Simple Interest and

Compound Interest
Definition of Terms
• Lender or Creditor – person (or institution) who
invests the money or makes the funds available
• Borrower or Debtor – person (or institution)
who owes the money or avails of the funds from
the lender
• Origin or Loan Date – date on which money is
received by the borrower
• Repayment Date or Maturity Date – date on
which money borrowed or loan is to be
completely repaid
Definition of Terms
• Time or Term (t) – amount of time in years the
money is borrowed or invested; length of time
between the origin and maturity date
• Principal (P) – amount of money borrowed or
invested on the origin date
• Rate (r) – annual rate, usually in percent,
charged by the lender, or rate of increase of the
investment
• Interest (I) – amount paid or earned for the use
of money
Definition of Terms
• Simple Interest (Is) – interest that is computed
on the principal and then added to it
• Compound Interest (Ic) – interest is computed
on the principal and also on the accumulated
past interests
• Maturity Value or Future Value (F) – amount
after t years; that the lender receives from the
borrower on the maturity date
If someone borrows money, what factors influence
how much is paid back?

Principal -How much was borrowed.

Time - How long it was borrowed for.
(in years)
Rate - What interest was charged.
(annual % rate)

Amount to Payback = Principal + Interest

Interest = Principal  Rate  Time
I  P r t
Joe borrows Php 200 from the bank at 6% simple
interest for 3 years. What interest does he owe,
and what is his total balance (amount to payback)
P  200
r  6%  0.06
t 3
Interest Balance
I  P r t Balance = P + I
I  (200)(0.06)(3) Balance = 200 + 36
I  36 Balance = 236
Interest = Php 36 Balance = Php 236
Juan invests Php5000 in bonds for 6 months at an
annual interest rate of 7%. How much interest
did he earn, and what is the balance in his account?

P  5000
r  7%  0.07
t  6 months  0.5 years
Interest Balance
I  P r t Balance = P + I
I  (5000)(0.07)(0.5) Balance = 5000 + 175
I  175 Balance = 5175

Interest = Php 175 Balance = Php 5175

 Find the simple interest and the balance.
1.) Php 2000 at 4% for 9 months
P  2000
r  4%  0.04
t  9 mos.  0.75 yrs.
I  P r t
I  (2000)(0.04)(0.75)
I = Php 60
Balance = P + I
Balance = 2000 + 60
Balance = Php 2060
 Find the annual simple interest rate.
Php 2000 earns Php 420 simple interest over 3 years.
P  2000
I  420
t  3 years
I  P r t
420  (2000)(r)(3)
420  6000r
6000 6000
0.07  r
Annual Interest Rate  7%
Find the annual simple interest rate.
Php 625 simple interest earned on a 2 year loan of
Php 5000.
P  5000
I  625
t  2 years
I  P r t
625  (5000)(r) (2)
625  10,000r
10,000 10,000
0.0625  r
r  6.25% or 6 %1
4
Find the principal amount invested.
Interest of Php 1650 is earned over 4 years at 5½ %.
I  1650
t  4 years
r  5.5%  0.055
I  P r t
1650  (P)(0.055)(4)
1650  0.22P
0.22 0.22
7500  P
Principal = Php 7500
 Quick Draw for Points

• You will have 60 seconds to solve each

problem

• The text is Simple Interest Problems

 Example 1: Finding Interest on a Loan

To buy a car, Jessica borrowed Php 15,000 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?

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 = Php 4050 Solve for I.

 Example 1A: Finding Total Payment on a Loan

What is the total amount that she will repay?

You can find the total amount A to be repaid on a
loan by adding the principal P to the interest I.
Jessica will pay Php 4050 in interest.

P+I=A principal + interest = total amount

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

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

 Example 2

TJ invested Php 4000 in a bond at a yearly

rate of 2%. He earned Php 200 in interest.
How long was the money invested?
I=P  r  t Use the formula.

200 = 4000  0.02  t Substitute values into

the equation.
200 = 80t
2.5 = t Solve for t.
The money was invested for 2.5 years, or 2
years and 6 months.
 Example 3
Bertha deposited Php 1000 into a retirement
account when she was 18. How much will
Bertha have in this account after 50 years at a
yearly simple interest rate of 7.5%?

