Business

Mathemati
cs
Simple and Compound Interests
Paying interest has been part of human activities and has been
regarded as legitimate commercial practice as far back as the
ancient period. But during the Middle Ages, religious and secular
laws branded interests as usury and prohibited charging interest in
any business transaction. However, with the rapid growth of
commerce and industry and the development of banking system,
the concept of usury became limited to exorbitant interest.
Governors started to regulate and set limits on interest rates.
Interest
INTEREST is the amount paid
for the use of another amount
of money, called the principal
amount or simply principal.
Principal
PRINCIPAL is the base in which
interest is computed. If an
amount is loaned or borrowed,
this amount is referred to as
principal.
Term
TERM is the unit of time for
which the principal is loaned, or
the length of time the principal is
borrowed.
Interest Rate
INTEREST RATE is the multiplier
expressed as percent of the
principal to be paid each term.
Maturity Value
MATURITY VALUE, is the
sum of the principal and
the interest to be paid
each term.
Simple Interest
Simple interest refers to the amount
earned for one year calculated by
multiplying the principal by the
interest rate.
I=Prt
Example 1:
An amount of P 150,000 is
invested for 9 months at 4%.
Find:
a. the interest
b. the maturity value
HOW MUCH MONEY WILL YOU
HAVE AFTER 4 YEARS AND 3
MONTHS IF YOU HAVE DEPOSITED
P10,000 IN A BANK THAT PAYS
0.5% SIMPLE INTEREST?
Example 2:
A dollar investment of
$1,200 is transacted for 5
months at 6%. Find:
a. The interest
b. Maturity value
Example 3:
A amount of P1,000,000 is invested in a
financial institution.
a. How long will it take for the amount to
reach P1,001,000 at 2% simple interest?
b. At what interest rate will it earn
P1,000 in 10 months ?
Example 3:
A amount of P1,000,000 is
invested in a financial
institution.
At what interest rate will it
earn P1,000 in 10 months ?
HOW LONG WILL 1 MILLION
PESOS EARN A SIMPLE
INTEREST OF P100,000 AT
1% PER ANNUM?
HOW MUCH SHOULD YOU
INVEST AT THE SIMPLE
INTEREST IS 7.5% IN ORDER
TO HAVE P300,000 IN 2
YEARS?
TASK 1:
1. FIND THE SIMPLE INTEREST ON A LOAN
OF P65,000 IF THE LOAN IS GIVEN AT A
RATE OF 20% AND IS DUE IN 3 YEARS.
2.HOW MUCH SHOULD INVEST AT 6%
ANNUAL INTEREST RATE TO OBTAIN A
SIMPLE INTEREST OF P 72,OOO IN 3
YEARS?
3. HOW LONG WILL AN AMOUNT OF
P50,000 GAIN A SIMPLE INTEREST OF
P10,000 AT 4% PER ANNUM?
Term: Ordinary Time and Exact Time
• Ordinary Time is based on 30-day month computation. This means
that a 6-month transaction covers (6)(30 days)=180 days

• Exact Time is based on the exact number of inclusive dates of

transaction. For instance, a loan entered on December 24, 2014
and matureson April 11, 2015 has

7 days-from December 25, 2014 to December 31, 2014

31 days-from January 1, 2015 to January 31, 2015

28 days-from February 1, 2015 to February 28, 2015

31 days-from March 1, 2015 to March 31. 2015

11 days-from April 1, 2015 to April 11. 2015

108 days
Interest: Ordinary Interest and Exact
Interest

Exact Time Ordinary Time

360 days Ordinary Ordinary
interest with interest with
exact time ordinary time
(Bankers Rule)
365 days Exact interest Exact interest
with exact time with ordinary
time
Example

Find the exact interest and the

ordinary interest given the
following values: P5,000 for 120
days at 5%.
Example

• Mr. Seniro issued a Promissory

Note on May 8. 2015 to BPI
amounting to P100,000 with
interest at 6%. The due date is
October 8, 2015. Determine the
maturity value to be paid.
Installment Payments

Paying on Installment Basis Rule No. 1

Payment received must be deducted first
from the amount with interest due. The
balance, the amount due after deducting the
payment, is then subjected to the agreed
interest is computed from the date of the last
payment and the balance of the principal.
Installment Payments

