INTEREST AND DISCOUNT: CHAPTER

4
Learning Objectives: At the end of the lesson, the
student must be able to:

 Define and discuss the terms principal,

interest, and maturity value.
 Finding the number of days between dates.
TERMS:
Principal - when an investor lends money to a borrower, the
borrower must pay back the money originally
borrowed

Interest – the fee charged for the use of the money

- the amount of interest is based on 3 factors:

a. Principal
b. Rate of interest
c. time span of the loan
 Loan

Lender Borrower

Lends money (the Principal) Borrows money

(borrower OWES
to Lender (debt))
Earns Income from the
Borrower (Interest on the Borrower pays
Principal) Interest to Lender
 WHAT IS INTEREST?
INTEREST –
lending - amount of money paid by the borrower to the
principal (lender) in the case of lending

- an expense on the side of the borrower

investment - amount of money received by the

investor in the case of investment

- an income on the side of the investor

Two methods of computing interests:
 Simple interest – the interest paid on the
investment during the period
I=PxRxT

 Compound interest – means earning interest

on interest
Futurevalue
Present value
Simple I nterest
 Simple Interest
- Calculated on an ANNUAL or per annum
(pa) basis

Formula: I = PRT

I = interest earned (cost of borrowing)

P = Principal amount invested or borrowed
R = Interest rate usually given as a percent
(must changed to decimal before plugging it into formula)
T = Time (must be measured in years)
CONVERSION: TO PERCENTAGES, TO DECIMAL PLACES

Change % to decimal

1.) 12% 4.) 8.5%

2.) 5% 5.) 10.5%
3.) 2 ½ %

Change from decimal to %

1.) .098 4.) .1375

2.) .155 5.) .03
3.) .125
The sum of the principal and the interest due - called the
amount, or accumulated value or maturity value
(or future value or terminal value)

=P+I
EXERCISE:
Solve for the following using simple interest:
1) Maria borrowed PhP100,000 from Bank of Philippine Islands
(BPI) for a 12% interest payable in 3 years.
a) What is the annual interest?
b) What is the interest for 3 years?
c) What is the maturity value of the loan at the end of the term?

2. Mr. Lim lends money to Mr. Bill amounting to PhP50,000 with

an interest of 6% per annum payable in 18 months.
a) What is the annual interest income of Mr. Lim?
b) What is the interest income for 18 months?
c) At the end of 18 months, how much is due for Mr. Lim?
EXERCISE:
Solve for the following:
1) Maria borrowed PhP100,000 from Bank of Philippine Islands
(BPI) for a 12% interest payable in 3 years.
a) What is the annual interest? PhP12,000.00
b) What is the interest for 3 years? PhP36,000.00
c) What is the maturity value of the loan at the end of the term?
P136,000

2. Mr. Lim lends money to Mr. Bill amounting to PhP50,000 with

an interest of 6% per annum payable in 18 months.
a) What is the annual interest income of Mr. Lim? PhP3,000.00
b) What is the interest income for 18 months? PhP4,500.00
c) At the end of 18 months, how much is due for Mr. Bill? P54,500.00
SOLVE FOR THE UNKNOWN:

1. If I (interest) is unknown: then, I = PRT

2. If P (principal) is unknown: then, P = I/RT
3. If R (rate) is unknown: then, R = I/PT
4. If T (time) is unknown: then, T = I/PR
EXERCISES: SIMPLE INTEREST
1. Sylvia bought a 6-month PhP20,000 certificate of deposit. At the
end of 6 months, she received PhP20,500. What rate of interest
did Sylvia pay?

2. If a loan of PhP2,000 accumulate PhP400 interest annually,

what was the simple interest rate used in the computation?

3. When invested at an annual simple interest rate of 7%, an account

will earn PhP3,500.00. How much money was originally invested
in the account?

