SIMPLE &

COMPOUND
INTEREST
MATH 101 – General Mathematics
 LESSON OBJECTIVE
At the end of the lesson, learners will be able to:

01 02
illustrate distinguish
simple and compound between simple and
interests; compound interests;

03 04
compute solve problems
interest, maturity value, future value, and involving simple and
present value in simple interest and
compound interest environment; and compound interests.
Think about it!
Do you know someone who
invested his/her money in a
bank or cooperatives?
 Think about it!
Do you know
someone who borrowed money
from any of those banks?
Think about it!
Any savings? Where did you
place your savings?
Anna is very excited for her educational tour in
college, and she needs to have at least ₱ 24,000
to join the tour. Later, she found out that the total
savings she has in her piggy bank is only ₱ 15,000.

To solve her problem, she plan to invest her

money for a year so she can get the total money
needed for the tour.
With the help of her friend
Olaf, they went to a bank
which offers two types of
interest when it terms to
investment.
 With the help of her friend Olaf, they went to a bank
which offers two types of interest when it terms
to investment.

SIMPLE INTEREST COMPOUND INTEREST

Principal Amount: ₱ 15,000 Principal Amount: ₱ 15,000

Rate: 0.6 Nominal Rate: 0.4

Time: 1 year Time: 1 year

Conversion Period: Monthly

 INTEREST
It is the amount a person gets or pays on top of the original
investment or loan.

LOAN INVESTING
The cost of borrowing money Conversely, interest can also
as in the case of interest be the rate paid for money
charged on a loan balance invested either on a bank or a
cooperative.

Interest can be calculated in two ways, simple interest or compound interest.

Then, what is the difference between simple interest and compound interest?
01 SIMPLE
INTEREST
SIMPLE INTEREST
An interest which is computed on the original
principal during the whole period or time of
borrowing or invested until it will be paid.

𝑰 = 𝑷𝒓𝒕
where :
I – interest
P – principal amount
r – rate (in decimal)
t – time (in years)
 SIMPLE INTEREST
Principal Amount (P) – the amount of
money extended for credit, or the
amount of money deposited in a bank
for safekeeping purposes. 𝑰 = 𝑷𝒓𝒕
Interest Rate (r) – the charged amount
for using the money over a certain
period.

Time of Interest (t) – the period

covered from the time that the money
(principal) is borrowed until its due date.
 Maturity Value
(Final Amount)
Maturity Value (or also known as Final Amount) is the
sum of the Principal and Interest.

To compute for the final amount of an investment or

the total amount to be paid in a loan.:

𝑭=𝑷+𝑰
Alternative formula

𝑭 = 𝑷(𝟏 + 𝒓𝒕)
Example 1:
Mike invests in a company that returns 8.2% simple interest every year. He invested
₱ 400, 000 for 7 years.
a. How much did he earn?
b. How much is the total amount of his investment after 7 years?

SOLUTION:
a. Given : Using the formula, 𝐼 = 𝑷𝒓𝒕, you will have,
Interest rate (r) = 8.2 % or 0.082 𝐼 = 𝑷𝒓𝒕
Time (t) = 7 years 𝐼 = (400, 000)(0.082)(7)
Principal amount (P) = 400, 000 𝑰 = ₱ 𝟐𝟐𝟗, 𝟔𝟎𝟎. 𝟎𝟎

Thus, Mike earned ₱ 229,600 after 7 years.

Example 1:
Mike invests in a company that returns 8.2 % simple interest every year. He invested
₱ 400, 000 for 7 years.
a. How much did he earn?
b. How much is the total amount of his investment after 7 years?
SOLUTION: Formula:
𝐹 = 𝑃 + 𝐼
b. Given :
𝐹 = 400, 000 + 229,600
Interest rate (r) = 8.2 % or 0.082
𝑭 = ₱ 𝟔𝟐𝟗, 𝟔𝟎𝟎
Time (t) = 7 years
Principal amount (P) = 400, 000
Alternative formula:
Interest (I) = 229, 600 𝐹 = 𝑃 1 + 𝑟𝑡
𝐹 = 400, 000 1 + 0.082 7
𝐹 = ₱ 629,600
Thus, the total amount of investment after 7 years
is ₱ 629,600.
 Example 2:
Armand borrowed ₱ 560, 200 from a bank that charges 4.3% simple interest per year.
How much will Armand pay after:
a) 3 years?
b) 6 years and 5 months?

