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General Mathematics

(MATH 01)
CHAPTER 5 MODULE

MATH 01 – General Mathematics: Simple and Compound Interests


CHAPTER 5: Simple and Compound Interests

 Definition
 Computation of Simple Interest
 Exact & Ordinary Interest and Maturity Value
 Computation of Principal, Interest Rate and Time
 Future Value, and Present Value in Simple Interest and
Compound Interest Environment.
 Annual Percentage Yield - Applications

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.1 Definition

What are some ways to take care of hard-


earned money?
• Buy only what you need
• Saving money
• Invest some money
• Borrow money

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.1 Definition

Borrow $1,000 from the Bank


Alex wants to borrow $1,000. The local bank says "10%
Interest". So to borrow the $1,000 for 1 year will cost:
$1,000 × 10% = $100
Of course, Alex will have to pay back the original $1,000
after one year, so this is what happens:

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.1 Definition

Definition
Interest is the amount paid or earned for the use of
money. Simple interest means that the interest is calculated only
once for the entire rate of the loan. At the end of the time period,
the borrower repays the principal plus the interest.
Simple interest means “the investment of money at the rate of r
in t years”

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.1 Definition

The Simple Interest Formula:


Simple Interest (I) = Principal (P) x Rate (R) x Time (T)

Stated as a Stated in
Percent Years

An annual simple interest is based on the 3 factors:


a. Principal (P) which is the amount invested or borrowed
b. Simple interest rate (R), usually expressed in percent
c. Time or term of loan (T), in years

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.2 Computation of Simple Interest
Magic Triangle in a Circle of a Simple Interest

Let F be the final amount resulting from the investment of P for t years at the rate r, and I be the
interest at the end of t years ; F= P + I
= P + Prt
= P ( 1+ rt)

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.2 Computation of Simple Interest

Solve for the following:


1. What is the amount of interest for a loan P8,000 at 9% interest for 1 year?
2. What is the amount of interest for a loan of P16,500 at 12 ½ % interest for
7 months?
3. A man placed some money for an investment generating the final amount
of P 69,375 at 12.5% simple interest rate in 15 mos. Find the original
amount invested and the interest earned.
4. if money is worth 9% simple interest, find the present value of P2,500 due
at the of 1 ½ years.
5. A student purchases a computer by obtaining a simple interest loan. The
computer costs $1500, and the interest rate on the loan is 12%. If the loan
is to be paid back in weekly installments over 2 years, calculate:
a. The amount of interest paid over the 2 years;
b. The total amount to be paid back;
c. The weekly payment amount.

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.2 Computation of Simple Interest

Complete the table below by finding the unknown:

Principal (P) Rate (R) Time (T) Interest (I)

(a) 2.5% 4 P1,500

P36,000 (b) 1.5 P4,680

P250,000 0.5% (c) P275

P500,000 12.5% 10 (d)

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.2 Computation of Simple Interest

Seatwork: Solve for the following:


1. When invested at an annual interest rate of 7%, an amount
earned P11,200 of simple interest in two years. How much
money was originally invested?
2. If an entrepreneur applies for a loan amounting to
P500,000 in a bank, the simple interest of which is
P157,500 for 3 years, what interest rate is being charged?
3. How long will a principal earn an interest equal to half of it
at 5% simple interest?
4. Shelby borrowed $10,000 at 8% and paid $1,600 in
interest. What was the length of the loan?

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.3 Exact & Ordinary Interest and Maturity
Value

Two kinds of Interest Rate:


Ordinary interest is calculated on the basis of a 360-day year or a 30-day
month; exact interest is calculated on a 365-day year. The interest formulas
for both ordinary and exact interest are actually the same, with time slightly
differing when given as number of days.

Ordinary Interest, for D days


𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑎 𝑙𝑜𝑎𝑛 𝐷
𝑇𝑖𝑚𝑒 = ; 𝐼𝑜 = Pr
360 360

Exact Interest , for D days


𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑎 𝑙𝑜𝑎𝑛 𝐷
𝑇𝑖𝑚𝑒 = ; 𝐼𝑒 = 𝑃𝑟
365 365

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.3 Exact & Ordinary Interest and Maturity
Value
The “Hand Calculator!”

Knuckles are ALL 31 days

Spaces are ALL 30 days except for February which can be


either 28 or 29 days in a Leap year!