4. Mark paid PhP70,800 for a loan of PhP60,000 with 6% annual

simple interest. What was the term of the loan?
EXERCISES: SIMPLE INTEREST
1. Sylvia bought a 6-month PhP20,000 certificate of deposit. At the
end of 6 months, she received a PhP20,500. What rate of
interest did Sylvia pay?
I = PRT R= 500
R = I/PT 20,000*6/12
R = 5%

2. If a loan of PhP2,000 accumulate PhP400 interest annually,

what was the simple interest rate used in the computation?
I = PRT R = 400/2,000 (1)
R = I/PT R = 20%
EXERCISES: SIMPLE INTEREST
3. When invested at an annual simple interest rate of 7%, an account
will earn PhP3,500.00. How much money was originally invested
in the account?
I = PRT P = 3,500
P = I/RT .07 (1)
P = PhP50,000

4. Mark paid PhP70,800 for a loan of PhP60,000 with 6% annual

simple interest. What was the term of the loan?
I = PRT T= 10,800
T = I/PR 60,000 x .06
T = 3 years
CALCULATING DUE DATES
A. If the term of loan is given in months, the due date of the
loan is a corresponding day in the maturity month
Example (1): a 2-month loan dated December 31 is due on
February 28 (or February 29 in a leap year)

Exercise: What is the maturity/due date of the following

loan:
(1) A 15-month loan dated February 2

(2) A loan dated May 31 and due in 4 months

(3) A 7-month loan dated December 4 on the current year

CALCULATING DUE DATES
B. When the time is given in days, calculate due dates by using either:
a. Exact simple interest – on the basis of a 365-day year (leap
year or not)
Formula: t = number of days
365
b. ordinary simple interest – on the basis of a 360-day year;
also called banker’s year; approximate 30 days per month

Formula: t = number of days

360

- of the two (2), ordinary interest brings greater revenue to the

lender
EXERCISES:
3. Find the maturity date of the following:

Exact Approximate

a. 60-day loan dated June 15, 2014 _____________ ______________

b. 120-day loan dated Oct. 1, 2014 _____________ ______________

c. 45-day loan dated April 9, 2014 _____________ ______________

EXERCISES:
3. Find the maturity date of the following:

Exact Approximate

a. 60-day loan dated June 15, 2014 Aug. 14, 2014 Aug. 15 , 2014

b. 120-day loan dated Oct. 1, 2014 Jan. 29, 2015 Feb. 1, 2015

c. 45-day loan dated April 9, 2014 May 24, 2014 May 24, 2014
EXERCISES:
1. Find the exact and ordinary simple interest on a 60-day loan
of P20,000 at 8%:

Exact simple interest: I = PRT

I = P20,000 x 8% x 60/365
I = PhP263.01

Ordinary simple interest: I = PRT

I = P20,000 x 8% x 60/360
I = PhP266.67
EXERCISES:
2. Find the exact and ordinary simple interest on a 90-day loan
of P90,000 at 15 1/4%:
EXERCISES:
2. Find the exact and ordinary simple interest on a 90-day loan
of P90,000 at 15 1/4%:

Exact simple interest: I = PRT

I = P90,000 x 15 1/4% x 90/365
I = PhP3,384.25

Ordinary simple interest: I = PRT

I = P90,000 x 15 1/4% x 90/360
I = PhP3,431.25
Compound I nterest
 Compound interest – interest that occurs
when interest paid on the investment during
the first period is added to the principal;
then during the second period, interest is
earned on this new sum.
Terms used:
 FVn = the future value of the investment at the end of n year; the future
value of the present sum

 PVn = the present value or original amount invested at the beginning of

the period; the current value of the future sum/payment; moving
future money back to the present; discounted back to the present

 i = the annual interest or discount rate

 n = the number of years until payment will be received or during which

compounding occurs

 m = the number of times compounding occurs during the year

 PMT = the annuity payment deposited or received at the end of each year
Terms used:
 Future-value interest factor (FVIF i,n) =
The value (1+i) n used as a multiplier to
calculate an amount’s future value

