ILLUSTRATING

SIMPLE AND COMPOUND

INTEREST
GENERAL MATHEMATICS 11
DEFINITIONS OF TERMS

• Lender or creditor – a person ( or institution) who invests

the money or makes the funds available.

• Borrower or debtor – a person ( or institution) who owes

the money or avails of the funds from the lender.
DEFINITIONS OF TERMS

• 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 be to completely repaid.
DEFINITIONS OF TERMS

• 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.
DEFINITIONS OF TERMS

• Rate (r) – annual rate, usually in percent, charged by the

lender, or rate of increase of the investment.
• Maturity value or future value (F) – amount after t years
that the lender receives from the borrower on the
maturity date.
• Interest (I) – amount paid or earned for the use of money.
SIMPLE INTEREST
 interest that is computed on the
principal and then added to it.
 Formula for Simple Interest
𝐈 𝒔 =𝑷𝒓𝒕
Where,
= simple Interest
P = Principal
r = rate
t = term or time, in years
Formula for Principal

I 𝑠 = 𝑃𝑟𝑡
=

P=
Formula for rate

I 𝑠 = 𝑃𝑟𝑡
=

r=
Formula for rate

I 𝑠 = 𝑃𝑟𝑡
=

t=
𝐼𝑠

r t
MATURITY VALUE

 also known as Future value

 computed by getting the sum of the principal and

interest due.
Formula for Maturity Value
𝐅 =𝐏 + 𝐈 𝒔 𝐅 =𝐏 + 𝐏𝐫𝐭 𝐅 =𝐏 ( 𝟏+ 𝐫𝐭 )
Where
F = maturity (future) value
P = principal

r = rate
t = term / time in years
Complete the table below by finding the unknown
Principal (P) Rate (r) Time (t) Simple Interest (

(a) 2.5 % 4 1,500

36,000 (b) 1.5 4,860

250,000 0.5 % (c) 275

500,000 12.5 % 10 (d)

Principal (P) Rate (r) Time (t) Simple Interest Maturity
( Value (F)

(a) 2.5 % 4 1,500 (e)

36,000 (b) 1.5 4,860 (f)

250,000 0.5 % (c) 275 (g)

500,000 12.5 % 10 (d) (h)

PROBLEM SOLVING

1. A bank offers 0.25% annual simple interest rate

for a particular deposit. How much interest will be
earned if 1 million pesos is deposited in this savings
account for 1 year?
PROBLEM SOLVING

2. How much interest is charged when

P50,000 is borrowed for 9 months at an
annual simple interest rate of 10%?
PROBLEM SOLVING

3. When invested at an annual interest rate

of 7%, the amount earned P11,200 of simple
interest in two years. How much money was
originally invested?
PROBLEM SOLVING

4. Find the present value of P86,000 at 8%

simple interest for 3 years?
PROBLEM SOLVING

5. If an entrepreneur applies for a loan

amounting to P500,000 in a bank, the simple
interest of which is P157,500 for 3 years,
what interest rate is being charged?
PROBLEM SOLVING

6. How long will a principal earn an interest

equal to half of it at 5% simple interest?
PROBLEM SOLVING

7. Find the maturity value if 1 million pesos is

deposited in a bank at annual simple interest
rate of 0.25% after 5 years?
 ACTIVITY 1
A. Complete the table by finding the unknown
Principal (P) Rate (r) Time (t) Simple Interest () Maturity Value (F)

60,000 4% 15 (1) (2)

(3) 12% 5 15,000 (4)

50,000 (5) 2 (6) 59,500

(7) 10.5% (8) 157, 500 457,500

1,000,000 0.25% 6.5 (9) (10)

B. Solve the following problems.

1. Angel invested a certain amount at 8% simple interest per year. After 6

years, the interest she received amounted to P48,000. How much did
she invest?

2. Justin borrowed P5,000 at 5% annual simple interest rate. If he

decided to pay after 1 year and 3 months, how much should he pay by
then?
B. Solve the following problems.
3. A nurse put P22,000 in the bank 15 years ago. She has earned P21,450
in interest – nearly as much as her initial investment. What was the
interest rate that the bank was paying her?

4. An investor places P15,000 in a savings account that pays 4.5%

interest. She will leave the money there for 6 years. What will her
interest be?
B. Solve the following problems.

5. A bank is offering an interest rate of 4.75%. How

long would it take to earn P500 if you invested
P12,000 in the bank?
COMPOUND INTEREST

 interest is computed on the principal

and also on the accumulated past
interest.
 Maturity (Future) Value

F=P(
where

P = principal or present value

F = maturity (future value) at the end of the term
r = interest rate
t = term/time in years
 Compound Interest

=F-P
where
= compound interest
P = principal or present value
F = maturity (future) value
 Principal or Present Value

P= Or P=
 Problem Solving

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.
 Problem Solving
Example 2:
Suppose your father deposited in your bank account
P10,000 at an annual interest rate of 0.5%
compounded yearly when you graduate from
kindergarten and did not get the amount until you
finish Grade 12. How much will you have in your bank
account after 12 years?
 Problem Solving

Example 3:

What is the present value of P50,000 due in 7

years if money is worth 10% compounded
annually?
 Problem Solving

Example 4:
How much money should a student place in a time
deposit in a bank that pays 1.1% compound
annually so that he will have P200,000 after 6
years?
 COMPOUND INTEREST

COMPOUNDING MORE THAN

ONCE A YEAR
DEFINITIONS OF TERMS

• Frequency of Conversion (m) – number of conversion

periods in one year.
• Conversion or interest period (t) – time between
successive conversion of interest.
• Total number of conversion periods (n)
n = mt (frequency of conversion) x (time in years)
DEFINITIONS OF TERMS

• Nominal rate () – annual rate interest.