I=P  r  t Use the formula.

I = 1000  0.075  50 Substitute. Use 0.075

for 7.5%.
I = 3750 Solve for I.

The interest is Php 3750. Now you can find the

total.
 Example 3 Continued

P+I=A Use the formula.

1000 + 3750 = A Substitute.

4750 = A Solve for A.

Bertha will have Php 4750 in the account after 50

years.
 Example 4

Mr. Mogi borrowed Php 9000 for 10 years to

make home improvements. If he repaid a total
of Php 20,000 at what interest rate did he
borrow the money?

P+I=A Use the formula.

9000 + I = 20,000 Substitute.
I = 20,000 – 9000 = 11,000 Subtract 9000
from both sides.
He paid Php 11,000 in interest. Use the amount of
interest to find the interest rate.
 Example 4 Continued

I=P  r  t Use the formula.

11,000 = 9000  r  10 Substitute.

11,000 = 90,000  r Simplify.

11,000= r Divide both sides by 90,000.

90,000

0.12 = r

Mr. Mogi borrowed the money at an annual rate of

about 12.2%.
 Suppose you won Php 10,000 and
you plan to invest it for 5 years. A
cooperative group offers 2% simple interest
rate per year. A bank offers 2% compounded
annually. Which will you choose and why?
 Cooperative Group (2% simple interest rate per year)

Simple Interest
Principal Maturity
Time (t)
(P) Value
Solution Answer

1 (10,000)(0.02)(1) 200 10,200

2 (10,000)(0.02)(2) 400 10,400

3 10,000 (10,000)(0.02)(3) 600 10,600

4 (10,000)(0.02)(4) 800 10,800

5 (10,000)(0.02)(5) 1,000 11,000

 Bank (2% compounded annually)

Compound Interest
Time Principal Maturity
(t) (P) Value
Solution Answer

1 10,000 (10,000)(0.02)(1) 200 10,200

2 10,200 (10,200)(0.02)(1) 204 10,404

3 10,404 (10,404)(0.02)(1) 208.08 10,612.08

4 10,612.08 (10,612.08)(0.02)(1) 212.24 10,824.32

5 10,824.32 (10,824.32)(0.02)(1) 216.49 11,040.81

• Simple Interest
11,000 – 10,000 = 1,000

• Compound Interest
11,040.81 – 10,000 = 1,040.84
Compound Interest
 Ella and Thelma each invest Php
10,00 for two years, but under different
schemes. Ella earns 2% of Php10,000
during the first year, which is Php 200,
then another Php 200 the second year.
Thelma earns 2% of Php 10,000 the first
year, which Php 200, same as Ella’s. But
during the second year, she earns 2% of
the Php 10,000 and 2% of the Php 200
also.
• Many bank savings account pay
compound interest. In this case, the
interest is added to the account at regular
intervals, and the sum becomes the new
basis for computing interest. Thus, the
interest earned at a certain time interval is
automatically reinvested to yield more
interest.
 P= 40,000; t= 3 years; r= 6%
Principal
Amount (At the
at the
Interest end of the
start of
year)
the year
First (40,000)(0.06)(1)
40,000 42,400
Year = 2,400

Second (42,400)(0.06)(1)
42,400 44,944
Year = 2,544
(44,944)(0.06)(1)
Third
44,944 = 2,696.64 47,640.64
Year
Example 1
Find the maturity value and the
compound interest if Php10,000 is
compounded annually at an interest rate of
2% in 5 years.
Example 2
Find the maturity value and interest if
Php 50,000 is invested at 5% compounded
annually for 8 years.
Example 3
What is the present value of Php
50,000 due in 7 years if money is worth 10%
compounded annually?
Example 4
How much money should a student
place in a time deposit in a bank that pays
1.1% compounded annually so that he will
have Php 200,000 after 6 years?
Compounding More than
Once a Year
Example 5
Find the compound amount of a
deposit at the end of 1 year if Php 20,000 is
deposited at 4% compounded (a)annually
and (b) semi-annually.
 Identify the interest rate per
compounding period and the number of
compounding periods for each of the
following investments.

