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Simple Interest

This document provides an overview of simple interest, including key concepts, formulas, examples, and terminology. It defines simple interest as interest paid only on the principal amount. Formulas are provided to calculate interest, principal, time, final amount, and rate of interest. Examples demonstrate calculating interest on loans and investments. The document distinguishes between exact and ordinary interest, and defines actual and approximate time between dates. It also covers simple discounts, promissory notes, and examples involving notes.

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Junrie Ferrer
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Download as PPTX, PDF, TXT or read online on Scribd
42 views

Simple Interest

This document provides an overview of simple interest, including key concepts, formulas, examples, and terminology. It defines simple interest as interest paid only on the principal amount. Formulas are provided to calculate interest, principal, time, final amount, and rate of interest. Examples demonstrate calculating interest on loans and investments. The document distinguishes between exact and ordinary interest, and defines actual and approximate time between dates. It also covers simple discounts, promissory notes, and examples involving notes.

Uploaded by

Junrie Ferrer
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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SIMPLE INTEREST

Chapter 1
Subtopics:
Concept of Simple Interest
Accumulated Value and Present Value
Exact and Ordinary Interest
Time Between Two Dates
Simple Discount
Promissory Notes
Learning Objectives
Solve problems involving simple interest and simple discount

Compare and contrast simple interest and simple discount

Identify appropriate formula in solving problems in simple interest


and simple discounts

Determine the exact and approxiamte time number of days between


teo dates; and,
Find the proceeds of promissory notes.
Interest is the amount of money charged for borrowing or using money.
When you deposit money into a savings account, you are paid interest.
Simple interest is one type of fee paid for the use of money.

Rate of interest is the


Simple interest is percent charged or earned.
money paid only on
the principal.
I=P 
r 
t
Term refers to the length of
Principal the sum of money time from the origin date to
borrowed. the maturity date and is
expressed in unit year
Notations and Definition of Terms
Notation Interest Definition

I Interest The payment for the use of borrowed money


or the amount earned on invested money.

P Principal The amount borrowed or invested.


r Rate of Interest A fractional part of the principal that is paid
on loan or investment

t Term The number of years for which the money is


borrowed or invested

F Final amount or The sum of the principal and interest earned


maturity value within the time
Formulas in solving problems involving simple interest:

Required Formulas

Interest (I) I = Prt

Final Amount F=P+I


F = P (1+rt)

Principal P = I/rt or P = F - I

Time t = I/Pr

Rate of interest (r) r = I/Pt


Additional Example 1: Finding Interest and Total
Payment on a Loan

To buy a car, Jessica borrowed P15,000 for 3 years at an annual


simple interest rate of 9%. How much interest will she pay if she
pays the entire loan off at the end of the third year? What is the total
amount that she will repay?
First, find the interest she will pay.

I=P 
r 
t Use the formula.

I = 15,000 
0.09 
3 Substitute. Use 0.09 for 9%.

I = 4050 Solve for I.


Additional Example 1 Continued

Jessica will pay $4050 in interest.

You can find the total amount A to be repaid on a


loan by adding the principal P to the interest I.

P+I=A principal + interest = amount


15,000 + 4050 = A Substitute.
19,050 = A Solve for A.

Jessica will repay a total of $19,050 on her loan.


Check It Out: Example 1

To buy a laptop computer, Elaine borrowed $2,000 for 3 years


at an annual simple interest rate of 5%. How much interest will
she pay if she pays the entire loan off at the end of the third year?
What is the total amount that she will repay?
Check It Out: Example 1

To buy a laptop computer, Elaine borrowed $2,000 for 3 years


at an annual simple interest rate of 5%. How much interest will
she pay if she pays the entire loan off at the end of the third year?
What is the total amount that she will repay?

First, find the interest she will pay.

