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SIMPLE INTEREST AND

SIMPLE DISCOUNT
Concepts: Simple Interest, Simple Discount,
Ordinary and Exact Simple Interest, Interest on
Actual and Approximate Time, Promissory Note

Simple Interest and Simple Discount


OBJECTIVES:
At the end of this unit, you must be able to
1. differentiate simple interest from simple
discount;
2. compute simple interest using actual or
approximate time;
3. compute ordinary and exact interest;
4. determine whether the promissory note is an
interest bearing or a non-interest-bearing note;
5. solve problems on simple interest and simple
discount using appropriate formulas.

OVERVIEW
For every amount borrowed or invested a
corresponding portion of the amount is paid or
earned and this is called interest.
Simple interest is an interest that is
paid/earned at the end of a loan/investment
period.

OVERVIEW (CONTINUED)
When interest is paid in advance, interest deducted
from the principal is called simple discount.
When a borrower is not ready to pay his debt, he can
write a note stipulating his promise to pay an amount at
a specified time with a specified interest rate.

DEFINITION OF TERMS
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)
Time t
number of years for which the money is borrowed or
invested

DEFINITION OF TERMS (CONTINUED)


Maturity Value or Final Amount F
combined amount of the principal and the interest
accumulated over a certain period of time
(also called Future Value)

SIMPLE INTEREST
interest computed based on the principal and is paid at the
end of the specified period of time
Formula:

I Pr t

where

P = principal invested
r = rate of interest in decimals
t = time in years

SIMPLE INTEREST
Final Amount or Maturity Value F

F P I
F P Pr t P 1 rt

EXAMPLES
1. Find the interest paid by Ms. April on
P25,000 that she borrowed for three years at
4% simple interest.
2. Determine the simple interest to be paid by
Lorna if she borrowed P1,200 at 6 % for 8
months?
3. At what rate of interest did Mary invest the
amount of P27,500 for it to earn a simple
interest of P3, 245 for three years?

EXAMPLES (CONTINUED)
4. How much was borrowed by Ms. Michelle if the interest
she paid after 3 months at 10.5% simple interest is P3,000?
5. How long should Dan invest the amount of P80,000 to
earn an interest of P4,500 at 6.5% simple interest?
6. How much is the final amount would Ms. Nessa receive if
she invested P75,000 for 4 years at 5 % simple interest?

ORDINARY AND EXACT INTEREST

Ordinary Interest, Oi vs. Exact Interest, Ei


a
rate
per
day
that
assumes
360
days
Oi
per year
a
rate
per
day
that
assumes
365
days
Ei
per year
Default: Ordinary Interest

ORDINARY AND EXACT INTEREST


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

ACTUAL AND APPROXIMATE 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
Default: Actual Time

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
Oi act = Pr
Default

360

approximate time
Oi app = Pr

360

actual time
Ei act = Pr

365

approximate time
Ei app = Pr

365

INTEREST BETWEEN DATES

Note:
If the type of interest is not specified
in any problem, the problem will be
solved using the Bankers Rule or
ordinary interest in actual time.

EXAMPLES
7. For 209 days, what would be the interest if
Gretel invested Php 43 500.00 at
(a) 5 % ordinary simple interest?
(b) 5 % exact simple interest?
(c) How much is the difference between these
two investments?

8. Determine the the ordinary and exact


interest on P8350 at 17% from February 14
2010 to September 12 of the same year using
actual and approximate time.

DO IT ON YOUR OWN
1. What final amount should Carol
pay for a loan of P8,200 at 14 %
simple interest she borrowed on
March 10, 2000 if she promised to
pay on November 25, 2000.
ANS: P9,043.92

2. On August 6, Gaby went to the MSS Bank and took


out a loan for 80,000, at 10% interest, for 60
days.
a. What is the maturity value of the loan? ANS: P1,333.33
b. When will the loan mature?
ANS: The loan will mature on Oct. 5.

