BF LAS 6 For Reproduction

Republic of the Philippines
Department of Education
Region III - Central Luzon
Schools Division of Tarlac Province
Marawi National High School
Camiling, Tarlac
Business Finance
Quarter 3 – Module 6:
Bank and Nonbank Loan Requirements
Name of Student:
___________________________________________________
Grade & Section:
___________________________________________________
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Marawi, Camiling, Tarlac
Contact No.: (045) 800-9003
Email Address: 300972.marawinhs@deped.gov.ph
Camiling, Tarlac
What I Need to Know
This module deals with simple and compound interest. The concepts of
simple and compound interest are explained.
At the end of this module, you are expected to calculate future value and
present value of money (ABM_BF12-IIIg-h-18) by:
• distinguishing simple and compound interest; and

• solve exercises and problems in computing for time value of money
with the aid of present and future value tables.
Lesson 1: Simple and Compound Interest
Businesses and individuals borrow money if in need of cash. When they borrow
money, they incur debt. The lender earns money through interest and the borrower
gets the money he needs but in return, he needs to pay the money he borrowed
plus the interest.
What is the time value of money?

The time value of money (TVM) is the concept that money you have now is worth
more than the identical sum in the future due to its potential earning capacity. This
core principle of finance holds that provided money can earn interest, any amount
of money is worth more the sooner it is received. (Investopedia)
People invest their money to receive returns in the future. The time value concept
helps individuals or businesses to analyze what will be the value of money in the
present and in the future.
The present value is the original amount borrowed, the future value is the
principal plus the total interest earned over a stated period, the interest is the
amount of money paid for the use of borrowed money. Present value and future
value are both involved in the time value of money. Both consider three factors:
principal, interest rate, and time.
What is It
Simple Interest
Simple interest is computed based on the principal amount (original amount) and
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based on the annual time. It is computed by multiplying together the principal, rate,
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and time.

Contact No.: (045) 800-9003
Camiling, Tarlac
I = Prt
Where: I = simple interest
P = principal
r = interest rate
t = time
To find the future value (maturity value) at the end of the term, add the principal
amount and the interest earned.
FV = P + I or FV = P (1+rt)
Example 1: You invested Php 20,000.00 for three years at 5% simple interest rate.
How much will you get after three years?
Solution:
Given: P = Php 20,000.00 r = 5 % or .05 t = 3 years I = Php
20,000.00 x .05 x 3
= Php 3,000.00
FV = Php 20,000.00 + Php 3,000.00

= Php 23,000.00
Figure 1. Growth Value Using Simple Interest
Example 2: Alex paid Php 1,537.50 with a loan made 3 months before at 10% simple
interest. Find the principal amount of the loan and the interest generated.
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Contact No.: (045) 800-9003
Camiling, Tarlac
Example 3: The interest on a loan of Php 20,000.00 is Php 3,200.00. If the rate is
8%, when is the loan due?
Given: P = Php 20,000.00 r = 8 % or .08 I = Php 3,200.00
I
t =
Pr
Php 3,200.00
=
Php 20,000.00 (.08)
= 2 years
Example 4: Determine the simple interest rate if an investment of Php 25,000.00
accumulates Php 27,625.00 in 18 months.
Given: P = Php 25,000.00 FV = Php 27,625.00 t = 18
months = 1.5 years I = FV – P

= Php 27,625.00 – Php 25,000.00
= Php 2,625.00
I
r =
Pt
Php 2,625.00
=
Php 25,000.00(1.5)
= .07 or 7 %
Compound Interest
Compound interest is simply earning interest on interest. It means that the interest
earned is added to the principal, and the new principal draws interests.
FV = P (1 + r) t
Where: FV = future value
P = principal
r = interest rate
t = time
Example 5: You invested Php 20,000.00 for three years at 5% compound interest
rate. How much will you get after three years?
P = Php 20,000.00 r = 5 % or .05 t = 3 years FV = Php

20,000 (1+.05)3
= Php 20,000.00 (1.05)3
4
= Php 23,152.50
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Contact No.: (045) 800-9003
Camiling, Tarlac
Figure 2 Growth Value Using Compound Interest
Instead of computing the value for (1 + r) t, we can use the Future Value Interest
Factor (FVIF). The values for Future Value Interest Factors are shown in Table 1.1
and Table 1.2.
FV = P x FVIF
= Php 20,000.00 x 1.157625
= Php 23,152.50
See Table 1.1. The rate is 5% and

the time is 3 years.
Example 5: Your father paid Php 176,234.17 with a loan made 5 years ago at 12%
compound interest. What is the principal amount of the loan and the interest
generated?
Solution:
Given: FV = Php 176,234.17 r = 12 % or .12 t = 5 years

