Interest

Interest

When you deposit money in a bank, you permit the bank to use your
money. The bank may lend the deposited money to customers to buy
cars or make renovations on their homes. The bank pays you for the
privilege of using your money. The amount paid to you is called
interest.

If you are the one borrowing money from a bank, the amount you pay
for the privilege of using that money is also called interest.
Jakob deposited Php10,000 in a savings account paying 0.5%
interest per year.

The amount deposited in a bank or borrowed from a bank is called the

principal.
P10,000 is the principal.

The amount of interest paid is usually given as a percent of the principal. The
percent used to determine the amount of interest is called the interest rate.
0.5% is the interest rate

Interest paid on the original principal is called simple interest.

SIMPLE INTEREST

The simple interest formula is

I=Prt
where I is the interest
P is the principal
r is the interest rate
t is the time period
SIMPLE INTEREST

When using the simple interest formula, the time factor, T,

must be expressed in years or a fraction of a year.
In other words, the time t is expressed in the same period as
the rate. If the rate is given as an annual interest rate, then the
time is measured in years; if the rate is given as a monthly
interest rate, then the time must be expressed in months.
SIMPLE INTEREST

Interest rates are most commonly expressed as annual interest

rates. Therefore, unless stated otherwise, we will assume the
interest rate is an annual interest rate. Interest rates are
generally given as per cents.
Future Value and Maturity Value

When you borrow money, the total amount to be repaid to the

lender is the sum of the principal and interest. This sum is
calculated using the following future value or maturity value
formula for simple interest.
Future Value or Maturity Value Formula
for Simple Interest
The future or maturity value formula for simple interest is
A=P+ I
where A is the amount after the interest, I has been added to
the principal, P.
Problem 1
Find the interest and the amount (maturity value) on P880
at 8 ½ % per annum for 3 years.
I = Prt
I = 880(0.085)(3)
I = 224.40
A=P+I
A = 880 + 224.40
A = 1104.40
Problem 2
Find the interest and the amount (maturity value) on P1,990
at 7 1/4 % simple interest for 19 months.
I = Prt
I = 1,990(0.0725)(19/12)
I = 228.44
A=P+I
A = 1,990 + 228.44
A = 2218.44
Problem 3
Find the interest and the amount (maturity value) on P1,400 at
11% simple interest for 3 years and 3 months.
I = Prt
I = 1,400(0.11)(39/12)
I = 550.50
A=P+I
A = 1,400 + 550.50
A = 1,950.50
Problem 4
If a principal of P2,500 earns interest of P185 in 4 years and
8 months, what interest rate is in effect?
I = Prt
185 = 2,500(r)(56/12)
185 = 11,666.67r
r = 0.0159
r = 1.59%
Problem 5
If money is invested on 10% simple interest, how much money
should be invested to have P40,000 in 5 years?
A = P + I; I = Prt
40,000 = P + P(0.10)(5)
40,000 = P + 0.50P
40,000 = 1.5P
P = 26,666.67
Problem 6
Rizza’s savings earned P105 after a year. If her account
balance after earning interest showed P3,605, how much rate
interest did the bank offer for her savings?
A=P+I
3,605 = P + 105
3,500 = P
Problem 6
Rizza’s savings earned P105 after a year. If her account
balance after earning interest showed P3,605, how much rate
interest did the bank offer for her savings?
I = Prt
105 = 3,500(r)(1)
0.03 = r
3% = r
Problem 7
A loan shark gave Kevin a personal loan that was charged
P630 interest after 3 months. The rate of interest of the loan
was 7% per month. How much was the personal loan?
I = Prt
630 = P(0.07)(3)
630 = 0.21P
P = 3,000
Problem 8
Nina has a savings account balance of P38,400. She withdraws
P1,800 to buy a gift for her friend. How much interest does her
new balance earn for a year if the bank’s interest rate is 0.9%
per annum?
I = Prt
I = (38,400 – 1,800)(0.009)(1)
I = 329.40
Problem 9
Vince deposited P4,500 in his savings account with a balance
of P1,300. At 0.5% interest per annum, how much will his new
balance earn at the end of a year?
I = Prt
I = (4,500 + 1,300)(0.005)(1)
I = 29.00
A=P+I
A = (4,500 + 1,300) + 29 = 5,829.00
Problem 10
One year and six months ago, Nigel borrowed P25,000 from
Sitti with the promise that Nigel will pay Sitti the principal
plus accumulated interest at 8 2/3% simple interest now. What
amount is due?
I = Prt
I = (25,000)(0.0867)(18/12)
I = 3,251.25
A=A+I
A = 25,000 + 3,251.25 = 28,251.25
Calculating Simple Interest For Loans
with Terms of Days
Exact Interest
t = number of days of a loan/ 365 days
Exact interest uses 365 days as the time factor denominator.
This method is used by government agencies, the Federal
Reserve Bank, and most credit unions.
Calculating Simple Interest For Loans
with Terms of Days

Ordinary Interest
t = number of days of a loan/ 360 days
Ordinary interest uses 360 days as the denominator of the time factor. This method
dates back to the time before electronic calculators and computers. In the past, when
calculating the time factor manually, a denominator of 360 was easier to use than
365.
Calculating Simple Interest For Loans
with Terms of Days