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.3 Exact & Ordinary Interest and Maturity
Value
There are 2 ways of computing the number of days between 2
dates
1.Actual time- the number of days is obtained by counting all the days,inclusive
between the 2 given dates including the last day but not the first day.
2. Approximate time- assume that every month counts 30 days.
There are four varieties of interest between two dates:
𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒
1. Ordinary interest at actual no.of days= Ioi= Pr ( ) “Banker’s rule”
360
𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
2. Ordinary interest at approximate no.of days= Ioii= Pr ( )
360
𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒
3. Exact interest at actual no.of days= Iei= Pr ( )
365
𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
4. Exact interest at approximate no.of days= Ieii= Pr ( )
365

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.3 Exact & Ordinary Interest and Maturity
Value
Solve for the following:
1. Find the actual and approximate number of days from
Oct.3,2001 and March 30, 2002
2. Find the ordinary and exact interest of the amount
P15,000 using the a) approximate b) actual number of
days from oct 3,2001 to March 30,2002 at 12.5% simple
interest.
3. Jun invested P20,000 on November 30,1999 to March
1,2000 at 14.5% interest rate. How much will he earn and
how much is the final amount?

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.3 Exact & Ordinary Interest and Maturity
Value
Solve for the following: ( Seatwork)
1. Using the exact interest method, what is the amount of
interest on a loan of P4,000 at 7% interest for 88 days?
2. Using the ordinary interest method, what is the amount of
interest on a loan of P19,500 at 6% interest for 160 days?

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.3 Exact & Ordinary Interest and Maturity
Value
Maturity Value is the total payback of principal and interest of
an investment or a loan.

Maturity Value = Principal + Interest


MV = P + I

Maturity Value = Principal (1 + Rate × Time)


MV = P(1 + R × T)

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.3 Exact & Ordinary Interest and Maturity
Value
Examples:

1. What is the amount of interest and the maturity value of a


1
loan for $15,400 at 6 % simple interest for 24 months? (Use
2
the formula MV= P + I)
2. Apollo Air Taxi Service borrowed $450,000 at 8% simple
interest for 9 months to purchase a new airplane. Use the
formula MV = P(1 +RT) to find the maturity value of the
loan.

MATH 01 – General Mathematics: Simple and Compound Interests


CALCULATING DAYS OF A LOAN

• A loan was made on April 4 and had a due date of July 18.
What was the number of days of the loan?
• Ryan McPherson borrowed $3,500 on June 15 at 11%
interest. If the loan was due on October 9, what was the
amount of interest on Ryan’s loan using the exact interest
method?

MATH 01 – General Mathematics: Simple and Compound Interests


LESSON 5.1 Definition

Definition
Compound interest means that the interest is calculated
more than once during the time period of the loan. When
compound interest is applied to a loan, each succeeding time
period accumulates interest on the previous interest in addition to
interest on the principal. Compound interest loans are generally
for time periods of a year or longer.

Simple versus
Compound
Interest

MATH 01 – General Mathematics: Simple and Compound Interests


DETERMINING MATURITY DATE OF A
LOAN

• What is the maturity date of a loan taken out on


September 9 for 125 days?
• On October 21, Jill Voorhis went to the Regal
National Bank and took out a loan for $9,000 at
10% ordinary interest for 80 days. What is the
maturity value and maturity date of this loan?

MATH 01 – General Mathematics: Simple and Compound Interests


ADDITIONAL EXAMPLES :

• Telex Electronics borrowed money at 9% interest for 125


days. If the interest charge was $560, use the ordinary
interest method to calculate the amount of principal of the
loan.
• Using the ordinary interest method, what is the rate of
interest on a loan of $25,000 for 245 days if the amount of
interest is $1,960? Round your answer to the nearest
hundredth of a percent.
• What is the time period of a loan for $15,000 at 9.5%
ordinary interest if the amount of interest is $650?

MATH 01 – General Mathematics: Simple and Compound Interests


CALCULATING LOANS INVOLVING
PARTIAL PAYMENTS

• Rita Peterson borrowed $15,000 at 12% ordinary interest


for 100 days. On day 20 of the loan, she made a partial
payment of $4,000. On day 60, she made a partial payment
of $5,000. What is the maturity value of the loan after the
partial payments?

MATH 01 – General Mathematics: Simple and Compound Interests


COMPOUND INTEREST – THE
TIME VALUE OF MONEY

MATH 01 – General Mathematics: Simple and Compound Interests


• Compound Interest – interest that is applied a number of
times during the term of a loan or an investment.
Interest paid on principal and previously earned interest
• Compound Amount (Future Value)-total amount of
principal and accumulated interest at the end of a loan
or investment.
• Present Value-amount of money that must be deposited
today at compound interest to provide a specified lump
sum of money in the future.

