SIMPLE AND COMPOUND

INTEREST
Learning Objectives:
At the end of the lesson, you are expected to:
 illustrate simple and compound interest;
 distinguish between simple and compound interest;
 compute interest, maturity value, future value and present
value in simple and compound interest; and
• solve problem involving simple and compound interest.
GUESS THE
PICTURE
WHO AM I?
WHO AM I?
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
 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 also on the accumulated past interests
Simple Interest vs. Compound Interest
 If you’re a borrower who doesn’t want to get stuck with expensive debt
that takes years to eliminate, you’ll probably want a loan with interest
that doesn’t compound. But if you’re an investor looking to earn lots of
money that you can use in retirement, it’s best to search for an account
with interest that compounds frequently.
 Compound interest is greater than simple interest:

Compound interest is greater than simple interest. The reason is very

simple. Under simple interest system, the interest is computed only on
principal amount whereas under compound interest system, the interest is
computed on principle as well as on accumulated interest.
How to compute simple
interest:
Simple Interest (Is) - interest that is computed on the
principal and then added to it
I = Prt
Where,
I = interest P = principal r = interest rate t =
time
 How to compute simple
interest:
EXAMPLES:
1.Suppose you invest P1000.00 at 7% simple interest. How
much money will you have after 6 years?
Solution:
Given: P = P1000.00 r = 7% t = 6 years
I=?
a. I = Prt
I = (1000)(0.07)(6)
I = P420.00
 How to compute simple
interest:
b. Final amount of money (F) = Principal (P) +
Interest (I)
F=P+I
F = 1000 + 420
F = P1,420.00
Thus, P1,420.00 is the amount of money after 6
years.
 How to compute simple
interest:
John want to buy a new Loptop, to buy a Loptop he need to borrow P30,000.00
for three years at a rate of 10% per annum. What will John’s total repayments
be?
Given: P = P30,000.00 r = 10% t = 3 years I=?
I = Prt
I = (30000)(0.1)(3)
I = P 9000.00
Total Repayments = P + I
= P30000.00 + P9000.00
= P39000.00
How to compute simple
interest:
2. How much was borrowed if the interest at 3% after 6 months is P300?
Solution:
Given: I = P300 r = 3% t = 6 months P=
?
6 months = ½ year
P=
P=
P = 20,000.00
Therefore, the amount borrowed was P20,000.00
How to compute simple
interest:
3. At what rate should be P15,000 be invested in order to have a final amount of P15,750.00 in one
month?
Solution:
Given: P = 15,000 F = 15,750 t = 1 month r=?
a. 1 month = 1/12 year b. I = F – P c. r =
I = 15,750 – 15,000
I = 750.00
r=
r = 0.6
r = 60%

Thus, the rate that the money should be invested is 60%

How to compute simple
interest:
4. How many years would it take for P1800 to grow until P4,000 if it is invested at 15% simple
interest?

Solution:

Given: P = 1800 F = 4000 r = 15%

a. I =F – P
I = 4000 – 1800
I = 2200
b. t =
t=
t ≈ 8.148…
t ≈ 8 years
Assessment:
•Directions: Read carefully each situation. Then, answer the
question in each number and support your answer.
1. Ms. Jennelyn avails a cash loan from her friend for her son’s
tuition fee. Her friend let her choose what interest will be used
on her borrowed money – it’s either simple or compound
interest. If you were Ms. Jennelyn, what would you choose? Why?
2. Ms. Joy has P150,000.00 which she plans to put an investment
for 3 years. She is choosing between simple and compound
interest to be used. If you were Ms. Joy, what would you choose –
simple or compound interest? Why?
 Assessment:
Directions: Complete the table below using simple interest.
Show your solution if necessary.

Principal Rate Time Interest Final Amount

1200 1% 12 1212

100 2 months 5/6 100

5% 2 years 5000 55,000

How to compute maturity or future
value in simple interest:

 Repayment date or maturity date as date on which the money borrowed or loan is to
be completely repaid
 Maturity value or future value (F) - amount after t years; that the lender receives
from the borrower on the maturity date

Formula:
A=P+I or A = P + Prt or A = P(1 + rt)
Where, A = Maturity Value P = Principal I = Interest
Examples:

1. At what simple interest rate per annum will 25,000 accumulate to 33,000 in 5 years?

Given: P = 25,000 A = 33,000 t = 5 years

A = P(1 + rt)

33,000 = 25,000(1 + r(5))

= (1 + r(5))

1.32 = 1 + 5r

1.32 - 1 = 5r

0.32 = 5r

0.064 = r

6.4% = r
2. Grace deposited P1000 today in a bank providing 4% simple interest per year. She wants to have
savings worth P2000 in the future. If she will not withdraw any amount, how long must she wait?

