Topic 2:
Simple and Compound Interest
Learning Outcomes:
At the end of the module, students are expected to:
Analyze and distinguish the advantages and disadvantages of simple and
compound interest.
Perform problem solving relating to simple and compound interest.
Relate real life applications of simple and compound interest on everyday life.
Teaching – Learning Activity (Lesson Proper):
A1 & A2 Activate Prior Knowledge and Acquire New Knowledge
A. Simple Interest: Simple interest is interest calculated on the principal portion of
a loan or the original contribution to a savings account.
Solving for the simple interest and the future value:
Simple Interest Formula: I=Prt
I = interest : The amount paid for the use of money that is deposited or loaned.
P=principal amount: The amount deposited in a bank or borrowed from a bank.
r = interest rate : The percentage/time used to determine the amount of interest.
t = time: The length of time an amount is loaned or deposited.
F= total amount after interest (P + I) : Future Value
(Other books uses different variable like F,MV,V,A)
A.1 Calculating Simple Interest and future value
Ex. 1 (Solving Interest given rate, time and principal)
You have deposited Php 5,000 in a Savings Bank on January 1,2016 with an
interest rate of 3% and have withdrawn it on January 1,2017. Calculate the
simple interest. What will be the total amount to be widthrawn.
Step 1: Identify the given and what is being asked in the problem.
P=Php 5,000
r= 3% per year (note: if the rate is not identified, it is understood to be annually)
t= Jan.1,2016-Jan1,2017 = 1 year
I = ? (We are looking for the interest)
F = ? (What is the future value?)
Step 2: Substitute the given to the Simple Interest Formula I=Prt
Step 3: Simplify the equation
P=Php 5,000 I=Prt
r= 3% / 1 year(3%=.03) I=(Php 5,000)(3%/year)(1year)
t= 1 year I=(Php 5,000)(.03)(1)
I=? I = Php 150
F=?
F= P + I
F=Php 5000 + Php150
F=Php 5,150
We can also solve for the future value using the formula : F = P(1+rt)
F = P(1+rt)
F = Php 5,000 ( 1+ (.03 or 3% / 1 year)( 1 year) Derivation of the formula
F = Php 5,000 ( 1+.03)
Given I = Prt and F = P+I
F = Php 5,000 ( 1.03)
Substitute Prt which is I in F = P+I
F = Php 5,150
F=P+I
* Yearly, annually and per annum means the same.
F = P + Prt
**If time unit of rate is not indicated, use annually.
Ex. 2 (Solving Interest given rate, time and principal: rate F = Pperoid
(1+rt) is not similar
with time peroid)
Your savings deposit of Php7,000 earns a simple interest of 5% annually.
How much is the interest for 9 months?
* Time unit of rate is yearly, while time unit of t is given in months.
**Convert the time similar with the rate peroid I = (Php7,.000)(5%)(9months)
P=Php 7,000 I = (7,000)(0.05annually)(9/12 annually)
r = 5% annually I = 262.50
t = 9 months or 9/12 annually I = Php262.50
I = (Php262.50)?
F =(Php7,262.50)? F= P + I
F = Php 7,000 + Php262.50
F = Php 7,262.50
***The Future value (F) of your savings(P) after 9 months(t) at the interest rate(r) of
5% is Php 7,262.50.
Ex. 3 (Solving interest rate, given P,I and t)
I=Prt
I=Php 200 200 = (5000)(r/yr)(4yr)
P=Php 5000 200 = (5,000) (4 ) (r)
r = ?% annually 200 = (20,000)(r)divide both sides with 20000
t = 4 years 0.01 = r
r = 1%/year
Ex.4 (Solving Principal, given I, r and t)
I=Prt
I=Php 200 200 = (P)(4%/yr)(5yr)
P= ? 200 = (P)(0.04)(5)
r = 4% annually 200 = (P)(.2)
t=5 1000 = P
P= Php1000
Ex.5 (Solving Time, given I, P and r)
I=Prt
I=500 500 = (Php10,000)(2%)(t in years)
P=Php 10,000 500 = (10,000)(0.02)(t)
r = 2% annually 500 = 200t
t=? 2.5 = t
t = 2.5 years
B. Approximate and Exact Number of days : Ordinary and Exact Interest
1.Exact Time
It uses the precise number of days for time of the loan or
investment.
Ex.6 Calculate the simple interest due
on a 45-day loan of P3500 if the annual interest
rate is 8%.
I=? I = Prt
P = P3500 I = (P3500)(.08/year)(45days)
r = 8%/year I = (P3500)(.08/year)[(45/365)/year]
t = 45 days or 45/365 year I = P34.52 Exact interest
2.Approximate time:
Assumes that each year has 360 days and each month has 30
days.
Ex.7 Calculate the simple interest
due on a 45-day loan of P3500 if the
annual interest rate is 8%.
