SIMPLE INTEREST AND SIMPLE DISCOUNT A promissory note is a written promise by a

debtor, called the maker of the note, to pay to,

(FROM BSA1-10) or to the order of, the creditor, called the payee
SIMPLE INTEREST DEFINITION OF TERMS of the note, a sum of money, with or without
interest, on a specified date
• Interest: an amount paid or earned for the
use of money.

• Simple interest: interest earned when a

loan or investment is repaid in a lump sum.

• Principal: the amount of money borrowed

or invested.

• Rate: the percent of the principal paid as

interest per time period.

• Time: the number of days, months or SIMPLE INTEREST FORMULA

years that the money is borrowed or TAKE NOTE:
invested.
• Convert months to a fractional or
• Investor: who is lending money to decimal part of the year.
someone
• Find the principal, rate or time using the
• Debtor, who is borrowing money from the
simple interest formula.
investor.
• Amount or Accumulated value: is the sum I - Simple Interest P-Principal R- Interest Rate T-Time
of the principal and interest due
• Rate of interest: is the ratio of the interest I=PxRxT
earned in one time unit on the principal. Example:
• Maturity value: the total amount of
When Kevin bought a new office phone, he
money due by the end of a loan period
borrowed P1,200 at a rate of 18% for 9 months.
• Ordinary time: time that is based on
How much interest did he pay?
counting 30 days in each month.
• Exact time: time that is based on counting Remember that the interest formula asks for the
the 31 days time in years. However, the time was given in
months. So to get the time in years we represent
• Ordinary interest: a rate per day that
9 months as 9/12 of a year, or 0.75.
assumes 360 days per year.
• Exact interest: a rate per day that
P= P1,200 I= PRT
assumes 365 days per year.
r= 18% or .18 I=(1,200)(.18)(.75)
• Banker’s rule: calculating interest on a
t= 9 months or .75 I=P162
loan based on ordinary interest and exact
I= ?
time which yields a slightly higher amount
of interest.
Answer: Kevin paid P162.00 in interest.
SIMPLE DISCOUNT DEFINITION OF TERMS

• Simple Discount - the difference FIND PRINCIPAL USING SIMPLE INTEREST

between the amount and its present FORMULA
value
• Maturity value - amount the borrower is P= I/RT
obligated to repay Example:
• Discount – the interest deducted
Chelle paid P7,000 interest at 14.5 for a four-year
• Proceeds - the actual amount that is
given to the borrower loan. What was the original loan?
Given: Solution
P=? P=I/RT
PROMISORRY
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I= P7,000 P= 7,000/.145(4) P=P2,500 MV = 2,500 ( 1 + 0.09 x 2)
R= 14.5% or .0145 P= P12,068.97 R= 9% MV = 2,500 (1 + 0.18)
T= 4 years T= 2 years MV = 2,500 (1.18)
Answer: The original loan was P12,068.97 MV = P2,950

Answer: Marcus will pay $2,950 at the end of two

FIND RATE USING SIMPLE INTEREST FORMULA years.

FIND EXACT TIME EXAMPLE.

R= I/PT

The ordinary time from July 12 to September 12 is

Example:
60 days. To find the exact time from July 12 to
Lea invested P30,000 in the stock market September 12, add the following:
Which guaranteed an interest of P6,500 after 3
years. At what rate would her investment earn? Days in July (31 -12 =) 19
Given: Solution Days in August 31
R=? R=I/PT Days in September +12
I= P6,500 R= 6,500/30,000x3 62 days
P=P30,000 R= .0722 or 7.22%
T= 3 years FIND ORDINARY INTEREST RATE PER DAY
Answer: Her investment earn a rate of 7.22%
For ordinary interest rate per day, divide the
FIND TIME USING SIMPLE INTEREST FORMULA annual interest rate by 360.

