SIMPLE AND

COMPOUND INTEREST
 Interest
When you deposit money in a bank, you permit the bank to
use your money. The bank may lend the deposited money to
customers to buy cars or make renovations on their homes.
The bank pays you for the privilege of using your money. The
amount paid to you is called interest

If you are the one borrowing money from a bank, the amount
you pay for the privilege of using that money is also called
interest.
Example
• Jakob deposited Php10,000 in a savings account paying 0.5% interest per year.

The amount deposited in a bank or borrowed from a bank is called the principal.
P10,000 is the principal.

The amount of interest paid is usually given as a percent of the principal. The percent used to determine the
amount of interest is called the interest rate.
0.5% is the interest rate

Interest paid on the original principal is called simple interest.

 Simple
Interest
 Simple Interest
Simple Interest (denoted as I) is defined as the interest on a loan or principal that is based only on the original
amount of the Loan or Principal. This means that the interest charges grow in linear function over period of time.
This is usually used for short-term loans where the period of the loan is measured in days rather than years. It can
be calculated using the following formula:

I=Prt
where:

P = principal/loan
I = interest
r = interest rate
t = period

When using the simple interest formula, the time factor, t, must be expressed in years or a fraction of a year.

In other words, the time t is expressed in the same period as the rate. If the rate is given as an annual interest rate,
then the time is measured in years; if the rate is given as a monthly interest rate, then the time must be expressed
in months.

Interest rates are most commonly expressed as annual interest rates. Therefore, unless stated otherwise, we will
assume the interest rate is an annual interest rate. Interest rates are generally given as per cents.
 Future Value and Maturity Value
When you borrow money, the total amount to be repaid to the lender is the sum of
the principal and interest. This sum is calculated using the following future value
or maturity value formula for simple interest.

The future amount or maturity value of the principal may be calculated by

adding the interest (I) to the principal (P).

A=P+I

where A is the amount after the interest, I have been added to the principal, P.

Substituting I = P r t, we get
A=P+ Prt

factoring out P, we get

A = P (1 + r t)
 Problem 1
Find the interest and the amount (maturity value) on ₱880 at 8 ½ % per annum for 3 years.

Given:
P = ₱800
r = 8 ½ % = 0.085
t = 3 years

Substituting;
I=Prt
I = ₱880 (0.085) (3)
I = ₱ 224.40

A=P+I
A = ₱880 + ₱224.40
A = ₱ 1,104.40
 Problem 2
Find the interest and the amount (maturity value) on ₱1,990 at 7 1/4 % simple interest for 19 months.

•We have to express 19 months as a fraction of a year, so that t = 19 month/ 12 months/ year
Therefore, we have t = 19/ 12 years

Given:
P = ₱1,900
r = 7 ¼ % = 0.0725
` t = 19/ 12 years

Substituting;
I = Prt
I = ₱ 1,990 (0.0725) (19/12)
I = ₱ 228.44

A=P+I
A = ₱ 1,990 + ₱ 228.44
A = ₱2218.44
 Problem 3
Find the interest and the amount (maturity value) on ₱1,400 at 11% simple interest for 3 years and 3 months.

We have to express 3 year and 3 months as a fraction of year. Since, in a year we have 12 months, then, we multiply 3 years
by 12 to get 36 plus the remaining 3 months and we get 39 months. So that, t = 39 months/12months/year. Therefore, t =
39/12 years

Given:
P = ₱1,900
r = 11 % = 0.0725
` t = 39/ 12 years

Substituting,
I = Prt`
I = ₱1,400(0.11)(39/12)
I = ₱550.50

A=P+I
A = ₱1,400 + ₱550.50
A = ₱1,950.50
 Problem 4
If a principal of ₱2,500 earns interest of ₱185 in 4 years and 8 months, what interest rate is in effect?

We have to express 4 year and 8 months as a fraction of year. Since, in a year we have 12 months then,
we multiply 4 years by 12 to get 48 and add the remaining 8 months and we get 56 months. So that, t =
56 months/12months/year. Therefore, t = 56/12 years

Given:
P = ₱2,500
` t = 56/ 12 years
I = ₱185

Substituting;
I = Prt
₱185 = 2,500(r)(56/12)
₱185 = 11,666.67r
r = 0.0159
r = 1.59%
 Problem 5
If money is invested on 10% simple interest, how much money should be invested to have ₱
40,000
in 5 years?

Given:
A = ₱ 40,000
r = 10 % = 0.10
` t = 5 years

Substituting;
A= P+Prt
₱40,000 = P + P(0.10)(5)
₱40,000 = P + 0.50P
₱40,000 = 1.5P
P = ₱26,666.67
 Problem 6
Rizza’s savings earned ₱105 after a year. If her account balance after earning interest showed
₱3,605, how much rate interest did the bank offer for her savings.

