BUSANA1 Chapter1 - Simple Interest and Discount

Simple Interest and Discount
Christopher F. Santos
BUSANA1 Chapter 1
De La Salle University
2nd Term 2015-16
DLSU BUSANA1 Chapter 1
1 / 34
Interest
Interest is a benefit in the form of a fee that the

lender/creditor receives for letting the borrower use
his money.
TWO TYPES:
1
Simple Interest
2
Compound Interest
- will be discussed in the next chapter
2 / 34
Important Dates in Lending
Origin Date (O.D.) - date on which borrowed

money is received by borrower
Maturity Date (M.D.) - date on which the loan is to
be completely repaid
3 / 34
Factors Affecting Simple Interest I
principal P - amount of money borrowed or

invested
interest rate r - annual rate (in percent) charged by
the lender
term of the loan t - number of years the sum of
money was borrowed or invested
I = Prt
4 / 34
Example
How much simple interest is charged when 100PhP is

borrowed for 3 years with an interest rate of 10%?
Solution:
I =?
P = 100PhP
r = 10% = 0.10
t =3
) I = Prt = (100)(0.10)(3) = 30
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Example

Solution:
I =?
P = 100PhP
r = 10% = 0.10
t =3
) I = Prt = (100)(0.10)(3) = 30
5 / 34
Example

Solution:
I =?
P = 100PhP
r = 10% = 0.10
t =3
) I = Prt = (100)(0.10)(3) = 30
5 / 34
Example

Solution:
I =?
P = 100PhP
r = 10% = 0.10
t =3
) I = Prt = (100)(0.10)(3) = 30
5 / 34
Example

Solution:
I =?
P = 100PhP
r = 10% = 0.10
t =3
) I = Prt = (100)(0.10)(3) = 30
5 / 34
Example

Solution:
I =?
P = 100PhP
r = 10% = 0.10
t =3
) I = Prt = (100)(0.10)(3) = 30
5 / 34
Example

Solution:
I =?
P = 100PhP
r = 10% = 0.10
t =3
) I = Prt = (100)(0.10)(3) = 30
5 / 34
Maturity/Future Value F
- amount to be received by the lender from the

borrower on the maturity date
F =P +I
F = P + Prt
F = P(1 + rt)
6 / 34

F =P +I
F = P + Prt
F = P(1 + rt)
6 / 34

F =P +I
F = P + Prt
F = P(1 + rt)
6 / 34
Examples
1. How much should the borrower pay the lender

after 3 years if he borrowed 100PhP at an interest
rate of 10%?
ANS. 130PhP
2. In how much time will 28,000PhP amount to
29,134PhP at 16.2% simple interest rate?
ANS. 0.25 years or 3 months
7 / 34
Examples

rate of 10%?
ANS. 130PhP
7 / 34
Examples

rate of 10%?
ANS. 130PhP
7 / 34
Examples

rate of 10%?
ANS. 130PhP
7 / 34
Examples
3. At what simple interest rate will a sum double itself

in 5 years?
ANS. 20%
4. What principal will amount to 6,750PhP in 2 years
and 6 months at 8% simple interest rate?
ANS. 5,625PhP
8 / 34
Examples

in 5 years?
ANS. 20%
ANS. 5,625PhP
8 / 34
Examples

in 5 years?
ANS. 20%
ANS. 5,625PhP
8 / 34
Examples

in 5 years?
ANS. 20%
ANS. 5,625PhP
8 / 34
Computing I when t is in months
If the term t is given in months, convert it first to years

before applying the formulas.
P
r (per yr)
t
I
F
7,200
(1)
7 months 352.80
(2)
6,800
0.156
(3)
(4)
8,568.00
3
(5)
12 4 %
(6)
948.28 9,448.28
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Computing I when t is in days D
Ordinary Interest - t =
Exact Interest - t =
D
(default)
360
D
365
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Example
Find the amount if 8,000PhP is invested for 250 days

at 14% simple interest rate using
1
exact interest
ANS. 8,767.12PhP
ordinary interest
ANS. 8,777.78PhP
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Example

1
exact interest
ANS. 8,767.12PhP
ordinary interest
ANS. 8,777.78PhP
11 / 34
Example

1
exact interest
ANS. 8,767.12PhP
ordinary interest
ANS. 8,777.78PhP
11 / 34
Counting Days Between Two Dates (O.D. and M.D.)
Actual Time - we count everyday, except the origin

date, within the term
Approximate Time - we assume every month
consists of 30 days
Example: Find the actual and approximate time from

January 21, 2016 to June 19, 2016.
ANS. The actual time is 150 days while the
approximate time is 148 days.
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consists of 30 days

January 21, 2016 to June 19, 2016.
12 / 34

consists of 30 days

January 21, 2016 to June 19, 2016.
12 / 34
Computing Term Between Two Dates
2
3
4
ordinary interest, actual time

- the default and a.k.a. the Bankers Rule
ordinary interest, approximate time
exact interest, actual time
exact interest, approximate time
NOTE:
1
2
The Bankers Rule gives the highest interest.

