ULE IN APPLIED MATHEMATICS OF INVESTMENT

Lesson 1
Simple Interest

Topic Objective/s:
At the end of this lesson, you must have:
Described the concept of simple interest.
Calculated simple interest on loans and investments.
Solved real life problems involving interest.

Keywords
List the keywords in Lesson 1

Let’s Look Back!

To better prepare yourself from the lesson ahead, answer the short activity below.

The following are in percentage form. Convert each into decimal.

1) 5% =
2) 25% =
3) 1% =
4) 100% =
5) 3% =
Please turn to page 14 to check your answers.
Have you have correctly converted the above percentages to decimals?
The conversion from percentage to decimal is an important knowledge for you to be able
to compute for interest, both simple and compound.

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 Interest plays an important part in our lives. Understanding interest is an important skill
in life. When you learn to calculate simple and compound interest, it can help you make wise and
informed financial decisions in the future. Computing interest is a must in evaluating loan and
investment proposals.
Interest can be calculated in different ways using different methods. There are two types
of interests: Simple Interest and Compound Interest.

Let’s Learn!

1.1 Nature of Interest

Interest may be described as the fee for using the borrowed money. It is an expense for
the person who borrows money and income for the person who lends money. Interest is
charged at a certain rate on the principal amount for a given period. It refers to the amount
received as a result of the possession or ownership of a contractual obligation to pay on the
part of another. Interest also serves as a mechanism of imposing penalty to a borrower for
not paying a matured financial obligation at a specified time. Interest emanates from certain
transactions which are economic or financial in character.

1.2 Parties Involved in the Payment of Interest:

Lender or creditor
o Refers to the party lending money or extending credit.
o He/she expects to earn income from this transaction.
Borrower or debtor
o Refers to the party using the money or credit.
o He/she expects future expenses as the cost of using it.

1.3 Elements of Interest Computation

Principal

o Refers to the amount of money extended for credit or the money deposited
in the bank for safekeeping.
Interest Rate
o Refers to the charged amount for using the money over a certain period. It is
expressed in percent per year unless otherwise indicated in the
problem. TIME
o Refers to the period covered from the time that the money (principal) is
borrowed until its due date. The due date for the payment of the principal is
known as the maturity date.

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 ***Illustration 1.1
On March 1, 2019, Ms. Jo borrowed Php1,000,000.00 from Metro Savings at 10%
interest, payable on March 1, 2020, to finance the construction of her manufacturing plant.
Based on the data:
✓ Principal = PHP 10,000,000.00
✓ Interest Rate = 10%
✓ Time = 1 Year (March 1, 2019 – March 1, 2020)

LEARNING MODULE IN APPLIED MATHEMATICS OF INVES

1.4 Simple Interest
Simple interest is the interest paid only on the PRINCIPAL and not on any accumulated
interest. It is an interest that is computed only once from the time the amount is borrowed until
it is paid. Under the concept of simple interest, the amount of interest is usually paid at the
maturity date of due date.
The formula to compute the simple interest is as follows:
Interest = Principal x Rate x Time
Or
I=PRT
where:
I = Interest
P = Principal
R = Rate
T = Time
***Illustration 1.2
Alexa borrowed Php600,000 from ABC Lending on March 1, 2019 at 9 percent
interest, which is payable after 1 year. Find the simple interest.

Given:
P = 600,000.00
R = 9% or .09
T = 1 year
Solution:
I=?
I=PRT
I = (600,000.00)(9%)(1year)
I = 54,000.00

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***Illustration 1.3
On June 1, 2019, James borrowed a sum of money from LandCity Bank, payable
for 3 years at 6% simple interest. She paid Php 9,900 for the interest of her loan. Find how
much was borrowed by James.
Given:
P=?
R = 6% or .06
T = 3 years
I = 9,900.00LEARNING MODULE IN APPLIED MATHEMATICS OF
INVESTMENT

Solution:
I=PRT
P = I/RT
P = 9,900.00/(6%)(3years)
P = 55,000.00
***Illustration 1.4
Jenny borrowed 90,000 from Phil Bank at 9% simple interest. She paid 16,200 as
interest upon payment of the principal on the maturity date. Determine how long it took
her to pay the money in full.
Given:
P = 90,000.00
R = 9% or .09
T=?
I = 16,200.00
Solution:
I=PRT
T = I/PR
T = 16,200.00/(90,000.00)(9%)
= 2 years
***Illustration 1.5
Suppose Alex borrowed 10,000 from a certain lending institution to pay her
daughter’s tuition with 2% interest rate per month for 2 months. (a) How much is the
simple interest for two months? (b) How much is the total amount to pay including the
principal amount and interest to the lender?
Problem (a)
How much is the simple interest for 2 months?

Given:
P = 10,000
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 R = 2% or .02
T = 2 months
I=?
Solution:
I=PRT
I = (10,000) (.02) (2 months)
I = Php 400.00
EARNING MODULE IN APPLIED MATHEMATICS OF INVESTMENT

Problem (b)
How much is the total amount to pay including the principal amount and interest
to the lender for two months?
Given:
P = 10, 000
I = 400.00
Total amount = ?
Solution:
Total amount = P + I
Total amount = 10,000 + 400
Total amount = Php 10, 400

Let’s Try!
1. Mrs. Santos borrowed P50,000.00 from the loan shark to invest in her business at 5% a
month interest rate for 6 months.
a. How much is the simple interest for 6 months?

b. How much is the total amount to pay to the lender including principal amount
and interest for 6 months?

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2. A student loan of Php 1,500 at 3% was repaid at the end of 3 years. How much interest
did he pay?

EARNING MODULE IN APPLIED MATHEMATICS OF INVESTMENT

3. Php 7, 000 is deposited to an account paying 6% simple interest. How much is in the
account after five years?

4. You have received a Php50,000 loan from your wealthy aunt in the United States in order
to finance your 4-year college course. The term is that you have to repay your aunt in full
at the end of 10 years with simple interest of 2% per year. How much should you repay
your aunt after 10 years?

5. What principal will yield Php201.60 interest in 3 years at 16%?

6. How many months are needed to earn Php52.50 if Php1,500 is invested at 14%?

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Let’s Do This!
1. Research the interest rate for two savings account and two personal loans.
2. Determine which savings account and personal loans would be the best option
to select.

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 LEARNING MODULE IN APPLIED MATHEMATICS OF INVESTMENT

From page 8: Answers to Let’s Look Back section

The following are in percentage form. Convert each into decimal.

1) 5% = .05
2) 25% = .25
3) 1% = .01
4) 100% = 1
5) 3% = .03