Ordinary interest per day

T=I/PR = Interest rate per year/360

Example: FIND EXACT INTEREST RATE PER DAY

Lina borrowed P10,000 from a bank charging
12% simple interest with promise that she would For exact interest rate per day, divide the
pay the principal and interest at the end of the annual interest rate by 365.
agreed term. If she paid P4,500 at the end of the
specified term, how long did she use the Exact interest per day
money? = Interest rate per year/365

USE ORDINARY TIME TO FIND ORDINARY

Given: Solution: INTEREST LOAN.
T=? T= I/PR
P= P10,000 T= 4,500/10,000(.12) A loan of P300 at 7% annual interest rate. The
R= 12% or .12 T= 3.75 years loan was made on March 15 and due on May
I = P4,500 15. (Principal = $500)

Answer: Lina used the money for 3.75 years. I=PxRxT

Length of loan (ordinary time) = 60 days
FIND MATURITY VALUE OF LOAN
Rate = 0.07/360 (ordinary interest)
MV = P (1 + RT)
Interest = P300 x 0.07/360 x 60
Example: Interest = P5.83
Marcus Logan can purchase furniture on a FIND THE EXACT INTEREST USING EXACT TIEM
2-year simple interest loan at 9% interest per
FOR THE PREVIOUS LOAN.
year. What is the maturity value for a P2,500
loan? A loan of P500 at 7% annual interest rate. The
loan was made on March 15 and due on May
GIVEN: SOLUTION: 15. (Principal
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I=PxRxT
Length of loan (exact time) = 61 days ANSWER THE PROBLEMS USING THE GIVEN
Rate = 0.07/365 (exact interest) FORMULA IN THIS REVIEWER.

Interest = P500 x 0.07/365 x 61

1. A total of $1,200 is invested at a simple
Interest = P5.84 interest rate of 6% for 4 months. How much
interest is earned on this investment?
FIND THE BANK DISCOUNT AND PROCEEDS FOR A
SIMPLE DISCOUNT NOTE.
2. Glen received $2,250 loan from bank.
For the bank discount, use: After six months, he paid back $2,295 and
closed the loan. Find the rate of interest.
Bank discount = face value x disc. rate x time
[I = P x R x T] 3. Find the exact interest on a $8,000 loan
for 388 days at 10.1%.
For the proceeds, use: 4. How long will it take $3000 to earn $60
interest at 6%?
Proceeds = face value – bank discount
A=P-I
5. A business takes out a simple interest loan
of $10,000 at a rate of 7.5%. What is the
Mihoc Trailer Sales made a note of $10,000 with total amount the business will repay if the
Darcy Mihoc,owner, at 9% simple interest based loan is for 8 years?
on exact interest and exact time. The note is
made on August 12 and due November 10. Since 6. You are tired at the end of the term and
Mihoc Trailer Sales needs cash, the note is taken decide to borrow $500 to go on a trip to
to a third party on September 5. The third-party Whatever Land. You go to the bank and
agrees to accept the note with a 13% annual borrow the money at 11% for 2 years.
discount using the banker’s rule. Find the
proceeds of the note. a. Find the interest you will pay on the loan.
To find the proceeds, we find the maturity value b. How much will you have to pay the bank
of the original note, then the third-party discount. at the end of the two years?

Exact time is 90 days (314-224) 7. A loan of $15 000 is taken out. If the interest
rate on the loan is 7%, how much interest
Exact interest rate is .09/365
is due and what is the amount repaid if
MV = P(1+ RT)

MV = $10,000 ( 1 + 0.09/365 x 90) a. The loan is due in seven months;

b. The loan was taken out on April 7 and is
MV = $10.221.92
due in seven months?
FIND THE PROCEEDS ON NOTE
8. Michelle invested a certain amount of
Exact time of the discount period is 66 days. money in a bank; at the maturity date
(314 - 248) period between Sept. 5 and Nov. 10. she will receive € 5,000.00. Applying the
Ordinary discount rate is 0.13/ 360. discount rate of 4.8%, what amount
would she get asking to be paid in
Third party discount = I = PRT advance of 3 months?
Third party discount = $10,221.92 ( 0.13/360)(66)

Third party discount = $243.62

Proceeds = A = P – I

Proceeds = $10,221.92 - $243.62 = $9,978.30

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COMPOUND INTEREST keep as many decimals as possible until the final
step.
COMPOUND INTERESTEST
Round your final answer to two decimals
• “Interest on interest” places.
• If you walk into
a bank and open a savings account, Or directly solve it on calculator.
you will earn interest on the money
GROWTH TIME OF AN INVESTMENT
you deposit in the bank. If the interest is
calculated once a year, then the interest 𝑟 𝑛𝑡
𝐴 = 𝑝 (1 + )
is called “simple interest”. If the interest is 𝑛
calculated more than once per year,
If you deposit $5000 into an account paying
then it is called “compound interest”.
6% annual interest compounded monthly, how
• Accumulates faster than simple interest.
long until there is $8000 in the account?
• Frequency of compounding n
n= 1 annual n=2 semi- A= $8,000
annual
n=4 quarterly n=12 monthly P= $5,000
n=52 weekly n=365 daily r= 6% (0.06)

