Simple Interest

In many aspects of modern life, Mathematics plays an important role. In the field of
business, mathematics is essential in analyzing markets, predicting stock market prices,
business decision making, forecasting production, financial analysis, and in business
operation in general. This module will introduce the students to the basic concepts of
business mathematics such as the simple and compound interests.

At the end of the lesson, the learners should be able to:

1. define simple interest;
2. compute simple interest, maturity value and present value; and
3. solve problems involving simple interest.

Pretest

Directions: Read each statement carefully. Choose the letter of the correct answer and write it
on a 1 whole sheet of paper.

1.) This refers to the accumulated amount obtained by adding the principal and the
compound interest.
A. Compound amount C. Present value
B. Compound interest D. Simple interest

2.) Date on which the money borrowed or loaned is to be completely repaid.

A. Conversion period C. Maturity date
B. Loan date D. Origin date

3.) What is the formula in computing the simple interest on a given financial transaction?
A. = 𝑃𝑟𝑡 C. 𝐼𝑠 = 𝑃
𝑟𝑡
B. = 𝑃𝑟 2𝑡 𝑟
D. 𝐼𝑠 = 𝑃𝑡

4.) This refers to the interest rate per conversion period.

A. Compound interest C. Rate of interest
B. Periodic rate D. Simple interest
5.) This refers to the amount paid or earned for the use of money.
A. Conversion period C. Principal
B. Interest D. Rate

6.) 30 months is equivalent to

A. 2.5 years C. 3 years
B. 2.75 years D. 3.25 years

7.) How much is the simple interest on this financial transaction, P = ₱5,000.00, r = 6%,
and t = 2 years?
A. ₱120.00 C. ₱1,200.00
B. ₱600.00 D. ₱6,000.00

8.) What is the total number of conversion periods when a certain amount is borrowed at
10% compounded monthly for 5 years?
A. 12 C. 24
B. 50 D. 60

9.) How much was the interest if Sophia borrowed ₱45,000.00 and paid a total of
₱55,500.00 at the end of the term?
A. ₱10,500.00 C. ₱11,500.00
B. ₱45,000.00 D. ₱100,500.00

10.) What is the interest rate per conversion period if ₱25,900.00 was invested at 3.5%
compounded annually for 4 years and 6 months?
A. 0.035 C. 0.140
B. 0.350 D. 0.460

11.) John borrowed ₱45,400.00 at 10% simple interest rate. How much should he repay
after 3 years?
A. ₱13,620.00 C. ₱59,020.00
B. ₱46,762.00 D. ₱104,420.00

12.) An interest of ₱760 was earned on an investment for 9 months at 3% interest rate. How
much was invested?
A. ₱2,052.00 C. ₱20,520.00
B. ₱2,814.81 D. ₱33,777.78

13.) At what simple interest rate was ₱18,350.00 invested if it earned ₱1,025.00 interest
for 1.5 years?
A. 0.0372% C. 3.72%
B. 0.1193% D. 11.93%
Simple Interest (Is)

For every financial transaction, whether you borrowed or invested a certain amount P,
a corresponding percentage of the principal called interest is being paid. Simple Interest (Is)
is the interest charged on the principal alone for the entire duration or period t of the loan or
investment, at a particular rate r. After the term of the loan or investment, the maturity value
or future value F is computed by getting the sum of the principal and the interest due.

“When you saved money in the bank, you will gained an interest paid by the bank. On
the other hand, when you borrow money, you are charged an interest on the amount you
borrowed. How does gained and charged interests computed?”

A debtor pay the bank an amount which is more than the amount they borrowed. An
investor may withdraw from the bank more than the amount deposited. This additional sum is
called INTEREST.

Definition of terms:

Lender or creditor – person (or institution) who invests the money or makes the funds
available.

Borrower or debtor – person (or institution) who owes the money or avails of the funds from
the lender.

Origin or loan date – date on which money is received by the borrower.

