SIMPLE INTEREST

INTEREST - A most important factor that affects the household or business budget, and the
prosperity of a nation. Refers to the following:
 The earnings of an invested amount; and
 The money paid for the use of borrowed money.

SIMPLE INTEREST – Refers to the interest computed on a yearly basis.

I = Prt

where:
Interest, I - The amount paid for borrowing money.
Principal, P - The original sum of money borrowed (present value)
Interest Rate, r – The rate used in computing the interest.
Time - Term of the loan

The FINAL AMOUNT or MATURITY VALUE, F, is equal to

F=P+I or F = P (1 +rt )

F
To solve for P given F : P=
1 + rt

Examples:
1. Find the interest and the final amount due on P5,500 at a simple interest rate of 15.5% for 9
months?

Solution: Given: P = P5,500

r = 15.5% p.a. = 0.155 p.a.
t = 9/12 mos. = 0.75 year (or ¾)

Find Interest (I) and Final Amount (F):

I = Prt I = P5,500 (0.155) (0.75)

= P639.38
F = P(1 + rt ) F = 5,500 (1+(0.155)(0.75)) = P6,139.68
F= P +1 F = 5,500 + 639.38 = P6,139.38

2. Mr. Ty paid P1,222.50 on a loan made 3 months before at 12.5% simple interest. Find the
Principal and the interest made.
Solution: Given : F = P1,222.50
r = 12.5% p.a. = 0.125 p.a.
T = 3/12 mos. = 0.25 year (or ¼)
 Find Principal, P:

F
P = P = P1,222.20/(1+(0.125)(0.25)
1 + rt
P = P1,185.45

I = Prt I = P1,222.50(0.125)(0.25) = P37.05

Or I =F–P I = P1,185.45 – 1,222.50 = P37.05

3. The interest on a loan of P15,000 is P4,500. If the rate is 15% , when is the loan due?
Solution: Given: P = P15,000
I = P 4,500
r = 15% p.a. = 0.15
Find t:

4. Find the simple interest rate if an investment of P20,000 accumulates to P23,300 in 18 months.

Solution: Given: P = P20,000

F = P23,300
t = 18/12 mos. = 1.5 years
Find r:

ORDINARY INTEREST – When the term is expressed in days, t becomes d/360. Ordinary interest is
based on a 360-day year and a 30 – day month.
D
I o = Pr (from I = Prt)
360

EXACT INTEREST – This is based on a 365- day year and t = D/365.

D
I e = Pr (from I = Prt)
365

Examples:
1. Find the exact interest and the final amount due on P28,000 at 12% for 120 days.
2. Using ordinary interest, determine the final amount due on P10,800 at 15.5% for 100 days.

Time Between Two Dates

 1. Actual No. of Days - to number compute, count every day up to the repayment date. Table 1
may be used for this purpose.
2. Approximate No. of Days – to compute, simply assume that every month has 30 days.

Examples:
1. Find the approximate and actual number of days from March 15, 1993 to December 20 of the
same year.

Year Month Day

End. 1993 12 20
Less: Beg. 1993 3 15_____
0 9 months 5 days

Approximate No. of Days: (9 * 30) + 5 = 275 days

Actual No. of Days: March (16) + April (30) + May (31) *March: (31 – 15 = 16days)
June (30) + July (31) + Aug (31)
Sept (30) + Oct (31) + Nov (31)
Dec (20) = 280 days (Actual No.)

Ex.2 Year Month Day

End. 1994 4 20
Less: Beg. 1993 5 25

By using Table 1:
from January to December 20 354
Less: January to March 15 - 74
Actual No. of Days 280 days

Finding simple Interest Between 2 Dates:

1. Ordinary Interest at Actual No. of Days (Banker's Rule)

Actual No. of Days
Io = P r ---------------------------
360

2. Exact Interest at Actual No. of Days

Actual No. of Days
Ie = P r -----------------------------
365

3. Ordinary Interest at Approximate No. of Days

Approximate No. of Days
 Io = P r -------------------------------
360

4. Exact Interest at Approximate No. of Days

Approximate No. of Days
Ie = P r -------------------------------
365

Exercise 1

1. Find the interest and the final amount due on P5,500 at a simple interest rate of 15.5% for 15
months?

2. Find the interest rate of a P100,000 loan which accumulates to P 125,000 in 5 years.

3. Jojo borrowed P 50,750 from Mark. If he paid P 1,900 for 3 months, what was the annual rate
of interest?

4. How long would it take for P 50,500 to earn an interest of P 1,767.50 at a simple interest
rate of 14%.

5. Accumulate P 35,790 from March 15,2001 to January 7, 2002 at 12% simple interest. Solve for
the Interest and Final Amount.
a. Use Banker’s Rule;
b. Use Exact Interest at Approximate No. of Days

6. At what simple interest rate would money double itself in 4 years?

7. Find the actual and approximate time between the dates: USE TABLE 1.

a. April 15 and October 14, 2010

b. February 20 and September 16, 2010
c. October 28, 2011 and March 15, 2012
d. June 5, 2011 and April 17, 2012
e. January 01, 2011 and February 08, 2012.

8. How long would it take for P 50,000 to accumulate to P57,500 at a simple interest rate of
7.5%?

9. Using the Banker's rule, find the interest and the amount due if P 165,000 was borrowed
on August 16, 2008 to be repaid on April 15, 2009 at 14 ½% simple interest.

