BASIC

LONG-TERM
FINANCIAL
CONCEPTS
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ABM5
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 SIMPLE INTEREST

Simple interest is computed based on the principal amount

(original amount) and based on the annual time. It is computed by
multiplying together the principal, rate, and time.
I = PxRxT To find the future value (maturity
value) at the end of the term, add
Where: I = simple interest the principal amount and the
P = principal interest earned.
r = interest rate
t = time FV = P + I or FV = P (1+rt)
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 1. You invested Php 20,000.00 for three years at 5% simple
interest rate. How much will you get after three years?

Given: P = Php 20,000.00, r = 5 %, t = 3 years

I = Prt
I = Php 20,000.00 x .05 x 3
I = Php 3,000.00
0 1 2 3
FV = P + I or FV = P (1+rt) P20,000 P23,000

FV = Php 20,000.00 + Php 3,000.00

FV = Php 23,000.00
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 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.

Given: FV = Php 1,537.50 r = 10 % or .1 t = 3 months = 3/12 = .25

P=
𝑭𝑽 I = FV – P
𝟏+𝒓𝒕
𝑃ℎ𝑝 1,537.50 I = Php 1,537.50 – Php 1,500.00
P= I = Php 37.50
1+ 0.1 (0.25)
P = Php 1,500
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 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
t=
𝑃ℎ𝑝 20,000 (0.08)
t = 2 years
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 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
r =
I = FV – P 𝑷𝒕
𝑃ℎ𝑝 2,625.00
I = Php 27,625.00 – Php 25,000.00 r =
𝑃ℎ𝑝 25,000 (1.5)
I = Php 2,625.00 r = 0.07 or 7%
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 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
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 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

𝐹𝑉 = 𝑃ℎ𝑝 20,000 (1.05)3 0 1 2 3
P20,000 P23,152.50
𝐹𝑉 = 𝑃ℎ𝑝 23,152.50
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 FUTURE VALUE INTEREST FACTOR (FVIF)
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 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?

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

𝑭𝑽 𝟏
P= Instead of computing the value for we
(𝟏+𝒓)𝒕 (𝟏+𝒓)𝒕
𝑃ℎ𝑝 176,234.17 can use the Present Value Interest Factor (PVIF).
P=
(1+0.12)5
The values for future value interest factors are
P = Php 100,000.00
shown below. P = FV x PVIF
P = Php 176,234.17 x 0.567427
P = Php 100,000.03
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 PRESENT
VALUE
INTEREST
FACTOR
(PVIF)
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 PRESENT
VALUE
INTEREST
FACTOR
(PVIF)
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 COMPOUNDING FREQUENCY

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
𝒊
j= .
𝒎 Total number of conversion periods n
n = tm = (frequency of conversion) x (time in years)
Where:
j = nominal rate To find the maturity value, the equation is
i = interest rate 𝑭 = 𝑷 (𝟏 + 𝒋)𝒏
m = frequency of conversion
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 EXAMPLE OF NOMINAL RATES
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 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?

P = Php 15,000.00, r = 12 % or .12, t = 5 years, m = 4

𝒊
J= 𝐅 = 𝐏 (𝟏 + 𝐣)𝐧
𝒎
J=
𝟎.𝟏𝟐 𝐅 = 𝐏𝐡𝐩 𝟏𝟓, 𝟎𝟎𝟎 (𝟏 + 𝟎. 𝟎𝟑)𝟐𝟎
𝟒
F = Php 27,091.27
J = 𝟎. 𝟑 𝒐𝒓 𝟑%
F = Php 27,091.67 - Php 15,000.00
n = mt = (4)(5) = 20
F = Php 2,091.67
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 FV = P x FVIF
FV = Php 15, 000.00 x 1.806111
FV = Php 27,091.67
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.
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.
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 SIMPLE INTEREST VERSUS COMPOUND INTEREST

SIMPLE INTEREST COMPOUND INTEREST

Interest Interest
Year Principal Future Value Principal Future Value
P x 0.05 P x 0.05
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
2 Php 20,000.00 Php 1,000.00 Php 11,000.00 Php 21,000.00 Php 1,050.00 Php 22,050.00
3 Php 20,000.00 Php 1,000.00 Php 11,500.00 Php 22,050.00 Php 1,102.50 Php 23,152.50
Total: Total:
Php 3,000.00 Php 3,152.50
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