SIMPLE AND COMPOUND INTEREST

QUESTION: What are someways to take care of hard-earned money?

Activity: Imagine that you won in a mega lotto for 100, 000.00 pesos. How would you spend your money?

Definition of Terms:
Definitions of Terms:
Lender or creditor–person (or institution) who invests the money or makes the funds available
Borrower or debtor – person (or institution) who owes the money or avails of the funds from the lender
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
Time or term (t)– amount of time in years the money is borrowed or invested; length of time between
the origin and maturity dates
Principal (P)– amount of money borrowed or invested on the origin date
Rate(r)– annual rate, usually in percent, charged by the lender, or rate of increase of the investment
Interest (I)– amount paid or earned for the use of money
Simple Interest (Is) – interest that is computed on the principal and then added to it
Compound Interest (Ic)–interest is computed on the principal and also on the accumulated past
interests
Maturity value or future value (F) –amount after t years that the lender receives from the borrower
on the maturity date.

Illustration of Simple and Compound Interest

Example 1. “Suppose you won 10,000 pesos and you plan to invest it for 5 years. A cooperative group
offers 2% simple interest rate per year. A bank offers 2% compounded annually. Which will you choose
and why?”
Solution.
Investment 1: Simple Interest

Investment 2: Compound Interest (Annual)

SIMPLE INTEREST

Example 1: A bank offers 0.25% annual simple interest rate for a particular deposit. How much interest
will be earned if 1 million pesos is deposited in this savings account for 1 year?
Given: P = 1,000,000 I = 0.25% = 0.0025 t = 1 year
Find: Is
Solution: Is = Prt
Is = (1,000,000)(0.025)(1)
Is = 2,500
Therefore, the interest earned is P 2, 500.00.

Example 2: How much interest is charged when P50,000 is borrowed for 9 months at an annual interest
rate of 10%?

Example 3: When invested at an annual interest rate of 7%, the amount earned P11,200 of simple
interest in two years. How much money was originally invested?

Activity 1: Give what is asked.

a. If an entrepreneur applies for a loan amounting to P500,000 in a bank, the simple interest of which
is P 157,500 for 3 years, what interest rate is being charged?

b. Complete the table below by finding the unknown.

Principal (P) Rate (r) Time (t) Interest
1. ________________ 2.5% 4 1,500
36,000 2. _________________ 1.5 4,860
_
250, 000 0.5% 3. ________________ 275
500, 000 12.5% 10 4. _____________________

MATURITY VALUE OR FUTURE VALUE (F) –amount after t years that the lender receives from the
borrower on the maturity date.
Example 7: Find the maturity value if 1 million pesos is deposited in a bank at an annual simple interest
rate of 0.25% after (a) 1 year (b) 5 years?

Example 8: What are the amounts of interest and maturity value of a loan for P25,000 at 12%
simple interest for 5 years?

Example 9. How much money will you have after 4 years and 3 months if you deposited
P 10,000 in a bank that pays 0.5% simple interest?

Activity 2:
a. Complete the table by finding the unknown.
Present Value (P) Rate ( r ) Time (t) Interest (I) Maturity Value (F)
8, 000 8% 6 years 1. ____________ 2. __________
5, 000 3. _________ 1 month 4. ____________ 6, 000
5. 12% 5 years and 3
_________________ months

b. Find the simple interest on a loan of P65,000 if the loan is given at a rate of 20% and is due in 3
years.

c. Amparo invested a certain amount at 10% simple interest per year. After 2 years, the interest she
received amounted to P3,000. How much did she invest?

d. How long will an amount of P50,000 gain a simple interest of P10,000 at 4% per annum?
 e. If you deposit P5,000.00 in a bank at an annual simple interest rate of 0.5%, how much money will
you have after 12 years?

COMPOUND INTEREST

Example 1. Find the maturity value and the compound interest if P10,000 is compounded annually at an
interest rate of 2% in 5 years.
Given: P = 10,000 r = 2% = 0.02 t = 5 years

Find: (a) maturity value F

(b) compound interest Ic
Solution:
(a) F= P(1+r)t ( b ) Ic = F – P
F = (10,000)( 1 + 0.02)5 Ic = 11,040.81 – 10,000
F = 11,040. 081 Ic = 1,040.81

Example 2. Find the maturity value and interest if P 50,000 is invested at 5% compounded annually for
8 years.
Given:

Activity 3:
Suppose your father deposited in your bank account P10,000 at an annual interest rate of 0.5%
compounded yearly when you graduate from kindergarten and did not get the amount until you finish
Grade 12. How much will you have in your bank account after 12 years?

PRESENT VALUE P AT COMPOUND INTEREST:

The present value or principal of the maturity value F due in t years any rate r can be obtained from the
maturity value formula F = P(1+r)t.
Example 3: What is the present value of P50,000 due in 7 years if money is worth 10% compounded
annually?
Given: F = 50,000 r = 10% = 0.1 t = 7 years
Find: P
Solution: The present value P can be obtained by

P = 25,657.91.
Answer: The present value is P25,657.91.

Example 4.How much money should a student place in a time deposit in a bank that pays 1.1%
compounded annually so that he will have P200,000 after 6 years?
Given: F = 200,000 r = 1.1% = 0.011 t = 6 years
Find: P
Solution: The present value P can be obtained by

Answer: The student should deposit P187,293.65 in the bank.

