SIMPLE
AND
COMPOUND INTEREST
I. Learning Competency
• Illustrates simple and compound interests;
• Distinguishes between simple and
compound interests;
• Computes interest, maturity value, future
value, and present value in simple interest
and compound interest environment;
• Solves problems involving simple and
compound interests.
a person (or institution) who invest
the money or makes the funds
available
L E N D E R
a person (or institution) who owes the
money or avails the funds from the
lender
B O R R O W E R
date on which money is received by the
borrower
O R I G I N
date on which the money borrowed or
loan is to be completely repaid
M A T U R I T Y
DATE
amount of time in years the money borrowed or
invested; length of time between the origin and
maturity dates
T E R M
amount of money borrowed or invested
on the origin date
P R I N C I P A L
usually in percent, charged by the lender, or rate
of increase of the investment
R A T E
paid or earned for the use of money
I N T E R E S T
interest that is computed on the
principal and then added to it
S I M P L E
INTEREST
interest is computed on the principal and also
on the accumulated past interests
C O M P O U N D
INTEREST
amount after t years that the lender receives
from the borrower on the maturity date
F U T U R E
VALUE
LESSON 1:
SIMPLE INTEREST
interest that is computed on the principal and then added to it
Annual Simple Interest
Is= Prt
Where Is= simple interest
P= principal, or the amount invested or
borrowed
r= simple interest rate
t= term or time in years
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 r= 0.25% or 0.0025
t= 1 year
Find: Is
Solution: Is=Prt
Is= (1,000,000) (0.0025) (1)
Is= 2,500
Answer: The interest earned is P2,500.
Example 2: How much interest is charged when P50,000 is
borrowed for 9 months at an annual interest rate of 10%?
9
Given: P= 50,000 r= 10% or 0.10 t= 12
year or 0.75 year
Note: When the term
Find: Is is expressed in months
(M), it should be
converted in years by
Solution: Is=Prt 𝑀
t= 12 .
Is= (50,000) (0.10) (0.75)
Is= 3,750
Answer: The simple interest charged is P3, 750.
Example 3. Complete the table below by finding the unknown.
Principal Rate Time Interest
(P) (r) (t) (Is)
(a) 2.5% 4 1,500
36, 000 (b) 1.5 4,860
250,000 0.5% (c) 275
500,000 12.5% 10 (d)
Solution:
(a)The unknown principal can be obtained by
𝐼
P= 𝑟𝑡𝑠
1,500
P=
0.025 ( 4)
P= 15, 000
(b) The unknown rate can be computed by
𝐼
r= 𝑠
𝑃𝑡
4,860
r= 36,000 (1.5)
r= 0.09 𝑜𝑟 9%
(c) The unknown time can be calculated by
𝐼
t= 𝑃𝑟𝑠
275
t= 250,000 (0.005)
t= 0.22 years
(d) The unknown simple interest is given by
Is= Prt
P= (500,000) (0.125)(10)
P= 625,000
Maturity (Future Value)
F= P + IS
Where F= maturity (future) value
P= principal
Is= simple interest
Substituting Is by Prt F= P + Prt, = P(1 + rt)
Maturity (Future Value) .
F= P(1 + rt)
Where F= maturity (future) value
P= principal
R= interest rate
t=term/time in years
Example 4. Find the maturity value if 1 million pesos is
deposited in bank at an annual simple intrest rate of 0.25%
after (a) 1 year (b) 5 years?
Given: P= 1,000,000 r= 0.25% or 0.0025
Find: (a) maturity or future value F after 1 year
(b) maturity or future value F after 5 years
Solution:
(a)When t= 1, the simple interest is given
by
Method 1:
Is= Prt
Is= (1,000,000) (0.0025) (1)
Is= 2,500
The maturity or future value is
given by
F= P + Is
F= 1,000,000 + 2,500
F= 1,002,500
Method 2: To directly solve the future value F
F= P(1 + rt)
F= (1,000,000) (1+0.0025(1))
F= 1,002,500
Answer: The future or maturity value
after 1 year is P1,002,500.
(a)When t=5 years
Method 1:
Is= Prt
Is= (1,000,000) (0.0025) (5)
Is= 12,500
F= P + Is
F= 1,000,000 +12,500
F= 1,012,500
Method 2:
F= P(1 + rt)
F=(1,000,000) (1+0.0025(5))
F= 1,012,500
Answer: The future or maturity
value after 5 years is P1,012,500.
Example 5. How much should you invest at the
simple interest 7.5% in order to have P300,000 in 2
years?
Given: r= 0.075 F= 300,000 t= 2 years
Find: P
𝐹
Solution: 𝑃 = 1+𝑟𝑡
300,000
𝑃 = 1+ 0.075 (2)
Answer: P= 260, 869.57
LESSON 2:
COMPOUND INTEREST
interest is computed on the principal and also on the
accumulated past interests
Maturity (Future) Value And Compound Interest
F= P(1+r)t
Where
P= principal or present value
F= maturity (future) value at the end of the term
r= interest rate
t= term/ time in years
The compound interest Ic is given by
Ic= F- P
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% or 0.02 t= 5 years
Find: (a) maturity value
(b) compound interest Ic
Solution:
(a) F= P(1+r) t
F= (10,000) (1+0.02)5
F= 11, 040.81
(a) Ic= F- P
Ic= 11, 040.81 – 10,000
Ic= 1,040.81
Answer: The future value F is P11,040.81 and the compound interest is
P1,040.81.
Present Value P at Compound Interest
𝐹 −𝑡
𝑃= 𝑜𝑟 𝑃 = 𝐹(1 + 𝑟)
(1 + 𝑟)𝑡
Where
P= principal or present value
F= maturity (future) value at the end
of the term
r= interest rate
t= term/time in years
Example 2. 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% or 0.1 t= 7
years
Find: P
𝐹
Solution: 𝑃=
(1+𝑟)𝑡
50,000
𝑃 = (1+0.1)7
𝑃 = 25, 657.91
Answer: The present value is P25, 657.91.
Seatwork:
Exercise 1: Joebert borrowed ₱3,000 at 9% interest for 4
years to buy a cellular phone. How much money did he
have to pay back in all?
Exercise 2: What interest rate is needed for ₱2,100 to earn
₱122.50 in 14 months?
Exercise 3: How long will a principal earn an interest equal
to half of it at 5% simple interest?
Exercise 4: Rutchel invested a certain amount of money
and got back an amount of ₱8,400. If the bank paid an
interest of ₱700, find the amount Rutchel invested.
Seatwork:
Exercise 5: The mother of Kriz Anthony was hospitalized
and he needs an amount of ₱50,000 for the surgery. He
decided to borrow money from the bank with 5% interest
rate compounded annually payable for 4 years. How much
should Kriz pay at the end of the term?