Paying on Installment Basis Rule No. 2

The interest for the entire term of the
principal amount is added to the maturity value. If
installment payments are made, these payments
plus the interest on each installment payment from
the date that payment is made to the due date are
subtracted from the computed maturity value to
obtain the amount due. “Merchants Rule”
Present Value at a Simple Interest
Rate

The present value P at a simple interest

rate r of a given amount A for a given
term t can be determined by the
formula,
Example

Find the present value of a loan due

on December 24, 2015 with a
maturity value of P340,600 and a
rate of 6% in 159 days.
COMPOUND INTEREST

Compound Interest is also the

amount earned for one year
calculated by multiplying the
principal by the interest rate.
Compound Interests are usually used
for a long-term transactions.
Conversion Period

The periods of time when the addition of

interest and the principal occur.
These time intervals when applied, may have
the interests compounded annually (once a
year), semi-annually (twice a year), quarterly
( four times a year) and monthly (twelve
times a year)
Compound Amount
The accumulated amount of a given principal
at the end of a given interval.
Compound Interest
The original principal minus the compound
amount.
Term
The length of time for which the compound
interest is to be calculated.
 Maturity (Future) Value and Compound
Interest

Where:
Principal or present value
Maturity (Future) value at the end of the term
interest rate
term/time in years
 Maturity (Future) Value and Compound
Interest

Where:
Principal or present value
Maturity (Future) value at the end of the term
interest rate
term/time in years
Example 1
Find the maturity value and the
compound interest if P10,000 is
compounded annually at an interest
rate of 2% in 5 years.
Example 2
How much money should a student
place in a time deposit in a bank that
pays 1.1% compounded annually so
that he will have P200,000 after 6
TASK 11/18/2024
1. FIND THE MATURITY VALUE AND THE
COMPOUND INTEREST IF P50,000 IS
INVESTED AT 5% COMPOUNDED
ANNUALLY FOR 8 YEARS.
2. MR. BAUTISTA AIMS TO HAVE HIS
INVESTMENT GROW TO P500,000 IN 6
YEARS. HOW MUCH SHOULD HE INVEST IN
AN ACCOUNT THAT PAYS 5% COMPOUNDED
ANNUALLY?
EXAMPLE 2
HOW MUCH MONEY SHOULD A
STUDENT PLACE IN A TIME
DEPOSIT IN A BANK THAT PAYS
1.1% COMPOUNDED ANNUALLY
SO THAT HE WILL HAVE
P200,000 AFTER 6 YEARS.
 COMPOUNDING MORE THAN ONCE A YEAR
DEFINITION OF TERMS:
FREQUENCY OF CONVERSION (m)=number of
conversion periods in a year
NOMINAL RATE

total number of conversion periods

TERMS IN A YEAR
MATURITY VALUE, COMPOUNDING M TIMES
IN A YEAR
PRESENT VALUE, COMPOUNDING M TIMES
IN A YEAR
EXAMPLE 1
FIND THE MATURITY VALUE AND INTEREST
IF P10,000 IS DEPOSITED IN A BANK AT 2%
COMPOUNDED QUARTERLY FOR 5 YEARS
Nominal rate

The quoted rate which is the basis for converting the interest rate per
conversion periods.

Nominal Interest per Conversion Period

Rate
Annually Semi-annually Quarterly Monthly

1 year 1%

2 years 2% 1%

3 years 3% 1
Example

Compute for the compound

amount and compound interest
on P100,000 principal for 2
years at3% compounded
quarterly.
Formula for Compound Interest
Let P be the original principal, I the interest
rate per period, and n the number of
conversion periods. The compound amount
An at the end of the nth period is

,
And the compound interest In for n
conversion period is
Example

Find the compound amount and

compound interest on a loan of
P50,000 at 6% for 6 years
compounded semi-annually.
Present Value at Compound Rate
The present value at compound interest of a
given amount is the principal that will result
to the given amount at the given rate in the
given term.

The present value P of a given amount An at

compound interest rate I per period for n
periods is
Example

Find the present value of

P50,000 due in 8 years at 4%
compounded monthly.
Thank you