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INTEREST
BRAINY TEST
What do you know about INTEREST
in business?
DEFINITION OF INTEREST
charge of borrowing money
LENDER
BORROWER
HOW TO CALCULATE
INTEREST?
INTEREST
Principal
Amount of money
borrowed
Rate
Percentage charged
by lender
Time
Borrowing period
FORMULA OF SIMPLE
INTEREST
I=Pxrxt
Where P = principal
r = interest rate
t = time in year
10
The term of the loan is the period during which the borrower has the use
of all or part of the borrowed money. The term or time may be stated in
any of the following ways:
When the time is expressed in number of year(s), our formula will be:
I = P x r x number of years
When the time is expressed in number of month(s).
I=Pxrx
When the time is expressed in number of days, there are two (2)
ways of computing interest namely:
Ordinary Interest (Io)
Io = P x r x
Exact Interest (Ie)
Ie = P x r x
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12
EXAMPLE1:
Find the interest and amount on P800 at 6 simple interest
for 5 years.
F=P+I
Solution: P = P800
= 800 + 260
r = 6 = .065
F = P1060.00
t = 5yrs
I=? F=?
I = Prt
= (800)(.065)(5)
I = P260.00
13
EXAMPLE2:
If a principal of P2, 500 earns interest of P185 in 3 years and
3 months, what interest rate, is in effect?
Solution: P = P2,500
r= ?
t = 3 yrs. 3months = 3.25
I = P185
r = I/Pt x 100
= 185/(2,500)(3.25)
r = 2.28%
14
EXAMPLE3:
A principal earns interest of P385 in 2 years and 9months at
a simple interest rate of 9 %. Find the principal invested.
Solution: P = ?
r = 9 % = .095
t = 2 yrs. 9months = 2.75
I = P385
P = I/rt
= 385/(.095)(2.75)
P = P1,473.68
15
EXAMPLE4:
How long will it take for P8, 000 to earn P2, 400, if it is
invested at 6 % simple interest?
Solution: P = P8,000
r = 6 % = .065
t=?
I = P2,400
t = I/Pr
= 2,400/(8,000)(.065)
t = 4.62yrs.
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EXERCISE:
1. Find the interest and amount on P900 at 7 % simple interest for 9
months.
2. Marteena Moefy borrowed P15, 000 from a bank at 11 % simple
interest for 2 years and 9 months. How much did Marteena Moefy
pay back the bank?
3. At what simple interest rate should Rainey invest his P25, 500 so
that it earns P5,500 in 5yrs. And 5months?
4. A principal earns interest of P672 in 4 years at a simple interest
rate of 5 4/5%.
5. How long it will take for P6,700 to earn P496, if it is invested at 5 %
simple interest?
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EXAMPLE:
Find the ordinary and exact interest on P8,800 for 85 days at
11 3/4% simple interest.
Solution: P = P8,800
r = 11 % - .1175
t = 85days
Io = ? Ie = ?
Io = P x r x # of days/360
= P8,800 x .1175 x 85/360
Io = P244.14
Ie = P240.79
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EXAMPLE 1:
Find the actual and approximate time from March 23 to
October 16, 2005.
ACTUAL DAYS
MONTH
APPROX. DAYS
Solution:
8
March
30
April
30
31
May
30
30
June
30
31
July
30
31
August
30
30
September
30
16
October
16
207 days
203 days
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EXAMPLE 2:
Find the actual and approximate time from November 1,
2007 to March 23, 2008.
Solution:
ACTUAL DAYS
MONTH
APPROX. DAYS
29
November
29
31
December
30
31
January
30
28
February
30
23
March
23
142 days
142 days
22
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EXAMPLE 1:
Find the interest using the four methods on P8,000 at 11
% from August 2, 2006 to November 27, 2006.
Solution:
a. Io Act = P 8,000 x .115 x 117/360 = P299.00
b. Io App = P 8,000 x .115 x 115/360 = P293.89
c. Ie Act = P 8,000 x .115 x 117/365 = P294.90
d. Ie App = P 8,000 x .115 x 115/365 = P289.86
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NOW
Its time to do an exercise.
GOOD LUCK
25
EXERCISE:
1. Find the interest and amount on P8,800 at 10 3/8% simple interest
from November 17, 2007 to May 4, 2009 using the Bankers Rule.
2. What amount should be paid on the due date February 22, 2012 on
a loan of P15,000 made on October 11, 2011 with 11 3/5% simple
interest?
3. Duran borrowed P25,000 from Bull on September 13,2009 with
promise that he pays the principal plus interest at 13 1/5%. If he
makes the payment on March 3, 2010, what amount is due?
4. Find the interest on P10,500 at 11 1/8% from September 4, 2004 to
February 14, 2005, using the four methods.
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AMOUNT AND
PRESENT VALUE AT
SIMPLE INTEREST
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EXAMPLE 1:
A businessman borrows P9, 900 for 2 years at 9 % simple
interest. What amount must he pay?
