SIMPLE

INTEREST

BRAINY TEST
What do you know about INTEREST
in business?

DEFINITION OF INTEREST
charge of borrowing money
LENDER
BORROWER

When people need to secure funds for some

purposes, one of the ways they usually resort
to is BORROWING. On the other hand, the
person or institution which lends the money
would also wish to get something in return for
the use of the money. The persons who
borrows money for any purpose is a
DEBTOR or MAKER, and the person or
institution which loans the money is the
LENDER.

 INTEREST- it is the payment for the use of a

given sum of money over a period of time. Thus,
at simple interest rate, the interest is computed
on the original principal during the whole time at
the stated interest rate.
DISCOUNT- it is a deduction from the maturity
values of an obligation when the obligation is sold
before its due date or date of maturity. It is a
percentage of the amount of maturity value and
not a percentage of the principal.

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

 Other formulas can be derived from the

above.
;
;
Final Amount formula:
F=P+I
;
I=FP

Ordinarily, in business, the interest

rate is expressed as percents. In
computing the interest it is
necessary to convert the rate into a
fraction or decimal equivalent such
as 9% = 9/100 or .09; 6 = 6.5%
= .065

CONVERTING TIME (YEAR)

1 Year
12 months
52 weeks
360 days

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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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 When the time is expressed between dates, there are four

(4) ways of computing interest, namely:
Io - Act. Time = P x r x
Io - App. Time = P x r x
Ie Act. Time = P x r x
Ie App. Time = P x r x
Known as the Bankers Rule, this is the formula being
applied by banks in computing the interest on savings
deposits.

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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

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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%

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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

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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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ORDINARY AND EXACT INTEREST

There are instances when the time for which a certain amount of
money is borrowed is given in number of days.
In such case, it is necessary to change the number of days to a
fractional part of a year when substituting in the simple interest
formula.
If the interest is computed with a denominator of 360, the interest is
called Ordinary (Io)and if the denominator is 365, the interest is
called Exact (Ie).
Note:
Ordinary interest is greater than exact interest.
When interest (Io or Ie) is not specified in any problem it is assumed
as Ordinary (Io)

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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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ACTUAL AND APPROXIMATE TIME

When the time is expressed between to dates, it
is necessary to determine the actual and
approximate date.
Actual Time is the exact or actual number of days
in any given month
Approximate Time where all the months within in a
year contain 30 days.

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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

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INTEREST BETWEEN DATES

In the previous case, the time for which interest is calculated
is directly given terms of years, months, or days. In cases,
when interest is to be computed from a certain date
inclusively, there are four methods of computation namely:
Ordinary Interest for Actual Time (Io-Act)
Ordinary Interest for Approximate Time (Io-App)
Exact Interest for Actual Time (Ie-Act)
Exact Interest for Approximate Time (Ie- App)

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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

AMOUNT AND PRESENT VALUE AT SIMPLE

INTEREST
At the end of the term for which interest is to be computed, the amount due on a
lender is the sum of the principal and interest and is designated by the symbol (F).
This is called final amount or maturity value and is given by the formula.
F=P+I
F = P + Prt
By factoring. We have F = P (1 + rt)
Accumulation is the process of determining the amount F of a given principal P due at
a specified time (t). To accumulate a principal P for (t) years means to solve for the final
amount by applying the formula:
F = P (1 + rt)
Discounting is the process of determining the present value P of any amount due in the
future. To discount the amount F for (t) years, means to solve for P applying the formula.
P=

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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?

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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.

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SAMPLE PROMISSORY NOTES

39

IMPORTANT FEATURES OF
PROMISSORY NOTES
FACE VALUE (FV) of
the note- the amount
borrowed.

40

IMPORTANT FEATURES OF
PROMISSORY NOTES

DATE OF NOTE (Dn)the date of the note

was written.

41

IMPORTANT FEATURES OF
PROMISSORY NOTES

MATURITY DATE- the

promised date of
payment or due date.

42

IMPORTANT FEATURES OF
PROMISSORY NOTES

INTEREST RATEthe simple interest

rate.

43

IMPORTANT FEATURES OF
PROMISSORY NOTES

LENDER or PAYEE the person

to whom the payment is due.

44

IMPORTANT FEATURES OF
PROMISSORY NOTES

MAKER the borrower.

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.

What is the MATURITY DATE of the note?

Md = Dn + tn
where: Md = Maturity Date
Dn = Date of Note
tn = Term of Note
2. What is the MATURITY VALUE of the note?
MV = FV (1 + r x tn)
where: FV = Face Value
r = interest rate
tn = term of note

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COMPUTING PROBLEMS IN
PROMISSORY NOTES

3. What is the DISCOUNT DATE of the note?

Discount Date = given already in the problem.
Compute for the term of discount or td = Md Dd
where: td = term of discount
Md = Maturity Date
Dd = Discount Date
4. Solve for the PROCEEDS.
Pro. = MV (1 rt)
where: MV = Maturity Value
r = discount rate
t = time (term of discount)

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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%.

50

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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--- END --ST

1 PART OF PRELIM