a. 12% compounded monthly for 4

years.
b. 10.2% compounded quarterly for 9
quarters.
ANNUITIES
 ANNUITY

ANNUITY ANNUITY
CERTAIN UNCERTAIN

SIMPLE GENERAL
ANNUITY ANNUITY
GENERAL
ORDINARY
ORDINARY
ANNUITY
ANNUITY
GENERAL
ANNUITY DUE
ANNUITY DUE

DEFERRED PERPETUITIES
ANNUITY
Definition of Terms
1. Annuity – a fixed sum of money paid to
someone at regular intervals, subject to a
fixed compound interest rate.
2. Annuity Certain – payable for a definite
duration. Begins and ends on a definite or
fixed date.
3. Annuity Uncertain – annuity payable for
an indefinite duration; dependent on
some certain event.
Definition of Terms
4. Simple Annuity – interest conversion or
compounding period is equal or the same
as the payment interval.
5. General Annuity – interest conversion or
compounding period is unequal or not the
same as the payment interval.
Determine if the given situations represent
simple annuity or general annuity.

1. Payments are made at the end of each

month for a loan that charges 1.05%
interest compounded quarterly.
- Since the payment interval at the end of
each month is not equal to the compounding
interval, quarterly, the situation represents a
general annuity.
Determine if the given situations represent
simple annuity or general annuity.

2. A deposit of Php 5,500 was made at the

end of every three months to an account
that earns 5.6% interest compounded
quarterly.
- Since the payment interval at the end of
three months (or quarterly) is equal to the
compounding interval, quarterly, the situation
represents a simple annuity.
Definition of Terms
6. Ordinary Annuity – annuity in which the
periodic payment is made at the end of
each payment interval.
7. Annuity Due – an annuity in which the
periodic payment is made at the
beginning of each payment interval.
Determine whether the situation describes
an ordinary annuity or an annuity due.

1. Jun’s monthly mortgage payment is

Php 35,148.05 at the end of each month.
- Because the payments are made at the end
of each month, Jun’s stream of monthly
mortgage payments is an ordinary annuity.
Determine whether the situation describes
an ordinary annuity or an annuity due.

2. The rent for the apartment is Php 7,000

and due at the beginning of each month.
- Since the payments come at the beginning
of each month, the stream of rental payments is
an annuity due.
Definition of Terms
8. Deferred Annuity – the periodic payment
is not made at the beginning nor at the
end of each payment interval, but some
later date.
9. General Ordinary Annuity – first
payment is made at the end of every
payment interval.
Definition of Terms
10. General Annuity Due – first payment is
made at the beginning of every payment
interval.
11. Perpetuities – series of periodic
payments which are to run infinitely or
forever.
Definition of Terms
12. Future Value – the total accumulation of
the payments and interest earned.
13. Present Value – the principal that must
be invested today to provide the regular
payments of an annuity.
 Mr. and Mrs. Mariano are planning to have
their own home but have limited budget. They
went to a bank for some advice as to how they can
produce enough amount for the down payment on
a house and lot they have chosen. This is the
advice of the bank:
If you will invest Php 20,000 at the end of
each year for 5 years in an account that pays
interest at 10% compounded annually, you will
have the amount for the down payment of the
house and lot at the end of 5 years.
Period 0 1 2 3 4 5
(Year)

Payment 20,000 20,000 20,000 20,000 20,000

 Part I.
Simple Ordinary Annuity
 Part I. A.
Future Value of Simple
Ordinary Annuity
The future value of simple ordinary annuity is:
Example 1
If you pay Php 50,000 at the end of
each month for 40 years on an account that
pays interest at 10% compounded monthly,
how much do you have after 40 years?

Given:
P= Php 50,000
i= 0.10/12
n= (40)(12)= 480
Example 2
Alex and Tony are twins. After graduation
and being finally able to get a good job, they plan
for retirement as follows:

– Starting at age 24, Alex deposits Php 10,000 at the

end of each year for 36 years.
– Starting at the age 42, Tony deposits Php 20,000 at
the end of each year for 18 years.