If the day of the dates are the same, then we count in months.
13 / 34
Examples
O.D.: June 25, 2011

M.D.: December 25, 2011
) t = 6 months = 0.5 years
O.D.: February 9, 2011
t = 3 months = 0.25 years
) M.D.: May 9, 2011
14 / 34
Examples
O.D.: June 25, 2011

M.D.: December 25, 2011
) t = 6 months = 0.5 years
O.D.: February 9, 2011
t = 3 months = 0.25 years
) M.D.: May 9, 2011
14 / 34
Examples
OIAcT
EIApT
EIAcT
OIApT
EIApT
OIAcT
O.D.
Days M.D.
t
2/18/12 120
(1)
(2)
2/18/12
(3) 6/18/12 (4)
2/18/12
(5) 6/18/12 (6)
2/18/12 120
(7)
(8)
10/31/10 120
(9)
(10)
3/6/11
(11) 8/11/11 (12)
15 / 34
Examples
1. Find the amount of 10,000PhP on December 15,
2009 if it was invested on March 15, 2009 at
5.04% simple interest rate.
ANS. 10,378PhP
2. Find the maturity value of 18,000PhP if it is
invested from February 10, 2008 to April 16, 2009
at a simple interest rate of 15%?
ANS. 21,232.50PhP
16 / 34
Examples
ANS. 10,378PhP
ANS. 21,232.50PhP
16 / 34
Examples
ANS. 10,378PhP
ANS. 21,232.50PhP
16 / 34
Examples
ANS. 10,378PhP
ANS. 21,232.50PhP
16 / 34
Present Value
- another name/terminology for the principal P

- current value of an amount F that is due at some
future date
F = P(1 + rt)
P=
F
1 + rt
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Present Value
- another name/terminology for the principal P

- current value of an amount F that is due at some
future date
F = P(1 + rt)
P=
F
1 + rt
17 / 34
Examples
The question
What principal will amount to 6,750PhP in 2
years and 6 months at 8% simple interest rate?
can be restated as
What is the present value of 6,750PhP due in
2 years and 6 months if money is worth 8%
simple interest?
18 / 34
Examples
1. In order to have 163,200PhP three years from
now, how much must a business invest today if the
simple interest rate is 18% per annum?
ANS. 105,974.03PhP
2. To pay a debt, Pong offered Bert 1,000PhP now or
1,100PhP three months from now. If saving
account simple interest is 10%, which offer will
give better return for Bert?
ANS. 1,100PhP in 3 months
19 / 34
Examples
ANS. 105,974.03PhP
19 / 34
Examples
ANS. 105,974.03PhP
19 / 34
Examples
ANS. 105,974.03PhP
19 / 34
Discount Interest/Simple Discount Id

-interest collected/deducted in advance (on O.D.
instead of on M.D.)
Factors Affecting Id :
1
2
maturity value F - loan amount applied for

discount interest rate d - interest rate (in percent)
charged in advance
term of the loan t - time between O.D. and M.D.
Id = Fdt
20 / 34
Discount Interest/Simple Discount Id

-interest collected/deducted in advance (on O.D.
instead of on M.D.)
Factors Affecting Id :
1
2
maturity value F - loan amount applied for