I=? I = Prt
P = P3500 I = (P3500)(.08/year)(45days)
r = 8%/year I = (P3500)(.08/year)[(45/360)/year]
t = 45 days or 45/360 year I = P35 Ordinary Interest
Ex.8
You loaned Php10,000 last January 1 at 5% interest per year. You
were able to pay it ealy at January 31. Solve for the simple interest.
A.Exact Method:
I=? I = Prt
P = Php 10,000 I = (Php 10,000)(.05/year)(30/365)
r = 5%/year I = (Php 10,000)(.05/year)[(30/365)/year]
t = 30 days or 30/365 year I = Php 41.09589401
I = Php 41.10Exact Interest
B.Ordinary Method
I=? I = Prt
P = Php 10,000 I = (Php 10,000)(.05/year)(30/360)
r = 5%/year I = (Php 10,000)(.05/year)[(30/360)/year]
t = 30 days or 30/360 year I = Php 41.666667
I = Php 41.67Ordinary Interest
** Always use ordinary method if it is not indicated in the problem on which of
the two method shall be used.
Bankers rule : t= actual time
ordinary interest
Ex. 9
On April 26, Php 1,000 was borrowed and to be paid on June 3 at 10%
interest rate.
Exact No. of Days Approximate No. of Days
Number of days : April 26 to April 30 = 4days 4 days
May 1 to May 31 = 31days 30 days
June 1 to June 3 = 3 days 3 days
TOTAL = 38 days 37 days
Exact interest = Php1,000 x .10 x 38/365 =Php 10.41
Ordinary interest = Php 1,000 x .10 x 37/360 = Php 10.28
Banker’s rule = Php 1,000 x .10 x 38/360 = Php 10.56
*If you will notice the banker’s rule yields the highest amount of interest, which is being
used by many bank in the world in computing interest for loans.
C. Compound Interest
Compound interest is a method of calculating interest periodically on the sum of
the principal and the accumulated interest of previous periods. In means that the
earned interest will also earn interest.
Ex.10
What is the compound amount and interest if Php 6,000 is invested at 2%
compounded monthly for 2 years?
P= 6,000 . 02 (12)(2)
𝐴 = 6000 (1 + )
r= 2% 12
n=12
t=2 𝐴 = 6000(1 + 0.001667)(24)
𝐴 = 6000(1.001667)(24)
𝐴 = 6000(1.04078)
𝐼 =𝐴−𝑃 𝐴 = 𝑃ℎ𝑝 6,244.66
𝐼 = 6,244.66 − 6000
𝐼 = 𝑃ℎ𝑝244.66
* n = 12, since it is compounded monthly
Ex.11
What is the principal amount, given a compound amount of Php 30,000
at 5% compounded quarterly for 3 years?
Step 1: Determine the given
P=?
r = 5%
t = 3yrs
n = 4 Compounded Quarterly
I=?
A = Php 30,000
Step 2: Substitute the given in the formula:
. 05 (4)(3)
30,000 = 𝑃 (1 + )
4
Step 3: Simplify
. 05 (12)
30,000 = 𝑃 (1 + )
4
. 05 (12)
30,000 = 𝑃 (1 + )
4 Final Answer:
30,000 = 𝑃 (1.0125 )(12)
P = Php 25,845.26
30,000 = 𝑃(1.160754518)
I = Php 4,154.75
25,845.25801 = 𝑃
Note: Round off only
Step 4: Solve for I on the final answer
𝐼 =𝐴−𝑃 with 2 decimal
places.
𝐼 = 𝑃ℎ𝑝 30,000 − 25,845.25801
𝐼 = 𝑃ℎ𝑝 4,154.751987
A3 & A4 Analysis and Application : Enhancement Activity:
Complete the table and check if your answer is similar with the ones provided:
Answer:
Assessment:Problem Solving(1-5)
Provide what is being asked in the problem:
1. A loan of Php 20,000 with a simple interest rate of 5% per year will be paid
within 10 months. What value will you substitute for t(time) when you
calculate the amount of interest?
2. A loan of Php65,000 in Marh 2014 with a simple interest of 3% per year, has
been paid in the amount of P72,000. What is the duration of the loan?
3. Anabelle borrrowed Php12,000 that bears a simple interest. She has fully
paid Php12,750 after 3 months. What is the rate of the loan per month?
4.How much interest is earned in 20 years on Php40,000 deposited in an
account at 4% compounded semi- annually?
5. What is the Principal amount, given a compound amount of Php45,350 at
2% interest compounded semi-annually for 12 years?
6. If you are going to take a loan, which type of interest will you prefer, simple
or compound? Why?
7. If you are going to deposit in a bank, which type of interest will you prefer,
simple or compound? Why?
Reference:
Mathematical_Excursions_Aufmann_et_al._2010_