Solution:

Given: P = 1000 r = 0.04 A(t) = 2000

A = P(1 + rt)

2000 = 1000(1 + 0.04t)

= (1 + 0.04t)

2 = 1 + 0.04t

2 -1 = 0.04t

1 = 0.04t

t = 25

It will take 25 years for Grace’s deposit to be worth P2000.00

3. If you deposit P1500 in an account paying 10% simple interest for 2 year, determine the
future value of the deposit.

Solution:

Given: P = 1500 r = 0.1 t = 2 years

A = P(1 + rt)

A = 1500[1 +(0.1)(2)]

A = 1800.00
 How to compute present value
in simple interest:
Present Value is the amount A needed now to accumulate A in time t.

Formula:

P=

Examples:

1. Find the present value of P5500.00 due in three years at simple interest rate of 2.5% per year?

Solution:

Given: A = 5500 r = 0.025 t = 3 years

P=

P=

P = 5,116.28
2. As preparation for Ava’s college studies, her parents want to save an amount of P200,000
after 3 years. If they decide to deposit it in a bank offering an annual simple interest rate of
3%, how much do they need to deposit now?

Solution:

Given: A = 200,000 r = 0.03 t = 3 years

P=

P=

P = 183,486.24

P183,486.24 is the present value of P200,000 at 3% simple rate of interest per year.
3. Mrs. Garcia currently has P30,000 in an account providing 5% simple interest per year. She
wishes to have P55,000 in 5 years but she noticed that her savings are not enough to
accumulate that amount. How much additional money must she deposit now in order to
achieve her goal?

Solution:

Given: P = 30,000 r = 0.05 t = 5 years

a. A = P(1+rt) c. P =

A = 30,000(1+(0.05)(5)) P=

A = 37,500 P = 14,000.00

b. P55,000 – P37,500 = P17,500.00

Therefore, Mrs. Garcia needs an additional deposit of P = 14,000.00.

 COMPOUND INTEREST
How to compute compound interest:
Compound Interest (Ic) - interest is computed on the principal and also on the accumulated
past interests
Formula: A = P (1+ ct

Where, A = amount (future value) P = principal r= rate t = time

c = number of compounding c = 1(annually ) c = 2 (semi-annually)

c = 4 (quarterly) c = 12 (monthly) c=
365 (daily)
How to compute compound interest:

Examples:

1. Find the compound amount on deposit at the end of 1 year if P10,000 is deposited at
3% compounded annually.

a. Given: P = 10,000 r = 0.03 t=1 c=1

A = P (1+ ct

A = 10,000 (1+ (1)(1)

A = P10,300.00
How to compute compound interest:

2. If Ana deposits P6500.00 into an account paying 10% annual interest compounded
monthly, how much money will be in the account after 7 years?

Solution:

Given: P = 6500 r = 0.1 t=7 c = 12

A = P (1+ ct

A = 6500 (1+ (12)(7)

A = P13,051.48
How to compute the Maturity or Future
Value under Compound Interest:

Maturity or Future Value under Compound Interest - amount after t

years; that the lender receives from the borrower on the maturity
date

Formula: A = P (1+ ct

Where, A = amount (future value) P =

principal

r= rate t = time c = number of compounding

 How to compute the Maturity or Future
Value under Compound Interest:

Examples:

1. Find the future value of P500 at 8% after 3years compounded

annually.

Given: P = 500 r = 0.08 c = 1(compounded annually) t=3

A = P (1+ ct

A = 500 (1+ 1(3)

A = P629.86
• 2. At what interest rate, compounded annually must P12,000 be invested in order to earn
an interest worth P2000 in 4 years?

Given: P = 12,000 A = 14,000 c = 1(compounded annually) t=4

A = P (1+ ct

14,000 = 12,000(1+ (1)(4)

= (1+ (1)(4)

1.167 = (1+ r)4

Thus, the interest rate should be 3.93%

How to compute the Present Value (P) at
Compound Interest:

Present Value at compound interest:

a. present value of A at an annual compound interest rate r is P

P=

b. Present value of A at an annual interest rate of r compounded c times a year

P=

c. present value of A at an annual interest rate of r compounded continuously

P = = Ae-rt
Examples:

1. What is the present value of P10,000 due in 7 years if money is worth 10%
compounded annually?

Solution:

Given: A = 10,000 r = 0.1 t=7 P=?

P=

P=

P = 5,131.58
2. Two years from now, Mr. Ronnie wants to start a business. In order to do that, he
estimated that he needs an initial capital of P60,000. He can deposit an amount today in
one of the following accounts:

Account 1: offers 1.5% annual compound interest rate

Account 2: offers 1.4% annual interest rate compounded quarterly
Account 3: offers 1.1% annual interest rate compounded monthly
Account 4: offers 1% annual interest rate compounded continuously
Which of the accounts will require the least deposit?
Solution:

a. Account 1: c. Account 3:
P= P=
P= P=

P = 58,239.70 P = 58,695

b. Account 2: d. Account 4:
P= P=
P= P=
P = 58,346.15 P = 58,811.92
Solve the problem below.
1. Find the future value of P1000 at 7.5%
after 3years compounded quarterly.