Lesson 3.

Interest
Business Mathematics
Accountancy, Business, and Management

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Learning Objectives

At the end of this lesson, you should be able

to do the following:
● Identify the different types of interests.
● Demonstrate how to calculate simple and
compound interest.
● Evaluate business decisions concerning
interests. 2
Are interests helpful
or harmful to
business?

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INTEREST
● the profit from lending or investing a
certain amount of money
● the amount of money paid regularly at a
particular rate in exchange for money
lent
● could also represent the amount of due
for delayed payment of debt
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KINDS OF INTEREST

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1. SIMPLE INTEREST

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 Simple Interest

Simple interest is calculated in

reference to the original amount or
principal on a yearly basis.

It is the product of the principal, rate

of interest, and time in year/s.
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 Simple Interest
1. Principal (P)
The principal is the original amount of
money invested or borrowed.
2. Rate of interest (R)
The rate of interest is the percentage set
by the lender or the bank annually or
yearly. 8
 Simple Interest

3. Time (T)
The time or the term is the period set
for the loan or investment.

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 Simple Interest

Simple interest formula

I = (P) (R) (T)

I = Interest
P = Principal amount loaned or invested
R = Rate of interest annually or yearly (convert to decimal
form)
T = Time period of the principal (convert to decimal form)
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 Simple Interest

Table 1. Simple interest formula

Solving for Solving for Solving for
the Principal the Rate the Time

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 Simple Interest

Table 2. Table for conversion of time to years

Time given in
Time given in
Time given in days
days
months (ordinary
(exact method)
method)

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 Simple Interest

A client deposited ₱18,000 at a

bank and earned ₱1,900 interest
after 2 years. Compute the simple
interest rate in that period.

ans. 5.28%
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 Simple Interest

Solution:
Step 1: Identify what is required in
the problem.
You are asked to calculate the simple
interest rate (R).
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 Simple Interest

Step 2: Identify the given in the problem.

Given:
Principal (P), interest amount (I), time (T)

P = ₱18,000.00
I = ₱1,900.00
T = 2 years
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 Simple Interest

Step 3: Write the working equation.

Step 4: Substitute the given values.

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 Simple Interest

Step 5: Find the answer.

R = 5.28%
The simple interest rate is 5.28%.

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 Simple Interest
2. Future Value
The future value is the final amount or the
maturity value at the end of the period. It is
the sum of the principal and the interest.

F = Future value
P = Principal
I = Interest 18
 Simple Interest

The final amount can also be expressed by

replacing the I by the formula I = PRT.

F = Future value
P = Principal
R = Rate of interest annually or yearly (convert to decimal
form)
I = Time period of the principal (convert to decimal form) 19
 Simple Interest

2. Find the final amount of a 60-

day loan amounting to ₱45,000 at
11.5% annual simple interest rate
in exact method and ordinary
method.

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 Simple Interest
Solution:
Step 1: Identify what is required in
the problem.
You are asked to calculate the
final amount (F).

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 Simple Interest

Step 2: Identify the given in the problem.

Given:
Principal (P), simple interest rate (R), time (T)
P = ₱45,000.00
R = 11.5%
T = 60 days
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 Simple Interest
Step 3: Write the working equation.

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 Simple Interest
Step 4: Substitute the given values.
a. Exact method (365 days)

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 Simple Interest
Step 4: Substitute the given values.
b. Ordinary method (360 days)

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 Simple Interest

Step 5: Find the answer.

Exact method: F = ₱45,850.50
Ordinary method: F = ₱45,862.50
The final amount using the exact method is
₱45,850.50
The final amount using the ordinary method is
₱45,862.50 26
 Check Your Progress
Solve the following. Round off your answers to the nearest
hundredths.

Compute the simple interest rate

1 of an investment of ₱70,000 with
a future value of ₱79,450 for a
period of 36 months.
Ans. 4.5%

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COMPOUND
INTEREST

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 Compound Interest

Compounding
Compounding is the process of calculating
the interest in a given time interval and
adding it to the principal. The sum
becomes the new principal and repeats
the process.
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 Compound Interest

Compound interest formula

where

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 Compound Interest
Compound interest formula
F = Future or final value at the end of N periods.
P = Principal
J = Nominal interest rate per year
M = Number of compounding periods per year
I = Rate per compounding period
N = Total number of compounding periods
T = Number of years
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 Compound Interest

Table 3. Table of Compounding Frequencies and Periods

Number of
Compounding Compounding
compounding
frequency period
per year (M)
Annually 1 Every year

Semi-annually 2 Every 6 months

Quarterly 4 Every 3 months

Bimonthly 6 Every 2 months

Monthly 12 Every month

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 Compound Interest:

Example 1
Determine the interest rate per period
I, and the number of compounding periods
N:
a. 12% compounded bimonthly for 5 years
b. 7.5% compounded monthly for 3 years

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 Compound Interest
Solution:
Step 1: Identify what is required in the
problem.
You are asked to calculate the net price (NP)
and total trade discount (TD)You are asked
to calculate the interest rate per period (I)
and number of compounding periods (N).