Given:
I = ₱105
A = ₱3,605

Substituting;
A=P+I
₱3,605 = P + ₱105
P = ₱3,500

I=Prt
105 = 3,500(r)(1)
0.03 = r
3% = r
 Problem 7
A loan shark gave Kevin a personal loan that was charged ₱630 interest after 3 months. The rate of
interest of the loan was 7% per month. How much was the personal loan?

Given:
I = ₱ 630
r = 7 % = 0.07
` t = 3 months
Since the interest rate is express monthly, no need to express 3 months as a fraction of year.

Substituting;
I = Prt
₱630 = P(0.07)(3)
₱630 = 0.21P
P = ₱ 3,000
 Problem 8
Nina has a savings account balance of ₱38,400. She withdraws ₱1,800 to buy a gift for her friend.
How much interest does her new balance earn for a year if the bank’s interest rate is 0.9% per
annum?

Given:
P = ₱38,400 – ₱1,800
r = 0.9 % = 0.009
` t = 1 years

Substituting;
I = Prt
I = (₱38,400 – ₱1,800)(0.009)(1)
I = ₱ 329.40
 Problem 9
Vince deposited ₱4,500 in his savings account with a balance of ₱1,300. At 0.5% interest per
annum, how much will his new balance earn at the end of a year?

Given:
P = ₱ 4,500 + ₱1,300
r = 0.5% = 0.005
` t = 1 years

Substituting;
A= P (1+rt)
A = (₱4,500 + ₱ 1,300)[1 + (0.005)(1)]
A = ₱5,829.00
 Problem 10
One year and six months ago, Nigel borrowed ₱25,000 from Sitti with the promise that Nigel will
pay Sitti the principal plus accumulated interest at 8 2/3% simple interest now. What amount is
due?

We have to express 1 year and 6 months as a fraction of year since rate of interest is expressed
annually. We multiply 1 year by 12 months to get 12 months and add the remaining 6 months and
we get 18 months. So that, t = 18 months/12months/year. Therefore, t = 18/12 years

Given:
P = ₱25,000
r = 8 2/3% = 0.0867
t = 18/12 years

Substituting;
A= P (1+rt)
A = ₱25,000 [1 + (0.0867)(18/12)]
A = ₱ 28,251.25
 Types of Simple
Interest
There are two types of simple interest namely, ordinary simple interest and
exact simple interest.

Ordinary simple interest is based on one banker’s year. A banker year is

composed of 12 months of 30 days each which is equivalent to a total of
360 days in a year. The value of t that is used in the preceding formulas may
be calculated as
𝒅
𝒕=
𝟑𝟔𝟎
where:
d = number of days the principal was invested

𝑑
Note: Count the exact number of days in a month then use 𝑡 = to solve
360
problems that uses ordinary simple interest.
 Types of Simple
Interest
Exact simple interest is based on the exact number of days given in a year.
A normal year has 365 days while a leap year (which occurs once every 4
years) has 366 days. Unlike the ordinary simple interest where each month
has 30 days, in this type of simple interest, the number of days in a month is
based on the actual number of days each month contains in our Gregorian
calendar. This method is used by government agencies, the Federal Reserve
Bank, and most credit unions.

To determine the year whether leap year or not, one has to divide the
year by 4. If it is exactly divisible be 4, the year is said to be a leap year
otherwise it will be considered just a normal year with 365 days. However, if
the year is century year (ending with two zeroes, e.g. 1700, 1800, …), the
year must be divided by 400 instead of 4 to determine the year whether or
not a leap year. Hence, year 1600 and year 2000 are leap years.
 Types of Simple
Interest
Under exact simple interest method of computation of interest, it must be
noted that under normal year, the month of February has 28 days while
during leap year it has 29 days. Again, the values of n to be used in the
preceding formulas are as follows:

𝒅
𝒕= ⇒ under normal year
𝟑𝟔𝟓

𝒅
𝒕= ⇒ for leap years
𝟑𝟔𝟔

𝑑
• Note: Use 𝑡 = when the year is leap year but have not yet reach the 29th
365
of February (example: February 18, 2004, since the year is considered a
𝑑
leap year but have not yet reach the 29 of February use 𝑡 =
th to solve
365
problems that uses exact simple interest.)
 Problem 1
Francis wants to know which credit company offers lower interest at the same interest rate of 9% if
plans to borrow a quick cash of ₱30,000 for 90 days. Company A uses the ordinary interest method
to compute for the interest while Company B applies exact interest method. Which company will
he choose? What is the difference between the interests offered by the two companies?

Given:
P = ₱30,000
r = 9% = 0.09
t = 90 days.

