Module 1.1: Simple Interest-2
ORDINARY INTEREST – based on 360 day per
SIMPLE INTEREST
Definition of Terms:
• Lender / Creditor – the person or institution that
makes the funds available to those who need it.
• Borrower – the person or institution that avails of
the funds from the lender.
• Interest – a certain sum of money that the lender
charges the borrower for the use of the funds.
1. Principal (P): is the sum of money borrowed or
invested.
2. Interest (I): The amount of money that you pay to
borrow money or the amount of money that you
earn on a deposit.
3. Time (T): The duration for which the money is
borrowed/deposited.
4. Rate of Interest (R): is the rate charged by the
lender or the rate of increase of the investment.
To Calculate simple interest on the principal only, I =
Prt. Simple interest does not include the effect of
compounding.
Simple Interest Formulas:
I = Prt, where: I = Interest Amount
• P = Principal Amount
• r = Rate of Interest per year in decimal.
r = R/100
• t = Time Periods involved
• F = Final Amount
Calculate Interest, solve for I
• I = Prt
Calculate Principal Amount, solve for P.
• P = I / rt
Calculate rate of interest in decimal, solve for r
• r = I / Pt
Calculate time, solve for t.
• t = I / Pr
Final Amount (F) = P + I or F = P (1 + rt)
Note:
1) Base formula I = Prt, where P is the Principal
amount of money to be invested at an Interest Rate
r% per period for t Number of Time Periods. Where r
is in decimal form; r=R/100. r and t are in the same
units of time.
2) If the loan is for less than 1 year, use the fraction of
a year.
1.
calendar year.
2. EXACT INTEREST – based on 365 day per
calendar year.
3. ACTUAL TIME – based on actual / exact number
of days per month. (ex. January 31 days,
February 28 or 29 days for leap year, March
31and so on)
4. APPROXIMATE TIME - it assumes 30 days per
month.
• ORDINARY INTEREST/ACTUAL TIME = exact
days of the year/360
• ORDINARY INTEREST/APPROXIMATE TIME
= 30 days per month/360
• EXACT INTEREST/ACTUAL TIME = exact
days of the year/365
• EXACT INTEREST/APPROXIMATE TIME = 30
days per month/365
Module 1.2: Simple Discount-2
SIMPLE DISCOUNT
• The process of finding the present value of a
given amount that is due on a future date and
includes a simple interest is called discounting
at simple interest, or commonly, r=the simple
discount method. In other words, to discount
an amount by the simple interest process is to
find its present value.
The Simple Discount Formula
D = Fdt
• D = represents the amount of SIMPLE
DISCOUNT; Bank discount (interest taken in
advance)
• F = represents the MATURITY VALUE
• d = represents the INTEREST DISCOUNT
RATE (Interest rate for interest taken in
advance)
• t = represents the TERM FOR THE LOAN (in
years)
• P = proceeds/present value of the loan
Calculate Simple Discount, solve for D.
• D = Fdt
Calculate Maturity value, solve for F
• F = D / dt
Calculate interest discount rate, solve for d
• d = D / Ft
Calculate time, solve for t.
• t = D / Fd
Calculate Present value, solve for P.
• P=F-D
• P = F (1 – dt)
Sample Problems on SIMPLE DISCOUNT
The interest is P2,000. The total amount of Rafael’s
1. Discount P5,875 at 12% simple discount for 4 money after 2 years
months. Find P. is P22,000.

Given: F = P5875 d = 12% or 0.12 T = 4/12 2. At what annual interest rate is P500 one year ago
Solution: equivalent to P600 today?
D = FdT Given: F = P600 P = P500 I = 100 t = 1 year
P = 5875 - 235 r =?
Solution:
D= (5875) (.12) (4/12) r = 100/ (500)(1)
P = P 5640 r = 0.20 or 20% interest rate
D = P235
3. Determine the principal that would have to be
2. How much interest will be deducted from a Lolo invested to provide P200 simple interest at the end of
north P20,000 after 3 years with a discount rate of 18 months if the interest rate is 7.5%
6%? How much will the proceeds of the loan be? Given: I = P200 r = 7.5% or 0.075 t = 18
months (18/12 or 1.5) P= ?
Given: F = P20,000 d = 6% or 0.06 t = 3 years
D =? P =? Solution:
Solution: P = 200/ (0.075) (1.5)
D = 20,000 (0.06) (3) P = 20,000 – 3,600 P = P1,777.78
D = P3,600 P = P16,400
4. How long will it take for an investment of P5,000 to
3. Sam wants to borrow P12,000 payable in two years grow to P7,500 if it earns 10% simple interest per
a at 12% discount rate. How much will Sam receive year?
on the origin date? How much will he pay on the
maturity date? Given: F = P7,500 P = P5,0000 I = P2,500
Given: F = P12,000 d = 12% or 0.12 t=2 r = 10% or 0.10 t=?
years P =?
Solution:
Solution: t = 2,500/ (5,000) (0.10)
t = 5 years
P = F (1-dt)
= P12,000 [ 1 – (0.12) (2)]
P = P9120.00
5. Anastasia-Grey Company deposited P100, 000 in
*Sam will receive P9120 on the origin date. However, a bank account on Oct 12 and withdraws a total of
he would pay P12,000 on the maturity date since the P115,000 exactly on October 12 of the next year.
interest has already deducted in advance. What is the annual interest rate at which the company
was paid?
Sample Problems on Simple Interest and Final
Amount Given : P = P100,000 F = P115,000 I = P15,000
t = 1 year r =?
Simple Interest (I) = Prt Final Amount (F) = P + I Solution: r = 15,000 / (100,000) (1)
or F = P (1 + rt) r = 0.15 or 15%

