P Principal Amount I Interest

SIMPLE INTEREST
The concept of computing interest was already being practiced since the ancient Babylonian
mathematicians created tables of numbers. They used tables to determine how long it would take to
double one’s money at a particular interest rate.
In this lesson, we shall learn how to calculate simple interests. Although most financial transactions use
compound interest, simple interest is still used in many short-term transactions.
The sum of the money paid for the use of money is called interest. The interest earned on a deposit
or charged against a loan depends on three factors.
1. The rate of interest (r) which is given by the bank or charged by the lender.
2. The length of time (t) for which money is deposited or borrowed.
3. The sum of the money deposited or borrowed which is called the principal (P).
When money is deposited or borrowed, the total amount of money at the end of the transaction period
is called the final amount. The final amount is equal to the sum of the principal and the interest. In
symbol we write
F=P+I
Where F = final amount
P = principal amount
I = interest
When interest on a deposit or loan is computed once for the full term of the loan, it is called simple
interest. The simple interest (I) is compute by multiplying the principal (P) by the rate of interest (r)
and the length of the time (t) of the deposit or loan. In symbol, we write
I = Prt
Based on this formula, other formulas may be derived as given below.
𝑰 𝑰 𝑰
𝒓= 𝒕= 𝑷 = 𝒓𝒕
𝑷𝒕 𝑷𝒓
Since I = Prt and F = P + I, we have
F=P+I
F = P + Prt
F = P(1 + rt)
The interest rate and the time must always correspond accordingly. Thus, they must be both
expressed monthly, quarterly, semi-annually. Unless otherwise specified, all simple interest rates are
expressed as annual rate. Therefore, the time of the loan or investment must always be expressed
in years.
Example 1
Yuan deposited Php 5 000 in a bank paying 9% simple interest for 3 years. How much would he have
in his account at the end of three years, assuming that no withdrawal was made?
Step 1. Identify the given information.
P = 5 000 r = 9% = 0.09 t = 3 years
Step 2. Identify what is asked in the problem and the formula to be used.
We are asked to find the final amount F. The formula to be used is F=P(1 +rt)
Step 3. Substitute the given values and compute the value of the unknown
F = P(1 + rt)
= 5 000[1 + (0.09)(3)] = 6 350
So the amount of money after 3 years is Php 6 350.
Example 2
Brando Maribeles borrowed Php 15 000 from a bank charging 7% simple interest with an agreement
that he would pay the principal and the interest at the end f the term. If he paid Php 17 100 at the end
of the term, for how long did he used the money?
Step 1. Identify the given information
P = 15 000 F = 17 100 r = 7% = 0.07
𝐼
Step 2. Identify what is asked to find the time t. The formula to be used is 𝑡 = 𝑃𝑟
We will solve first for I using the formula
I=F–P Solve for t.
I = 17 100 – 15 000 𝐼
𝑡=
I = 2 100 𝑃𝑟
𝑡
2 100
=
(15 000)(0.07)
t=2
So, the money was used for 2 years.
Example 3
Jonathan invested Php 75 000 in the stock market which guaranteed an interest of Php 11 250 after
one and a half years. At what rate would his investment earn?
P = 75 000 I = 11 250 t = 1.5 years
Step 2. Identify what is in the problem and the formula to be used. We are asked to find the
𝐼
rate r. The formula to be used is 𝑟 = 𝑃𝑡
𝐼
𝑟 = 𝑃𝑡
11 250
= = 0.10 = 𝟏𝟎%
75 000 (1.5)
So, the interest rate is 10%.
Example 4
Julius De mesa paid an interest of Php 5 000 on a three years loan at 8% simple interest.
a. What was the original loan?
b. How much did he pay at the end of three years?
I = 5 000 t = 3 years r = 8% = 0.08
Step 2. Identify what is asked in the problem and the formula to be used. We are asked to find the
𝐼
principal P. The formula to be used is 𝑃 = 𝑟𝑡
𝐼
𝑃 = 𝑟𝑡
5 000
=( = 𝟐𝟎 𝟖𝟑𝟑. 𝟑𝟑
0.08)(3)
So the original amount of loan is Php 20 833.33
Next, we compute the total amount paid for the loan.

F=P+I
= 20 833.33 + 5 000 = Php 25 833.33

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SIMPLE INTEREST

So, the money was used for 2 years.

Next, we compute the total amount paid for the loan.

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