SIMPLE INTEREST and

COMPOUND INTEREST
SIMPLE INTEREST
Examples:
1. A certain bank offers 5% annual interest
for their time deposit account. Ariel invested
P 100,000 for 5 years. How much will Ariel
have at the end of the term?
given:
r = 5% = 0.05
P = P 100,000
t = 5 years
F=?

solution:
I = Prt = (100,000)(0.05)(5) = P25,000
F = P + I = 100,000 + 25,000 = P 125,000
2. Rica borrowed P 20,000 for an annual
interest of 10% for 9 months. At the end of
teh term, how much is the interest and the
total amount paid by Rica?

given:
P = P 20,000
r = 10% = 0.10
t = 9 months = 0.75 yr
I =?
F=?
solution:
I = Prt = (20,000)(0.10)(0.75)
I = P 1,500

F = P + I = 20,000 + 1,500 = P 21,500

3. An enterpreneur loans P500,000 payable
in 3 years. How much is the interest rate of
the bank if he pays a total interest of
P150,000?

given:
P = P 500,000
t = 3 years
I = P 150,000
r=?
solution

I = Prt
150,000 = (500,000)(r)(3) = 1,500,000r
r = 150,000
1,500,000
r = 0.10 = 10%
 Compound interest Formula

F = P(1 + r )n
Ic = F - P
where:
F = future value or maturity value
P = present value or principal amount
Ic = compound interest
r = interest rate per compounding period = i /m
t = term in years
n = total number of compounding periods = m*t

values of m:
m = 1 (annual)
m = 2 ( bi-annual or semi-annual)
m = 4 (quarter)
m = 12 ( monthly)
1. P100,000 was invested at an interest rate of
7% compounded semi-annually. How much is the
maturity value of the investment at the end of the
period?
given:
P = 100,000
i = 5% = 0.05
m = 2(semi-annual)
t = 5 yrsm

solution:
r = I / m = 0.07/2 = 0.035
n = m*t = 2*5 = 10
F = P(1+r)n = 100,000(1+0.035)10
F = P 141,059.88