MODULE 2

PRESENT VALUE AT SIMPLE INTEREST

All financial decision making must take into account the basic idea that money has time value. A
thousand pesos today is worth more than a thousand pesos next year, because a thousand pesos today
can be invested to give a thousand pesos plus interest next year. Therefore, it is important to know the
present value of certain sums of money as it will help us in choosing between 2 plans such as paying
cash or using credit. A good way to compare plans is to get all of them on a present value basis, because
it is easier to choose when we know what each is worth NOW.

PRESENT VALUE may be defined as the current value of an amount which is due at some future time. To
find the present value, it is assumed that money is loaned out or invested at a certain interest rate. If the
interest is computed on a yearly basis, then, it is at simple interest. Hence, from the simple interest
formula F=P ( 1+ rt ) , we derived the formula for the present value P .

F
P=
1+rt

where; P=¿ present value

F=¿ final amount
r =¿simple interest rate per year in %
t=¿ time or term in years

Example 1.
If money is worth 9 ½%, what is the present value of P 10,500 due in 1 ½ years?
Solution:

Given: F=¿P 10,500

r =¿ 9 ½% = 0.095
t=¿ 1 ½% = 3/2 years

Find: P
F
P=
1+rt
P10,500
¿
3
1+ ( 0.095 ) ( )
2
¿P 9,190.37

Enrichment Exercise 1
1. How much must a father invest today at 15% simple interest in order to have P 245,000 for the
college education of his son five years later?

2. Find the present value of P 5,250 at 15 ½% simple interest for a 6-month term?

3. Discount P 5,000 at 12% simple interest for 4 months.

BANK DISCOUNT
If the charge for business loans is based on the final amount rather than on the principal or present
value, this charge is called BANK DISCOUNT or simply DISCOUNT. The money which the borrower
receives is called the PROCEEDS. The percent used in computing the discount is called the DISCOUNT
RATE. Discount, like simple interest is also an amount paid for borrowing money. However, unlike simple
interest, the discount is charged in advance.

As an example of a bank discount transaction, consider the following: Suppose a man wants to borrow P
10,000 for a year from a lender who charges a discount rate of 20%. The lender will take 20% of P
10,000 from the P 10,000 and give the borrower P 8,000. The P 2,000 taken was the interest in advance,
thus, the computation of bank discount is exactly the same as the computation of simple interest
except that it is based on the final amount rather than on the principal. This leads to the bank discount
formula:

I d=Fdt

where; I d=¿ discount in pesos

F=¿final amount in pesos
d=¿ discount rate in %
t=¿time or term of the loan

To compute compute P , use formula P=F−I d

We can also derive the formula for the proceeds P

From: P=F−I d
and I d=Fdt

P=F−Fdt (replacing I d by Fdt )

By factoring P=F ( 1−dt )

P
To solve for F : F=
1−dt

Example 2.
A man borrows P 800 due in 6 months from a lender who charged a discount rate of 8%. How much was
the discount and the money the borrower gets?

Solution:
Given: F=¿P 800
d=¿ 8% = 0.08
t=¿6 months = 6/12 = ½ year

Find: I d and Proceeds P

I d=Fdt
¿P 800 (0.08) (1/2)
 ¿ P 32.00

P=F−I d
¿P 800.00 −¿P 32.00
¿P 768.00
Example 3.
Discount P 5,000 at 12% simple discount for 4 months.

Solution:
Given: F=¿ P 5,000
d=¿ 12% = 0.12
t=¿ 4 months = 4/12 = 1/3 yr.

Find: P
P=F ( 1−dt )
¿P 5,000 [ 1−( 0.12 )( 1/3 ) ]
¿ P 5,000 ( 0.96 )
¿P 4,800

Or use: I d=Fdt
¿P 5,000 ( 0.12 ) ( 1/3 )
¿P 5,000 (0.04)
¿P 200

Then, P=F−I d
¿P 5,000 – P 200
¿P 4,800

Example 4.
Find the amount due at the end of 18 months whose present value is P 2,000 at 14% simple discount.

Solution:
Given: P=¿P 2,000
d=¿ 14% = 0.14
t=¿ 18 months = 18/12 = 3/2 yr.

Find: F
P
F=
1−dt

2,000
¿
3
1−( 0.14 ) ( )
2

¿P 2, 531.65

SIMPLE INTEREST RATE VS. SIMPLE DISCOUNT RATE

Example 5
Discount P 10,900 for 9 months and find the discount at a) 12 % simple interest b) 12 % simple discount

Solution:
Given: F=¿P 10,900
t=¿ 9 months =9/12 = 3/4 yr.
r =d=12 %=0.12
Find: a. P and I at 12% simple interest
b. P and I d at 12% simple discount

a. at simple interest
F=P(1+rt )

F
P=
1+rt

10,900
¿
3
1+(0.12)( )
4

10,900
¿
1+ 0.09

¿P 10,000

I =F−P
¿ P 10,900 – P 10,000
¿P 900

b. at simple discount
I d=Fdt
¿P 10,900 (0.12) (3/4)
¿ P 981

P=F−I d
¿P 10,900 −¿ P 981
¿P 9,919

Thus, the present value at 12% simple interest is P 10,000 and the simple interest ( I ) is P 900, while the
present value at 12 % simple discount is P 9,919 and the simple discount ( I ¿¿ d)¿ is P 981.

