50,000 from First Bank at 8% interest. She paid ₱8,900
interest plus the principal on the due date.
Determine the time involved using: a. Ordinary b. Exact interest
SOLUTION
:
a.
T = 2 & 0.225(360)
I = PRT T = 2 & 81
T = 2 years and 81 days
T=
b.
T= T = 2 & 0.225(365)
T = 2 & 83
T = 2.225 years
T = 2 years and 83 days
3 DISCOUNT
NATURE OF DISCOUNT

The term “discount,” as a noun, can mean any of the following:

1 Reduction from the full amount of a price or debt.
2 The interest deduction in advance in lending commercial paper

3 The rate of interest deducted in a lending transaction

As a verb, discount may connote the following:

1 To deduct from a price
2 To advance money after deducting interest

3 To reduce the value

3 DISCOUNT
SIMPLE DISCOUNT

Refers to the difference between the future value or amount due and its present
value.
Is also equivalent to the simple interest. The discount is computed only once
during the entire period of borrowing
Under Simple Interest Under Simple Discount
Principal = Present value
Maturity value = Future value or amount due
Interest = Discount
Interest Rate = Discount Rate

Where:D = Discount F = Future value

D=Frt r = Discount rate t = Discount time
EXAMPLE
Differentiation of Interest and Discount
8
QUESTION
: Sol borrowed ₱15,000 at 12% for a term of 2 years. Determine the
following under simple interest and simple discount:
a. Interest deducted in advance
b. Amount received on the loan date
c. Amount payable on the due date
SOLUTION
: Interest/Discount = 15,000(0.12)(2) = ₱3,600
a. Simple Interest = 0
Simple Discount = ₱3,600
b. Simple Interest = ₱15,000
Simple Discount =(15,000 – 3,600) = ₱11,400
c. Simple Interest = (15,000 + ₱3,600) = ₱18,600
Simple Discount = ₱15,000
EXAMPLE
Determining the Discount
9
QUESTION
:
Geraldine borrowed ₱20,000 at 12% discount rate, payable after 2 years and
6 months. Determine the discount.
SOLUTION
GIVEN:
:
D=?
D=Frt
F = ₱20,000
r = 12% or 0.12 = (20,000)(0.12)(2 )
t = 2y & 6m D = ₱6,000

On the loan date, Geraldine will receive ₱14,000 (₱20,000 - ₱6,000), and will pay
₱20,000 on the due date. The ₱14,000 is the present value, while the ₱20,000 is the
maturity or future value.
EXAMPLE
Discount Interest
10
QUESTION
:
Find the maturity value of ₱4,500 discount interest for the period of 8
months at 7.5%.

GIVEN: SOLUTION
:
D = ₱4,500
F=? D=Frt
r = 7.5% or 0.075
F=
t = 8 months
F=

F = ₱90,000
EXAMPLE
“To Discount” Computation
11
QUESTION
:
On January 1, 2012, Joylyn discounted ₱24,750 at 9 ½% for 2 years and 6
months. Find the present value of the amount.

GIVEN: SOLUTION
:
P=?
F = ₱24,750 F = P (1 + r t)
r = 9 ½%
P=
t = 2y & 6m
P=

P = ₱20,000