Father Saturnino Urios University

Arts and Sciences Program

The Nature of
Financial
Management 1
GE 104: Mathematics in the Modern World

GRACEFYL JOY L. PIA

Faculty, Natural Science and Mathematics Division
[email protected]
1
SIMPLE
INTEREST
2
 Basic Concept of Simple Interest

Lesson Objectives:

❖Define simple interest;

❖Compute simple interest using actual and approximate
time;
❖Compute ordinary and exact interest; and
❖Solve application problems involving simple interest.
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 Concept Check:

❑ Interest is the payment for the use of one’s money.

❑ Simple Interest is computed using either actual
or approximate time.
❑ Actual time is the sum of the exact number of
days of each month.
❑ Approximate time is computed using 30 days of
each month in a year.
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 SIMPLE INTEREST FORMULA
❖ Simple Interest on the amount invested or
borrowed is computed based on the principal,
interest rate, and length of time for which the
money is invested or borrowed. The formula for
the simple interest is

𝑰 = 𝑷𝒓𝒕
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 Notations and Definition of Terms
Notation Terminology Definition
The payment for the use of borrowed money or
𝐼 Interest the amount earned on invested money.

𝑃 Principal The amount borrowed or invested.

A fractional part of the principal that is paid on

𝑅 Rate of Interest loan or investment.
The number of years for which the money is
𝑡 Time borrowed or invested.

Final amount or maturity The sum of the principal and interest earned
𝐴 value within the time.

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Formulas in solving problems involving
simple interest

Required Formulas
Interest (𝐼) 𝑰 = 𝑷𝒓𝒕

𝑨=𝑷+𝑰
Final Amount (𝐴)
𝑨 = 𝑷(𝟏 + 𝒓𝒕)
𝑰
Principal (𝑃) 𝑷= or 𝑷 = 𝑨 − 𝑰
𝒓𝒕
𝑰
Time (𝑡) 𝒕=
𝑷𝒓
𝑰
Rate of interest (𝑟) 𝒓=
𝑷𝒕 10
Ms. Theodosia Rodriquez is 25 years old and is
now a teacher. She wants to prepare for her future.
She invests her first salary of 𝑃30,000.00 in a trust
1
fund that pays 5 5 % interest. She plans to retire at
age 60. How much money will she have on her
retirement?

Interest is the cost for the use of money.

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When you deposit money in the bank, for
example, in a savings account, you are
permitting the bank to use your money. The bank
may lend the deposited money to customers to buy
a lot or make renovations on their homes. The bank
pays you for the privilege of using your money. The
amount paid to you is called interest. If you are the
one borrowing money from the bank, the amount
you pay for the privilege of using that money is also
called interest.
“Aufman R. et. al “Mathematical Excursion”
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Other terms:

Principal (𝑷) – the amount deposited in a bank or

borrowed from a bank. The amount
of interest paid is usually given as a
percent of the principal

Interest rate (𝒓) – the percent used

to determine the
amount of interest

Simple Interest (𝑰) – the interest paid on the

original principal
1
0
The time (𝒕) is expressed in the same period as the rate. For
example, if the rate is given as an annual interest rate, then the
time is measured in years; if the rate is given as a monthly interest
rate, then the time must be expressed in months.

Interest rates are most commonly expressed as annual

interest rates. Therefore, unless stated otherwise, we will
assume the interest rate as an annual interest rate. It is
generally given as percent, so before performing calculations
write the interest rate as a decimal.

1
1
1.) You have deposited 𝑃ℎ𝑝 5,000.00 in a Savings Bank on
January 1, 2016, with an interest rate of 3% and have
withdrawn it on January 1, 2017. Calculate the simple
interest.

Solution: 𝐼 = 𝑃𝑟𝑡
𝐼 = (5,000 𝑥 0.03 𝑥 1)
𝐼 = 𝑃ℎ𝑝150.00

1
2
2.) A loan of Php3,000.00 bears an interest rate of 2%. If the
loan shall be paid in 4 years, how much is the interest?

Solution: 𝑰 = 𝑷𝒓𝒕
𝑰 = (𝟑, 𝟎𝟎𝟎𝒙𝟎. 𝟎𝟐𝒙𝟒)
𝑰 = 𝑷𝒉𝒑𝟐𝟒𝟎. 𝟎𝟎

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3
➢ If time is in months – should be converted using
1 year = 12 months.

3.) Your savings deposit of 𝑃ℎ𝑝7,000.00 earns a

simple interest of 5%. How much is the interest for 9
months.
𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒅𝒂𝒚𝒔
• If the 𝒕 is in days, either Exact Method: 𝒕 = 𝟑𝟔𝟓 𝒅𝒂𝒚𝒔
or

𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒅𝒂𝒚𝒔
Ordinary Method: 𝒕 = 𝟑𝟔𝟎 𝒅𝒂𝒚𝒔

Solution: 𝐼 = 𝑃𝑟𝑡
𝐼 = (7,000 𝑥 0.05 𝑥 𝐼) = 𝑃ℎ𝑝 262.5 1
4
4.) Calculate the simple interest due on a 45-day
loan of 𝑃ℎ𝑝3,500.00 if the interest rate is 8%.