 Present-value interest factor (PVIF i,n) =

The value used as a multiplier to
calculate an amount’s present value
FORMULA:
Future/Maturity Value Present Value

Annual Periods:
FVn = PV (1+i)n PVn = FVn 1 or FVn
(1+i)n (1+i) n
Non-annual Periods:
FVn = PV (1+ i)nm PVn = FVn 1 or FVn
m (1+i)nm (1+i)nm
m m
example: if semi-annual
FVn = PV (1+ i)n(2) PVn = FVn 1 or FVn
2 (1+i)n(2) (1+i)n(2)
2 2
EXERCISE:
1. Find the accumulated value of P30,000 for 3 years at
14% compounded

a. annually d. monthly
b. semiannually e. daily
c. quarterly
ASSIGNMENT:
1. Find the accumulated value of P30,000 for 3 years at 14%
compounded
a. annually FVn = PV (1+i)n
= 30,000 (1 + .14)^3
= 30,000 (1.4815)
= PhP44,445.00

b. semiannually FVn = PV (1+ i)nm

m
= 30,000 (1+.14)^3(2)
2
= 30,000 (1+.07)^6
= 30,000 (1.5007)
= 45,021.00

c. quarterly d. monthly e. daily

c. quarterly FVn = PV (1+ i)nm
m
= 30,000 (1+.14)^3(4)
4
= 30,000 (1+.035)^12
= 30,000 (1.5111)
= 45,333.00
d. monthly FVn = PV (1+ i)nm
m
= 30,000 (1+.14)^3(12)
12
= 30,000 (1+.01167)^36
= 30,000 (1.5184)
= 45,552.00

e. daily
e. daily FVn = PV (1+ i)nm
m
= 30,000 (1+.14)^3(360)
360
= 30,000 (1+.000388)^1080
= 30,000 (1.5204)
= 45,612.00
2. ANSWER THE FOLLOWING USING SIMPLE
INTEREST:
P R T I Maturity Value
100,000 4% 2 years A B
2 years and
C 3% 3,750 D
half
45,000 E 3 yrs. F 58,500

G 8% H 60,000 210,000

200,000 5% 18 months I J
 P R T I Maturity Value

100,000 4% 2 8,000 108,000

50,000 3% 2.5 3,750 53,750

45,000 10% 3 13,500 58,500

150,000 8% 5 60,000 210,000

200,000 5% 1.5 15,000 215,000

3. DETERMINE THE ORDINARY INTEREST AND EXACT INTEREST OF EACH OF
THE FOLLOWING NOTES:

Due
Date of the Interest Interest Dates
P R T (days) loan (Ordinary) (Exact) (exact)

1. 40,000 5% 155 May 3, 2014

Dec. 18,
2. 65,000 4% 210 2014

3. 100,000 7% 68 June 3, 2014

Sept. 10,
4. 130,000 9% 70 2014
Nov. 16,
5. 200,000 10% 90 2014
3. DETERMINE THE ORDINARY INTEREST AND EXACT INTEREST OF EACH OF
THE FOLLOWING NOTES:

Due
Date of the Interest Interest Dates
P R T (days) loan (Ordinary) (Exact) (exact)
861.11 849.32
1. 40,000 5% 155 May 3, 2014
Dec. 18,
1,516.67 1,495.89
2. 65,000 4% 210 2014
1,322.22 1,304.11
3. 100,000 7% 68 June 3, 2014
Sept. 10,
2,275.00 2,243.84
4. 130,000 9% 70 2014
Nov. 16,
5,000.00 4,931.51
5. 200,000 10% 90 2014
SEATWORK:
1. Find the interest and the FV of the following using
the compound method:

a. P6,000 for 6 years at 9% compounded

quarterly

b. P25,000 for 2 years at 6% compounded daily

c. P100,000 for 10 years at 18% using simple

interest
SEATWORK:
2. Find the PV of the following using the compound
method:

a. P50,000 for 6 years at 9% compounded

quarterly

b. P15,000 for 10 year at 6% compounded

semiannually
END