1. Rafael deposits P20,000 in a savings account that

pays interest at the rate of 5% per year. How much is
the interest and what will be the total amount after two
years?
Given: P = P20,000 r = 5% or 0.05 t=2
Solution: I = (20,000) (0.05) (2) F = P + I
I = P 2,000 F = 20,000 + 2,000
F = P22,000
 COMPOUND INTEREST 2. What is the present value of P35,000 due in 7
years and 6 months if the rate is 12% compounded
COMPOUND INTEREST quarterly?
• interest that is computed on the sum of the Given: F = P35,000 t = 7.5 years
original principal of a deposit or loan and the m=4 r =12% or 0.12
interest accumulated.
Solution:
• Interest earned per period is automatically
i = 0.12 / 4 = 0.03 n = (7.5) (4) = 30
reinvested to earn more interest.
P = F (1 + i)-n
• The rate of interest may be compounded once,
P = P35,000 (1 + 0.03)-30
twice, or several times in a year.
P = P14,419.54
Definition of Terms:
*The present value of P35,000 that is due at the
• Frequency of conversion (m) – is the number
end of 7.5 years is P14,419.54
of times that the interest is computed for the
span of 1 year. 3. How much do you need to invest now, to get
• Total number of conversion periods for the P10,000 in 10 years at 8% interest rate?
entire term (n) – is the product of the frequency
of conversion and the number of years. P =P10,000(1+0.08)-10
• Nominal rate – is the rate charged which may =10,000 (2.1589)
be converted several times per year. n = tm P =P4,631.93
• Compound Interest – the total interest earned
for the entire term. So, P4,631.93 invested at 8% for 10 Years grows to
F = Compound amount or accumulated value of P at $10,000.
the end of the term.
=Future value
P = Present value or original principal 4. You take out a P1,000 loan for 12 months and it
i = interest rate per period says 1% per month, how much do you pay back?
n = total number of conversion period
Just use the Future Value formula with "n" being
Nominal interest rate and Effective interest rate. the number of months:
• The nominal interest rate does not take into
account the compounding period. The effective F = P (1+r)n
interest rate does take the compounding period = P1,000 × (1.01)12
into account and thus is a more accurate = P1,000 × 1.12683
measure of interest charges. F = P1,126.83 to pay back

Sample Problems on Compound Interest and 5. (Based on #4 problem)

Compound Amount At 6% interest with monthly compounding does
not mean 6% per month, it means 0.5% per month
If Mrs. De Leon invested P12,900 for 4 years in a bank (6% divided by 12 months), and is worked out like
that pays 3% compounded semi-annually, how much this:
will she receive after 4 years? How much interest will
F = P (1+r/n) n
Mrs. De Leon’s investment earn?
= P1,000 (1 + 0.06/12)12
Given: P = P12,900 t = 4 years m = 2 j = 3% or 0.03
= P1,000 (1 + 0.005)12
Solution:
= P1,000 (1.005)12
i = 0.03/2 = 0.015 n = 4 (2) = 8
=P1,000 × 1.06168...
F = P (1 + i) n
F = P12,900 (1 + 0.015) 8 = P14,531.75 F =P1,061.68 to pay back

