l.

SIMPLE INTEREST
 Learning objectives:
Know and use simple interest terminology.
Understand when interest is paid.
Understand when interest is earned.
Know and use the formula for calculating simple
interest.
Know and use the formula for calculating the total
amount of a loan or total value of an investment at the
end of a specified term.
 INTRODUCTION
Some people keep money at home in an easily
accessible location, perhaps a piggy bank, a safe or
locked box, or perhaps even a mattress. Although this
provides instant access to funds it does not provide
any return or earnings on this money. For that reason,
most people hold their money in accounts or
investments that provide some form of return or
earning power.
Interest is the price paid for the use of money. If you
borrow money from another person or a lending
institution, eventually you must pay back this amount
plus the interest owing. When you deposit money in
a bank, you are lending them money and after some
time they will pay you interest on the money you lent
them.
The amount of interest you will owe or receive is
determined by the principal, the interest rate, and
the time (the length of the loan).
The amount of money that you lend or borrow is called
the principal. The length of the loan can range between
a few days to several years is the time. The interest
rate is stated as an annual percentage.
With simple interest the interest is calculated
only once during the entire time period of the loan or
deposit. Simple interest is calculated solely on the
principal investment or loan.
Simple interest is calculated by finding the product of
the principal (P), the rate (r), and the time (t).
The simple interest formula is I = Prt where
I = interest earned
P = principal
r = annual interest rate ( stated as a decimal)

t = time (in year/s)

Interest rates are quoted for periods of one year and
when used in a formula must be converted to a
decimal fraction. The time must be expressed in the
same unit of time as the interest rate so time must be
stated in years or portions of a year.
If you deposit money in a savings account earning 3%
interest then the annual interest rate is 3% per year.
a) If an investment is made for a period of 145 days,
what portion of the year does this represent? (There
are 365 days in one year) 145/365
b) If an investment is made for a period of 48 weeks,
what portion of the year does this represent? (There
are 52 weeks in one year) 48/52
c) If an investment is made for a period of 10 months,
what portion of the year does this represent? (There
are 12 months in one year) 10/12
Example 1
Joe borrows PHP 2,000 at an interest rate of 5% per year.
How much interest will Jo owe after one year? I = Prt
Solution:
Identify the P, r, and t.
P = PHP 2,000 r = 5% = 0.05 t = 1 year
Start with the formula I = Prt
I = PHP 2,000 (5%) (1) Replace P, r, and t with their values
I = PHP 2,000 (0.05) (1) Change 5% to its decimal
equivalent, 0.05
I = PHP 100
Jo will pay PHP 100 in interest.
Try it
Terri borrowed P3,200 at an interest rate of 4.75%. How much
interest will Terri owe on the loan at the end of one year?

Show answer: P3,200 x .0475 = P152

Note that the time t is expressed in terms of years. When the

time period is not exactly one year, the value for t will be the
fraction of the year during which interest is earned.
If the investment is made for 3 months, then t = 3 months/12
months = 0.25 years.
If the investment is made for 35 days then t = 35 days/365
days = 7/73 year.
EXAMPLE 3
1. Determine the interest that will be earned on a deposit of P1,350 at 2.8%
over:
a) 7 months (7/12) = .028 x 7/12
b) 25 days (25/365)
2. Determine the interest that will be earned on a deposit of P2,200 at 4.52%
over:
Determine the interest earned after
a) 13 weeks
b) 300 days
3. Determine the interest that will be earned on a deposit of P15,000 at
6.5% over:
Determine the interest earned after
a) 8 months
b) 4 weeks
Assignment:
Max deposited P1500 in a savings account at an
interest rate of 3.28%.
Determine the interest earned after
1) 3 months
2) 65 days
3) two years.
Show answer
ll. MATURITY VALUE
The total amount of money due at the end of a
loan period is called the maturity value of the
loan. It is the amount to be paid on the due
date of a loan or the amount to be paid to an
investor at the end of the period for which an
investment has been made.
 Maturity Value
The Maturity Value (MV) of a loan is the sum
of the principal P plus the interest I.
Formula: MV = P + I
In Example 1, Jo borrowed P2,000 at an interest
rate of 5%. At the end of one year Jo owed P100
in interest.
The maturity value of the loan is MV = P + I
where P = P2,000 and I = P100.
MV = P2,000 + P100 = P2,100
The maturity value of the loan is P2,100. At the
end of the year Jo will be expected to pay back
P2,100.
EXAMPLE 5.
Linda lends Ed P500. Ed says he will pay her
back in 60 days at 9% simple interest. How
much interest should Linda receive? How much
must Ed pay Linda altogether?
Solution
MV = P + I = P500 + P7.40 = P507.40
Linda should receive P7.40 in interest. At the
end of 60 days Ed will owe Linda P507.40.
TRY IT 5
In order to purchase equipment, a barbershop
takes out a short term loan of P3,000 at a rate of
4.35%. The loan is due in 80 days.
Determine the interest that will be owed at the
end of 80 days and find the maturity value of the
loan.
Show answer
III. VARIATIONS ON SIMPLE INTEREST
The amount of interest earned on an investment or due on
a loan is calculated using I = Prt.
This formula can also be used to determine:
1. The amount of principal (P) that needs to be invested in
order to earn a certain amount of interest over a certain
period of time.
2. The interest rate (r) that is needed in order to earn a
certain amount of interest over a given time period.
3. The amount of time (t) it will take in order to earn a
certain amount of interest at a stated interest rate.
These amounts can be determined by solving
the simple interest formula for any of r, P or t.
Finding the Principal, Interest Rate, or Time
Where I = interest earned
P = principal
r = annual interest rate
t = principal
The following memory aid is often called the “Magic Triangle”, because
if you cover the variable you are trying to find, the formula will
magically appear!
IV. DETERMINING THE
PRINCIPAL
EXAMPLE 6
A six-month investment will earn 5.25%. How
much would you need to invest if you want to
earn P100 in interest?

Formula: Principal = Interest earned

Rate x Time
Solution
The principal is unknown. Cover P in the Magic Triangle.

P = ? or appears. Use the formula: P = I

RxT
 Replace I, r and t with their
or respective values

Multiply 0.0525 by 0.5

Divide 100 by 0.02625 and

round answer to nearest cent

You would need to invest P3,809.52

TRY IT 6
A student borrowed money from his best friend at
the very low interest rate of 1.5% for a period of 9
months. At the end of 9 months the friend had
earned P22.50 in interest. Determine the original
amount of the loan.

Show answer
V. DETERMINING THE INTEREST RATE
EXAMPLE 7
Mariko had P240 in the bank for the month of April.
At the end of the month she had earned P0.90 in
interest.
What interest rate was the bank paying?

Formula: Interest rate = Simple interest

Principal x Time
Solution
The interest rate is unknown. Cover r in the Magic Triangle.

r = ? or appears.
Use the formula:
r = Simple interest
Principal x Time
Since r = 0.045, the interest rate as a percentage is 4.5%
VI. DETERMINING THE TIME
EXAMPLE 8
Carol invested P500 at an interest rate of 6%.
How long will it take her to earn P250 in
interest?

Formula: Time = Simple interest

Principal x rate
Solution
The time is unknown. Cover t in the Magic Triangle.

t = ? or appears.

Formula : Simple interest

Principal x rate
Solution
The time is unknown. Cover t in the Magic Triangle.

t = ? or appears.
Formula : Simple interest
Principal x rate
It will take 8.33 years.