The MATHEMATICS of FINANCE

SIMPLE INTEREST

The following variables will be our

mathematical treatment of simple interest.

P = Principal amount of the loan or investment.

r = Annual rate of simple interest.
t = Time period (term) of the loan or
investment.
I = Amount of interest paid or received.
F = Maturity value of the loan or investment.
Formula

I = Prt P=
F = P + I F = P(1 +rt)
Determining TIME PERIOD

Due date
Loan date
(Maturity Date)

TIME PERIOD
1. Approximate Time 2. Actual Time

Exact number of days in

30 days in every month
every specific months
The number of days in each month

Month No. of Days Month No. of Days

January 31 July 31

February 30 August 31

March 31 September 30

April 30 October 31

May 31 November 30

June 30 December 31

Note: if it is leap year, February will have 29 days.

Steps in solving the number of days of a Loan

1. Identify the number of days remaining in the first

month by subtracting the loan date from the number
of days in that month.
2. Write the number of days in each month.
3. Write the number of days in the last month.
4. Add the days from the first month to the last month.
Example 1: Find the actual time and approximate
time from March 3, 2017 to September 10, 2017.
Month Actual Time Approximate Alternative solution in
Time
determining the actual
March 3, 2017 31 - 3 = 28 30 – 3 = 27 time.
April 30 30 Sept. 10 = 253rd day
May 31 30 March 3 = - 62nd day
191 days
June 30 30
July 31 30
There are 191 days in actual time,
August 31 30 while 187 days in approximate time.
September 10, 2017 10 10
Total 191 187
Example 2: Find the actual and approximate
time from November 18, 2915 to may 9, 2016.
• Since 2016 is a leap year, the month of February contains 29 days in
the actual time.
Month Actual Time Approximate Alternative solution in
Time determining the actual
November 18, 2015 30 - 18 = 12 30 – 18 = 12 time.
December 31 30 Dec. 31, 2015 = 365th day
January 31 30 Nov. 18, 2915 - 322nd day
February 29 30 =
43 days
March 31 30
May 9, 2016 = + 130th day
April 30 30
(2016 is a leap 173 days
May 9, 2016 9 9 yr.)
Total 173 171
EXACT INTEREST and ORDINARY INTEREST

• Exact interest is computed in a 365 days in a year as the time

factor denominator. On the other hand, Ordinary Interest is a
type of interest where in the number of days is computed
based on 360 days in a year.

Banks and most other institutions still use ordinary interest

becasue it yields a somewhat higher interest as compared to
exact interest method. If the type of interest is not specified in
any problem, the problem will be solved using the Banker’s
Rule or ordinary interst in actual time.
Note:

• Rate must be converted to a decimal or fraction

before substituting to any formula.
• Time period is computed in terms of years. This
means that time period is expressed in months or
days must be converted to a fraction before being
substituted into formula fot t unless stted
otherwise.
Example 3: Find the interst on P28,700 at 7.3% from
March 14, 2017 to August 16, 2017 using the following:
Given: P = P28,700 r = 7.3% = 0.073
A. Ordinary interest The first step is to determine the approxiamte time and
using actual time.
actual time of the term, then compute for the ordinary
B. Ordinary interest interest and exact interest using the formula I = Prt.
using approximate
time. Month Actual Time Approximate Time
C. Exact interest March 14, 2017 31 – 14 = 17 30 – 14 = 16
using actual time. April 30 30
D. Exact interest May 31 30
using approximate June 30 30
time. July 31 30
August 16, 2017 16 16
TOTAL 155 152
A. Ordinary interest using actual C. Exact interest using actual
time. t = 155 days time. t = 155 days

I = 28,700 (0.073) = P902.06 I = 28,700 (0.073) = P889.70

B.
B. Ordinary
Ordinary interest
interest using
using D.
D. Exact
Exact interest
interest using
using
approximate
approximate time.
time. tt =
= 152
152 days
days approximate
approximate time.
time. tt =
= 152
152 days
days

I = 28,700 (0.073) = P884.60 I = 28,700 (0.073) = P872.48

Example 4: What amount of interest will be charged
on P7,300 borrowed for 3 years at a simple interest
rate of 12% per annum?

Given: P = P7,300 r = 12% = 0.12 t = 3 years

The amount of interst payable at the end of the loan period is

I = Prt = 7,300 (0.12) (3) = P2,628

The principal will earn an interest of P2,628.

 Example 5: Maria paid P9,250 on a lona made 6
months before at 12% simple interest. Find the
interest generated.
Given:
•  F = P9,250 r = 12% = 0.12 t= 6 months = 0.50 years

We will use the maturity value formula and solve in terms of P, thus
F = P(1 + rt)  P =

F = P + I  I = F – P = 9,250 – 8,726.42 = P523.58

The interest will amount to P523.58.
Example 6: If a nine-month term deposit at a bank earns a
simple interest rate off 9% per annum, how much will
have to be depsosited to earn P225 of interest?
• 
Given: I = P225 r = 9% = 0.09 t = 9 months = 0.75 years
P=

must be deposited in the nine-month term deposit to earn P225 of

interest.
Example 7: What is the present value of
P5,275 due in 6 months if 11% interest is paid?

•Given:
  F = P5,275 r = 11% = 0.11 t = 6 months = 0.5 years

Solving for P, we get

F = P(1 + rt)  P =

The present value is P5,000.

 When the time period of a loan reaches its
maturity date, the loan is said to mature. In that
point, the borrower repays the principal and the
interest. The total repayment is known as the
future value (maturity value)
Example8: Aaron makes an investment by lending P24,000
to Bartholome for 2 years at an interest rate of 11% per
annum. What is the maturity value of the investment?

Given: P = P24,000 r = 11% = 0.11 t = 2 years

The maturity value of the investment is:

F = P(1 + rt) = 24,000[1 + (0.11)(2)] = 24,000 (1.22) = P29,280

Bartholome should pay P29,280.

Example9: Abel placed P18,000 in a 240-day term deposit
earning 8 ½ % per annum. How much will the bank pay Abel
on the maturity date?
• 
Given: P = P18,000 r = 8 ½ % = 0.085 t=

F = P(1 + rt) = 18,000 [1 + (0.085)

= P19,020

The bank should pay Abel P19,020.

 Short Quiz

1.Determine the exact and ordinary interest on P15,800 at 12%

from January 9, 2018 to June 24 of the same year using actual and
approximate time.
2. Find the interest paid by Veronica on P35,000 that he borrowed
for 2 years at 15% simple interest.
3. The repayment on a loan was P13,670. If the loan was for 15
months at 12% interest a year, how much was the principal?
4. How much final amount would Abraham received if he invests
P100,000 for 1 year and 3 months at 11% simple interest?