discount interest rate d - interest rate (in percent)
charged in advance
term of the loan t - time between O.D. and M.D.
Id = Fdt
20 / 34
Loan Proceeds Lp
- actual amount received by the borrower on the
origin date
Lp = F
Lp = F
Lp = F (1
Id
Fdt
dt)
NOTE:
1
d is computed on F ; r is computed on P.
2
In problems involving discount interest rates,
we always apply the BANKERS RULE
when the O.D. and M.D. are given.
21 / 34
Loan Proceeds Lp
origin date
Lp = F
Lp = F
Lp = F (1
Id
Fdt
dt)
NOTE:
1
2
21 / 34
Loan Proceeds Lp
origin date
Lp = F
Lp = F
Lp = F (1
Id
Fdt
dt)
NOTE:
1
2
21 / 34
Loan Proceeds Lp
origin date
Lp = F
Lp = F
Lp = F (1
Id
Fdt
dt)
NOTE:
1
2
21 / 34
Examples
1. Find the discount interest and the proceeds of
4,000PhP due at the end of 8 months if the
discount interest rate is 10 12 %.
ANS. Id = 280PhP; Lp = 3720PhP
2. Find the interest charged in advance on
20,000PhP due in 210 days at a discount interest
rate of 7 12 %. What is the present value of this
20,000PhP?
ANS. Id = 875PhP; Lp = 19, 125PhP
22 / 34
Examples
20,000PhP?
ANS. Id = 875PhP; Lp = 19, 125PhP
22 / 34
Examples
20,000PhP?
ANS. Id = 875PhP; Lp = 19, 125PhP
22 / 34
Examples
20,000PhP?
ANS. Id = 875PhP; Lp = 19, 125PhP
22 / 34
Examples
3. If 24,000PhP is the present value of 27,500PhP
due at the end of 16 months, find the
1
discount interest rate

ANS. 9.55%
simple interest rate

ANS. 10.94%
4. Find the amount due at the end of 7 months on a

present value of 3,790PhP at
1
9% simple interest rate

ANS. 3,988.98PhP
9% discount interest rate

ANS. 4,000PhP
23 / 34
Examples
1

ANS. 9.55%

ANS. 10.94%

1

ANS. 3,988.98PhP

ANS. 4,000PhP
23 / 34
Examples
1

ANS. 9.55%

ANS. 10.94%

1

ANS. 3,988.98PhP

ANS. 4,000PhP
23 / 34
Examples
1

ANS. 9.55%

ANS. 10.94%

1

ANS. 3,988.98PhP

ANS. 4,000PhP
23 / 34
Examples
1

ANS. 9.55%

ANS. 10.94%

1

ANS. 3,988.98PhP

ANS. 4,000PhP
23 / 34
Examples
1

ANS. 9.55%

ANS. 10.94%

1

ANS. 3,988.98PhP

ANS. 4,000PhP
23 / 34
Assignment
1
Discount 60,000PhP due in 150 days at a

discount interest rate of 8%. (Note: To discount
means to find the present value, which should be
more appropriately referred to as the proceeds for
a given amount of money due at a future time.)
Lito received 11,500PhP proceeds for a loan he
applied for at a 12% discount interest rate on June
15, 2011. How much is the loan which is to be due
on November 15, 2011?
What is the term of the loan whose proceeds and
maturity value are 67,820PhP and 80,000PhP,
respectively, at a simple discount rate of 8.7%?
24 / 34
(Promissory) Note
- a written promise drawn by a person or business
entity (drawer/maker) to another person or business
entity (drawee/payee) to pay a certain sum at a
specified time and interest rate
TWO TYPES:
1
Simple Interest Note - uses simple interest;
face value is the principal
2
Bank Discount Note - uses discount interest;
face value is the maturity value
Face Value - value stated in the note
25 / 34
Example of a Simple Interest Note

10,000PhP Taft Ave, Manila January 14, 2016
Seventy-Five Days, after the above date, the
undersigned promises to pay to the order of
Company ABC Ten Thousand Pesos with simple
interest at 12% per annum.
(Sgd) Juan dela Cruz
Determine the drawer, drawee, face value, simple
interest rate, term, O.D. and M.D. of the note above.
26 / 34
Examples
1. What is the term of a simple interest note with a
face value of 80,000PhP, a maturity value of
83,100PhP, and an interest rate of 15.5%?
2. A simple interest note for 120 days at 13.8% per
annum has a maturity value of 57,530PhP. What is
the face value of the note?
ANS. 55,000PhP
27 / 34
Examples
ANS. 55,000PhP
27 / 34
Examples
ANS. 55,000PhP
27 / 34
Examples
ANS. 55,000PhP
27 / 34
Example of a Bank Discount Note
70,000PhP
Manila, Philippines
Oct. 7, 2009
Three Months, after the above date, for value received with interest at 13.75% per annum discounted to maturity, the undersigned promises to pay to the order of Pasig Centennial Bank
Seventy Thousand Pesos.
(Sgd) Ding Javier
Determine the drawer, drawee, face value, discount interest rate, term,
O.D. and M.D. of the note above.
28 / 34
Examples
1. Find the interest deducted in advance and the
proceeds of a 90,000PhP bank discount note with
an interest rate in advance of 18% per annum, and
a term of June 4, 2011 to March 3, 2012.
ANS. Id = 12, 285PhP, Lp = 77, 715PhP
2. Ted Mars signed a 10,000PhP bank discount note.
If the proceeds were 8,750PhP and the term was
10 months, at what rate was the interest charged
in advance?
ANS. 15%
29 / 34
Examples
ANS. Id = 12, 285PhP, Lp = 77, 715PhP
in advance?
ANS. 15%
29 / 34
Examples
ANS. Id = 12, 285PhP, Lp = 77, 715PhP
in advance?
ANS. 15%
29 / 34
Examples
ANS. Id = 12, 285PhP, Lp = 77, 715PhP
in advance?
ANS. 15%
29 / 34
Discounting Notes
If the drawee of a note needs money prior to maturity