Activity 4:
A. Find the unknown principal P, rate r, time t, and compound interest Ic by completing the table.
Principal (P) Rate ® Time (t) Compound Interest Maturity value (F)
(Ic)
6,000 8% 12 1. ________________ 2. ________________
__ __
12,000 5.5% 6 years and 9 3. ________________ 4. ________________
months __ __
60, 000 9.75% 10 months 5. ________________ 6. ________________
__ __
7. 1% 6 7. ________________ 8. ________________
__________________ __ __
9. 7.5% 4 years and 6 9. ________________ 400, 000
__________________ months __

B. What amount must be deposited by a student in a bank that pays 2 % compounded annually so that
after 12 years he will have P100,000?
 BASICS OF SIMPLE AND GENERAL ANNUITIES
Annuity – a sequence of payments made at equal (fixed) intervals or periods of time. (Verzosa et.al,
2016)
Simple Annuity – an annuity where the payment interval is the same as the interest period. Payment
period per year = interest period per year or in symbol, P/Y = I/Y. (Verzosa et.al, 2016)
General Annuity – an annuity where the payment interval is not the same as the interest period.
Payment period per year ≠ interest period per year or in symbol, P/Y ≠ I/Y. (Verzosa et.al, 2016)

EXAMPLE 1
Mrs. Remoto likes to save ₱3,000 every month for 6 years in a fund that gives 9% compounded monthly.
Solution:
The problem above, shows that the payment interval is every month, while the interest period is
compounded monthly. Since the payment interval and the interest period are the same, example 1
illustrates simple annuity.

EXAMPLE 2
Cris started to deposit ₱1,000 monthly in a fund that pays 6% compounded quarterly for 15 years.

Solution:
In this problem, the payment period is monthly, and the interest period is compounded quarterly. If
we match the payment period to the interest period, the two are different. Thus, this is an example of
general annuity.

Activity 5:
Given the following situations, illustrate and distinguish whether it is simple annuity or general annuity.
Write your answer in your activity notebook.
__________________________ 1. Monthly payments of ₱3,000 for 4 years with interest rate of 3%
compounded monthly.
__________________________ 2. Semi-annual payments of ₱150,000 with interest rate of 8% compounded annually
for 10 years.
__________________________ 3. Annual payments of ₱20,500 with interest rate of 8.5% compounded semi-annually
for 3 years.
__________________________ 4. Quarterly payment of ₱5,000 for 10 years with interest rate of 2%
compounded quarterly.
__________________________ 5. Quarterly payment of ₱15,000 for 10 years with interest rate of 8%
compounded annually.

APPLICATIONS OF ANNUITIES
 Mc Julius made yearly deposits of P75,000 at a bank that has 9% interest compounded annually,
for 2 years.
 Alex made payments of P10,000 at the beginning of every year. If the company’s interest rate is
6% compounded monthly.
FUTURE VALUE OF SIMPLE ANNUITY - The future value of a simple annuity is the amount of money one
has at the end of the term or the value of the last day of payment. The higher the discount rate, the
higher the future value of the annuity.

EXAMPLE 1: Duke is receiving P2,000 annually for the next 5 years and he invested each payment at 5%.
How much would Duke have at the end of the five-year period?
Given:
C = P2,000
i = 5% to 0.05
n = no. of period (1, annually)
t = no. of years (5)

PRESENT VALUE OF SIMPLE ANNUITY - The present value of an annuity is the current value of future
payments from an annuity, given a specified rate of return. The higher the discount rate, the lower the
value of the annuity.

EXAMPLE 2: Suppose Mrs. Mariño would like to know the present value of her monthly deposit of P3,000
when interest is 9% compounded monthly. How much is the present value of her savings at the end of 6
months?
Given:
C = P3,000 t = 6 mos or 0.5 years i = 9% to 0.09 m = monthly
(12)

FUTURE VALUE OF GENERAL ANNUITY - General annuity are annuities where the compounding period is
not equal to the payment period.

EXAMPLE 3: Find the future value of a P3,500 annuity payable at the end of every 6 months for 3 years if
money is worth 12% compounded monthly.
PRESENT VALUE OF GENERAL ANNUITY
 STOCKS AND BONDS
DEFINITION OF TERMS:
Stocks are shares in the ownership of the company.
Dividend is a share in the company’s profit.
Dividend per share is a ratio of the dividends to the number of shares.
Stock Market is a place where stocks can be bought or sold. The stock market in the Philippines is
governed by the Philippine Stock Exchange (PSE).
Market Value is the current price of a stock at which it can be sold.
Stock Yield Ratio (current stock yield) is the ratio of the annual dividend per share and the market
value per share.
Par Value is the per share amount as stated on the company’s certificate that is determined by the
company and remains stable over time.
Bond is the interest-bearing security which promises to pay:
1. a stated amount of money on the maturity date; and
2. regular interest payments called coupon.
Coupon is periodic interest payment that the bondholder receives during the time between purchase
date and maturity date that is usually received semi-annually.
Coupon Rate (r) is the rate per coupon payment period.
Price of a bond (P) is the price of the bond at purchase time.
Fair Price of a bond is the present value of all cash inflows to the bond holder.

STOCKS: BUYING PART OWNERSHIP IN A CORPORATION

When an investor buys shares of stock, he or she buys part ownership in a corporation. the value of
that corporation's stock will tend to reflect the earnings experience of the firm — up during profitable
periods and down during periods of loss. Generally speaking, the higher the potential return, the higher
the risk.
Types of Stocks
1. Common Stock - This entitles shareholders to share in the company’s profits through dividends
and/or capital appreciation. Common stockholders are given the voting rights, with the number of votes
directly related to the number
of shares owned.
2. Preferred Stock - This is considered less volatile than common stock but typically less potential for
profit. Preferred stockholders do not have voting rights but have a greater claim to the company’s
assets.