SOLUTION: Using the formula 𝑭 = 𝑷 (𝟏 + 𝒓𝒕), you will

a. Given : have,
Interest rate (r) 𝑭 = 𝑷 ( 𝟏 + 𝒓𝒕 )
= 4.3 % or 0.043
Time (t) = 3 years 𝑭 = 560, 200 1 + 0.043 3
Principal amount (P) = 560, 200 𝑭 = ₱ 𝟔𝟑𝟐, 𝟒𝟔𝟓. 𝟖𝟎

Thus, Armand will pay ₱ 632,465.80 after 3 years.

Example 2:
Armand borrowed ₱ 560, 200 from a bank that charges 4.3% simple interest per year.
How much will Armand pay after:
a) 3 years? Note: In this example, you may convert first 6
b) 6 years and 5 months? years into months then add it to 5 months to
get the total number of months. Then repeat
77
the process in example c or you can write as
12
an improper fraction to serve as your 𝒕.

SOLUTION:
d. Given : Using the formula 𝐹 = 𝑃 (1 + 𝑟𝑡), you will
Interest rate (r) = 4.3 % or 0.043 have,
Time (t) = 6yrs. & 5 months / 6 12 years
5
𝐹 = 𝑃 ( 1 + 𝑟𝑡 )
Principal amount (P) = 560, 200 77
𝐹 = 560, 200 ( 1 + 0.043 (12 ) )
𝑭 = ₱ 𝟕𝟏𝟒, 𝟕𝟔𝟖. 𝟓𝟐

Thus, Armand will pay ₱ 714,768.52 after 6 years

and 5 months
Example 3:
Amy borrowed ₱ 820, 000 and paid a total of ₱ 962,816.67 after 4 years and 7 months.
What was the simple interest rate applied in this term of loan ?

SOLUTION:

Formula for rate Substitute the values given, you will have,
𝐼
𝐼 𝑟=
𝑟 = 𝑃𝑡 𝑃𝑡
142,816.6667
𝑟=
7
820, 000 4 12

𝒓 = 𝟎. 𝟎𝟑𝟖 𝒐𝒓 𝟑. 𝟖%
Therefore, Amy loaned at a simple
interest rate of 3.8%.
Example 4:
How long will it take a principal of ₱ 500,000 to earn
₱250, 000 if invested at a simple interest rate of 8.5%?

Example 5:
Anne paid a total of ₱ 324,268 to settle her loan after 11
months. If the simple interest rate is 5.47%, how much did
Anne originally borrow?
Example 4:
How long will it take a principal of ₱ 500,000 to earn ₱250, 000 if invested at a simple
interest rate of 8.5%?

SOLUTION:
Formula for time Substitute the values given, you will have,
𝐼
𝐼 𝑡=
𝑡 = 𝑃𝑟 𝑃𝑟
250, 000
𝑡=
500,000( 0.085)
𝒕 = 𝟓. 𝟖𝟖

Thus, it will take at least 5.88 years to earn

approximately ₱ 250, 000
Example 5:
Anne paid a total of ₱ 324,268 to settle her loan after 11 months. If the simple interest
rate is 5.47%, how much did Anne originally borrow?

SOLUTION:
Formula for principal amount Substitute the values given, you will have,
𝐹 𝐹
𝑃= 𝑃=
1 + 𝑟𝑡 1 + 𝑟𝑡
324,268
𝑃=
11
1 + 0.0547
12

𝑷 = 𝟑𝟎𝟖, 𝟕𝟖𝟓. 𝟎𝟏

Therefore, Anne borrowed ₱ 𝟑𝟎𝟖,𝟕𝟖𝟓.𝟎𝟏

 02
COMPOUND INTEREST
COMPOUND INTEREST
An interest added to the principal of an
investment or a loan so that the added
interest also earns interest from then on.

This addition of interest to the principal is called “compounding” .