FV
P =
(1+r)𝑡𝑡𝑡𝑡
𝑃𝑃𝑃𝑃ℎ𝑝𝑝𝑝𝑝 176,234.17
=
(1+.12)5
= Php 100,000.00
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Contact No.: (045) 800-9003
Camiling, Tarlac
Compounding frequency is the number of times an interest is computed on a certain

principal in one year. The conversion period per year could be annually,
semi-annually, quarterly, or monthly. The equation is j = 𝑖𝑖𝑖𝑖 .
𝑚𝑚𝑚𝑚
Where: j = nominal rate
i = interest rate
m = frequency of conversion
Total number of conversion periods n
n = tm = (frequency of conversion) x (time in years) To find the
maturity value, the equation is F = P (1+j) n
No. of Interest Rate per Period
Compounding Frequency Compoundin % decimal
g Periods
10 % compounded annually 1 10 .1
= 10
1
10 % compounded semi-annually 2
10 .05
=5
2
10% compounded quarterly 4
10 .025
= 2.5
4
10 % compounded monthly 12 10 .0083
= .83
12
Table 3. Example of Nominal Rates
Example 5: Find the maturity value and interest if Php 15,000.00 is deposited in a
bank at 3% interest compounded quarterly for five years.
P = Php 15,000.00 r = 12 % or .12 t = 5 years m = 4
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Contact No.: (045) 800-9003
Camiling, Tarlac
Simple Interest versus Compound Interest

Simple interest is the interest paid on the initial principal only, while compound
interest is the interest paid on both the principal and the amount of interest
accumulated in prior periods.
Using the previous example, let us compare simple and compound interest. What
did you notice with the principal amount and the interest amount? In simple interest,
the interest is earned on the initial principal only, but in compound interest, the
interest is earned on both the principal and the amount of interest accumulated in
previous periods.
Simple interest Compound interest
Interest Interest
Year Principal Future Value Principal Future Value
P x .05 P x .05
1 Php 20,000.00 Php 1,000.00 Php 10,500.00 Php 20,000.00 Php 1,000.00 Php 21,000.00
TOTAL: TOTAL:
Php 3,000.00 Php 3,152.50
Table 4. Simple Interest versus Compound Interest
Activity 6
Problem 1
Compute the following using a simple interest assumption:

1. Liza borrowed Php 18,000.00 at 11% interest for 3 years. How much money
did she have to pay?
Answer:______________________________________________
2. Mario borrowed from his friend Php 15,000.00 to buy a new laptop. His friend
charged 5% for the borrowed amount payable after two years. How much will be the
interest and the future value?
Answer:______________________________________________
Problem 2
Using the situations provided in Activity 1, compute each scenario using compound
interest assumptions.
Answer:______________________________________________
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Answer:______________________________________________

Contact No.: (045) 800-9003
Camiling, Tarlac
Directions: Choose the correct answer from the box below.
Present Value Interest Factor (PVIF) Simple
Future Value Interest Factor (FVIF) Compound
Compounding frequency Rate
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Contact No.: (045) 800-9003
Camiling, Tarlac
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Contact No.: (045) 800-9003
Camiling, Tarlac
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Contact No.: (045) 800-9003
Camiling, Tarlac
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Contact No.: (045) 800-9003
Camiling, Tarlac
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Contact No.: (045) 800-9003

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Republic of the Philippines

Grade & Section:

Marawi National High School

What I Need to Know

• distinguishing simple and compound interest; and

Lesson 1: Simple and Compound Interest

What is the time value of money?

Marawi National High School

FV = Php 20,000.00 + Php 3,000.00

Figure 1. Growth Value Using Simple Interest

Marawi National High School

Given: P = Php 25,000.00 FV = Php 27,625.00 t = 18

months = 1.5 years I = FV – P

P = Php 20,000.00 r = 5 % or .05 t = 3 years FV = Php

Marawi National High School

Figure 2 Growth Value Using Compound Interest

See Table 1.1. The rate is 5% and

Given: FV = Php 176,234.17 r = 12 % or .12 t = 5 years

Marawi National High School

Compounding frequency is the number of times an interest is computed on a certain

Marawi National High School

Simple Interest versus Compound Interest

Compute the following using a simple interest assumption:

Marawi National High School

Directions: Choose the correct answer from the box below.

Present Value Interest Factor (PVIF) Simple

Future Value Interest Factor (FVIF) Compound

Compounding frequency Rate

Marawi National High School

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