Simple Interest Discounted Loan

-a discounted loan is a loan that collects interest from the amount of the loan or face value
of the loan when the loan is made. The interest is deducted from the loan amount so the full
loan amount or face value is not received during the release of the loan. The deducted
interest is the discount.

Discount (D)

-interest deducted in advance

D=F–P
= Fin
Where: F = future worth of money (Principal plus interest or the Face value of the loan)
P = present worth of money (Principal or the actual amount received for the loan)

Rate of discount (d)

-discount on one unit of principal for one unit of time (interest period)

Borrower’s perspective:

(1+i)-1

__________________________________________________ 1
0

P 1.00

D=F–P

d = 1 – (1 + i)-1

d = 1 – (1 + i)-1

d = 1 – (P/F)

d = D/F

Solving for i,

i = d / (1 – d)

= D / (F – D)
Where: d = rate of discount for the period
i = rate of interest for the same period

Example:

A man borrowed P 5,000 from a bank and agreed to pay the loan at the end of 9 months. The
bank discounted the loan and gave him P 4,000 in cash.
a. What was the rate of discount?
b. What was the rate of interest?
c. What was the rate of simple interest for one year?

Solution:

P 4,000

__________________________________________________ 9 mos.
0

P 5,000

a. D = F – P = 5,000 – 4,000 = 1,000

d = D/F = 1,000/5,000 = 0.20 or 20% (answer)

another solution: d = 1 – (P/F) = 1 – (4,000/5,000) = 1 – 0.80 = 0.20

b. i = d / (1 – d) = 0.2 / 1 – 0.2 = 0.25 or 25% (answer)

another solution,

i = D / (F - D) = 1,000 / (5,000 – 1,000) = 1,000 / 4,000 = 0.25 or 25%

c. i = I/(P n) = 1,000/[(4000)(9/12)]

i = 0.3333 = 33.33%
Exercise:

1. A man borrows P10,000 from a firm, but the firm deducted the interest for one year and he
only received an amount of P 8,500. At the end of one year he agreed to pay back P 10,000.
a. What was the rate of discount?
b. What was the rate of interest?

2. You borrow 2,000 pesos on a 12% (interest rate) discounted loan for 4 months.
a. what is the loan discount?
b. how much will be the money received when the loan is released?
c. what is the loan’s actual annual simple interest rate?

Answers:
1. a. 0.15 or 15%; b. 0.1765 or 17.65%
2. a. P 80.00; b. P 1,920; c. 0.125 or 12.5%