SIMPLE INTEREST
Learning Outcome
• At the of the lesson, the learner is able to
compute interest, maturity value, and
present value in simple interest environment,
and solve problems involving simple interest.
Lesson Outline
• Compute simple interest
• Compute maturity value
• Compute unknown principal
Definition of Terms
Lender or creditor
• Person (or an institution) who invest
the money or makes the funds
available
Borrower or debtor
• Person (or institution) who owes the
money or avails the funds from the
lender
• Has a legal obligation to pay an
amount to another person or entity.
Example
• If you borrow 10 000.00 from a
bank, you are the debtor and the
bank is the creditor.
Origin or loan date
• Date on which money is received by the
borrower
Repayment date or maturity date
• Date on which the money borrowed or
loan is to be completely repaid
Time or term (t)
• Amount of time in years the money
is borrowed or invested ; length of
time between the origin and
maturity dates.
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
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 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
Example 1:
• Suppose you won 10 000.00Php 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?
Simple interest with annual rate r
Time Principal Simple Interest Amount after t years
(t) (P) (Maturity Value)
Solution Answer
1
10 000(.02)(1) 200 10 000 + 200 = 10 200
2
10 000(.02)(2) 400 10 000 + 400 = 10 400
10 000
3 10 000(.02)(3) 600 10 000 + 600 = 10 600
4 10 000(.02)(4)
800 10 000 + 800 = 10 800
5 10 000(.02)(5) 1 000 10 000 + 1 000 = 11 000
Compound interest with annual rate r
Time Principal Compound Interest Amount after t years
(t) (P) (Maturity Value)
Solution Answer
1 10 000
10 000(.02)(1) 200 10 000 + 200 = 10 200
2 10 200 10 200(.02)(1) 204 10 200 + 204 = 10 404
10 404(.02)(1)
3 10 404 208.08 10 404 + 208.08 = 10 612.08
10 612.08(.02)(1)
4 10 612.08 212.24 10 612.08 + 212.24 = 10 824.32
5 10 824.32 10 824.32(.02)(1) 216.49 10 824.32 + 216.49 = 11 040.81
Simple Interest ------ 1 000
Compound Interest ------ 1 040.81
What is the difference between simple and
compound interest?
How will you distinguish simple and compound
interest based on the illustrations?
• Simple interest remains constant throughout
the investment term.
• Compound interest, the interest from the
previous year also earns interest. Thus, the
interest grows every year.
Simple Interest
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
When the term is expressed in months (M), it
should be converted in years by t =
Example 2
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 = 1 000 000.00
r = 0.25% or 0.0025
t=1
Ans.
Is = 2 500.00 (the interest earned)
Example 3
If an entrepreneur applies for a loan amounting
to 500 000.00 in a bank, the simple interest of
which is 157 500 for 3 years, what interest rate
is being charged?
Given: P = 500 000 Is = 157 500
t = 3 years
Find r?
Ans. r = 0.105 10.50%
Maturity (Future) Value
F = P + Is
• Where F = maturity (future)
P = principal
Is = simple interest
Maturity (Future) Value
F = P(1 + rt)
• Where F = maturity (future)
P = principal
r = interest rate
t = term/time in years
Example 4
Find the maturity value if 1 million
pesos is deposited in a bank at an
annual simple interest rate of 0.25%
after 1 year? 5 years?
• Ans. F = 1 002 500.00 (for 1 year)
• Ans. F = 1 012 500.00 (for 5 years)
Activity
1. What are the amounts of interest
and maturity value of a loan for 150
000.00Php at 6.5% simple interest
for 3 years?
2. At what simple interest rate per
annum will 25 000.00Php
accumulate to 33 000.00 in 5
years?
3. How long will 40 000.00 amount to
51 200.00 if the simple interest rate
is at 12% per annum?
4. In order to have 200 000.00 in
3 years, how much should you
invest if the simple interest is
5.5%
5. Angel deposited 20 000.00 in a
bank that pays 0.5% simple
interest. How much will be her
money after 6 years?
Find the unknown principal, rate, time, and
interest by completing the table
Principal (P) Rate (r) Time (t) Interest (I)
10,000. 00 8% 15 (1)
(2) 2% 5 10,000.00
360,000.00 (3) 2 3,600.00
500,000.00 10.50% (4) 175,500.00
880,000.00 9.25% 2.5 (5)
Compound
Interest
