Simple and

Compound
Interest

Chapter 4 – Business Mathematics

Joy Santos-Salunga
Simple Interest

– An interest computed/calculated on the original principal in

specified time.
– An interest computed on the amount the borrower received at the
time the loan is obtained and is added to that amount when the
loan becomes due.
– Computed only once for the entire time period of the loan.
– The product of the principal, rate and time.
Finding the Simple Interest

Interest = Principal x Rate x Time

I = PRT
– Principal is the amount of deposit made by a depositor or the face amount lent
to the borrower on loan date. It also represents the amount still owed on a
loan. Principal is usually denoted by the letter P.

– Simple Interest Rate or the Rate is usually expressed as percentage of the

principal, is converted to a decimal for computation purposes unless otherwise
stated, the simple interest is an annual rate. Interest rate is denoted by the
letter r.

– Time is the length of time for which the money is borrowed or lent. It also
pertains to the term or life of the loan. The time expressed in years or fractional
part of a year is the period between the loan date that is when the loan was
obtained and maturity date or the date when the loan becomes due. This
specifies how long the debt must be paid by the borrower or how long until a
particular amount of money is received by the lender. Time is usually denoted
by t.
Example:

Luz Clarita borrowed P280, 000 at simple interest rate of 9%

for one year. Compute for the simple interest and maturity
value of the loan.

Solution:
FINDING THE MATURITY OR
ACCUMULATED VALUE
– The maturity/accumulated value is the sum of the principal amount and the
amount of interest payable. It is the amount to be paid by the borrower.
– After one year, Luz Clarita‘s loan matures and she is obliged to pay the maturity
value of the loan. This is the sum of the principal she received on the loan date
and the interest. In formula,

Maturity Value = Principal + Interest

MV = P + I
– The computation is on the premise that interest has been initially computed.
Maturity value may also be computed directly by substituting the interest
formula, I = PRT to I in the maturity value formula MV = P + I,

Maturity Value = Principal + Interest

Maturity Value = Principal + (Principal x Rate x Time)

– The formula below is arrived at by factoring:

Maturity Value = Principal (1 + Rate x Time)

MV = P (1 +RT)
MANIPULATING THE SIMPLE
INTEREST FORMULA

– There may be cases when the simple interest is known yet either
the principal rate or time is not. These problems may be solved by
manipulating the simple interest formula I = PRT. The variable or
unknown factor is isolated to one side of the equation opposite
the givens.
PRINCIPAL IS UNKNOWN

Example:
A bank loaned Skylar fashion boutique money at 8% simple interest for 90 days. If the
amount of interest was P4,000 use the ordinary interest method to find the amount of
principal borrowed.

The principal formula may be derived by dividing both sides of simple interest formula I
= PRT by RT or P = I ÷ RT.

Principal = Interest .
Rate x Time
RATE IS UNKNOWN
It will be noticed that the answer when an unknown rate is being solved is a
decimal number. This must be converted to percent in as much as businesses
always express interest rates as a percentage.
Example:
If Skylar Fashion Boutique applies for a P175,000 loan in a bank the interest of
which is P5,810 for 125 days, what interest rate is being charged? Use the ordinary
interest method.
The rate formula is arrived at by dividing both sides of the simple interest formula I
= PRT by PT, or R = I ÷ PT. Solving the problem.

Rate = Interest .
Principal x Time
TIME IS UNKNOWN
When the T is missing, a whole number in the answer represents years and the
decimal represents s portion of a year. Decimal should be converted to days by
multiplying it to the number of days in a year.

Dividing both sides of the simple interest formula I = PRT by PR, the time formula T
= I ÷PR is arrived at.
Example:
What would be the time period of Skylar Fashion Boutique’s loan for P266,000, at
11% ordinary interest, if the amount of interest is P10,150?

Time = Interest .
Principal x Rate