MATH 01 – General Mathematics: Simple and Compound Interests


CALCULATING COMPOUND AMOUNT (FUTURE VALUE) BY
USING THE COMPOUND INTEREST FORMULA
𝒊 𝒏𝒕
FV = P(𝟏 + )
𝒏

where: FV= Future Value


P = Principal
i = Interest Rate
n = compounding periods
t=number of years

(Compound) Interest= Future Value - Principal


I = FV - P
MATH 01 – General Mathematics: Simple and Compound Interests
• John Anderson invested $1,200 in an account at 8% interest
compounded quarterly for 5 years. What is the amount of
the compound interest and compound amount?
• Jenny Chao invested $20,000 at 6% interest compounded
semi-annually for 8 years. What is the amount of
compound interest and future value of the money invested
by Jenny?
• Stan Gray invests $3,500 at 8% interest compounded
quarterly for 7 years. Find the compound amount and
compound interest of Stan’s investment.

MATH 01 – General Mathematics: Simple and Compound Interests


Present Value

−𝑛𝑡
𝐹 𝑖
𝑃𝑉 = 𝑛𝑡 =𝐹 1+
𝑖 𝑛
1+
𝑛

MATH 01 – General Mathematics: Simple and Compound Interests


• What is the present value of Php 50,000 due in 7 years if
money is worth 10% compounded annually?
• Find the present value of Php 50,000 due in 4 years if
money is invested at 12% compounded semi-annually?
• What is the present value of Php 25,000 due in 2 years and
6 months if money is worth 10% compounded quarterly?

MATH 01 – General Mathematics: Simple and Compound Interests


Compound Interest Compounded
Continuously

𝑖𝑡
𝐹 = 𝑃𝑒
• Suppose you invested Php 20,000 at 3%
compounded continuously. How much will you have
from this investment after 6 years?

MATH 01 – General Mathematics: Simple and Compound Interests


Additional Examples

• How long will it take Php 3000 to accumulate Php 3500 in a


bank savings account at 25% compounded monthly?
• At what nominal rate compounded semi-annually will Php
10000 accumulate to Php 15000 in 10 years?
• How long will it take an investment of Php 20,000 to
accumulate Php 22,549.94 at 3% interest rate compounded
continuously?

MATH 01 – General Mathematics: Simple and Compound Interests


CALCULATING ANNUAL PERCENTAGE YIELD
(APY) OR EFFECTIVE INTEREST RATE
APY is a percentage rate reflecting the total amount of interest paid on an account,
based on the interest rate and the frequency of compounding for a 365-day
period.

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 𝑖𝑛 1 𝑦𝑒𝑎𝑟


Annual Percentage Yield (APY) =
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙

• Jill Quinn invested $7,000 in a certificate of deposit for 1 year at 6%


interest compounded quarterly. What is the compound amount,
compound interest, and annual percentage yield of Jill’s investment?

MATH 01 – General Mathematics: Simple and Compound Interests


CALCULATING ANNUAL PERCENTAGE
RATE (APR) BY FORMULA
APR allows you to evaluate the cost of the loan in terms of a percentage. If your
loan has a 10% rate, you’ll pay $10 per $100 you borrow annually. All other
things being equal, you simply want the loan with the lowest APR.

72𝐼
APR =
3𝑃 𝑛+1 +𝐼(𝑛−1)

I = finance charge on the loan


P = principal, or amount financed
n = number of months of the loan

MATH 01 – General Mathematics: Simple and Compound Interests


CALCULATING APR BY FORMULA

• Christina Pitt repaid a $2,200 installment loan with 18


monthly payments. The total finance charge on the loan
was $320. Determine the annual percentage rate of
Christina’s loan.

MATH 01 – General Mathematics: Simple and Compound Interests


NORMAL ZUMBA
1. If Christian Grey wants to earn 10% annual simple interest on an
investment, how much should he invest to have Php 30000.00 interest in
9 months?
2. Suppose that a savings account is compounded yearly with a principal
of P1700. After 2 years, the amount increased to P1910. What was the
per annum interest rate?
3. Last April 12, 2015, Anastacia Steele borrowed $5000 from her credit
union at 9% for 80 days. The credit union uses the ordinary interest
method. What is the amount of interest, maturity value and maturity date
of her loan?
4. Brad Pitt invested $4000 for 1 year at 8% compounded semiannually at
Taghirap Bank. Compute for the compound amount, compound interest
and annual percentage yield of his investment in pesos. (Assume that $1 =
Php 48.12)