90
For Company A (use 𝑡 = )
360
Substituting;
I=Prt
I = ₱30,000 (0.09) (90/360)
I = ₱675
 Problem 1

90
For Company B (use 𝑡 = )
365
Substituting;
I=Prt
I = ₱30,000 (0.09) (90/365)
I = ₱665.75

In Problem 1, the advantage of 365-day year offerd by Comapany B that is more realistic
financially better for the borrower since the interest are smaller under the same interest rate. He
could save an amount of ₱9.25 (₱675 - ₱665.75 = ₱9.25) if he borrowed the money from
Company B instead of borrowing it from Company A.
 Problem 2
Jen borrowed ₱20,000 from her friend last November 15, 2019. She promised that she would pay her
friend on January 20, 2020 at 3% interest. Find the exact simple interest to be paid by Jen.

• Let us count the days between November 15, 2019 to January 20, 2020 but use exact number of days
in each month.

November 15 – 30, 2019 = 15 days

December ⇒ 31 days
January ⇒ 20 days
Total = 66 days
Given:
P = ₱20,000
r = 3% = 0.003
𝒅
t = 66/365 (We use 𝒕 = since the year 2020 is considered a leap year but have not yet
𝟑𝟔𝟓
reach the 29th of February)

Substituting;

I = Prt
I = ₱ 20,000 (0.03) (66/365)
I = ₱108.49
 Problem 3
On May 30, 2019, a USL elementary teacher applied for an emergency loan of ₱ 50,000 for the expansion
of her kitchen. It was agreed that she would pay the amount with 2.5% rate of interest on August 10,
2019. Calculate the ordinary simple interest to be paid.

• Let us count the days between May 30, 2019 to August 10, 2019 but use exact number of days in each
month.

May – 31 days – 30 days = 1 day (Loan started on May 30 and May has 31 days)
June – 30 days
July– 31 days
August – 10 days
Total = 72 days

Given:
P = ₱50,000
r = 2.5% = 0.025
t = 72/360 years

Substituting;
I = Prt
I = ₱ 50,000 (0.025) (72/360)
I = ₱ 250.00
 Problem 4
On April 12, Lian borrowed ₱5,000 from her credit union at 9% for 80 days. The credit union uses the
ordinary interest method.
a. What is the amount of interest on the loan?
b. What is the maturity value of the loan?
c. What is the maturity date of the loan?

Given:
P = ₱5,000
r = 9% = 0.09
t = 80/360

a. What is the amount of interest on the loan

Substituting;
I = Prt
I = ₱ 5,000 (0.09) (80/360)
I = ₱100.00

b.What is the maturity value of the loan?

Substituting;
A=P+I
A = ₱5,000 + ₱100.00
A = ₱5,100.00
 Problem 4

c. What is the maturity date of the loan?

April ⇒ 30 days – 12 days = 18 days (The loan starts on April 12 and

April has 30 days)
May ⇒ 31 days
June ⇒ 30 days
July ⇒ 1 day
Total = 80 days

• Therefore, the maturity date of the loan falls on July 1.

 Problem 5
How much is the maturity value of a ₱60,000 loan for 100 days at 5.5% interest
using the exact interest method?

Given:

P = ₱ 60,000
r = 5.5% = 0.055
t = 100/365 years

Substituting;

A = P (1 + rt)
A = ₱60,000 [1 + (0.055)(100/365)]
A = ₱60,904.11
 Problem 6
Central Auto Parts borrowed ₱350,000 at 4.5% interest on July 19 for 120 days.

a. If the bank uses the exact interest method, what is the amount of interest of the
loan?
b. What is the maturity value of the loan?
c. What is the maturity date of the loan?

Given:
P = ₱350,000
r = 4.5% = 0.045
t = 120/366 years

a. If the bank uses the exact interest method, what is the amount of interest of the
loan?
Substituting;
I = Prt
I = ₱ 350,000 (0.045) (120/366)
I = ₱5,163.93
 Problem 6
b. What is the maturity value of the loan?

Substituting;

A=P+I
A = ₱350,000 + ₱5,163.93
A = ₱355,163.93

c. What is the maturity date of the loan?

July⇒ 31 days – 19 days = 12 days (Loan Starts on July

19 and Juky has 31 days)
August ⇒ 31 days
September ⇒ 30 days
October ⇒ 31 days
Novemeber ⇒ 16 days
Total = 120 days

• Therefore, the maturity date of the loan falls on the 16th of

November.
 COMPOUND
INTEREST

Compound Interest is defined as the interest of loan

or principal which is based not only on the original
amount of loan or principal plus the previous
accumulated interest. This means that aside from
the principal, the interest now earns interest as
well. Thus, the interest charges grow exponentially
over a period of time.

