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Simple Interest Definitions

The document defines simple interest and the key terms used to calculate it such as principal, interest rate, time period, and maturity value. It provides the simple interest formula: Interest = Principal x Rate x Time. It then gives examples of using the formula to calculate interest and maturity value for different scenarios, including when the principal, interest rate, or time period is unknown. It also discusses methods for calculating interest over partial year time periods.

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88 views

Simple Interest Definitions

The document defines simple interest and the key terms used to calculate it such as principal, interest rate, time period, and maturity value. It provides the simple interest formula: Interest = Principal x Rate x Time. It then gives examples of using the formula to calculate interest and maturity value for different scenarios, including when the principal, interest rate, or time period is unknown. It also discusses methods for calculating interest over partial year time periods.

Uploaded by

123 456
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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SIMPLE INTEREST

Definitions :
1. Simple Interest - is an interest computed on the amount the borrower received at the time the loan is obtained, and
is added to that amount when the loan becomes due.
2. Lender or Creditor - the one who invests and lends the money.
3. Borrower of Debtor - the one who owes the money.
4. Principal - is the amount received by the borrower on loan date.
5. Simple Interest Rate - a factor expressed in percent per year and is converted to decimal for computation purposes.
6. Time or Term - expressed in years or fractional part of a year. It is the period between the loan date and maturity
date.
7. Loan Date - the date when the loan was obtained.
8. Maturity Date - the date when the loan becomes due.
9. Maturity Value - the sum of the principal, received on loan date, and the interest.
The Simple Interest Formula :
I = Prt
MV = P + I
where :
I = simple interest
P = principal
r = simple interest rate
t = time or term
MV = maturity value

Example :
1. Mr. Santos borrowed P280,000 at a simple interest rate of 9% per year for one year. Compute for the simple interest
and the maturity value of the loan.
GIVEN : P = P280,000
r = 9%/yr. = 0.09/yr
t = 1 yr.
REQ’D : I, MV
I = Prt = P280,000 (0.09/yr.) (1 yr.)
I = P25,200
MV = P + I
MV = P280,000 + P25,200
MV = P305,200

Alternative Solution for MV :


MV = P + I
MV = P + Prt
MV = P ( 1 + rt )
MV = P280,000 [ 1 + 0.09 (1) ]
MV = P305,200

The Concept of Time


1. 1 year and 6 months
6 months ×1 yr12 months=0.5 yr
2. loan date : June 13, 2019 payable in 4 months
maturity date : Oct. 13, 2019
3. 200 days
a. Exact Interest Method - a method which uses a 365-day time (366 days for leap year)
b. Ordinary Interest Method - a method which uses a 360-day time
Example :
1. Ms. Esperanza borrowed P140,000 at 7% interest for 64 days. How much would the interest be using the exact and
ordinary interest methods?
GIVEN : P = P140,000
r = 7% = 0.07
t = 64 days
REQ’D : 𝐼𝐸 and 𝐼𝑂
a. Exact Interest Method
𝐼𝐸=𝑃𝑟𝑡=𝑃140,0000.0764365
𝐼𝐸=𝑃1,718.36
b. Ordinary Interest Method
𝐼𝑂=𝑃𝑟𝑡=𝑃140,0000.0764360
𝐼𝑂=𝑃1,742.22
Time Between Dates
1. Actual Time - is determined by counting each day excluding the loan date.
2. Approximate Time - assume that each month has 30 days.

