LESSON 24: SIMPLE INTERESTS

Learning Outcomes(s): At the end of the lesson, the learner is able to compute interest, maturity
value, and present value in simple interest environment, and solve problems involving simple
interest.

Lesson Outline:
1) Compute simple interest
2) Compute maturity value
3) Compute unknown principal, rate, or time

Annual Simple Interest

l s=Prt
Where l = simple interest
P = principal, or the amount invested or borrowed
r = simple interest rate
t = term or time in years

Example 1: A BDO company offered 0.30% annual simple interest rate for a particular deposit.
How much interest will be earned if five hundred thousand pesos is deposited in this savings
account for 2 years?

Given: P = 500,000 l = 0.30% = 0.0030 t =

2 years

Find: l s

Solution: l s = Prt
l s = (500,000)(0.0030)(2)
l s = 3,000

Answer: The interest earned is P 9,000.

Example 2: How much interest is charged when P10, 000 is borrowed for 2 months at an annual
interest rate of 15%?

2
Given: P = 10,000 r = 15% = 0.15 t= = 0.17 year
12

Find: l s
 M
Note: When the term is expressed in months (M), it should be converted in years by t =
12
Solution:l s = Prt
l s = (10,000) (0.15) (0.17)
l s = 255
Answer: The interest charged is P 255.

Example 3: Complete the table below by finding the unknown

Principal(P) Rate ( r ) Time ( t ) Interest

a 6.4 4 3,000
80,000 b 2 13,000
130,000 0.8 c 225
150,000 19.4 8 d

Solution:

(a) The unknown principal can be obtained by

ls
P=
rt
3,000
P=
( 0.064 ) (4)
P=11,718.75
(b) The unknown rate can be computed by
ls
r=
Pt
13,000
r=
( 80,000 ) ( 2)
r=¿ 0.08 = 8%
(c) The unknown time can be calculated by
ls
t=
Pr
225
t=
(130,000 ) (0.008)
t=0.22 years

(d) The unknown simple interest is given by

l s=Prt
l s=( 150,000 )( 0.194 )( 8 )
l s=232,800

Example 4: When invested at an annual interest rate of 9%, the amount earned P 15,300 of
simple interest in 1 year. How much money was originally invested?

Given: r=13 =0.09 t=1 year ls=15,300

Find: Amount invested or principal P

ls
Solution: P=
rt

15,300
P=
( 0.09 ) (1)

P=170,000

Answer: The amount invested is P 170,000

Example 5: If an entrepreneur applies for a loan amounting to P735, 000 in a bank, the simple
interest of which is P 169,000 for 2 years, what interest rate is being charged?

Given: P=735,000 ls=169,000 t=2 years

Find: r

ls
Solution: r=
Pt
169,000
r=
( 735,000 ) (2)
r=0.115=11.5

Answer: The bank charged a annual simple interest rate of 11.5%.

Example 6: How long will a principal earn an interest equal to half of it at 8% simple interest?

1
Given : P r=8 =0.08 ls= P=0.5 P
2

Find: t

ls
Solution: t=
Pr
0.5 P
t=
( P ) (0.08)
t=6.25 years

Answer: It will take 6.25 years for a principal to earn half of its value at 8% simple annual
interest rate.

Maturity (Future) Value

Where F = Maturity (future) value
P = Principal
r = interest
t = term / time in years

Example 7: Find the maturity value if 1.5 million pesos is deposited in bank at an annual
simple interest rate of 0.30% after (a) 2 years and (b) 6 years?

Given: P=1,500,000 r=0.30 =0.0030

Find: (a) maturity or future value F after 2 years

(b) Maturity or future values after 6 years
Solution: (a) When t=2 , the simple interest is given by

Method 1:
l s=Prt
l s=( 1,500,000 )( 0.0030 ) ( 2 )
l s=9,000

The maturity or future value is given by

F=P+ls
F = 1,500,000 + 9,000
F = 1, 509,000

Method 2: To directly solve the future value F,

F = P(2+rt )
F = ( 1,500,000 ) ( 2+ 0.0030 ( 2 ) )
F = 3,009,000

Answer: The future or maturity value after 2 years is 3,009,000.

(b) When t=6,

Method 1:
l s=Prt
l s=( 1,500,000 )( 0.0030 ) ( 6 )
l s=27,000

F = P+ls
F = 1,500,000 + 27,000
F = 1,527,000

Method 2:
F = P (2+ rt )
F = ( 1,500,000 ) ( 2+ 0.0030 ( 6 ) )
 F = 3,027,000

Answer: The future or maturity value after 6 years is 3,027,000.

LESSON 25: COMPOUND INTEREST

Learning Outcomes(s): At the end of the lesson, the learner is able to compute interest, maturity
value, and present value in compound interest environment, and solve problems involving
compound interest.

Lesson Outline:
1) Maturity value
2) Present value
The following table shows the amount at the end of each year if principal P is invested at annual
interest rate r compounded annually. Computations for the particular example P=¿ P175,
000 and r=¿ 8% are also included.

Principal=P Principal=P 175, 000

Year( t) ∫ . rate=compounded ∫ . rate=8 compounded
annually annually
Amount at the end of the year Amount at the end of the year
1 P× ( 1+r )=P ( 1+r ) 175,000× 1.08=189,000
2 P (1+r ) × ( 1+ r )=P ( 1+r )
2
189,000× 1.08=204,120
3 P (1+r )2 × (1+r )=P ( 1+ r )3 204,120 ×1.08=220,449.6
4 3
P (1+r ) × (1+ r )=P ( 1+ r )
4
220,449.6 ×1.08=238,085.57

Maturity (Future) Value and Compound Interest

F = P (1+r )t

Where
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term / time in years

Example 1: Find the maturity value and the compound interest if P13, 000 is compounded
annually at an interest rate of 5% in 7 years.

Given: P13, 000 r = 5% = 0.05 t = 7 years

Find: (a) maturity value F

(b) Compound interest l c

Solution:
 t
(a) F = P (1+r )
0.05
F = (13, 000) (1 +
¿ ¿7
F = 18, 292.31

(b) lc = F- P
lc = 18, 292.31-13, 000
lc = 5,292.31

Answer: The future value F is P18, 292.31 and the compound interest is P5, 292.31

Example 1: Find the maturity value and the compound interest if P13, 000 is compounded
annually at an interest rate of 5% in 7 years.