𝒏𝒕
𝒊
𝑰= 𝑷 𝟏+ −𝑷
𝒏

Where:
I – interest n – number of conversion period
P – principal amount t - time
i – rate (nominal rate)
 COMPOUND INTEREST
Principal Amount (P) – the amount of money 𝒏𝒕
extended for credit, or the amount of money 𝒊
𝑰= 𝑷 𝟏+ −𝑷
deposited in a bank for safekeeping 𝒏
purposes.

Interest Rate (i) – the annual interest rate

that does not consider the compounding
period.

Conversion Period (n) – the time interval it

takes for money to earn interest in a year.

Time of Interest (t) – the period covered

from the time that the money (principal) is
borrowed until its due date.
 TYPES OF
COMPOUNDING
According to the number of conversion period in a year.

Annually once per year. 𝒏=𝟏

Semiannually twice a year 𝒏=𝟐

Quarterly four times per year (every 3 months) 𝒏=𝟒

Monthly 12 times per year 𝒏 = 𝟏𝟐

Example 1:
Nadine invested ₱ 550, 500 in a company that returns 3%. How much would be the increase
of Nadine’s investment after 7 years if the interest is compounded:
a) Annually?
b) Every 6 months?

SOLUTION:
𝒊 𝒏𝒕
a. Given : Using the formula 𝑰 = 𝑷 𝟏 + 𝒏 − 𝑷 ,you will have,
Nominal rate (i) = 3 % or 0.03 𝑖 𝑛𝑡

Time (t) = 7 years 𝐼 =𝑃 1+ −𝑃

𝑛
Principal amount (P) = 550, 500 0.03 1(7)
𝐼 = 550, 500 1 + − 550, 500
Number of conversion period (n) =1 1

𝑰=126,545.5629

Thus, the interest in this type of account is

₱ 126,545.56
Example 1:
Nadine invested ₱ 550, 500 in a company that returns 3%. How much would be the increase
of Nadine’s investment after 7 years if the interest is compounded:
a) Annually?
b) Every 6 months?

SOLUTION:
𝒊 𝒏𝒕
b. Given : Using the formula 𝑰 = 𝑷 𝟏 + 𝒏 − 𝑷 ,you will have,
Nominal rate (i) = 3 % or 0.03 𝑖 𝑛𝑡

Time (t) = 7 years 𝐼 =𝑃 1+ −𝑃

𝑛
Principal amount (P) = 550, 500 0.03 2(7)
𝐼 = 550, 500 1 + − 550, 500
Number of conversion period (n) =2 2

𝑰= 𝟏𝟐𝟕, 𝟓𝟖𝟏. 𝟓𝟐𝟗𝟕

Thus, the interest in this type of account is

₱ 𝟏𝟐𝟕,𝟓𝟖𝟏.𝟓𝟐𝟗𝟕
 Banks often advertise their nominal (annual) rates
and not their true or effective rates. For some, this
effective rate is called the Annual Percentage Yield
or APY. It is defined as the actual rate of return
annually. Note that APY is equivalent to a nominal
rate compounded annually. You can convert nominal
rate into effective rates by using the formula below.

𝒏
𝒊
𝑨𝑷𝒀 = 𝟏 + −𝟏
𝒏
Example 2:
Jean wants to borrow money from a bank. Help her decide where will be wiser to
borrow: East Bank at 9.54% interest compounded every 3 months or West Bank at
9.27% interest compounded monthly?

SOLUTION:
It will be more appropriate to compare the effective rates of each bank.
𝑖 𝑛
Use the formula 𝐴𝑃𝑌 = 1 + − 1 to calculate the APY
𝑛
0.0954 4
𝐴𝑃𝑌𝐸𝑎𝑠𝑡 = 1 + 4
− 1 ≈ 0.098868 or 9.887%

0.0927 12
𝐴𝑃𝑌𝑊𝑒𝑠𝑡 = 1 + − 1 ≈ 0.0967418 or 9.674%
12

Since Jean will borrow money, she must choose

the bank that has a lower interest which is West
Bank.
 HELPFUL FORMULAS
𝑖 −𝑛𝑡
Principal Amount (P) 𝑃 =C 1+𝑛

Compound Amount (C) 𝑖 𝑛𝑡

C=𝑃 1+
𝑛

1
C
Nominal rate or rate of interest (i) 𝑖=𝑛 𝑛𝑡 −1
𝑃

C
𝑙𝑜𝑔
𝑡= 𝑃
Time (t) 𝑖
𝑛 𝑙𝑜𝑔 1 +
𝑛
Example 3:
Eric needs to know how much should he invest in a bank that returns 8.61% interest
compounded quarterly so that he can have ₱ 540, 000 in 5 years.
Help Eric in his problem.