Repayment date or maturity date – date on which the money borrowed or loaned is to be
completely repaid.

Time or term (t) – amount of time in years the money is borrowed or invested; length of time
between the origin and maturity dates.
Principal or present value (P) – amount of money borrowed or invested on the origin date.

Rate of interest or simply rate (r) – annual rate, usually in percent, charged by the lender, or
rate of increase of the investment.

Interest (I) – amount paid or earned for the use of money.

Maturity Value or Future Value (F) – amount after t years that the lender receives from the
borrower on the maturity date; equal to the sum of principal and the interest earned.

Formulas:
 𝑰𝒔 = 𝑷𝒓𝒕

 𝑭 = 𝑷 + 𝑰𝒔 or 𝑭 = 𝑷 + 𝑷𝒓𝒕 or 𝑭 = 𝑷(𝟏 + 𝒓𝒕)

𝑰𝒔
 𝑷=
𝒓𝒕
 𝑰𝒔
 𝒕=
𝑷𝒓

𝑰𝒔
 𝒓=
𝑷𝒕

or 𝑷 = 𝑭 − 𝑰𝒔

***where 𝐼𝑠 − simple interest

𝑃 − principal
𝑟 − rate of interest or simply rate
𝑡 − time (in year)
𝐹 − future value (or maturity value)

Note: If the given time is in months, it can be converted to year(s) by using the formula

T= number of months
12

Example.
Directions: Complete the table below by solving the unknown quantities in each row.
Principal Rate Time Simple Interest Future Value
(P) (r) (t) (Is) (F)
1.) ₱500,000.00 12.5% 10 years
2.) 2.5% 4 years ₱1,500.00
3.) ₱36,000.00 1 year and ₱4,860.00
6 months
4.) ₱250,000.00 0.5% ₱1,400.00
5.) ₱10,000.00 4% 5 months

Solution:

1.) Given: P = ₱500,000.00 ; r = 12.5% or 0.125 ; t = 10 years

𝐼𝑠 = 𝑃𝑟𝑡 𝐹 = 𝑃 + 𝐼𝑠
𝐼𝑠 = ₱500,000.00(0.125)(10) 𝐹 = ₱500,000.00 + ₱625,000.00
𝑰𝒔 = ₱𝟔𝟐𝟓, 𝟎𝟎𝟎. 𝟎𝟎 𝑭 = ₱𝟏, 𝟏𝟐𝟓, 𝟎𝟎𝟎. 𝟎𝟎

2.) Given: r = 2.5% or 0.025 ; t = 4 years ; 𝐼𝑠 = ₱1,500.00

𝐼 𝐹 = 𝑃 + 𝐼𝑠
𝑃 = 𝑟𝑡𝑠
𝐹=₱15,000.000 + ₱1,500.00
₱1,500.00 F= 16,500.00
= 0.025 (4)
 year
3.) Given: P = ₱250,000.00 ; r = 0.5% or 0.005 ; 𝐼𝑠 =
₱1,400.00

𝐼
𝑡 = 𝑃𝑟𝑠
₱1,400.00
𝑡 = ₱250,000.00(0.005)
𝐹 = 𝑃 + 𝐼𝑠
𝐹 = ₱250,000.00 + ₱1,400.00
𝒕 = 𝟏. 𝟏𝟐 years 𝑭 = ₱𝟐𝟓𝟏, 𝟒𝟎𝟎. 𝟎𝟎

4.) Given: P = ₱250,000.00 ; r = 0.5% or 0.005 ; 𝐼𝑠 =

₱1,400.00

𝐼
𝑡 = 𝑃𝑟𝑠
₱1,400.00
𝑡 = ₱250,000.00(0.005)
𝐹 = 𝑃 + 𝐼𝑠
𝐹 = ₱250,000.00 +₱1,400.00
𝒕 = 𝟏. 𝟏𝟐 years 𝑭 = ₱𝟐𝟓𝟏, 𝟒𝟎𝟎. 𝟎𝟎

5.) Given: P = ₱10,000.00 ; r = 4% or 0.04 ; t= 5

12

𝐼𝑠 = 𝑃𝑟𝑡 𝐹 = 𝑃 + 𝐼𝑠
5
𝐼𝑠= ₱10,000.00 (0.04) ( ) 𝐹 = ₱10,000.00 + ₱166.67
12

𝑰𝒔 = ₱𝟏𝟔𝟔. 𝟔𝟕 𝑭 = ₱𝟏𝟎, 𝟏𝟔𝟔. 𝟔𝟕

 Exercises 1.