10. Find the ordinary and exact interest on 60- day loan of P 100,000 at 18½ % simple interest. Io
Ie

11. Find the amount due if P 1.5 M was invested at 12 ½ % for 200 days using
a) ordinary interest and
b) exact interest
c) How much would be the gain for a) and b)
d) Which should the investor prefers a) or b)

12. Find the ordinary and exact interest and the amount due on each if P 285,000 was borrowed at
18% from April 10 to December 9 of the same year using both the actual and the approximate
number of days.

Examples:
1. Orly borrowed P 10,000 from Art on December 15, 1993 at 16% simple interest to be paid
using the Banker's Rule, how much is the interest and how much is the final amount to be paid
when term expires?
Solution: Given: P = P 10,000
r = 16% p.a. = 0.16
Find Io and F.

2. Find the ordinary and exact interest at a) Approximate and b) Actual Number of days from
January 25, 1994 to November 23, 1994 on P50, 800 at 14% simple interest.

Find: a) Io and Ie at Approximate No. of Days

b) Io and Ie at Actual No. of Days

Present value
– the current value of an amount which is due at some future time.
F
P =
1 + rt

where: P = represent value, F = final amount due

r = interest rate per year and t = time or terms in years

Examples:

2. If money is worth 9-1/2%, what is the present value of Php 10,500.00 due in 1-1/2
years?

Answer: 9,190.37

3. How much must a father invest today at 15% simple interest in order to have
Php 245,000.00 for the college of education of his son five years later?
Answer: P 140,000.00
 4. Find the present value of Php 5,250.00 at 15-1/2% simple interest for six-month term?
Answer: 4,872.39

SIMPLE DISCOUNT

– If the charge for loans is based on the FINAL amount rather than on the
PRESENT VALUE or PRINCIPAL, this is called (Bank) DISCOUNT.

Id =Fdt P = F – Id

where:
Discount, Id – The amount paid for borrowing the money.
Proceeds, P - The money the borrower receives ( present value)
Discount Rate,d – the percentage rate used in computing the discount.
Final,f -Final amount
Time -Term of the loan

Also, P = F – Fdt (Id -Fdt)

P = F (1-dt)
P
To solve for F given P: F=
1 – dt

Examples:
1. A man borrows P 800 due in 6 months from lender who charged discount rate of 8%.
How much was the discount (Id) and the money the borrower gets (P)?

Solution: Given: F = P800

d = 8% = 0.08
t = 6 mos. = 0.5 year

Find Id and and Proceeds, P:

Id = Fdt Id = P 800(0.08) (0.5) = 32.00

P = F – Id = P 800 – 32 = P 768.00

2. Discount P5,000 at 12% simple discount for 4 months. ( Find the Proceeds.)

Solution: Given: F = P5,000

d = 12% = 0.12
t = 4 mos. = 0.333 year (or1/3)
 Find Proceeds. P:
Id = Fdt Id = P 5000(0.12) (0.33333) = 200.00

P = F – Id P = P 5000 – 5000(0.12)(0.333)
= P 4,800

or P = F(1-dt) P = 5000(1-(0.12) (0.333))

3. Find the amount due at the end of 18 months whose Proceeds (present value) is P2,000
at 14% discount.

Solution: Given P = 2,000

d = 14% = 0.14
t = 18 mos. = 1.5 years
P 2000
Find P: P = F(1- dt) F= =
1 – dt 1- (0.14) (1.5)

= 2000/ 0.79
= P 2,531.64

4. How much discount rate was charged if the discount on P1,000 was P125 at the end of
the year?

Solution: Given: F = P1,000

Id = P125
t = 1 year

Find discount rate, d:

Id = Fdt d = Id/ Ft
d = P125 / 1000 (1) = 12.5 %
 SIMPLE INTEREST RATE
vs.
SIMPLE DISCOUNT RATE

d r
r = d=
1 – dt 1+ rt

Examples:
1. What discount rate should a lender charge to earn an interest rate of 16% on a 6-month
loan?
D =14.81%

2. Find the a) interest rate and b) the discount rate if Php 15,000.00 accumulates to Php
19,575.00 in two and a half years.

I
And r =
Pt

I
d=
Ft

3. If money is worth at 16% simple interest, what is the present value of Php 125,555.00
due at the end of five years?

At simple interest F = P (1 + rt )

P
At simple discount F =
1- dt

Examples:
1. Discount Php 10,900.00 for 9 months and find the discount at a) 12% simple interest
and b) 12% simple discount.

Given:
F = 10,900 F = 10,900

Solve for: Principal and I / Proceeds and Id:

 Answers:

P = 10,000 Id = 981
I = 900 P = 9,919

4. a) At what simple interest rate, 18% or 18-1/2%, would a creditor prefer to compute the
present value of a Php 290,000.00 loan to a friend due at the end of 2-1/2 years, if his
friend would like to pay the debt now? B) How much is the creditor's gain from the
better choice?

5. Discount Php 65,950.00 for 8 months at 20%simple discount rate. How much is the
discount?

6. Find the discount rate if the borrower receives Php 35,750.00 from a loan of Php
48,770.50 which is the due at the end of 4 years and 3 months?

7. How much must Jeff invest today at 16-1/2% simple interest in order to accumulate Php
1 M for the college education of his son 8 years later?

8. Find the discount if Php 25,000 is discounted for 15 months at 10% simple
discount.

9. What discount rate was charged if the discount on Php 150,780.00 was Php
45,234.00 at the end of 3 years and 6 months?

10. A man in need of cash today has postdated a check of Php 275,000 due in 2 years
discounted at 10%. How much cash did he receive?