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 Compound Interest:
Step 2: Identify the given in the problem.
The amount of nominal interest per year (J),
number of compounding per year (M), and the
time (T) are given.
a. b.
J = 12% J = 7.5%
M = (Bimonthly) 6 M = (Monthly) 12
T = 5 years T = 3 years 35
 Compound Interest

Step 3: Write the working equation.

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 Compound Interest

Step 4: Substitute the given values.

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 Compound Interest

Step 4: Substitute the given values.

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 Compound Interest:
Step 5: Find the answer.
I = 2%, N = 30 periods
I = 0.625%, N = 36 periods
The interest rate per period is 2% for the total of
30 periods.
The interest rate per period is 0.625% for the
total of 36 periods.
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 Compound Interest: Example 2

2. Compute the accumulated

amount of ₱18,000 at the end of 2
years if compounded 2% annually
and 5% quarterly.

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 Compound Interest: Example 2

Solution:
Step 1: Identify what is asked in the
problem.
You are to calculate the accumulated
amount (F).
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 Compound Interest: Example 2
Step 2: Identify the given in the problem.
The principal (P), amount of nominal
interest per year (J), number of
compounding per year (M), and the time
(T) are given.
P = ₱18,000
T = 2 years 42
 Compound Interest: Example 2

a. b.
J = 2% J = 5%
M = (Annually) 1 M = (Quarterly) 4

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 Compound Interest: Example 2

Step 3: Write the working equation.

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 Compound Interest: Example 2

Step 4: Substitute the given values.

a.

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 Compound Interest: Example 2

Step 4: Substitute the given values.

b.

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 Compound Interest: Example 2

Step 5: Find the answer.

a. F = ₱18,727.20
b. F = ₱19,880.75
a. The accumulated amount is ₱18,727.20.
b. The accumulated amount is ₱19,880.75.
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 Check Your Progress
Solve the following. Round off your answers to the nearest hundredths.

2 Determine the future value of a

₱95,000 investment with an
interest of 14% compounded
quarterly for 6 years.
Answer area

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 Problems Involving Interest

Simple Interest Compound Interest

Loans Loans

● interest is ● interest is
calculated and
calculated more
credited only
once than once a year

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 Problems Involving Interest

Mortgage
● a loan to buy or
refinance a real
estate property
● lender takes the title
of the borrower’s
property until the
debt is paid off 50
Problems Involving Interest
Loan Amortization Schedule
● a table that summarizes
all periodic loan
payments (principal and
interest)
● amount due becomes
smaller as the
outstanding balance
decreases 51
 Problems Involving Interest: Example 1

1.Determine the simple interest

using ordinary and exact
methods when the loan
amount is ₱180,000 at 3.5% for
180 days.

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 Problems Involving Interest: Example 1

Solution:
Step 1: Identify what is required in
the problem.
You are asked to calculate the
interest amount (I).
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 Problems Involving Interest: Example 1

Step 2: Identify the given in the problem.

The amount of principal (P), simple interest
rate (R), and the time (T) are given.
P = ₱180,000.00
R = 3.5%
T = 180 days
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 Problems Involving Interest: Example 1

Step 3: Write the working equation.

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 Problems Involving Interest: Example 1

Step 4: Substitute the given values.

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 Problems Involving Interest: Example 1

Step 4: Substitute the given values.

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 Problems Involving Interest: Example 1

Step 5: Find the answer.

Exact method: I = ₱3,106.85
Ordinary method: I = ₱3,150.00
The simple interest using the exact method is
₱3,106.85.
The simple interest using the ordinary method is
₱3,150.00.

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 Problems Involving Interest: Example 2

Compute the accumulated amount of

₱120,000.00 at the end of 4 years if
compounded 6% semi-annually and 2%
monthly.
Solution:
Step 1: Identify what is required in the problem.
You are asked to calculate the accumulated amount (F).

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 Problems Involving Interest: Example 2

Step 2: Identify the given in the problem.

The principal (P), amount of nominal interest per year (J),
number of compounding per year (M), and the time (T) are
given.

