Scribd
Upload
12 views

genmath-simple interest

This is General Mathematics, where the topic is The Basic Concept of Simple Interest.

Uploaded by

KingdomOfWhat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
12 views

genmath-simple interest

This is General Mathematics, where the topic is The Basic Concept of Simple Interest.

Uploaded by

KingdomOfWhat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

BASIC BUSINESS MATHEMATICS

Simple and Compound Interests

❖ Learning Competencies
After completing this chapter, the learner will be able to:
o Illustrate simple and compound interest.
o Distinguish between simple and compound interests.
o Compute interest maturity value, future value, and present value in simple interest.
o Solve problems involving simple interest.
o Compute interest maturity value, future value, and present value in compound interest.
o Solve problems involving compound interest.

Basic Concepts of Simple Interest


The type of interest that is most calculated on short-term loans is simple interest. Simple interest is calculated only on the
original principal amount and is paid at the end of the loan period. Interest is the fee or rent that lenders charge to borrowers
for the temporary use of the borrowed money. The amount borrowed is called the principal. The rate of interest is the
percentage of the principal that will be charged for a specified period (e.g. daily, weekly, monthly, yearly, etc.)

Important Terms
o Simple Interest (𝑰𝒔) – interest that is computed on the principal. The interest remains constant throughout the term.
o Lender or creditor – person (or institution) who invests the money or makes the funds available.
o Borrower or debtor – person (or institution) who owes the money or avails of the funds from the lender.
o Origin or loan date – date on which money is received by the borrower.
o Repayment date or maturity date – date on which the money borrowed or loan is to be completely repaid.
o Time or term (t) – amount of time in years the money is borrowed or invested; length of time between the origin and
maturity dates.
o Principal (P) – amount of money borrowed or invested on the origin date.
o Rate(r) – annual rate, usually in percent, charged by the lender, or rate of increase of the investment.
o Interest (I) – amount paid or earned for the use of money.
o Maturity value or future value (F) –amount after t years that the lender receives from the borrower on the maturity
date.

The following variables will be in our mathematical treatment of simple interest:


P = Principal amount of the loan or investment.
r = Annual rate of simple interest.
t = Time period (term) of the loan or investment.
I = Amount of interest paid or received.
F = Maturity value of the loan or investment.

Simple Interest Formula:


𝐼 𝐼 𝐼
𝐼 = 𝑃𝑟𝑡 𝑃= 𝑅= 𝑇= 𝐹 = 𝑃(1 + 𝑟𝑡)
𝑟𝑡 𝑃𝑡 𝑃𝑟

Exact Interest and Ordinary Interest


As emphasized in the previous discussion, time should be expressed in years. However, there are instances that time
is measured in days. Hence, the interest can be obtained using two approaches – the exact interest and ordinary
interest.

Exact interest (Ie) is the interest computed on the basis of 365 days a year or 366 days on a leap year.
Ordinary interest (Io) is the interest computed on the basis of an assumed 30 days per month or 360 days a year.
Formula:
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝐼𝑒 = 𝑃𝑟 𝐼𝑜 = 𝑃𝑟
365 𝑜𝑟 366 360

Time Between Two Date


In case that dates are given, the number of days can be determined in two ways – the actual or exact time and the
approximate time.
Actual or exact time refers to the exact number of days between two dates.
Approximate time refers to the number of days based on a 36o day per year or assumed 30 days per month.

There are four possible time factors for computing the interest when time between two dates is considered. These are:
𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒
✓ 365 𝑜𝑟 366
𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
✓ 365 𝑜𝑟 366
𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒
✓ 360
𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
✓ 360

Basic Concepts of Compound Interest


Compound interest refers to the interest of the original amount or principal which is based not only on the principal but
also on the previous accumulated interest

Compound Amount and Present Value


The compound amount formula is
𝑭 = 𝑷(𝟏 + 𝒊)𝒏
And the present value formula is
𝑷 = 𝑭(𝟏 + 𝒊)−𝒏
Where: F = final value
i = compound interest
P = present value
n = number of periods
Note: Rounding-off is only permissible in the final result.
Based on the formula (𝟏 + 𝒊)𝒏 is the accumulating factor and (𝟏 + 𝒊)−𝒏 is the discount factor.
Interest could be compounded annually, semi-annually, quarterly, monthly or continuously. Hence, the compound interest
𝑗
rate (𝑖), can be determined using 𝑖 = 𝑚 where 𝑖 = compound interest rate per period.
𝑗 = nominal rate
𝑚 = conversion period
Nominal rate (𝑗), refers to the rate of interest per annum. The conversion period or interest period refers to the frequency of
conversion, denoted by 𝑚.
For the number of conversion periods (𝑛), the formula is: 𝑛 = 𝑡𝑚
Where: n = number of periods
t = time in years
m = conversion period

The following summaries the number of conversion periods in 1 year:


Annually 1
Semi-annually 2
Quarterly 4
Monthly 12
bimonthly 6

You might also like