𝑟 𝑛𝑡 n= 12 (monthly)
• FORMULA 𝐴 = 𝑝 (1 + )
𝑛
0.06 12𝑡
A= total amount P= principal amount ➢ 8,000 = 5,000 (1 + )
12
8,000 5,000 0.06 12𝑡
r= interest rate n= number of compounding ➢ = (1 + )
5,000 5,000 12
periods 0.06 12𝑡
➢ 1.6 = (1 + )
12
t= time in years ➢ 1.6= (1.005) 12𝑡

➢ ln 1.6 = ln 1.00512𝑡
➢ ln 1.6 = 12𝑡 ln 1.005
ln 1.6 12tln 1.005
• SAMPLE PROBLEM ➢ =
12tln 1.005 12𝑡 ln 1.005
ln 1.6
➢ =𝑡
Example 1: If you deposit $4000 into an account 12ln 1.005
paying 6% annual interest compounded ➢ t= 7.9 approximately 7.9 years for the
quarterly, how much money will be in the account to go from $5,000 to %8,000.
account after 5 years?
use calculator when solving natural
P= $4,000 logarithm (In)

r= 6% (0.06)

n= 4 (quarterly) COMPUTING THE INFLATION RATE

t= 5 years SAMPLE PROBLEM

𝑟 𝑛𝑡 Suppose a house that was worth $68,000 in

𝐴 = 𝑝 (1 + ) 1987 is worth $104,000 in 2004. Assuming a
𝑛
constant rate of inflation from 1987 to 2004. What
0.06 4(5)
𝐴 = 4,000 (1 + ) is the inflation rate?
4
FV= P(1 + 𝑟)𝑡
A= 4,000 (1.015)20
FV= 104,00
A=4,000 (1.345855007)
P= 68,000
A= 5,387.42 after 5 years there will be $5387.42
in the account T= 17 (2004-1987)

Use the order or operations to simplify R=?

the problem. If the problem has decimals,
➢ 104,000=68,000 (1 + 𝑟)17
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➢
104,000
=
68,000
(1 + 𝑟)17 Use calculator and solve it directly.
68,000 68,000
104,000 17
➢ (1 + 𝑟)
68,000
➢ 17
√
104,000
68,000
=(1+r) PRESENT VALUE
➢ 17
√
104,000
68,000
−1=r=𝟎.𝟎𝟐𝟓𝟑 • The value today of a future cash inflow or
outflow.
• You determined how much should be
invested today
PRESENT VALUE AND FUTURE VALUE OF • INTEREST RATES are sometimes called
COMPOUND INTEREST AND COMPOUND Discount Rates.
DISCOUNT • PRESENT VALUES / DISCOUNTED VALUES
𝐹𝑉 𝑡
• LOAN PRINCIPAL is the amount • FORMULA P=
(1+𝑖)
borrowed. • Remember to pay attention to the
• 2 TYPES OF INTEREST number of periods. Interest is often
(1) Interest rate multiplied by an compounded semi-annually instead of
unchanging principal amount annually.
(2) Interest rate multiplied by a changing
principal amount. SAMPLE PROBLEM:

FUTURE VALUE A city wants to issue $100,000 of non-interest-

bearing bonds to be repaid in a lump sum in 5
• The amount accumulated over time, years. How much should investors be willing to
including principal and interest pay for the bonds if they require a 10% return on
• future value (FV) is important to investors their investment?
and financial planners as they use it to
estimate how much an investment made FV= 100,000
today will be worth in the future. I= 10% (0.10)
• Future value (FV) refers to a method of
calculating how much the present value T= 5 years
(PV) of an asset or cash will be worth at a 100,000 5
specific time in the future. P= = 62,092.13
(1+0.10)

• FORMULA FV= P (1 + 𝑟)𝑡 If interest were compounded semi-annually

FV= Future Value P= Principal FV= 100,000

r= interest rate t= time I= 5% (0.05)

T= 10 years
100,000 10
SAMPLE PROBLEM P=
(1+0.05)
= 611,392.33

You are scheduled to receive $13,000 in two

years. When you receive it, you will invest it for
𝐹𝑉 𝑡
six more years at 8 percent per year. • FORMULA P=
(1+𝑖)