Who will have the greater amount at retirement if

both annuities earn 12% per year compounded
annually?
Example 3
Aaron’s mother saved Php 5,000 at the end
of every 6 months in an education plan that earns
6% per year compounded semi-annually. What is
the amount at the end of 18 years? How much
interest is earned?

Given:
P= Php 5,000
i= 0.06/2= 0.03
n= (18)(2)= 36
Example 4
Mr. Jose De Los Angeles deposits Php 3,500
every end of the month at Philippine Ordinary
Bank (POB) that credits 2.4% monthly for 6
months. How much money does he have at the
end of 6 months?

Given:
P= Php 3,500
i= 0.024/12= 0.002
n= (6/12)(12)= 6
 Part I. B.
Present Value of Simple
Ordinary Annuity
The present value of simple ordinary annuity is:
Example 1
Rose works very hard because she wants to
have enough money in her retirement account when
she reaches the age 60. She wants to withdraw Php
36,000 every 3 months for 20 years starting 3 months
after she retires. How much must Rose deposit at
retirement at 12% per year compounded quarterly for
the annuity?

Given:
P= Php 36,000
i= 0.12/4= 0.03
n= (20)(4)= 80
Example 2
Fernan borrows money to buy a motorcycle. He
will pay the loan by making monthly payments of Php
1,500 per month for the next 24 months at an interest
rate of 9% per year compounded monthly. How much
did Fernan borrow?

Given:
P= Php 1,500
i= 0.09/12= 0.0075
n= (2)(12)= 24
Example 3
How much is the cash equivalent of an
electronic product which can be purchased by paying
a down payment of Php 5,000 and Php 2,500 payable
at the end of each quarter for 2 years and 9 months.
The money is worth 4.5% compounded quarterly.

Given:
P= Php 2,500 Cash
i= 0.045/4= 0.01125 Equivalent
n= (2.75)(4)= 11 =PV+DP
Down payment= Php 5,000
 Part I. C.
Finding the Periodic Payment
of Simple Ordinary Annuity
In finding the periodic payment in an ordinary
annuity, we can use the following formulas:
Example 1
How much money must Ms. Bernie
Carmona pay every end of the year for 3
years and 6 months in a bank that charges
10% per annum on a commercial loan if she
wanted to avail now on a loan of Php
150,000 for additional capital in her retailing
business?
Example 2
Mrs. Dolly Bugtong plans to travel
abroad with her family. What amount should
she save at the end of each month in a bank
that credits 1.44% compounded monthly for
3 years in order to accumulate the Php
250,000 that she needs for her plan?
 Part II.
Simple Annuity Due
 Part II. A.
Future Value of Simple
Annuity Due
The future value of simple annuity due is:
Example 1
Suppose Mr. and Mrs. Mariano deposited
Php 20,000 at the beginning of each year for 5
years in an investment that earns 10% per year
compounded annually, what is the amount or
future value of the annuity?

Given:
P= Php 20,000
i= 0.10/1= 0.1
n= (5)(1)= 5
Example 2
Julius’ parents saved for his college
education by investing Php 12,000 at the
beginning of each year in an education plan that
earns 6% per year compounded annually. What is
the total amount of investment at the end of 16
years?

Given:
P= Php 12,000
i= 0.06/1= 0.06
n= (16)(1)= 16
Example 3
Consider the given annuities:
Annuity A:
Php 1,000 deposited at the beginning of
each month for 3 years at 12% compounded
monthly.

Annuity B:
Php 3,000 deposited at the beginning of
each quarter for 3 years at 12% compounded
quarterly.

Calculate the amount of each annuity. Compare the two

annuities.
Example 4
An investment of Php 1,500 is made at the
beginning of each year for 8 years. Find the total
investment at the end of the term if money is worth
4.6% compounded annually.

Given:
P= Php 1,500
i= 0.046/1= 0.046
n= (8)(1)= 8
 Part II. B.
Present Value of Simple
Annuity Due
The present value of simple annuity due is:

P
Example 1
Christianne borrows money for the
renovation of her house and repays by making
yearly payments of Php 50,000 at the beginning of
each year for a period of 10 years at an interest
rate of 8% compounded annually. How much did
Christianne borrow?

