Simple and

compound
interest
Definition of Terms simple and
compound interest
 1. lender or creditor – person or institution who
invest the money or makes the funds
available
 Borrower or debtor- 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- on the
which the money borrowed or loan is to be
completely repaid
Definition of Terms simple and
compound interest
 Time or term (t)- amount of time in years the
money is borrowed or invested; length of time
between 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, 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.
Definition of Terms simple and
compound interest
 Compound Interest (Ic) interest is
computed on the principal and also on
the accumulated past interest
 Maturity value or future value (F)- amount
after t years; that the lender receives
from the borrower on the maturity date.
 TWO TYPES OF INTERESTS
SIMPLE INTEREST COMPOUND INTEREST
MONEY YEAR RATE AT INTEREST MONEY YEAR RATE AT INTEREST
2% EARNED 2% EARNED

5000
5000 1 5000x0.02 100
x1
5100 1 5000*0.02 100
(1)
5000 2 5000x0.02 100
x1 5202 2 5100 * 0.02 102
(1)
5000 3 5000x0.02 100
x1 5306.04 3 5202 * 0.02 104.04
(1)
TOTAL 300 TOTAL 306.04
INTEREST INTEREST
AFTER 3 AFTER 3
YRS YRS
Illustration of simple and
Compound Interest
 Suppose you won 10,000 Php and you
plan to invest in for 5 years. A
cooperative groups offers 2 % simple
interest per year. A bank offers 2%
compounded annually. Which will you
choose and why?
Assignment 1
 Suppose you invested P30,000 and you
plan to invest it for 8 years. A financial
market group offers 5% simple interest
rate per year. A bank offers 3%
compounded annually. Which will you
choose and why?
Assignment 2: Annual Simple
interest
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 5 YEARS
 TWO TYPES OF INTERESTS
COMPOUND INTEREST
SIMPLE INTEREST -defined as
𝒓
-defined as I=Prt A= 𝐏(𝟏 + 𝒏)𝒏𝒕
P= A
____________
Where, 𝒓
(𝟏 + 𝒏)𝒏𝒕
I= interest earned per year
Where,
P= original amount
A=final amount (principal +interest)
(invested, loan, deposited, P= principal (original amount)
et.al) r= rate of interest
r= rate of interest n= number of compounding
periods per year
(expressed in decimal) t= time (length of time in years)
t= time (per year)
Example
A bank offers 0.25 % annual simple
interest rate for a particular deposit . How
much interest will be earned If 1,000,
000.00 peso is deposited in this in this
saving account for 1 year
solution
 Given
P=1,000,000.00
r=0.25 %=0.0025
t= 1 year
I=?
I=Prt
I= Prt
I= (1,000,000.00)(0.0025)(1)
I= 2500.00
Seat work
 Exercises
2. How much interest is charged when
P50,000.00 is borrowed for 9 months at
annual simple interest rate of 10 %.

P r t
Complete the table below
by finding the unknown
Principal Rate Time Interest
(a) 2.5% 4 1500
36,000 (b) 1.5 4,860
250,000 0.5% (c) 275
500,000 12.5% 10 (d)

I
P r t
Seat work
 When invested at an annual interest rate
of 7%, an amount earned P 11,200 of
simple interest in two years. How much
was originally invested?

I
P r t
Seat work
 Ifan entrepreneur applies for a a loan
amounting to P500,000.00 in a bank, the
simple interest of which is P157,500 for 3
years, what interest rate is being
charged?
CALCULATING SIMPLE INTEREST

Assignment 1:
Olive Branch invests 1500 pesos in a financial
institution that offers her an interest rate of
4% per annum. Calculate the interest Olive
will earn (a) at the end of three years, (b) at
the end of 7 months and (c) at the end of
100 days.
Given: I

P r t
CALCULATING SIMPLE INTEREST

Assignment 2:
Treya Pine invested a certain sum of money
in a financial institution and earned 20000
pesos interest after four years. If annual
interest rate is 5%, what amount did Treya
invest?
Given: I

P r t
CALCULATING SIMPLE INTEREST

Assignment 3:
Brooke Paul has 240000 to invest in a
financial institution. Calculate the annual
rate of interest if she plans to earn 30000 on
her investment at the end of two years.
Given:
I

P r t
CALCULATING SIMPLE INTEREST

Assignment 4:
Wane Lucas borrows 50000 from the bank.
He is charged interest at a rate of 4% per
year. Calculate the number of days Wane
kept the money if he owes 3600 in interest?