I=P 
r 
t Use the formula.
I = 2,000 
0.05 
3 Substitute. Use 0.05 for 5%.
I = 300 Solve for I.
Check It Out: Example 1 Continued

Elaine will pay $300 in interest.

You can find the total amount A to be repaid on a


loan by adding the principal P to the interest I.

P+I=A principal + interest = amount


2000 + 300 = A Substitute.
2300 = A Solve for A.

Elaine will repay a total of $2300 on her loan.


Determining the
Amount of
Investment Time
Additional Example 2: Determining the Amount of
Investment Time

Nancy invested P6000 in a bond at a yearly rate of 3%. She


earned P450 in interest. How long was the money invested?

t = I/Pr Use the formula.


t= 450/ (6,000x.03) Substitute values into
the equation.
t = 2.5 Solve for t.

The money was invested for 2.5 years


Finding the Rate
of Interest
Additional Example 4: Finding the Rate of Interest

Mr. Johnson borrowed $8000 for 4 years to make home


improvements. If he repaid a total of $10,320, at what
interest rate did he borrow the money?
r= I/Pt Use the formula.
r = (10,320-8,000)/8,000x4 Substitute.
r= 2,320/32,000 = 7.25%
Exact and
Ordinary
Interest
Exact Interest
It is used when interest is computed on the basis of 365 days a
year or 366 days in leap year.

Ordinary Interest
It is used when interest is computed on the basis of an assumed
30-day/month or 360-day year
Check It Out: Example 5

An amount of 28,100 was invested at 7% simple interest for 100


days. Compute the value of the a) exact interest and b)ordinary interest

Solution:.
The exact interest will be: The ordinary interest will be:
I =Prt I =Prt
= (28,100) (.07) (100/365) = (28,100) (.07) (100/360)
= 538.90 = 546.39
TIME BETWEEN
TWO DATES
Actual Time
refers to the exact number of days between two days. It is obtained
by counting the number of days of each month within the period of
transaction except the origin date

Approximate Time
refers to the assumption that each month has 30 days
Check It Out: Example 6

Determine the actual time and approximate time from April 11, 2013
to August 16, 2013 using the two methods
Solution:.
Using the actual time: Using the approximate time:

April (30-11) =19 April (30-11) =19

May =31 May =30

June = 30 June =30

July = 31 July =30

August =16 August =16

Actual Number of days = 127 days Actual Number of days = 125 days
SIMPLE
DISCOUNT
DISCOUNT (d)
The term discount refers to the amount deducted from maturity
value of an obligation. The price of using money is therefore deducted
in advance.
Formulas:
I=Fdt
F=I/dt
d=I/Ft
t=I/Fd
Check It Out: Example 7

How much interest will be collected in advance from a loan of


P15,000 for 2 years if the discount rate is 8%
Solution:.
Using the formula: I =Fdt
= 15,000(.08)(2)
=2,400
PROMISSORY
NOTES
Promissory Notes
A written agreement that specifies the following features:
Origin Date – refers to the date when the note was drawn
Maturity Date – refers to the date when the note is to be paid
Face Value – the present value of the note
Maturity Value – the accumulated value of the note

2 kinds of Promissory Note


Non-interest bearing notes – the value is equal to the maturity value
Interest bearing notes – Maturity value is equal to the face value plus the
amount of interest earned
Check It Out: Example 8

Mr. Johnny Santos owns a P12,500 note at 6% simple interest dated


September 6, 2013. The term of the note is 150 days. Fifty days after
September 6, 2013, he sold the note to the Philippine National Bank at
8% discount. Compute the maturity value of the note and the proceeds

Solution:
Matury Value Formula: F = P (1+rt) Proceeds Formula: Pr = F(1-dt)
= 25,000[1+.08(150/360)] = 12,812.50[1+.08(100/360)]
=12,812.50 =12,527.78
So, Mr. Santos will receive an amount of 12, 527.78 from PNB 150
days from September 6, 2013
Any questions and
clarifications?

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