Basic Concepts on Interest

In some occasions we don’t pay in cash whenever we purchase. Nowadays most people are
using postpaid connectivity in phones and internet, electricity consumptions, water
consumption which are some examples of using credit. Many prefer buying on credit at the
department or grocery store s, using credit card on big purchases, or buying automobile or
house and lot on installment plan. Before credit was oringinally given as an additional services
to hook customers and increase sales. Consumer credit now adays is not just a service to the
customers but an income generation to a company. Companies give interest or finance charge
for the credit used by the customers.

The two common types of loan are consumer loand and business loan. A consumer loan is
given to retail customers or individuals for personal purposes. On the other hand, business
loan is lent to companies or business enterprise to finance their business operating costs like
corporate loan, commercial loan, small – end- medium enterprise loan, among others.

Another type of loan is mortgage. Mortgage is a long term loan, it is usually applied when
purchasing a home , land, or a business, or when some money down and making requirements
to pay the balance in monthly installments over the life of the loan.

There are some types of mortgage such as Adjustable Rate Mortgage, Variable Rate
Mortgage,to Rate Mortgage, to name a few to compensate the lender preference in effort to
dampen inflation. The difference in the new mortgage rates is that the interest rates are not
fixed for the life of the loan and can be adjusted according to prevailing market rates of
interest.

On the other hand, amortization is financial arragement whereby a lump-sum is incurred at

compound interest now, such as loan, and its liquidated or paid off or by a series of equal
periodic payments for a special amount of time (e.g. monthly, quarterly, semiannually,
annually, etc.

Amortization loan is the repayment of a loan by periodic payments, with the possible exception
of the last payment, equal in amount . Amortization period is the lenght of time over which a
loan is scheduled to be fully repaid, after the two parties (lender and borrower) agree on the
amount of loan, the rate of interest and the repayment frequency.
INTEREST

The type of simple interest that is most commonly calculated on short-term loans is simple
interest.

Interest is a calculated only on the original principal amount and is paid at the end of the loan
period. Interest is the fee or rent that lender charge to borrowers for the temporary use of the
borrowed money. The amount borrowed is called principal. The rate of interest is the
percentage of the principal that will be charged for specified period of time (e.g. daily, weeky,
monthly, yearly, etc.).

Simple Interest

I = P . r . t.

Where:

I = interest, the amount charged for the use of money

P = principal of the original amount loaned or borrowed

R = rate of interest, the percent charged for the use of money on an annual basis.

T = time, the time allowed or taken to pay back the principal and the interest, stated
In years, months, or days.

If the time expressed in months or days, convert this year using these formulas:

1. T = no. Of months / 12
2. T = no. Of days / 360
3. T = no. Of days / 365

NOTE: if it is not specified, 360 days is used in all simple interest computation

To find final amount or maturity value ( F)

F=P+I

Since I = Prt, then, substitute Prt for 1 to F

Therefore, F = Prt

By factoring, F = P (1 + rt)
Derived Formulas:
If I given: If F given:

1. To find P 1. To find P

P= I P = F
rt 1 + rt

2. To find r 2. To find r

R =I r=F - P
Pt pt

3. To find t 3. To find t

T= I t =F -P
Pr pr

EXACT AND ORDINARY INTEREST

When time is stated in days, there are two methods commonly used to calculate the
time in terms of years and these will result to two different methods of computing for the
interest.

1. Ordinary Interest

Io = P x r x t no. Of days / 360

2. Exact Interest

Ie = P x r x t no. Of days / 365

NOTE: If the problem is not specify on which method to use always use the ordinary interest.

Actual and Approximate Time

When the time is expressed between two dates, there are four different methods of computing
for the interest.

a. Io actual = P x r x t actual no. Of days / 360 known as the Banker’s Rule

b. Io approximate = P x r x t approximate no. Of days / 360
c. Ie actual = P x r x t = actual no. Of days / 365
d. Ie approximate = P x r x t approximate no. Of days / 365
Methods of Computing Time

Two Measurements of Time

1. Approximate of time (30-day-month time)

2. Exact Time

In computing the approximate time, change the date of origin if 31 (days) to 30 or if 28 (days) to
30.

Exact time is the actual number of days and is the time basis, used for most interest
calculations.

When exact time is used, as approximate time, the first day is not counted, but the last day is
included in the total. It is necessary that you know the number of days in each month ( and
whether February falls in a leaf year).

Example:

Determine the actual and approximate time from March 3, 2015 to September 10, 25.

Month Actual time Approximate time

March 3 31-3= 28 30-3=27

April 30 30
May 31 30
June 30 30
July 31 30
August 31 30
September 10 10
Total 191 187
2. Find the exact time from January 15, 2000 to March 15, 2000

January 31-15 16 days

February 29 days (leaf year)
March 15 15 days
_________
Exact Time Total 60 days

Maturity Date or Due Date of a note is the date by which the loan must be paid in full by the
borrower of it is the date on which the loan is due and payabe.

To find the maturity date, count the number of days in the term of the loan, beginning with day
after the date of the note.

Example:

There are 90 days in the term.

Date of note: March 15, 1996

March has------------------------------------------31 days

Less: Date of note March ------------------------------15 days
Days remaining in March------------------------16

Days remaining in term after March 90-16 = 74

April has-------------------------------------------------- -30
Days remaining in term after April-------------- 44
May has------------------------------------------------ -31
---------
Due date-------------------------------------------June 13

The maturity date of the loan is June 13, 1996

Note: When Time of a Note is Expressed in Days

 The time period of most loans is expressed as a stipulated number of days from the
date of the loan. Thus the due date of a 30-day loan is exactly 30 days after date; the due date
of a 72-day loan is exactly 72 days after date;

When Time of a Note is Expressed in Months ( or Year)

If the time period of a loan is expressed as a specified number of months (Years), the
due date of the loan is found by 30-day-month time. Thus the due date of a 1-month loan
dated January would be February 25; the due date of a 3-month loan dated June 7 would be
September 7;

If there is not the required number of days in the maturity month, the maturity date is
the last day of the maturity month. Thus a 1-month loan dated January 31 is due on February
28 or February 29 in a leaf year) and a 4-month loan dated May 31 would fall due on Sept 30.

Likewise, a 1 – year loan falls due on the same date of the following year, a 2-year loan
falls due on the same day of the second year following etc;

Exact time and approximate between two dates

Activities
1. July 15, 2007 to August 25, 2008

2. June 31, 2005 to January 5, 2012

3. May 10, to August 10

4. July 8 to November 23

5. November 25, 2009 to Feb. 2, 2010

6. May 3, 2017 to September 10, 2017

7. November 18, 2015 to May 9, 2016

8. April 13, 2011 to Jan. 8, 2012

9. 5 YEARS AFTER NOVEMBER 8, 2010
10. 4 years, 4 Months after September 12, 2008