Simple Interest

Debtor/Maker
an individual or institution that borrows money
for any purpose

Lender
an individual or institution who loans the money

Interest I

payment for the use of borrowed money or the
amount earned on an invested money


Definition of Terms (continued)
Principal P
the capital or sum of money borrowed or
invested

Rate of Interest r
fractional part of the principal that is paid on the
loan or investment (expressed as percent) and the
annual rate set by the lender

Time t
number of years for which the money is
borrowed or invested


Definition of Terms (continued)
Final Amount or Maturity Value F
combined amount of the principal and the
interest accumulated over a certain period of time


Simple Interest
interest computed based on the principal and is
paid at the end of the specified period of time

Formula:
I

= Prt
where


= principal invested P
= rate of interest in decimals r
= time in years t
r t
Find the Principal, Rate or Time Using the
Simple Interest Formula
P
r
t
I
P
r
t
I
P
r
t
I
P
r
t
I
I Pr t =
I
P
rt
=
I
r
Pt
=
I
t
Pr
=
Examples
1. Find the interest paid by Ms. April on Php25,000
that she borrowed for three years at 4% simple
interest.
2. Determine the simple interest to be paid by Lorna
if she borrowed Php1,200 at 6 % for 8 months.
3. At what rate of interest did Mary invest the
amount of Php27,500 for it to earn a simple interest
of Php3, 245 for three years?
Final Amount or Maturity Value F
SIMPLE INTEREST
F P I = +
F P Pr t P rt = + = + 1
Examples (continued)
4. How much was borrowed by Ms. Michelle if the
interest she paid after 3 months at 10.5% simple
interest is Php3,000?

5. How long should Dan invest the amount of
Php80,000 to earn an interest of Php4,500 at 6.5%
simple interest?

6. How much is the final amount would Ms. Nessy
receive if she invested Php75,000 for 4 years at 5
% simple interest?
Ordinary and Exact Interest
Ordinary Interest vs. Exact Interest

i
O
i
E
Default: Ordinary Interest
i
O
- a rate per day that assumes 360 days
per year
i
E
- a rate per day that assumes 365 days
per year
Examples
1. For 209 days, what would be the interest if Gretel
invested Php43,500 at
(a) 5 % ordinary simple interest?
(b) 5 % exact simple interest?
(c) How much is the difference between these two
investments?

2. Use ordinary interest to find the final amount due on
Php 75,150 for 420 days at 12.75%

3. Use exact interest to find the interest and final
amount due on Php25,345 for 636 days at 10.25%


Ordinary and Exact Interest
Why do you think banks prefer to use
ordinary interest in their business? Support
your answer.

Actual and Approximate Time
Default: Actual Time
Actual time based on counting the exact
number of days in a time period
Approximate time based on counting 30
days in each month










ACTUAL NUMBER OF DAYS PER MONTH
MONTH NUMBER OF DAYS
January 31 days
February
28 days, 29 in leap
years
March 31 days
April 30 days
May 31 days
June 30 days
July 31 days
August 31 days
September 30 days
October 31 days
November 30 days
December 31 days
Examples
The approximate time from July 12 to
September 12 is 60 days.
To find the actual time from July 12 to
September 12, add the following:
Days in July (31 - 12 ) 19
Days in August 31
Days in September +12
62 days
Interest Between Dates
( )
actual time
=
i act
O Pr
| |
|
\ .
360
( )
approximate time
=
i app
O Pr
| |
|
\ .
360
( )
actual time
=
i act
E Pr
| |
|
\ .
365
( )
approximate time
=
i app
E Pr
| |
|
\ .
365
Default
Examples
1. Using the four methods, find the interest on
Php23,250 at 5 2/3% simple interest from August 9,
2003 to May 18, 2004. (p. 20)

2. Determine the ordinary interest on Php53,000 at
11% from June 17, 2003 to October 9, 2003 using
actual and approximate time. (p. 19)

3. What amount should be paid on February 10, 2004
for a loan of Php16,020 made on October 7, 2003 with
4 3/5% simple interest? (p. 21)


Do it on your own
What final amount should
Carol pay for a loan of
Php8,200 at 14 % simple
interest she borrowed in
March 10, 2000 if she
promised to pay on
November 25, 2000?
Present Value
amount of loan or investment known as the
prevailing value of an amount scheduled at some
future time
also called principal and denoted by P
formula is given by

where

F
P
rt
=
+ 1
= accumulated amount F
= simple interest rate in decimals r
= term of loan or investment t
Examples
1. How much must Ivy invest today in order to have
Php32,500 available in 4 years if money is worth 12% simple
interest?

2. Find the present value of Php19,200 for 120 days at 4 5/8
% simple interest.

3. Determine the present value of a 7-month 12.3% simple
interest loan if its final amount is Php19, 345?

4. Find the present value of Dorys loan, which amounted to
Php45,650.75 from January 5, 2008 to April 25, 2008 if the
money is worth 8.5% simple interest.
PRESENT VALUE