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
1 rt

F = accumulated amount
r = simple interest rate in decimals
t = term of loan or investment

PRESENT VALUE

EXAMPLES
10. How much must Ivy invest today in order to have
P32,500 available in 4 years if money is worth 12% simple
interest
11. Find the present value of P19,200 for 120 days at 4 5/8
% simple interest.
12. Determine the present value of a 7-month 12.3% simple
interest loan if its final amount is P19, 345?

PRESENT VALUE

EXAMPLES
13. Find the present value of Dorys loan, which amounted
to P45,650.75 from January 5, 2008 to April 25, 2008 if the
money is worth 8.5% simple interest.

SIMPLE DISCOUNT

interest is computed based on the final


amount and is paid at the beginning of a
specified period of time
interest paid in advanced
formula is given by

where

I a Fdt

F = amount of loan
d = simple discount rate in decimals
t = term of discount

SIMPLE DISCOUNT
Amount of loan is equal to the maturity
value of the loan.
Let proceeds P be the amount received
by the borrower after removing the
interest on the loan
To solve for the proceeds, we use the formula

P F Ia

P F 1 dt

SIMPLE DISCOUNT

To discount loan F for t years means to find


the present value (proceeds) P of F on a
day which is t years before F is due.

the interest on the present value P


I
the
discount
on
the
loan
F

Basic terms used with simple


interest

Simple interest rate for P2000.

Borrower receives the amount = P2000


Interest is P125.

Borrower must
pay back P2125
Maturity
Value
on the
maturity date
of the loan.

Basic terms used with simple


discount notes

Simple discount rate for P2000.


Amount of loan= P2000

Proceeds
Borrower receives P1875.
Discount
Interest is P125.

Borrower must
pay back P2000
on theMaturity
maturity
Value
date of the loan.

SIMPLE DISCOUNT

EXAMPLES
14. George borrowed P160,000 from the DLSU Credit
Cooperative for a term of one year and 3 months. The
interest charged is 10% simple discount rate. Find the
proceeds of the loan.
15. Ms. Zamora needs P18,800 today. How much should she
borrow from MsD bank charging 16 % interest-in-advance
payable in 2 years?
16. How long should P25,000 be discounted to have proceeds
of P22,000 at 14% simple discount rate?

SIMPLE DISCOUNT

EXAMPLES
17. Determine the discount rate if P25,000 is the proceeds of
a loan of P35,000 due in 14 months?
18. At a simple discount rate of 12%, find the discount on
P6,550 borrowed on January 13, 2009 if the debt is repaid on
July 13, 2009.
To discount an amount is the same as finding the present
value (proceeds) of an amount at a given simple discount
rate.
18. Discount P18,000 from August 3, 2010 to May 4, 2011 with
a simple discount rate of 6.2%.

Exercises
1. Sam is saving up to buy the new PlayStation that will be
released in 2 years. It is expected to cost P35,000. How much
does Sam need to deposit in a savings account today that is
earning 6.45% per annum for him to have enough money in
order to purchase the PlayStation in 2 years?
2. Sam has P60,000 and cant decide which of the
following 2 offers are better. Bank ABC Ltd is currently
offering customers 6.50% simple interest for 7 months
and bank XYZ Ltd is offering 6.95% simple interest for 4
months. Which bank should Sam bank at?
3. Discount P18,000 from August 3, 2010 to May 4, 2011
with a simple discount rate of 6.2%.

Comparing Interest Rates


Simple Interest Notes vs Simple Discount Notes
Which loan costs more to the borrower?

Simple interest note


P3,000 @ 7% for 10 months.

Simple discount note


P3,000 @ 7% for 10 months.

I = Prt
I = 3000 x .07 x 10/12
I = P175
Borrower gets
3000
$__________.

I = Fdt
I = 3000 x .07 x 10/12
I = P175
Borrower gets
2825
$__________.