date, he can sell the note at a discount to a third
party, which may be a financial institution or an
individual. In such case, the third party becomes the
new drawee and is said to have discounted the note.
The third party keeps the note until its maturity date
on which the drawer pays the third party the maturity
value of the note.
30 / 34
Discounting Notes
The length of time from the date the note is

discounted to the maturity date is called the discount
period t. The amount of money that the third party
pay the original drawee is the loan proceeds Lp . This
is also referred to as the discounted value of the note
on the date it is discounted by the third party.
31 / 34
Steps in Discounting Bank Discount Notes

1
2
Determine the discount period.

Compute the proceeds using the discount rate
and the discount period.
Ex. Allan bought office equipment from Boy for which

Allan made out a 70,000PhP bank discount note
promising to pay Boy on August 29, 2010. Boy needs
money on June 16, 2010 and sells the note to Charlie,
who discounts it at 13.8%. Find Boys proceeds.
ANS. 68,014.33PhP
NOTE: On August 29, 2010, Charlie collects
70,000PhP from Allan.
32 / 34

1
2


ANS. 68,014.33PhP
32 / 34

1
2


ANS. 68,014.33PhP
32 / 34
Steps in Discounting Simple Interest Notes

1
2
3
Compute the maturity value F of the note using

the formula F = P(1 + rt).
Ex. Boy holds a 28,000PhP note at 12% simple

interest good for 150 days. It was drawn by Allan on
March 16, 2009. If interest charged in advance is
14%, how much will Boy receive if the note is
encashed at a bank on June 29, 2009?
ANS. 28,885.50PhP
33 / 34

1
2
3


ANS. 28,885.50PhP
33 / 34

1
2
3


ANS. 28,885.50PhP
33 / 34
Assignment
1
A 30,000PhP bank discount note that was to

mature on August 1, 2010 was sold on May 2,
2010 at 12% discount interest. How much was the
discount? What was the discounted value of the
note?
On August 8, 2010, Allan promised to pay Noel
8,000PhP in 45 days with simple interest at 12%.
Noel, however, sold the note to Chris 9 days later
at a 10% discount rate. How much did Chris pay
Noel? How much did Noel earn in 9 days by
having lent Allan 8,000PhP?
34 / 34

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Simple Interest and Discount

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

Interest is a benefit in the form of a fee that the

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

Important Dates in Lending

Origin Date (O.D.) - date on which borrowed

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

Factors Affecting Simple Interest I

principal P - amount of money borrowed or

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

How much simple interest is charged when 100PhP is

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

How much simple interest is charged when 100PhP is

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

How much simple interest is charged when 100PhP is

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

How much simple interest is charged when 100PhP is

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

How much simple interest is charged when 100PhP is

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

How much simple interest is charged when 100PhP is

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

How much simple interest is charged when 100PhP is

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

- amount to be received by the lender from the

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

- amount to be received by the lender from the

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

- amount to be received by the lender from the

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

1. How much should the borrower pay the lender

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

1. How much should the borrower pay the lender

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

1. How much should the borrower pay the lender

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

1. How much should the borrower pay the lender

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

3. At what simple interest rate will a sum double itself

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

3. At what simple interest rate will a sum double itself

Simple Interest and Discount

DLSU BUSANA1 Chapter 1

3. At what simple interest rate will a sum double itself

Simple Interest and Discount