Ordinary Interest
Regardless of today’s electronic sophistication, banks and most other lending
institutions still use ordinary interest because it yields a somewhat higher amount of
interest than does the exact interest method. Over the years, ordinary interest has
become known as the banker’s rule.
Example 1

On May 30, 2019, a USL elementary teacher applied for an

emergency loan of P50,000 for the expansion of her kitchen.
It was agreed that she would pay the amount with 2.5% rate
of interest on August 10, 2019. Calculate the ordinary simple
interest to be paid.
Example 2

Aira borrowed Php20,000 from her friend last November 15,

2019. She promised that she would pay her friend on January
20, 2020 at 3% interest. Find the exact simple interest to be
paid by Aira.
Example 3

On April 12, Lian borrowed Php5,000 from her credit union

at 9% for 80 days. The credit union uses the ordinary interest
method.
a. What is the amount of interest on the loan?
b. What is the maturity value of the loan?
c. What is the maturity date of the loan?
Example 4

How much is the maturity value of a Php60,000 loan for 100

days at 5.5% interest using the exact interest method?
Example 5

Central Auto Parts borrowed Php350,000 at 4.5% interest on

July 19 for 120 days.

a. If the bank uses the ordinary interest method, what is the

amount of interest of the loan?
b. What is the maturity value of the loan?
c. What is the maturity date of the loan?
COMPOUND INTEREST
COMPOUND INTEREST

On the birth of her son Zac, Jen deposited P100,000 in a time deposit
that pays 3.5% interest compounded annually. How much money is in
the bank when Zac reaches his 5th birthday?

Year Principal Rate of Interest Interest Compound

Amount
1 100,000 3.5% 3,500 103,500
2 103,500 3.5%
3 3.5%
4 3.5%
5 3.5%
COMPOUND INTEREST

•The
  formula for calculating the amount of money
accumulated after n years, including interest is
A=P(1+ )nt
P = principal amount
r = annual rate of interest ( in decimal)
t = number of years the amount is deposited
n = is the number of times the interest is compounded per year
COMPOUND INTEREST

Compounding Frequency Number of Compounding

Periods
Annually 1
Semi – annually 2
Quarterly 4
Monthly 12
Example 1
•Russell
  invested P50,000 in a bank that pays 8% compounded quarterly
for 5 years. How much is his money in the bank after 5 years?
A = P(1+ )nt
A = 50,000(1+ )4(5)
A = 74,297.37
Example 2
•Harvey
  invested P100,000 in a time deposit that pays 12% compounded
semi – annually. How long will it take for Harvey to double his money?
A = P(1+ )nt
200,000 = 100,000(1+ )2(t)
2 = 1.062t
t = 5.95 years
Example 3
•Deposit
  the principal amount of P10,000 into a savings account that pays
interest at the rate of 5%. What is the amount in the account after 1 year if
the account is :
a. Compounded annually
b. Compounded semi – annually
c. Compounded quarterly
d. Compounded monthly
e. Which is advantageous to the investor?
Example 3
•Deposit
  the principal amount of P10,000 into a savings account that pays
interest at the rate of 5%. What is the amount in the account after 1 year if
the account is :
a. Compounded annually
A = P(1+ )nt
A = 10,000(1+ )1(1)
A = 10,500.00
Example 3
•Deposit
  the principal amount of P10,000 into a savings account that pays
interest at the rate of 5%. What is the amount in the account after 1 year if
the account is :
b. Compounded semi – annually
A = P(1+ )nt
A = 10,000(1+ )2(1)
A = 10,506.25
Example 3
•Deposit
  the principal amount of P10,000 into a savings account that pays
interest at the rate of 5%. What is the amount in the account after 1 year if
the account is :
c. Compounded quarterly
A = P(1+ )nt
A = 10,000(1+ )4(1)
A = 10,509.45
Example 3
•Deposit
  the principal amount of P10,000 into a savings account that pays
interest at the rate of 5%. What is the amount in the account after 1 year if
the account is :
d. Compounded monthly
A = P(1+ )nt
A = 10,000(1+ )12(1)
A = 10,511.62
Example 3
Deposit the principal amount of P10,000 into a savings account that pays
interest at the rate of 5%. What is the amount in the account after 1 year if
the account is :

e. Which is advantageous to the investor?

The interest rate compounded monthly gives the highest interest for
the same period of time.
Example 4
Leslie and Makoy both opened a savings account with a starting balance
of P20,000 on the first day of January. Leslie’s bank is paying her a
simple interest of 8% annually. Makoy’s bank is paying him an interest of
8% compounded annually. Who has a bigger balance at the end of 5
years?
Leslie : A = P + I
A = 20,000 + 20,000(0.08)(5)
A = 28,000
Example 4
•Leslie
  and Markus both opened a savings account with a starting balance
of P20,000 on the first day of January. Leslie’s bank is paying her a
simple interest of 8% annually. Makoy’s bank is paying him an interest of
8% compounded annually. Who has a bigger balance at the end of 5
years?
Makoy: A = P(1+ )nt
A = 20,000(1+ )1(5)
A = 29,386.56
So Makoy has a bigger balance at the end of 5 years.