I. Complete the table below by solving the unknown quantities in each row. Write
your complete solutions and answers on a 1 whole sheet of paper.
Principal Rate Time Simple Interest Future Value
(P) (r) (t) (Is) (F)
1.) ₱40,000.00 2% 3 years
2.) 10% 5 years ₱2,500.00
3.) ₱100,000.00 1.5 years ₱3,600.00
4.) ₱250,000.00 4.5% ₱15,400.00
5.) ₱12,345.00 8.25% 9 months

II. Solve the future value (refer on test I) using the alternative formulas:
= 𝑃 + 𝑃𝑟𝑡 or = (1 + 𝑟𝑡)

Problems Involving Simple Interest

1. A bank offers 1.5% annual simple interest rate for a particular deposit. How much
interest will be earned if 1 million pesos is deposited in this savings account for 1
year?

Solution:

Given: r = 1.5% or 0.015 ; P = ₱1,000,000.00 ; t = 1 year

𝐼𝑠 = 𝑃𝑟𝑡
𝐼𝑠 = ₱1,000,000.00 (0.015)(1)
𝑰𝒔 = ₱𝟏𝟓, 𝟎𝟎𝟎.00

Therefore, an interest amounting to ₱15,000.00 will be earned if 1 million pesos is

deposited in a savings account for 1 year with 1.5% annual simple interest rate.
2. When invested at an annual interest rate of 7%, the amount earned ₱11,200.00 of
simple interest in 2.5 years. How much money was originally invested?

Solution:

Given: r = 7% or 0.07 ; 𝐼𝑠 = ₱11,200.00 ; t = 2.5 years

𝐼𝑠
𝑃 =
𝑟𝑡

₱11,200.00
𝑃=
0.07(2.5)
𝑷 = ₱64,000.00

Therefore, the amount of money originally invested was ₱64,000.00.

3. Ricky borrowed ₱25,000.00 and paid ₱1,250.00 interest for 6 months. What was the
rate of interest?

Solution:

Given: P = ₱25,000.00 ; 𝐼𝑠
= ₱1,250.00 ; t = 612 year or 0.5 year
𝐼𝑠
𝑟 =
𝑃𝑡
₱1,250.00
𝑟=
₱25,000.00(0.5)
𝒓 = 0.1 or 10%

Therefore, the rate of interest was 0.1 or 10%.

4. How long in years will it take for ₱17,300.00 to amount to ₱20,000.00 at 11.25%
simple interest?

Solution:

Given: P = ₱17,300.00 ; F = ₱20,000.00 ; r = 11.25% or 0.1125

𝐼𝑠 = 𝐹 − 𝑃
𝐼𝑠 = ₱20,000.00 − ₱17,300.00
𝐼𝑠 = ₱2,700
𝐼𝑠
𝑡 =
𝑃𝑟
𝑡= ₱2,700
₱17,300.00(0.1125)
𝒕 = 𝟏. 𝟑𝟗 years
Therefore, it will take 1.39 years for ₱17,300.00 to amount to ₱20,000.00.
Exercises 2.

Answer the following problems involving simple interest. Write your complete
solutions and answers on a 1 whole sheet of paper.

1. Find the simple interest on a loan of ₱65,000.00 if the loan is given at a rate of 2%
and is due in 5 years and 3 months?

2. How much money will you have after 4 years if you deposited ₱10,000.00 in a bank
that pays 6% simple interest?