Enrichment Exercise 2.
1. How much discount rate was charged if the discount on P 1,000 was P 125 at the end of one year?

2. What simple interest rate is equivalent to simple discount rate 16% in discounting an amount for 3
months?
3. What discount rate should a lender charge to earn an interest of 16% on a 6-month loan?

4. Find the (a) interest rate (b) discount rate if P 15,000 accumulates to P 19,575 in two and a half years.

5. If P 17,000 is due on November 25, 2023, find the proceeds on August 15, 2023, if the discount rate
was
18 ½%?

PROMISSORY NOTES

A PROMISSORY NOTE is a written promise by a borrower to a lender as an evidence of indebtedness

payable within a specified time in the future.

The different terms/terminologies involved in promissory note problems are:

Face value is the amount loaned or borrowed.
Date is the date the note is drawn.
Term is the time from the date when the note was written to the maturity date.
Rate is the percent at which interest is to be computed.
Drawee or payee is the party to whom the note is due.
Drawer is the writer of the note.
Maturity date is the date the note will mature or becomes due.
Maturity value is the face value plus interest, if any.

A promissory note is either be an INTEREST-BEARING NOTE or a NON-INTEREST-BEARING NOTE.

AN INTEREST-BEARING NOTE

P 50,500 CITY OF SAN FERNANDO, PAMPANGA, PHILIPPINES MAY 25,

2023

Sixty days after date, for value received, the undersigned promises to pay to the order of Juan
Dela Cruz, the principal sum of fifty thousand pesos, five hundred & no/100 pesos with interest from
date at 14% per annum.

Payable at Security Bank, City of San Fernando, Pampanga

(Signed) Pedro Penduko

In an interest-bearing note, the face value is not equal to the maturity value, and the interest rate is
specified.
The interest is computed from the day the note was written to the maturity date and added to the
principal. ( F=P+ I )

In a non-interest-bearing note, the face value equals the maturity value, but this does not necessarily
mean that the original debt did not bear interest. It merely merely means that the interest if any has
been computed and added to the principal, and the result is specified as the face value of the note,
which alsi is its maturity value. In such a note, all the computations are concentrated on the day the
note was drawn. The interest earned can also be called interest-in-advance or discount.

DISCOUNTING PROMISSORY NOTES

If the holder pf a promissory note needs money before its maturity, he can have the note discounted or
sold at a discount to a third party even before its maturity. This discount is equivalent to the interest-in-
advance. The time from the day a note is bought or discounted to the maturity date is called the TERM
OF THE DISCOUNT.

The security behind a note is increased each time a temporary owner sells the note. Thus, a note can be
sold and resold.

To discount a promissory note at the discount rate d , first, compute the maturity value F and the
maturity date, then find the term of the discount, let this time be t years and discount F for t years
using the formulas I =Fdt and P=F=I . DISCOUNTING means getting the present value P of a sum
due in the future, hence, the formula used is P=F−I .

Example 6.
A 6-month note with a face value of 10,000 bears interest at 13 ½%. The note is discounted 60 days
before maturity at a discount rate of 12 ½%. Find the proceeds.

Solution:
Given: Face=¿P 10,000
r =¿13 ½% = 0.135
t=¿ 6 months = 180 days

Discounted at:
d=¿ 12 ½% = 0.125
t=¿ 60 days before maturity

In discounting promissory notes, it is necessary to make a time diagram. A time diagram helps in the
analysis and solution to problems as we can keep track easily and accurately the different sums and the
points in time at which these sums have particular peso values.

Face Value} -------------{add interest for 180} { Maturity Value

Days at 13 ½%
P 10,000 P 10,675

120 days 60 days

Start of term Proceeds (P) end of term

First find the maturity value F .

F=P ( 1+ rt¿ )

[
¿P 10,000 1+ ( 0.135 )
360 ) ]
( 180
¿P 10,000( 1+0.0675 )
 ¿ P 10,675

Then find the discount 60 days before maturity.

I d=Fdt
¿P 10,675 ( 0.125 ) ( 60/360 )
¿ P 10,675 (0.0208333)
¿P 222.40

Then solve for the Proceeds.

P=F−I
¿P 10,675 −¿P222.40
¿P 10,452.60
Thus, the proceeds the seller of the note received was P 10452. 60, while the buyer of the note
will receive P 10,675 at the maturity date. Both the first owner of the note (seller) and the buyer earned
interest. The seller earned P 452.60 (P 10,452.60 – P 10,000) simple interest, while the buyer earned P
222.40 (P 10,675 - P 10,452.60) simple discount.

Enrichment Exercise 3
1. A 180-day note for P 60,000 at 14 ½% interest was later discounted at a bank charging 15.09 %
discount.
If the proceeds were P 62,000, how long did the bank, which discounted the note, have the note?

2. On February 7, 2023, Mark discounted a 3-month note for P 50,000. The note bears interest at 15 ½%.
One month before maturity date, it was sold to a bank which charges 16 ½% discount rate. Find the
price at which the note was bought.