Solution:
45
Exact Method: 𝐼 = 3,500 𝑥 0.08 𝑥 365
= 34.52

45
Ordinary Method: 𝐼 = 3, 500 𝑥 0.08 𝑥 = 35.00
360

1
5
 FUTURE VALUE OR MATURITY VALUE

▰ If for loans or investment, it is the total amount to be repaid to the lender.

FUTURE VALUE or MATURITY VALUE for SIMPLE INTEREST

The future or maturity value is the sum of the principal and the interest. The formula
for simple interest is:

𝐴=𝑃+𝐼
Where A is the amount after the interest, I, has been added to the principal, P.
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❑ If we substitute 𝑷𝒓𝒕 to 𝑰, we will have 𝑨 = 𝑷 + 𝑷𝒓t or
𝑨 = 𝑷(𝟏 + 𝒓𝒕)

Example: Calculate the maturity value of a simple interest, 8-

month loan of 𝑷𝒉𝒑 𝟖, 𝟎𝟎𝟎. 𝟎𝟎 if the interest rate is 𝟗. 𝟕𝟓%.

𝑨 = 𝑷 + 𝑰
𝑨 = 𝑷 + 𝑷𝒓𝒕 (substitute the value of I)
𝑨 = 𝑷(𝟏 + 𝒓𝒕) (factor the common variable) 17
Solution:
❑𝐼 = 𝑃𝑟𝑡
8
𝐼 = 8,000 𝑥 0.0975 𝑥 12
𝐼 = 520.00

❑𝐴 = 𝑃 + 𝐼
= 8,000 + 520.00
= 8,520.00

Or from the given example:

8
❖ 𝐴 = 8,000 {1 + (0.0975 × }
12
𝐴 = Php8,520.00
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 PRESENT VALUE

▰ The interest on loans may be deducted in advance

from the principal amount, so if a borrower applies for a
loan of 𝑃ℎ𝑝 10,000.00, he will receive an amount of less
than 𝑃ℎ𝑝 10,000.00 since the interest is deducted from
the principal loan before it is released to the borrower.

The amount received by the borrower is called present

value of the loan (denoted by S).
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 PRESENT VALUE

▰ For example, if you borrow 𝑃ℎ𝑝10,000 from a credit

cooperative that charges 4% simple interest deducted in
advance, the interest would be 𝑃ℎ𝑝400 for 1 year. Out of
your 𝑃ℎ𝑝10,00 0 loan application, you will receive
𝑃ℎ𝑝9,600. This is called present value (𝑆) of the loan. The
formula for present value is 𝑺 = 𝑷 − 𝑰. If we substitute
𝑷𝒓𝒕 to 𝑰, then 𝑺 = 𝑷 − 𝑷𝒓𝒕 or 𝑺 = 𝑷(𝟏 − 𝒓𝒕).

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Example: Kleah needs 𝑃ℎ𝑝 25,000.00 now to buy a
laptop. She has decided to borrow money from a lending
company that charges 8% simple interest deducted in
advance. How much loan will Kleah apply for if she pays it
in 2 years?

Solution: Since the interest is deducted in advance, Kleah should apply for a
loan more than what she needs now. We will calculate the principal amount.
The 𝑃ℎ𝑝 25,000.00 is the present value, interest rate of 8%, and time is 2
years. The formula is 𝑆 = 𝑃(1 − 𝑟𝑡).

13
Solution: Since the interest is deducted in advance, Kleah should apply for a
loan more than what she needs now. We will calculate the principal amount.
The 𝑃ℎ𝑝 25,000.00 is the present value, interest rate of 8%, and time is 2
years. The formula is 𝑆 = 𝑃(1 − 𝑟𝑡).

𝑆 = 𝑃 1 − 𝑟𝑡
𝑃ℎ𝑝25,000 = 𝑃 1 − .08 2
𝑃ℎ𝑝25,000 = 𝑃 1 − 0.16
𝑃ℎ𝑝25,000 = 𝑃 0.84
𝑃ℎ𝑝25,000 𝑃(0.84)
=
(0.84) (0.84)
𝑃 = 𝑃ℎ𝑝29, 761.90

➢ Kleah should apply for a loan of 𝑃ℎ𝑝29,761.90 for her to receive

𝑃ℎ𝑝25,000, which she needs now to buy a laptop. 13
 References:

▰ Aufmann, R.N., Lockwood, J. S., Nation, R.D., Clegg,

D.K. “Mathematical Excursions” (3rd edition), Brooks Cole CENGAGE
Learning
▰ Brown, R. L. & Kopp, S. (2016). Mathematics of finance (8th ed.). New
York: McGraw-Hill.
▰ Bluman, A. G. (2013). Elementary statistics: A brief version (6th ed.). NY
McGraw-Hill.
▰ Calingasan, R.M., Marting, M.C., Yambao, E.M. (2018) Mathematics in
the Modern World. C&E Publishing, Inc.

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