Example :
1. Applying the four time combinations, compute for the interest and the corresponding maturity value if Ms. Esperanza
was lent P150,500 at 11% interest from June 16, 2018 to March 29, 2019.
GIVEN : P = P150,500
r = 11% = 0.11
t = Jun. 16, 2018 to Mar. 29,2019
REQ’D : 𝐼𝐸𝐴𝐶,𝐼𝐸𝐴𝑃,𝐼𝑂𝐴𝐶,𝐼𝑂𝐴𝑃, and corresponding MV
1. 𝐼𝐸𝐴𝐶=𝑃𝑟𝑡=𝑃150,5000.11286365
𝐼𝐸𝐴𝐶=𝑃12,971.86
𝑀𝑉=𝑃150,500+𝑃12,971.86=P163,471.86
2. 𝐼𝐸𝐴𝑃=𝑃𝑟𝑡=𝑃150,5000.11283365
𝐼𝐸𝐴𝑃=𝑃12,835.79
𝑀𝑉=𝑃150,500+𝑃12,835.79=P163,335.79
3. 𝐼𝑂𝐴𝐶=𝑃𝑟𝑡=𝑃150,5000.11286360
𝐼𝑂𝐴𝐶=𝑃13,152.03
𝑀𝑉=𝑃150,500+𝑃13,152.03=P163,652.03
4. 𝐼𝑂𝐴𝑃=𝑃𝑟𝑡=𝑃150,5000.11283360
𝐼𝑂𝐴𝑃=𝑃13,014.07
𝑀𝑉=𝑃150,500+𝑃13,014.07=P163,514.07
MANIPULATING THE SIMPLE INTEREST FORMULA

A. PRINCIPAL IS UNKNOWN
1. A bank lent Tri-Star Trading money at 9% simple interest for 90 days. If the amount of interest was P5,000, use the
ordinary interest method to find the amount of principal borrowed.
GIVEN : 𝑟=9%=0.09
𝑡=90 𝑑𝑎𝑦𝑠
𝐼=𝑃5,000
REQ’D : P
𝐼=𝑃𝑟𝑡
I Prt
=
rt rt
I
𝑃=
rt
P 5,000
P 5,000(360)
𝑃= 90 = =𝑃222,222.20
0.09( ) 0.09(90)
360
B. RATE IS UNKNOWN
1. If Tri-Star Trading applies for a P25,000 loan in a bank, the interest of which is P4,000 for 125 days, what interest rate
is being charged? Use the ordinary interest method.
GIVEN : 𝑃=𝑃250,000
𝐼=𝑃4,000
𝑡=125 𝑑𝑎𝑦𝑠
REQ’D : r
𝐼=𝑃𝑟𝑡
I Prt
=
rt rt
P 4,000
I
𝑟= = 125
Pt P 250,000( )
360
P 4,000 (360)
𝑟= =0.046=4.6%
P 250,000(125)
C. TIME IS UNKNOWN
1. What would be the time period of Tri-Star Trading’s loan for P300,000 at 11% ordinary interest if the amount of
interest is P12,250?
GIVEN : 𝑃=𝑃300,000
𝑟=11%=0.11
𝐼=𝑃12,250
REQ’D : t
𝐼=𝑃𝑟𝑡
𝐼𝑃𝑟=𝑃𝑟𝑡𝑃𝑟
𝑡=𝐼𝑃𝑟=𝑃12,250𝑃300,0000.11=0.371212𝑦𝑟𝑠.
𝑡=0.371212 𝑦𝑟 ×360 𝑑𝑎𝑦𝑠1 𝑦𝑟=133.64 𝑑𝑎𝑦𝑠
𝑡≈134 𝑑𝑎𝑦𝑠

Examples :
Find the unknown values.

Principal Rate Time Interest Interest Maturity Value


Method
1______ 9.5% 100 days Exact P3,400 _______
P130,000 14% 2______ Ordinary P9,600 _______
P36,000 3______ 160 days Exact P2,250 _______

1. 𝑃=𝐼𝑟𝑡=𝑃3,4000.095100365=𝑃3,4003650.095100
𝑃=𝑃130,631.58
𝑀𝑉=𝑃130,631.58+𝑃3,400=𝑃134,031.58
2. 𝑡=𝐼𝑃𝑟=𝑃9,600𝑃130,0000.14=0.527473 𝑦𝑟×3601 𝑦𝑟
𝑡=190 𝑑𝑎𝑦𝑠
𝑀𝑉=𝑃130,000+𝑃9,600=𝑃139,600
3. 𝑟=𝐼𝑃𝑡=𝑃2,250𝑃36,000160365=𝑃2,250365𝑃36,000160=0.1426
𝑟=14.26%
𝑀𝑉=𝑃36,000+𝑃2,250=𝑃38,250

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