BUSINESS MATHEMATICS John Lloyd P.

Monroyo, LPT
SIMPLE AND COMPOUND INTEREST Chapter 4
LEARNING OBJECTIVES
At the end of the lesson, you will be able to:
a.) define simple and compound interest, and
differentiate simple interest problems from
compound interest problems;
b.) compute compound interest and accumulated
values using different frequencies of compounding;
c.) distinguish between future and present values.
 WHAT WILL YOU DO IF THERE IS A Ponding Question
LACK OF FUNDS IN YOUR BUSINESS?
SIMPLE INTEREST Chapter 4.1
SIMPLE INTEREST (DEFINITION)
➢It is interest calculated on the principal only.

𝐼 = 𝑃𝑟𝑡
Where, r = interest rate per year
P = principal amount
t = number of years
ACCUMULATED VALUE
➢It is the sum of the principal amount and the
amount of interest payable.

𝐴 = 𝑃 + 𝐼 = 𝑃 + 𝑃𝑟𝑡 = 𝑃(1 + 𝑟𝑡)

Where, r = interest rate per year
P = principal amount
t = number of years
SIMPLE INTEREST
Example 1: Jonathan deposited 12,000 pesos in an
account that pays 3.5% simple interest per year.
After three years, he withdrew the entire amount in
the account. Determine how much was withdrawn.
Solution:
P = 12000
r = 3.5% or 0.035
t = 3 years
SIMPLE INTEREST
Solution: 𝐼 = 𝑃𝑟𝑡
𝐼 = 12000 × 0.035 × 3
𝐼 = 1260

𝐴=𝑃+𝐼
𝐴 = 12000 + 1260
𝐴 = 13260
COMPOUND INTEREST Chapter 4.2
COMPOUND INTEREST (DEFINITION)
➢It is interest calculated on the principal and the
interest earned from previous interest periods.

𝑟 𝑛𝑡
𝐴 =𝑃 1+
𝑛
Where, A = accumulated value
n = compounding frequency
COMPOUND INTEREST
Example 2: Suppose Lina borrows 12,500 pesos
from Victor, and this loan is payable in two years.
How much Lina pay Victor at the end of two years if
the 11.5% interest rate Victor mentioned was
compounded (a) annually, (b) semiannually, (c)
quarterly, (d) monthly, and (e) daily?
Solution:
P = 12500 r = 0.115 t = 2 years
COMPOUND INTEREST
Solution (a): n = 1 (annually)
𝑟 𝑛𝑡
𝐴=𝑃 1+
𝑛
0.115 1×2
𝐴 = 12500 1 +
1
2
𝐴 = 12500 1 + 0.115
𝐴 = 12500 1.243225
𝐴 = 15540.31
COMPOUND INTEREST
Solution (b): n = 2 (semiannually)
𝑟 𝑛𝑡
𝐴=𝑃 1+
𝑛
0.115 2×2
𝐴 = 12500 1 +
2
4
𝐴 = 12500 1 + 0.0575
𝐴 = 12500 1.25061
𝐴 = 15632.61
COMPOUND INTEREST
Solution (c): n = 4 (quarterly)
𝑟 𝑛𝑡
𝐴=𝑃 1+
𝑛
0.115 4×2
𝐴 = 12500 1 +
4
8
𝐴 = 12500 1 + 0.02875
𝐴 = 12500 1.25452
𝐴 = 15681.54
COMPOUND INTEREST
Solution (d): n = 12 (monthly)
𝑟 𝑛𝑡
𝐴=𝑃 1+
𝑛
0.115 12×2
𝐴 = 12500 1 +
12
𝐴 = 12500 1 + 0.009583ത 24

𝐴 = 12500 1.25722
𝐴 = 15715.28
COMPOUND INTEREST
Solution (e): n = 365 (daily)
𝑟 𝑛𝑡
𝐴=𝑃 1+
𝑛
0.115 365×2
𝐴 = 12500 1 +
365
730
𝐴 = 12500 1 + 0.00032
𝐴 = 12500 1.25855
𝐴 = 15731.93