• Rate (j) of interest for each conversion period.

j= =
 CONVERSION PERIOD

annually :m=1
semi-annually :m=2
quarterly :m=4
monthly : m = 12
Nominal rates and the corresponding frequencies of conversion and
interest rate for each period
= Nominal rate m = Frequency j = Interest rate per conversion One conversion period
(Annual Interest of conversions period
Rate)
2% compounded 1 = 0.02 = 2% 1 year
annually; = 0.02
2% compounded semi- 2 = 0.01 = 1% 6 months
annually; = 0.02

2% compounded 4 = 0.005 = 0.5% 3 months

quarterly; = 0.02

2% compounded 12 = 0.0016 = 0.16% 1 month

monthly; = 0.02

2% compounded daily; 365 1 day

= 0.02
MATURITY VALUE (F), compounding m TIMES A YEAR

F=

where
F = maturity (future) value
P = principal
= nominal rate of interest (annual rate)
m = frequency of conversion
t = term/time in years
EXAMPLE 1:

Find the maturity value and interest if

P10,000 is deposited in a bank at 2%
compounded quarterly for 5 years.
EXAMPLE 2:

Find the maturity value and interest if

P10,000 is deposited in a bank at 2%
compounded monthly for 5 years.
EXAMPLE 3:
Chris borrows P50,000 and promise to pay
the principal and interest at 12%
compounded monthly. How much must
he repay after 6 years?
 PRESENT VALUE (P) at Compounded Interest
P= (m)(t) P=

where
P = principal or present value
F = maturity (future) value at the end of the term
= nominal rate of interest (annual rate)
t = term/time in years
m = frequency of conversion
j=

n = mt
EXAMPLE 4:
Find the present value of P50,000 due in 4
years if money is invested at 12%
compounded semi-annually.
EXAMPLE 5:
What is the present value of P25,000 due in 2
years and 6 months if money is worth 10%
compounded quarterly.
 FINDING INTEREST RATE
AND
TIME IN COMPOUND INTEREST
EXAMPLE 1.

How long will it take P3,000 to accumulate to

P3,500 in a bank savings account at 0.25%
compounded monthly?
Finding the Number of Periods n, for Compound Interest

n =
EXAMPLE 2.

At what nominal rate compounded semi-

annually will P10,000 accumulate to P15,000 in
10 years?
Finding the Interest rate j, per conversion period

𝟏
𝒏
j = () -1
EQUIVALENT INTEREST RATE
AND
EFFECTIVE RATE
DEFINITION OF TERMS
Equivalent rates – two annual rates with different conversion
periods that will earn the same maturity value for the same
time.
Nominal rate – annual interest rate (may be compounded
more than once a year)

Effective rate – rate when compounded annually will give the

same compound each year with the nominal rate; denoted by
EXAMPLE 1.

What effective rate is equivalent to 10%

compounded quarterly?
EXAMPLE 2.

What nominal rate compounded quarterly is

equivalent to 8% compounded semi-annually?
EXAMPLE 3.

What nominal rate compounded semi-

annually is equivalent to 12% compounded
monthly?
 ACTIVITY 2
A. Solve the following problems on compound interest

1. What are the amounts of interest and maturity value of a loan

for P20,000 at 6% compound interest for 3 years?

2.In order to have P50,000 in 5 years, how much should you invest
if the compound interest is 5%?

3. A savings account in a bank yields 0.25% compound interest

annually. Find the future value of P25,000 for 4 years in this savings
account. How much interest will be gained?
 ACTIVITY 2
A. Solve the following problems on compound interest

4. In a certain bank, Angel invested P88,000 in a time deposit that

pays 0.5% compound interest in a year. How much will be her
money after 6 years? How much interest will she gain?

5. On the 7th birthday of her daughter. Shirlee deposited an amount

in a bank peso bond fund that pays 1.0% interest compounded
annually. How much should she deposit if she wants to have
P100,000 on her daughter’s 18th birthday?
B. Complete the table by computing for the maturity values, compound interests and present
values.
Principal Nominal Interest Frequency of Interest Years (t) Total number Compound Maturity
Rate ( compounded conversions rate per of Interest Values
(m) period (j) conversions () (F)
per year (n)

5,000 6% Semi- (1) (2) 10 (3) (4) (5)

annually

30,000 2% Quarterly (6) (7) 3 years (8) (9) (10)

and 9
months

(11) 10% Monthly (12) (13) 5 (14) (15) 100,00

0