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Lesson 1 Simple Interest

This document provides an overview of the course Investment Mathematics. The general objective is to provide knowledge about investment mathematics with an emphasis on interests in financing and investment activities. The specific objectives are to understand the importance of interests in business, identify types of interests, understand the time value of money, understand depreciation, and learn how to compute simple interest. The first lesson covers simple interest, defining key terms like principal, interest rate, and time period. It also provides examples of calculating simple interest.

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SERALDYN SAMSON
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30 views

Lesson 1 Simple Interest

This document provides an overview of the course Investment Mathematics. The general objective is to provide knowledge about investment mathematics with an emphasis on interests in financing and investment activities. The specific objectives are to understand the importance of interests in business, identify types of interests, understand the time value of money, understand depreciation, and learn how to compute simple interest. The first lesson covers simple interest, defining key terms like principal, interest rate, and time period. It also provides examples of calculating simple interest.

Uploaded by

SERALDYN SAMSON
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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INVESTMENT MATHEMATICS

MATH 206

General Objective:
The course is intended to provide students with knowledge and appreciation of investment mathematics with an emphasis on
interests in financing and investment activities. This course seeks to enhance the student’s ability to compute depreciation
expense for financial reporting purposes and understand the usefulness of sinking funds and amortization.

Specific Objectives:
At the end of the semester, the students are expected to:
1. Understand fully the importance of interests in business organizations.
2. Identify types of interests applicable to specific problems.
3. Learn the significance of the time value of money in evaluating financing and investment proposals.
4. Learn the relevance of depreciation as applied in business.

LESSON 1
SIMPLE INTEREST
(The Concept of Time, Manipulating the Simple Interest Formula)

Simple Interest Is
❖ It 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. Thus, simple interest is computed only
once for the entire time period of the loan. At the end of the time period, the borrower repays the
amount originally owed plus the interest.

❖ Type of interest which is computed based on the principal and is paid at the end of a specified
time.

❖ It 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.

❖ Interest in which only the original principal bears interest for the entire term of the loan. Here,
the principal and present value are equal.

Formula: Simple Interest Maturity Value


Is = P ⦁ r ⦁ t A = P + Is
where:
Is = Simple Interest A = Maturity/Future Value
P = Principal Is = Simple Interest
r = Interest Rate
t = Time
Interest I
Charge for the privilege of borrowing money.
The amount paid for the use of another amount of money or for delaying the repayment of a debt.
The amount of ownership a stockholder has in a company is usually expressed as a Percentage.
The payment for the use of borrowed money or the amount earned on invested money.

Principal P
An amount of money that is invested, lent, or borrowed.
The capital or sum of money borrowed or invested.
The base on which interest is computed.

Interest Rate r
Fractional part of the principal that is paid on the loan or investment.
The percent of principal charged by the lender for the use of its money.
The multiplier is expressed as the percent of the principal to be paid each term.

Term t
Unit of time for which the principal is loaned.
Length of time the principal is borrowed.
Length of time between the origin and maturity dates of the loan.
The Concept of Time
i. Ordinary time/Approximate time (Bankers’ Rule)
• Based on 30-day month computation
• Assuming that each month of the fiscal year has 30 days.
• Ordinary Interest Method, which uses 360 days.
ii. Exact time/Actual Time
• Based on the exact number of inclusive dates of the transaction
• Determined by counting every day excluding the loan date until the maturity date.
• Exact Interest Method, which uses 365 days as the time denominator.

Origin or Loan Date


Date on which money is received by the borrower.

Repayment Date or Maturity Date


Date on which the money borrowed, or loan is to be completely repaid.

Maturity Value A/F (future value)


The sum of the principal and the interest that accumulates over the agreed term.
The sum composed of the principal and the interest accumulates over a certain period.

Lender, Investor, Creditor


Person (or institution) who invests the money or makes funds available.
An individual or institution, which loans the money.
The one who sells on credit or makes a loan.

Borrower, Loaner, Debtor


Person (or institution) who owes the money or avails of the funds from the lender.
An individual or institution that borrows money for any purpose.
Anyone who buys on credit or receives a loan.

Illustrative Examples:

A. Complete the table.


Principal P Rate r Term t Simple Interest Is Maturity Value A
10,000 Php 8% 15 yr (1) (2)
(3) 2% 5 yr $ 10,000 (4)
1
255,000 11 % 300 days (ordinary) (5) (6)
4
360,000 Php (7) 11 mo 3,600 Php (8)
500,000 Php 10.5% (9) 175,500 Php (10)
36,000 Php (11) 160 days (exact) 2,250 Php (12)

B. Solve each of the following problem.


1. Mr. Servando Ercillo borrowed 240,000 Php in Banko de Mesa for 3 years at 6%. He received the
borrowed money July 18, 2016.
Find: a. interest b. maturity value

2. Mrs. Josefina Mendiola invested 90,000 Php in Pro-Life, a financial institution last February 8, 2017.
a. How long will it take for the amount to reach 95,000 Php at 4.5% simple interest?
b. At what interest rate will it earn 102,000 Php in 2 years?

3. What is the amount of money borrowed by Ms. Dela Fuentes from Northeast Bank last October 30,
2022, at a 7.3% interest rate, if in 5 years it will be charged 36,500 Php? What will be the value of the
money she borrowed by October 30, 2027?

4. What rate of interest was charged on an ordinary interest loan for 1,350,000 Php, if the interest was
44,000 Php, and the time period was from January 16 to April 27?

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