SOLUTION:
𝑖 −𝑛𝑡
Use the formula 𝑃 =𝐶 1+
𝑛
𝑖 −𝑛𝑡
𝑃 =𝐶 1+ 0.0861 −(4)(5)
𝑛 𝑃 = 540, 000 1 +
4
𝑷 = 𝟑𝟓𝟐, 𝟕𝟎𝟔. 𝟕𝟒𝟔

Thus, Eric should invest ₱ 𝟑𝟓𝟐,𝟕𝟎𝟔.𝟕𝟒𝟔 today to

have the desired amount in 5 years.
Example 4:
Erika needs Php 1,000,000 in 5 years and 2 months from now. She plans to invest her
Php 250, 000 now so that she can have the desired amount in time. At what interest
rate compounded monthly should she invest her money?

SOLUTION:
𝐶 1
Use the formula 𝑖=𝑛 𝑛𝑡 −1
𝑃
𝑪 −𝟏
𝒊=𝒏 𝒏𝒕 −𝟏 1
𝑷 1,000,000 2
12 5
𝑖 = 12 12 −1
250,000

𝒊 = 𝟎. 𝟐𝟕𝟏𝟑𝟑𝟕𝟐𝟐𝟕𝟐 ≈ 𝟐𝟕. 𝟏𝟑𝟑𝟕𝟐𝟐𝟕𝟐% or 27.13%

Thus, Erika needs to invest her money at least

27.13% compounded monthly.
Example 5:
How many years will it take Php 250, 000 to double if it is invested at
9.82 % compounded every 2 months?

𝐶
SOLUTION: 𝑙𝑜𝑔
𝑃
𝑡=
Use the formula 𝑖
𝑛 𝑙𝑜𝑔 1 + 𝑛
𝐶
𝑙𝑜𝑔 𝑃 500, 000
𝑡= 𝑙𝑜𝑔
𝑖 250, 000
𝑛 𝑙𝑜𝑔 1 + 𝑛 𝑡=
0.0982
6 𝑙𝑜𝑔 1 + 6

𝒕 = 𝟕. 𝟏𝟏

Thus, the actual time to double a Php 250,000

investment is around 7.11 years or this is approximately
7 years and 2 months at a rate of 9.82% compounded
every 2 months.
Question?
How about Anna? What type
of interest should she
choose from the option
given to her by the bank?
 Bank Investment Option
SIMPLE INTEREST COMPOUND INTEREST

Principal Amount: ₱ 15,000 Principal Amount: ₱ 15,000

Rate: 0.6 Nominal Rate: 0.4

Time: 1 year Time: 1 year

Conversion Period: Monthly

Interest: ₱ 9,000 Interest: ₱ 7,231

 Field Trip

Field Trip
whohoho!!!
 SEATWORK
1. Cheska wants to open a new business. To finance her for this
business, her friend Carla lends her money in a form of a loan
amounting to 55,000.00 to be repaid after 40 months with 9¼%
interest rate. How much will Cheska pay Carla?

2. A loan of 33,550.00 at 5.5% simple interest rate was paid back

with an amount of 36,000.00 at the end of the term. For how long
was the money borrowed?

3. A self-employed photographer deposits 47,000.00 in an

account paying 14.75% compounded quarterly. How much will the
photographer have in this account after 30 years?
 SEATWORK

4. Areneo Colleges anticipates additional expenses of 376,800.00 for

a new equipment needed for offering a new course 5 years from
now. How much should be invested in an account that earns 19%
compounded monthly?

5. After how long will 78,800.00 be due if its present value of

61,500.00 is invested at 10¾% compounded monthly?
 Reminder!
1. Long Test 1 for Final Term next
meeting
2. Scaffold 3 Guidelines will be posted in
the MS Teams within this week.
THANKS!

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