Chapter 6

SIMPLE AND COMPOUND

INTERESTS
LEARNING OUTCOMES:
After the lesson, the learner can
1) define simple interest
2) compute ordinary and exact interests.
3) compute simple interest using actual or approximate
time.
4) solve application problems involving simple interest.
5) solve application problems involving compound interest.
LESSON OUTLINE:
1.Simple Interest
2.Ordinary and Exact Interest
3.Actual and Approximate Time
4.Compound Interest
6.1. Simple Interest
Definition of Terms
Interest (I) – payment for the use of
money or the amount earned on invested
money.
Principal(P) – the amount borrowed or
invested
Rate of Interest (r) – a fractional part of
the principal that is paid on loan or
investment.
Time/Term of the loan - the number of
hours for which the money is borrowed or
invested
Final Amount = P + I
Examples:
If P 4,000 borrowed at an annual rate of
6.2. ORDINARY AND EXACT
INTEREST
6.3. ACTUAL AND APPROXIMATE
TIME
Computing Simple Interest
within 2 Calendar Dates
6.4. Compound Interest
Compound interest is an interest
computed every conversion period
whose principal amount includes the
interest earned every end of the
conversion period.
 Interest may be compounded annually
(once a year), semi-annually (twice a
year), or monthly (12 times a year) or
even daily. The final amount is called
the compound amount. The difference
between the compound amount and the
original principal is called the compound
interest.
Definition of Terms
Compound Amount (F) – P + I
Present value (P) – original principal
Conversion or interest period – time
between two successive conversions of
interest.
Frequency of conversion (m) – number
of conversion periods in one year

Nominal rate (r) – stated annual rate of

interest, unless indicated, the interest
is compounded annually.
 Periodic rate(i) – interest rate for each
conversion period
- can be computed as as
Annual rate of interest (nominal rate) r
i =
Frequency of conversion m
Total number of conversion period (n) –
(frequency of conversion)(time in years)
= mt
Example: If money is invested for 3 years
Frequency Interest One Total
of rate conversion Number of
Nominal rate (r) Conversio per period Conversion
n (m) period period (n)
(i)
8% compounded
1 8% 1 year (1)(3) = 3
annually
15% compounded
semi-annually 2 7.5% 6 months (2)(3) = 6
12% compounded
4 3% 3 months (4)(3) = 12
quarterly
10% compounded
12 5/6% 1 month (12)(3) = 36
monthly
Compound Interest Formula
Compound
Amount F  P(1  i ) n

Present n
Value P P  F (1  i)
  1

Interest  F n

r  m   1
rate r  P  
 
F
log 
 P
Time t t 
mlog1  i 
Examples:

1. Find the interest and compound amount

of P 15, 000 for 1 year at
a) 7% compounded semi-annually
b) 7 % compounded quarterly
2. Ana borrowed P 11, 300 from Amy at
15% compounded monthly for 18 months.
How much will Amy receive at the end of
the term?
3. How much will be invested to
accumulate P 87, 000 at the end of 6 years
if money earns 9% interest rate,
compounded quarterly?
4. Aliyah received an amount of P 33, 000
from her investment after 45 months. If
money is invested at 5 ½% compounded
semi-annually, how much was invested?
5. Justine invested P 50, 000 for 2 years.
At what rate of interest converted
monthly did his money earn if he received
P 61, 000 at the end of the term?
6. In how many years will P 23, 500
accumulate to P 30, 000 if invested at 5%
compounded quarterly?
7. An amount of P 15, 250 is increased to
P 28, 650. If it is invested at 15.5%
compounded semi-annually, find the term
of investment.
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1. A self-employed photographer
deposits P 47,000 in an account paying
14.75% compounded quarterly. How
much will the photographer have in this
account after 30 years?
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2. In June 12, 2010, a newly married
couple invested P 240,000 in an
account that pays 13% compounded
quarterly for the purchase of house
and lot. How much will the couple have
on June 12, 2016?
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3. A loan of P 125,000 at 8%
compounded quarterly was paid back
with an amount of P 176, 000 at the
end of the period. For how long was
the money borrowed?
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5. A certain amount is to be invested
to yield P 150,000 for a child’s college
education 16 years later. How much
should be invested if it earns interest
of 6% compounded semi-annually?
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8. If Lovely received a total amount of
P 67,500 five years and three months
after depositing P 42,950 in an
account, at what rate of interest
converted monthly did her money earn?
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10. When is P 78,800 due if its
present value of P 61,500 is invested at
10 ¾% compounded monthly?