*This is equal to a 6.168% (P1,000 grew to

I = P14,531.75 – P12,900 = P1,631.75
P1,061.68) for the whole year.
De Leon will receive P 14,531.75 after 4 years. Her
investment will earn total interest of P1,631.75 after 4
years.
6. Example: you have $1,000, and want it to grow to 9. How many years to turn P1,000 into P10,000 at 5%
$2,000 in 5 Years, what interest rate do you need? interest?
n = ln(P10,000/P1,000 ) / ln( 1 + 0.05 )
The formula is: r = (F / P )l n - 1 = ln (10)/ln (1.05)
=2.3026/0.04879
Note: the little "ln" is a Fractional Exponent Links to an n = 47.19
external site., first calculate 1/n, then use that as the
exponent on your calculator. *47 Years. But we are talking about a 10-fold
increase, at only 5% interest.
For example 20.2 is entered as 2, "x^y", 0, ., 2, =
Now we can "plug in" the values to get the result:

r = (P2,000 / P1,000 )1/5 − 1

= (2)0.2 − 1
= 1.1487 − 1
r=0.1487 and 0.1487 as a percentage is 14.87%,

*So, you need 14.87% interest rate to turn

$1,000 into $2,000 in 5 years.

7. What interest rate do you need to turn P1,000 into

P5,000 in 20 Years?

r =(P5,000 / P1,000 )1/20 − 1

= (5)0.05 − 1
=1.0838 − 1
r = 0.0838 and 0.0838 as a percentage is 8.38%.

*So, 8.38% will turn $1,000 into $5,000

in 20 Years.

8. You want to know how many periods it will take to

turn P1,000 into P2,000 at 10% interest.

This is the formula (note: it uses the natural

logarithm function ln):

t = ln (F / P) / ln(1 + r)

The "ln" function should be on a good calculator.

You could also use log, just don't mix the two.
Anyway, let's "plug in" the values:

t = ln (P2,000/P1,000 ) / ln( 1 + 0.10 )