Compound interest is frequently used in

commercial practical than simple interest, more
especially if it is longer period which spans more
than a year.
 COMPOUND
INTEREST

Period Principal Rate of Interest Total amount

(Year) Interest (Compound
amount)
1 P i Pi P + Pi
= P (1+i)

2 P (1 + i) i P(1+i)i P 1+i 1+i

=P 1+i 2

3 P (1 + i)2 i P 1 + i 2i P 1+i 2 1+i

=P 1+i 3

n P (1 + i)n-1 i P (1 + i)n-1 (i) P 1+i n

The tabulation above shows that the future amount (total amount) is
just the value P(1+i) with an exponent which is numerically equal to the
period.
 Example

On the birth of her son Zac, Jen deposited ₱100,000

in a time deposit that pays 3.5% interest compounded
annually. How much money is in the bank when Zac
reaches his 5th birthday?
Year Principal Rate of Interest Compound
Interest Amount

1 ₱ 100,000 3.5% 3,500 ₱ 103,500

2 ₱ 103,500 3.5% 3,622.5 ₱ 107,122.5

3 ₱ 107,122.5 3.5% 3,749.2875 ₱ 110,871.79

4 ₱110,871.79 3.5% 3,880.5126 ₱ 114,752.30

5 ₱ 114,752.30 3.5% 4,016.3305 ₱ 118,768.63

The formula for calculating the amount of money
accumulated after n years, including interest is

𝒓 nt
A=P (1+ )
𝒏

P = principal amount
r = annual rate of interest/ nominal rate of interest
t = number of years the amount is deposited
n = is the number of times the interest is
compounded per year

Compounding Frequency Number of Compounding Periods (n)

Annually 1

Semi – annually 2

Quarterly 4

Bimonthly 6

Monthly 12
 Problem 1

Russell invested ₱50,000 in a bank that pays 8%

compounded quarterly for 5 years. How much is his
money in the bank after 5 years?

Given:
P = ₱50,000
r = 8% = 0.08
n=4
t = 5 years

Substituting;
𝑟
A = P (1+ )nt
𝑛
0.08 4(5)
A = ₱50,000(1+ )
4
A = ₱74,297.37
 Problem 2
Harvey invested ₱100,000 in a time deposit that pays 12% compounded semi – annually. How long
will it take for Harvey to double his money?

Given:
P = ₱100,000
r = 12% = 0.12
n=2
A = 2P = 2(₱100,000) = ₱200,000

Substituting;
𝑟
A = P(1+ )nt
𝑛

0.12 2(t)
₱200,000 = ₱100,000(1+ )
2

₱ 20,000 = 1 + .06 2𝑡

₱ 100,000

2 = 1.062t

t = 5.95 years
 Problem 3

Deposit the principal amount of ₱10,000 into a savings account that pays interest at
the rate of 5%. What is the amount in the account after 1 year if the account is :

a. Compounded annually
b. Compounded semi – annually
c. Compounded quarterly
d. Compounded monthly
e. Which is advantageous to the investor?

Given:
P = ₱10,000
r = 5% = 0.05
t = 1 year
 Problem 3

a. Compounded annually (n= 1)

Substituting;
𝑟
A = P (1+ )nt
𝑛
0.05 1(1)
A = ₱10,000(1+ )
1
A = ₱10,500.00

b. Compounded semi – annually (n= 2)

Substituting;
𝑟
A = P (1+ )nt
𝑛
0.05 2(1)
A = ₱10,000(1+ )
2
A = ₱10,506.25
 Problem 3
c. Compounded quarterly (n= 4)
Substituting;
𝑟
A = P (1+ )nt
𝑛
0.05 4(1)
A = ₱10,000(1+ )
4
A = ₱10,509.45

d. Compounded monthly (n= 12)

Substituting;
𝑟 nt
A = P (1+ )
𝑛
0.05 12(1)
A = ₱10,000(1+ )
12
A = ₱10,511.62

e. Which is advantageous to the investor?

• It is more advantageous for the investor to invest his money that pays interest rate of
5% compounded monthly for greater interst is expected from it for the same period of
time.
 Problem 4

Leslie and Markus both opened a savings account with a starting balance of ₱20,000 on the first day of
January. Leslie’s bank is paying her a simple interest of 8% annually. Makoy’s bank is paying him an interest
of 8% compounded annually. Who has a bigger balance at the end of 5 years?

Given:
P = ₱20,000
r = 8% = 0.08
t = 5 years

Substituting;
Leslie: A=P+I
A = ₱20,000 + ₱20,000(0.08) (5)
A = ₱28,000
𝑟 nt
Makoy: A = P(1+ )
𝑛
0.08 1(5)
A = ₱20,000(1+ )
1
A = ₱29,386.56

So Makoy has a bigger balance at the end of 5 years

 Problem 4

REFERENCES:

Aufmann, R. N., Lockwood, J. S.,

Nation, R. D. & Clegg, D. K.
(2013). Mathematical Excursions,
Third Edition. CA: Brooks/Cole,
Cengage Learning.