P r t
 Maturity Value
Many person or institution are interested to
know the amount that a lender will give
to the borrower on the maturity date. For
instance, you may be interested to know
the total amount of money in a savings
account after (t) years at an interest rate (
r) this amount is called the maturity value
or future value (F)
Maturity ( future )Value
Where
F= P+Is
F= maturity ( future) value
P= principal
Is = simple interest
Subtituting Is by Prt gives

F= P + Prt
F= P+ ( 1+rt )
Where
F= maturity value
P= principal
r= interest
t=term/ time in years
Maturity value

 Findthe maturity value if 1 million is

deposited in a bank at an annual simple
interest rate of 0. 25 %& after (a) 1 year
and (b) 5 years?
Solution
Given: P = 1,000,000, r = 0.0025
Find : (a) maturity or future value F after 1
year.
(b. ) maturity or future value F after 5
years.
There are two way to solve
the problem
 Method 1: solve the simple interest Is first
and then add it to he P, the is F = P + Is
 Method 2: Used the derived formula F = P
( 1 + rt ).
a. When t, the simple interest
is given by
 Method 1. ( Long method)
I=Prt
F=P+Is
 Method 2.( short method)
F=P (1+rt)
Seat work
 Find each maturity value and the
amount of interest paid
 Rick borrows 20,000.00 from his parents at
5.25% to add a room on his house. He
plans to repay in a 9 months using bonus
he expects to receive at times.
Seat work
 B. A loan of P11,280 for 85 days at 9%
interest.
Seat Work /Assignment
Principal Rate Time Interest Maturity
Value F
60,000 4 15 (1) (2)
(3) 12% 5 15,000 (4)
50,000 (5) 2 (6) 59,500
(7) 10.5% (8) 157,500 457,500
1,000,000 0.25% 6.5 (9) (10)
Compound Interest
COMPOUND INTEREST
-defined as
𝒓
A= 𝐏(𝟏 + )𝒏𝒕
𝒏

Where,
A=final amount (principal +interest)
P= principal (original amount)
r= rate of interest
n= number of compounding periods per year
t= time (length of time in years)
Example 1
 Findthe maturity value and the
compound interest if P 10, 000.00 is
compounded annually at interest rate of
2% in 5 years.
Example 2
 Findthe maturity value and interest if
50,000 is invested at 5% compounded
annually for 8 years.
Example 3
 Suppose your father deposited in your
bank account 10,000 at an annual
interest rate of 0.05% compounded yearly
when you graduated from kindergarten
and did not get the amount until you
finish 12. How much will you have in your
bank account after 12 years.
Assignment
Principal Rate Time Compound Maturity
interest Ic Value
10,000 8% 15 (1) (2)
3000 5% 6 (3) (4)
50,000 10.5% 10 (5) (6)
(7) 2% 5 (8) 50,00
(9) 9.25% 2.5 (10) 100,000
Solve the following problem
on compound interest
 A.What are the amounts of interest and
maturity value of a loan for P20, 000 at 6 %
compound

 B. In order to have P50,000 in 5 years, how

much should you invest if the compound
interest is 5%
Solve the following problem
on compound interest
 C.A savings account in a bank yields
0.25% compound interest annually.
Accumulate ( find the future value of )
P25,000 for 4 years in this savings account.
How much interest will be gained?
Solve the following problem
on compound interest
 D.In a certain bank, angel invested
P88,000 in a time deposited that pays
0.5% compound interest in a year. How
much will be her money after 6 years?
How much will be her money after 6
years? How much interest will she gain?
Solve the following problem
on compound interest
 E. On the 7th birthday of her daughter,
Shirlee deposited an amount in a bank
peso bond fund that pays 1.0 % interest
compound annually. How much should
she deposit if she wants to have P100,000
on her daughter’s 18th birthday?