FV= P (1 + 𝑟)𝑡
P= Principal FV= Future Value
P= $13,000
i= interest rate t= time
r= 8% (0.08)
SAMPLE PROBLEM
t= 6
What is the present value of $1,000
FV= 13,000(1 + 0.08) 6 received in two years if the interest rate is
12% per year discounted annually?
FV= $20,629.37 the future value of $13,000 in 6
years 𝐹𝑉 𝑡
P=
1+𝑖
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FV= $1,00

i= 12% (0.12) Nominal and Effective

t=2 • Commonly quoted in business, finance,
1,000 2 and engineering economic decision-
• P=
1+0.12 making.
1,0002
• P=
1.12
• P= (892.8571429)2
Nominal Rate
P= 797,193.88 is the amount need to receive
$1,000 in 2 years. • Interest compounded more than once a
year.
Use the order or operations to simplify
the problem. If the problem has decimals,
Effective Rate
keep as many decimals as possible until the final
step. • Compounded annually
• Produces the same compound each
Or directly solve it on calculator.
year as nominal rate

TRY THESE:
Interest rates can be quoted in many ways:
1. If you deposit $6500 into an account
paying 8% annual interest 6%- per 6 months
compounded monthly, how much 12%- per year
money will be in the account after 7
years? 1%- per month

𝑟 𝑛𝑡 12.5% per year, compounded monthly

𝐴 = 𝑝 (1 + )
𝑛
12%- APR

Nominal Interest Rate (r)

2. How much money would you need to
deposit today at 9% annual interest • Not include any consideration of the
compounded monthly to have $12000 compounding of interest.
in the account after 6 years? • r = (interest rate per period) (No. of
periods)
3. If you deposit $8000 into an account • Example: 3% per month for 12 months.
paying 7% annual interest • (0.03or 3%)(12 months)=36%/year
compounded quarterly, how long until
there is $12400 in the account? Effective Interest Rate

• Periodic Interest Rate

• Applies for a stated period of time
4. Bank pays an annual interest of 4% on
2-year CDs and you deposit $10,000. • Conventional
What is your balance two years later? • EIR often referred as the Effective Annual
Interest Rate (EAIR)
𝒓
• 𝑬𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 𝒓𝒂𝒕𝒆 𝒑𝒆𝒓 𝑪𝑷 =
𝒎
5. $7,000 for 10 years from now at 7% is
worth how much today?

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Compounding Period F= 20,000 (2.2878)

F= $45,756.00
• Time unit to determine the effect of
interest. Payment Period (PP)

Time Period (t) • Deposits and withdrawals by an

individual
• Basic time unit of the interest rate
• Not a lending institution
• Typically, one year but can be other time
periods. Compounding Period (CP)

APR • Compounding interest by the lending

institution
• Annual Percentage Rate
Formula for finding the simple interest rate
APY
equivalent to a discount interest rate
• Annual Percentage Yield 𝑑
𝑟=
1 − 𝑑𝑡
Formula for finding the discount interest rate
Effective Annual Interest Rate equivalent to a simple interest rate
• 𝒊𝒂 = (𝟏 + 𝒊)𝒎 − 𝟏 𝑟
𝑑=
1 + 𝑟𝑡
Where:
Formula for finding the effective interest rate
m= number of compounding period per year equivalent to a nominal interest rate

i= effective interest rate per compounding 𝑢 = (1 + 𝑖)𝑚 − 1

period (CP)= r/m
Formula for finding nominal interest rate
r= nominal interest rate per year equivalent to an effective interest rate
1
ia= effective interest rate per year 𝑗 = 𝑚 [(1 + 𝑢)𝑚 − 1]
• Example: 12% per year compounded
quarterly
r= 12% per year
m= 4
𝒓
𝒊=
𝒎
12
𝑖 = = 3%
4
𝑖𝑎 = (1 + 𝑖)𝑚 − 1
𝑖𝑎 = (1 + 0.03)4 − 1 = 12.55%
per year compounded quarterly

Equivalence

Example: You borrow $20,000 at an interest rate

of 12% per year compounded quarterly. How
much do you owe after 7 years?

Given: P= $20,000, r= 12% or 0.12 t= 7 years

ia= 12.55% per year compounded quarterly

Formula: 𝑭 = 𝑷 (𝟏 + 𝒊)𝒕

𝐹 = 20,000(1 + 0.1255)7
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