P = ₱120,000
T = 4 years

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 Problems Involving Interest: Example 2

a.
J = 6%
M = (Semi-annually) 2

b.
J = 2%
M = (Monthly) 12

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 Problems Involving Interest: Example 2

Step 3: Write the working equation.

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 Problems Involving Interest: Example 2

Step 4: Substitute the given values.

a.

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 Problems Involving Interest: Example 2

Step 4: Substitute the given values.

b.

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 Problems Involving Interest: Example 2

Step 5: Find the answer.

a. F = ₱152,012.41
b. F = ₱129,987.87

a. The accumulated amount is ₱152,012.41.

b. The accumulated amount is ₱129,987.87.

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Keep in Mind

Lending and borrowing money comes

with a price. Borrowers pay an additional
amount, which represents interest, for
using the said money. On the other hand,
lenders and investors earn income from
these interest payments.
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Keep in Mind

● Interest is the amount paid regularly

at a particular rate in exchange for
money lent. There are two (2) types of
interest: simple and compound. The
factors that affect interest
computation are the principal
amount, rate of interest, and time. 67
 Keep in Mind

● Simple interest is calculated in

reference to the original amount or
principal amount. It is calculated and
credited only once. The days in simple
interest can be converted to years
using exact and ordinary methods.
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Keep in Mind

● Compound interest is calculated

based on a given time interval
and added to the principal
amount. The sum of the principal
and interest becomes the new
principal amount. 69
Keep in Mind

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Keep in Mind

● Understanding the implications of

interest rates is important for
entrepreneurs and business
persons as they deal with
investment, loans, mortgage, and
amortization schedules. 71
 Try This
Identify what is asked.

1. It is the amount of money

earned from an
investment.

Ans. INTEREST

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 Try This
Identify what is asked.

2. It is calculated in reference to
the original amount or
principal on a yearly basis.

Ans. SIMPLE INTEREST

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 Try This
Identify what is asked.

3. These are the two methods in

converting the days to years in
simple interest.

Answer : EXACT and ORDINARY METHODS

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 Try This
Identify what is asked.

4. It is the original amount of

money invested or
borrowed.

Answer: PRINCIPAL

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 Try This
Identify what is asked.

5. It is the sum of the

principal and interest.

Answer: FUTURE VALUE or MATURITY VALUE

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 Try This
TRUE OR FALSE

1.The ordinary method in

computing the time is the
number of days divided by
360
Ans: TRUE

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 Try This
TRUE OR FALSE

2. The variable I in compound

interest represents the rate of
interest per compounding
period.
Ans: TRUE

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 Try This
TRUE OR FALSE

3. The principal amount is

the product of the original
amount, rate of interest, and
time in year/s
Ans: FALSE

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 Try This
TRUE OR FALSE
4. Compounding interest is
calculated by dividing the nominal
interest per year by the number of
compounding periods per
year
Ans: TRUE

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 Try This
TRUE OR FALSE

5. The monthly amortization

schedules represent a
simple interest loan.
Ans: FALSE

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 Practice Your Skills
Compute the missing values and complete the table in Simple Interest.

Time in
Interest Principal Rate
Years

₱ 25,000.00 12% 9 months

₱ 5,040.00 4% 3

₱6,750.00 ₱135,000.00 2

₱6,500.00 ₱65,000.00 4%

₱1,650.00 11% 1.5

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 Practice Your Skills
Complete the table.

Rate per Nominal Number of

Time in
compounding interest rate compounding
Years
period per year periods per year

Ans. 0.01 12% Monthly 3

Ans. 0.01 4% Quarterly 4

Ans. 0.015 3% Semi-annually 5

Ans. 0.00667 4% Bimonthly 15

Ans. 0.11 11% Annually 10

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 Challenge Yourself
Solve the following problems.

1. A lending company offers you a ₱235,000 loan

with 3.8% annual simple interest for a period of
5 years to be paid in equal monthly payments.
You can set aside a maximum budget of ₱4,000
each month to repay your debt. Would you
grab the offer? Indicate the total payable
amount.
Ans. No, because the total payable amount is ₱279,650 and the monthly payment is
₱4,660.83. My ₱4,000 budget per month can not pay the monthly amount due.
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 Challenge Yourself
Solve the following problems.
2. You plan to get a loan for a small car
amounting to ₱645,000. There is no down
payment and payable equal monthly
payments in 3 years with 6.4% annual simple
interest rate or in 6 years with 3.3% annual
simple interest rate. Which payment scheme
should you choose?
Ans.

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