Given:
P= Php 50,000
i= 0.08/1= 0.08
n= (10)(1)= 10
Example 2
A machine can be bought for Php 4,000
down payment and 8 equal monthly payments of
Php 1,200 payable every beginning of the month.
If money is worth 6% compounded monthly, find
the cash equivalent of the machine.

Given:
P= Php 1,200
i= 0.06/12= 0.005
n= 8
 Part II. C.
Finding the Periodic Payment
of Simple Annuity Due
The following formulas can be used to
determine the amount of periodic payment in
an annuity due:
Example 1
Example 2
 Part III.
Deferred Annuity
 A deferred annuity is an annuity in
which the first payment is not made at the
beginning nor at the end of the payment
interval but at a later date. The length of time
when these payments are made is called the
period of deferment.
 An annuity that is deferred for 6 periods
will have the first payment at the end of 7
periods. Likewise, in an annuity whose first
payment is made at the end of 7 periods, the
annuity is deferred for 6 periods.
 Part III. A.
Future Value of Deferred
Annuity
The future value of a deferred annuity is given by
the formula:

Note: The future value of a deferred annuity is the same as the

future value of simple ordinary annuity.
 Part III. B.
Present Value of Deferred
Annuity
The present value of a deferred annuity is given by the
formula:

1 − (1 + 𝑖)−(𝑛+𝑑) 1 − (1 + 𝑖)−𝑑
𝑃𝑉 = 𝑃 −
𝑖 𝑖

where
PV = Present Value
P = Regular Payment
i = rate per conversion period
n = number of paying periods
d = number of deferred periods
Example 1
Find the present value of 10 semi-annual payments
of Php 2,000 each if the first payment is due at the end of 3
years and money is worth 8% compounded semi-annually.

1st PAYMENT
(P1)

P2 P3 P4 P5 P6 P7 P8 P9 P10

1 2 3 4 5 6 7 8
Given:
P= Php 2,000 n= 10
i= 0.08/2= 0.04 d= [(3)(2)]-1= 5 (see circles with x)
Example 2
Find the present value of a deferred annutiy
of Php 1,500 every 3 months for 8 years that is
deferred 3 years if money is worth 6% conerted or
compounded quarterly.

Given:
P= Php 1,500
i= 0.06/4= 0.015
n= (8)(4)= 32
d= (3)(4)= 12
Example 3
A deferred annuity is purchased that will pay
Php 5,000 per quarter for 10 years after being
deferred for 5 years and with interest rate of 6%
compounded quarterly. What is the present value
of the annuity?

Given:
P= Php 5,000
i= 0.06/4= 0.015
n= (10)(4)= 40
d= (5)(4)= 20
Example 4
What is the cash equivalent of an IPOD that
can be bought for Php 2,000 down payment and 8
monthly payments of Php 850 through credit card.
The first payment is due after 3 months from today.
Money is worth 2.4% compounded monthly.

Given:
P= Php 850
i= 0.024/12= 0.002
n= (8/12)(12)= 8
d= [(3/12)(12)]-1= 2
 Part III. C.
Finding the Periodic Payment
of Deferred Annuity
In finding the periodic payment of a deferred
annuity, we can use the following formulas:

• Periodic payment if the given is the sum of

a deferred annuity:
𝐹𝑉(𝑖)
𝑃=
(1 + 𝑖)𝑛 − 1
• Periodic payment if the given if the present
value of a deferred annuity:
𝑃𝑉
𝑃=
1 − (1 + 𝑖)−(𝑛+𝑑) 1 − (1 + 𝑖)−𝑑
−
𝑖 𝑖
 Mr. Sebastian avails the loan offered by
his company with a minimal interest of 1.5%
every 6 months. He borrows Php 150,000
and agrees to discharge his loan by paying
a series of 10 equal semi-annual payments.
The first payment is due at the end of 2
years. What amount should he pay every 6
months?
Amortization
The gradual extinction of a loan over a
period of time by means of a sequence of
regular or equal payments as to principal
and interest due at the end of equal intervals
of time is known as amortization.