Simple and

Compound
Interest
Sir Sem A. Mapa
sIMPLE
iNTEREST
Definition of
terms
Debtor or Maker - the person who borrows money for any purpose.
Lender or Creditor - the person or institution that loans money.
• There are two ways of of simple
Interest - the payment for the use of borrowed money. interest, ordinary and exact.
Principal - The sum of money invested. • There are two ways to finding time in
Interest Rate - The fractional part of the principal that is paid on the loan. between dates - approximate and actual
Time or Term - the length of time for which the money is borrowed.
Final amount or Maturity Value - The sum of the principal and the interest which is
accumulated at a certain amount of time.
Accumulation - The method when interest is paid at the end of the term.
Discounting - The method if interest is paid at the beginning of the term.
Interest-in-advance - A simple discount.
Proceeds - the amount a borrower receives.
 The formula for simple amount and simple interest:

I=P*r*t, where Alternately,

I=F-P

I = Interest

P = Principal amount ( the

amount of money borrowed)
r = rate (change the percent to a
decimal) Other formulas:
t = time (in years) When the
time is given in months or days,
it must be converted to years.
Illustrative
Examples:
1. Find the interest and the amount of ₱10,000 at 5 1/2% simple interest
for 3 years.

Given: P=₱10,000 t = 3 years r = 5 1/2% = 0.055

Required: Interest (I), Final amount (F)
Formula: I = Prt ; F = P + I F=P+I
I = Prt = ₱10,000 +₱1,650
= (₱10,000) (0.055) (3) F = ₱11,650
I = ₱1,650

Alternate Solution:
F = P ( 1 + rt )
=₱10,000 [1 + (0.055) (3)]
F = ₱11,650
Illustrative
Examples:
2. Lumnay borrowed ₱112,000 at 11% simple interest for 5 years
and 4 months. Find the final amount and interest.

Given: P=₱112,000 t = 5 years 4 months r = 0.11

Required: Interest (I), Final amount (F)

Formula: F = P ( 1 + rt) , I = F - P

3. If a deposit of ₱25,000 earns an interest of ₱1,850 at the end

of 3 years and 3 months, at what interest was it invested?

Given: P=₱25,000 t = 3 years 3 months I = ₱1,850

Required: Interest rate (r)
Formula: I = Prt
Illustrative
Examples:
4. Takoda earns ₱3,850 after 2 years and 9 months from deposit
at 9 1/2% simple interest. Find the principal amount deposited.

Given: I = ₱3,850 t = 2 years 9 months r = 9 1/2 %

Required: Principal (P)

Formula: I = Prt

5. How long will it take your deposit of ₱8,000 to earns as much

as the deposit, if it is invested at 6 1/2% simple interest?

Given: P=₱8,000 r = 6 1/2 % I = ₱8,000

Required: Time (t)
Formula: I = Prt
 Illustrative
Examples:
6. How much should Ione invest if she wants to have ₱19,640.62
at the end of 2.75 years at a bank that offers 11 1/4% simple
interest?

Given: F = ₱19,640.62 r = 11 1/4% = 0.1125 t = 2.75 years

Required: Principal
Formula: F = P ( 1 + rt )
Compound
Interest
Compound Interest is the interest
resulting from the periodic
addition of simple interest to the
capital creating a new capital
every now and then.

In transactions covering an
extended period of time, interest
may be handled in different ways.
Whenever at stipulated intervals, knows as
compounding or conversion period, during the
term of an investment or loan, the interest due is
added to the principal and thereafter earns an
interest.

compound interest - the sum which represents

the increase in the original principal at the end of
the term is called
compound amount or the final amount - is the
sum of the principal and the compound interest
Two types of
interest rates
There are two types of interest rates used in computation for investment earnings. To
be able to compare rates one must be converted in the same compounding period as
the other.

Effective rate - the interest rate when interest is compounded once a year.
Nominal rate - the interest rate when interest is compounded more than once a year.

Financial entities usually convert multiple loans of different rates into a loan that
will equally replace the many loans either by single payment, equal payments or
unequal payments.
Illustrative
Examples:
1. Determine the final amount and the interest of ₱10,500 that is deposited at a
savings account and is invested at 10% compounded quarterly.

Given: P = ₱10,500 t = 3 years r = 10% = 0.10

m=4 n = 3(4) = 12

Required: Final amount, Interest (I)

Formula:
Computation:
alternative solution

Thus, the compound amount of the

savings deposit is ₱ 14,121.33 and the
compound interest earned is ₱3,621.33
Illustrative
Examples:
2. On January 23, 2015, a Demothi borrowed ₱15,000 and promised to pay the
principal and interest at 9% compounded semiannually on October 23, 2019. How
much would he repay?
Solution:
Given: P = ₱15,000 t = 4 years 9 months = 4.75 r = 9% = 0.09
i=m=2 n = 4.75 9(2) = 9.5

Required: Final amount

Formula:
Computation:
= ₱22,787.46
Therefore, Demothi paid a total amount of ₱22,787.46.
Illustrative
Examples:
3. Your family invested ₱172,250 for 15yeas and 6 months in a time deposit at 6
3/4% compounded quarterly. How much compound amount and interest will your
family receive at the end of the term?

Solution:
Given: P = ₱172,250 t = 15 years and 6 mos = 15.5 r = 0.0675

i= m=4 n=

Required: Final amount, Interest (I), Net Amount

Formula:
Computation
Thank
You