= ln (2)/ln (1.10)
t =0.69315/0.09531
t =7.27

*It will need 7.27 years to turn P1,000 into

P2,000 at 10% interest.
 Buying Merchandise
Brand Alternatives:
1. (Manufacturer) Brands
- Designed, produced, and marketed by a
vendor and sold by many retailers.
2. Private-Label (Store) Brands
- Developed by a retailer and only sold in the
retailer’s outlets.
Categories of Private Brands
• PREMIUM – comparable to, even superior to,
manufacturer’s brand quality, with modest price
savings Ex. Walmart, Tesco
• GENERIC – target a price sensitive segment by
offering a no-frills product discount.
• COPYCAT – imitate the manufacturer’s brand in
appearance and packaging, perceived as lower
quality, offered at lower price.
• EXCLUSIVE CO BRANDS – developed by a
national brand vendor and sold exclusively by the
retailer. Difficult for consumers to compare prices
for virtually the same product.
EXCLUSIVE BRANDS
Relative Advantages of Manufacturer vs. Private
brands
National (Manufacturer) Labels
Advantages
1. Help retailers build their image and traffic flow.
2. Reduces selling/promotional expenses.
3. More desired by customers
4. Customers patronize retailers selling the
branded merchandise.
5. Large retailers can push some of the financial
risk of buying merchandise back onto the
vendor.
Disadvantages
1. Lower margins
2. Vulnerable to competitive pressures
3. Limit retailer’s flexibility
Private Labels
Advantages
1. Unique merchandise not available at
competitive outlets
2. Exclusivity boosts store loyalty
3. Difficult for customers to compare price with
competitors.
4. Higher margins
Disadvantages
1. Require significant investments in design,
global manufacturing sourcing.
2. Need to develop expertise in developing and
promoting brand.
3. Unable to sell excess merchandise.
4. Typically, less desirable for customers
Buying National Brand Merchandise
Buying decision for fashion apparel/accessories:
• 5-6 times a year
• Many months before delivery
• Withhold open-to-buy (OTB) for new items
with fashion change.
Buying decision for staple merchandise:
• Less frequent
• Continuous replenishment
Meeting National Brand Vendors
Wholesale Market Centers
• National Markets (New York), Regional
Markets (Dallas, Atlanta, Miami), London,
Milan, Paris, Tokyo
Trade Shows
• Frankfurt Book Fair, Las Vegas Consumer
• Electronics Show, Atlanta Super Show for
Sporting Goods
Internet Exchanges
• Worldwide Retail Exchange
Meeting Vendors at Your Company
 National Brand Buying Process
• Meet with vendors.
• Discuss performance of vendor’s merchandise
during the previous season
• Review the vendor’s offering for the coming
season.
• May place orders for the coming season.
• Sometimes they do not buy at market, but review
merchandise, return to their offices to discuss
with the buying team before negotiating with
vendors.
Developing Private-Label Merchandise
In-House: Large retailers (e.g., JCPenney, Macy’s,
The Gap, American Eagle Outfitters) have divisions
specialized in:
• identifying trends, designing, specifying
products
• Selecting manufacturers
• Monitoring and managing manufacturing
conditions and product quality
Acquisition: Limited Brands acquired MAST
Industries:
MAST
- one of the world’s biggest contract
manufacturers, importers, distributors of
apparel
- Have manufacturing operations and join
ventures in 12 countries.
- Also provides private label merchandise for
Abercrombie & Fitch, Lane Bryant, New
York & Company, Chico’s
Outsource: ex. Li & Fung
- partnered with many specialties’ retailers.
Sourcing Private-Label Merchandise
After decisions are made on what and how much
private-label merchandise will be acquired,
• Designers develop specifications.
• Sourcing departments find a manufacturer,
negotiate a contract, and monitor the
production process, or
• Use Reverse Auctions to get quality private-
label merchandise at low prices.
Support Services for buying Merchandise.
Resident Buying Services include.
• Reports on market and fashion trends
• Assistance with merchandise budget and
assortment plans
• Assistance in order placement, adjustments
with vendors
• Introduction to new resources
• Import purchases.
• Exclusivity of merchandise (private-label and
special purchases)
• Arrangement of vendor appointments
• Example: The Doneger Group
Retail Exchange
• Internet-based solutions and services for
retailers
• Example: Agentrics, WorldWide Retail
Exchange (WWRE), GlobalNetXchange
(GNX)
Legal and Ethical Issues for Buying Merchandise
• Purchase Terms and Conditions
• Resale Price Maintenance
• Commercial Bribery
• Chargebacks
• Buybacks
Terms and Condition of Purchase
The Robinson-Patman Act (Anti-Chain-Store Act)
• Restricts the prices and terms that vendors
can offer to retailers.
• Forbid vendors from offering different terms
and conditions to different retailers for the
same merchandise and quantity.
• Different prices can be offered if:
- The cost of manufacturing, selling, and
delivery are different.
- the retailers are providing different
functions (distribution, store service, etc.)
Resale Price Maintenance (RPM)
A requirement imposed by a vendor that a retailer
cannot sell an item for less than a specific price- the
manufacturer’s suggested retail price (MSRP)
- For ensuring adequate margin for retailers,
but some retailers do not appreciate RPM to
have the flexibility on pricing.
- Reduces free riding of discount stores.
- Is legal (was illegal in the past for obstructing
competition) as long as it promotes Interbrand
competition and restricts Interbrand
competition.
Commercial Bribery
• A vendor or its agent offers to give or pay a
retail buyer “something of value” to influence
purchasing decisions.
• A fine line between social courtesy of a free
lunch and an elaborate free vacation
• Some retailers with a zero-tolerance policy
• Some retailers accept only limited
entertainment or token gifts.
 Chargebacks
• A practice used by retailers in which they
deduct money from the amount they owe a
vendor without getting vendor approval.
• Two reasons:
- merchandise isn’t selling.
- vendor mistakes
• Difficult for vendors – Disrupt relationships.
Buybacks
• Stock lifts, Lift-outs
• Used to get products into retail stores.
• Two scenarios:
- Retailer allows a vendor to create space
for its goods by “buying back a
competitor’s inventory and removing it
from retailer’s system.
- Retailer forces a vendor to buyback
slow-moving merchandise.
Exclusive Dealing Agreements
• Occur when a manufacturer or wholesaler
restricts a retailer into carrying only its
products and nothing from competing
vendors.
• EX. Safeway – Coca cola
• Illegal when they restrict competition.
Tying Contract
• An agreement that requires the retailer to take
a product it doesn’t necessarily desire (the
tied product) to ensure that it can buy a
product it does desire (the tying product)
• Illegal when they lessen competition.
• Ok to protect goodwill and quality reputation
of vendor- legal for a vendor to require a
buyer to buy all items in its product line.

Counterfeit Merchandise
• Goods made and sold without the permission
of the owner of a trademark, a copyright, or a
patented invention that is legally protected in
the country where it is marketed.
• Major problem is counterfeiting intellectual
property.

Gray Markets and Diverted Merchandise

Gray Market Merchandise (parallel imports)
• possess a valid U.S. registered trademark and
is made by a foreign manufacturer but is
imported into the United States without
permission of the U.S trademark owner.
- Not counterfeited
- is legal.
Diverted Merchandise is similar to gray-market
merchandise except there need not be distribution
across boundaries.

Gray Markets and Diverted Merchandise:

Taking Sides
• Discount stores argue customers benefit
because it lowers prices.
• Traditional retailers claim important service
after sale will be unavailable.
• May hurt the trademark’s image.

How do Vendors avoid the Gray-Market problem?

• Require retail and wholesale customers to
sign a contract stipulating that they will not
engage in gray-marketing.
• Produce different versions of products for
different markets.