Solution: P = P9,900
t = 2yrs
r = 9 % - .0925
F=?
F = P (1 + rt)
= P9,900 (1+.0925 x 2)
F = P 11, 731.50
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EXAMPLE 2:
Discount
P5,500 for 11months at 14 % simple interest.
Solution: F = P5,500
t = 11 months
r = 14 % - .1425
P= ?
P=
=
P = P 4,864.57
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BANK
DISCOUNT
BANK DISCOUNT
Another way of lending money is to collect the
interest in advance. This interest is referred to as
bank discount. A Bank Discount is an interest
computed on the maturity value of the loan and is
deducted from the amount at loan date to
determine the net amount to be received by the
borrower. The bank discount is deducted from that
amount to arrive at the proceeds the amount the
borrower is to receive.
MAT 1013
32
BANK DISCOUNT
In computing for the bank discount, three factors are being
considered: maturity value, bank discount rate and time
or stated as a formula as a formula.
Bank Discount = maturity value x discount rate x time
BD = MV x R x T
The proceeds formula follows:
Proceeds = Maturity Value Bank Discount
P = MV BD
MAT 1013
33
EXAMPLE 1:
Angela Alta signed a P20, 000 bank discount notes at the Planters
Bank. The discount rate is 13% and the term of the note is 11months.
What is the amount of bank discount and what are Angelas proceeds on
the loan?
Solution: MV = P20,000
r = 13% - .13
P = MV BD
= P20,000 P2,383.33
t = 11 months
P = P17,616.67
BD = ?
P
=?
BD = MV x r x t
= P20,000 x .13 x 11/12
BD = P2,383.33
MAT 1013
34
NOW
Its time to do an exercise.
GOOD LUCK
35
EXERCISE:
1. Accumulate P10, 100 for 8months at 10 4/5% simple interest.
2. Discount P16,400 at 15 1/5% simple interest from August 9, 2009 to
December 25, 2009.
3. For a principal loaned at 15 3/5% simple interest, the amount of
P14,925 was paid at the end of four years and four months. What is
the original sum borrowed?
4. Annabelle Adell promises to repay a bank loan of P7,000 at the end
of 60 days. If the bank charges 18% interest in advance, what is the
discount and how much shall Annabelle receive?
5. X-bank charges 10 % for discounting loans. If Mr.Pilo a borrower
agrees to repay P22,850, after 1 year and 7 months, how much
does he receive now?
36
PROMISSORY
NOTES
PROMISSORY NOTES
Promissory Notes is a written promise signed by the maker or debtor
to pay a certain sum of money on demand or at fixed and
determinable future date, either to the bearer or to the order of a
designated person.
A promissory note is a negotiable financial paper; it can be sold to
a bank or lending agency at a specified discount rate.
When the holder of a promissory note finish himself in need of cash
before the maturity date, he may sell the note to other persons or to a
bank, this process is called discounting or selling the promissory
note.
A promissory note is either interest-bearing or non-interest-bearingnote.
If the note is non-interest-bearing the maturity value is the same as
the face value.
38
39
IMPORTANT FEATURES OF
PROMISSORY NOTES
FACE VALUE (FV) of
the note- the amount
borrowed.
40
IMPORTANT FEATURES OF
PROMISSORY NOTES
41
IMPORTANT FEATURES OF
PROMISSORY NOTES
42
IMPORTANT FEATURES OF
PROMISSORY NOTES
43
IMPORTANT FEATURES OF
PROMISSORY NOTES
44
IMPORTANT FEATURES OF
PROMISSORY NOTES
45
PROMISSORY NOTES
NOTATIONS:
FV = Face Value
Dn = Date of Note
MV = Maturity Value
Dd = Discounting Date
I = Interest
Md = Maturity Date
tn = Term of Note
td = Term of Discount
r = Interest Rate
Bd = Bank Discount
d = Discount rate
Pro = Proceeds
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PROMISSORY NOTES
FORMULA:
I = FV x r x tn
MV = FV + I
FV = MV I
Md = Dn + tn
td = Md Dd
Bd = MV x d x td
Pro. = MV Bd
Pro. = MV (1 d x td)
MV = FV (1 + r x tn)
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COMPUTING PROBLEMS IN
PROMISSORY NOTES
1.
48
COMPUTING PROBLEMS IN
PROMISSORY NOTES
49
EXAMPLE 1:
A merchant has a note for P14, 500 dated
March 17, 2006. The note is due in 120 days
with interest at 11 1/8%. If he sells the note
on May 6, 2006 at a bank charging a
discount rate of 10 5/8%.
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EXERCISE:
A note of P13, 700 dated November 27, 2007
will mature in 90 days with interest at 12 %.
The note is discounted on January 6, 2008 at
a discount rate of 11 %. What are the
proceeds?
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