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Guess the Word!

SIMPLE and
COMPOUND
INTEREST
OBJECTIVES:
•illustrates s i m p l e a n d c o m p o u n d interest;

•d i s ti n g u i s h e s b e t w e e n s i m p l e a n d c o m p o u n d

interest; a n d

•solves p r o b l e m s i nvo l v i n g s i m p l e a n d c o m p o u n d

interest.
TYPES OF INTEREST
Related Terms
Interest

● A fracti on or p e r c e n t a g e b e i n g i m p u t e d to a s u m of m o n e y

• F e e for b o r r o w i n g or l e n d i n g m o n e y

Interest rate

● A p e r c e n t a g e of t h e p r in cip a l a m o u n t d u e p e r p e riod

Time/Loan Period

● A g r e e d d a t e or ti m e w h e n t h e l o a n will b e p a i d in full
Related Terms
Principal / Present Value / Capital

● S u m of m o n e y t h at s o m e o n e b o r ro w s or l e n d s

Maturity Value / Future Value

● T h e a m o u n t to b e p a i d b y t h e h o ld e r of a fi nancial
o b l i gati o n at t h e obligati on’s m at u r i t y

● S u m of m o n e y to w h i c h today ’s i nv e s t m e n t will g r o w b y a
specifi c future d ate

● Maturity va l u e – i nv e s t m e n t s a n d de posits

● F u t u re va l u e – i n s u ra n c e a n d b o n d s
 I = Prt
I = interest

P = principal amount

r = rate
t= time
 Simple
Interest
● -the interest charged to a borrower

or earned by a lender for the full

term of the loan

● -interest on the principal

amount only
 Compound
Interest
● It is computed based on the

principal plus the accumulated

interest.

● Interest on interest
S u p p o s e y o u w o n 10, 0 0 0 p e s o s a n d

y o u p l a n to invest it for 5 years. A

co o p e r a ti v e g r o u p off ers a 2% s i m p l e

interest r a te p e r year. A b a n k off ers

2% c o m p o u n d e d a n n u a l l y. W h i c h

will y o u c h o o s e a n d w h y ?
FORMULA(future value)…
 Sample problems…
1. S u p p o s e y o u h a v e savings. Yo u r friend a p p r o a c h e d y o u

a n d a s k e d if y o u c a n l e n d h i m 10, 0 0 0 p e s o s for his

tuiti on fee p a y m e n t . H e s a i d h e is willing to p a y 5% p e r

a n n u m p a y a b l e in 6 m o n t h s . Yo u a g r e e d w i t h t h e terms.

H o w m u c h is t h e interest s h o u l d y o u r friend p a y y o u

aft er 6 m o n t h s ? H o w m u c h is t h e total a m o u n t y o u

s h o u l d receive aft er 6 m o n t h s ?
 Sample problems…
2. W h a t is t h e ra te of interest if y o u h a v e p a i d a n interest

of 750 p e s o s aft er 1 y e a r a n d 3 m o n t h s for a

s i m p l e interest l o a n a m o u n ti n g to 25, 0 0 0 p e s o s ?

3. C o m p u t e t h e l o a n p e r i o d a p p r o v e d for a b o r r o w e r if h e

w a s r e q u i r e d to p a y a s i m p l e interest of 1, 0 0 0 p e s o s for

his l o a n a m o u n ti n g to 10, 0 0 0 pesos. Interest rate

c h a r g e d is 5% p e r a n n u m .
 Sample problems…
4. Yo u w a n t to start s a v i n g m o n e y. Yo u p l a c e d a ti m e

d e p o s i t in a b a n k for 50, 0 0 0 p e s o s w i t h a n interest rate

of 5% c o m p o u n d e d t w i ce a year. H o w m u c h will b e t h e

p r i n c i p a l a n d interest aft er 5 y ears?

5. H o w m u c h s h o u l d y o u r m o t h e r invest t o d a y in a m u t u a l

f u n d t h a t off ers n o m i n a l r a te of 12% c o m p o u n d e d

q u a r te rly if s h e desire s to g i v e y o u c a p i t a l w o r t h 20, 0 0 0

p e s o s for y o u r s m a l l b u s i n e s s aft er y o u g r a d u a t e ?
Let’s
Reflect!!
Let’s
Summarize!!
• H o w d o w e d e fi n e s i m p l e
a n d c o m p o u n d interest?
• H o w i m p o r t a n t is
k n o w i n g t h e c o n c e p t of
these terms?

• H o w will this k n o w l e d g e
h e l p y o u i n life?
Assignment:
R e a d a n d u n d e r s t a n d t h e fo llow in g p r o b l e m s a n d s h o w a c o m p l e t e
s o l u ti o n i n solving.
1. Yo u w a n t to start s a v i n g m o n e y. Yo u p l a c e d a ti m e d e p o s i t i n a b a n k
for 50, 0 0 0 p e s o s w i t h a n inte re st r a t e of 5% c o m p o u n d e d t w i c e a year.
H o w m u c h will b e t h e p r i n c i p a l a n d inte re st aft er 5 y e a r s ?
2. Yo u d e c i d e d to p u r c h a s e a 50, 0 0 0 p e s o s L E D T V t h r o u g h y o u r credit
card. Aft er a m o n t h , y o u d i s c o v e r e d f r o m y o u r s t a t e m e n t of a c c o u n t
t h a t y o u w e r e c h a r g e d w i t h 1, 0 0 0 p e s o s interest. H o w m u c h w a s t h e
m o n t h l y inte re st r a t e a p p l i e d to y o u r cr e d it c a r d p u r c h a s e ?
3. Yo u a r e p l a n n i n g to inv e st i n a l ow - risk u n i t i n v e s t m e n t trust f u n d
(UITF) of a b a n k w h i c h will g i v e y o u inte re st of 5% p e r a n n u m i n 5 years.
Yo u ta r g e t to e a r n a total f u t u r e v a l u e of 320, 0 0 0 pe sos. H o w m u c h
s h o u l d y o u inv e st i n U I T F n o w ?