Money – Time Relationships (Simple Interest)

Interest (for the borrower)

-The amount of money paid for the use of borrowed capital

Interest (for the lender)

-the income produced by the money which he/she has lent

Simple Interest

-the interest to be paid is directly proportional to the length of time the amount or principal is
borrowed
-calculated using the principal only ignoring any interest that had been accrued in preceding
periods

PRINCIPAL –the amount of money borrowed and on which interest is charged

RATE OF INTEREST – amount of money earned by one unit of principal during a unit time or one
interest period
I = Pin

I = total interest earned by the principal

P = amount of the principal
i = rate of interest expressed in decimal form
n = no. of interest periods

Total amount to be paid (F) after n interest periods:

F = P + I = P + Pin

F = P (1 + in)

Ordinary Simple Interest

-computed on the basis of one banker’s year
(1 banker’s year = 12 months, each month consisting of 30 days = 360 days)

Exact Simple Interest

-based on the exact no. of days in a year (365 – ordinary year, 366 – leap year)
-leap years are those which are exactly divisible by 4, but excluding the century years
(e.g. 1800, 1900, 2000)

Ex: Determine the ordinary simple interest on P10,000 for 9 months and 10 days if the rate of interest is
12%.

Solution:
Total no. of days = 9(30) + 10 = 280 days
I = ?; P = 10,000, i = 12%

I = Pin
I = (10,000)(0.12)(280/360)
= P933.33 (answer)

Ex. Determine the a. ordinary simple interest & b. exact simple interest on P5,000 for the period from
Jan 15 to Jun 20, 2011, if the rate of simple interest is 14 %.

Solution:
2011 is not a leap year.

a. Jan 15 – 31 = 16 days (excluding Jan 15)

Feb = 28 days
Mar = 31 days
Apr = 30 days
May = 31 days
Jun (1 – 20) = 20 days (including June 20)
Total = 156 days

Ordinary simple interest: I = Pin

= (5,000)(0.14)(156/360)
= P303.33 (answer)

b. Exact simple interest: I = (5000)(0.14)(156/365)

= P299.18 (answer)

Exercise Problem:

Determine the exact & ordinary simple interest on P1200 for the period from Jan 16 to Nov. 26 2012 if
the rate of interest is 24%.

Answer: exact simple interest = P247.87; ordinary simple interest = P252.00