PACKET 1∥ CHAPTER 1: SIMPLE INTEREST

Chapter 1: Simple Interest

Money is borrowed or loaned for many reasons. When you open a business or
even want to own but you are in short of money, you may resort to credit or loan. There
are even times that even if we have adequate funds, we still borrow rather than withdraw
funds from our deposits. Just like in owning a home, we use other people’s money,
through housing loans or by borrowing money from a lending institution for the
construction of our dream house. Another example is the so called cashless transaction.
This cashless transaction referred to the credit card. Paying the goods you buy through
a credit card is of advantage to the creditor but you must be smart in paying your
account on or before the due date or else it will incur an interest.

Always keep in mind that when you use or borrow a person’s money, a debt is
created. The amount you borrow will most of the time change into a greater value the
moment you pay back. You pay back the money originally borrowed, called the principal,
and also the charged fee for the use of the money called the interest; these form the
debt of the borrower.

In this chapter, you must have a good understanding of interest and how it is
calculated. To compute for interest, even if it is simple interest, you must know how
much money is borrowed, the rate of interest and the term of the loan.

KEY TERMS

Interest, Simple Interest, Ordinary Interest, Exact Interest, Principal,

Rate of Interest, Time , Approximate Time , Actual Time
 PACKET 1∥ CHAPTER 1: SIMPLE INTEREST

LEARNING OBJECTIVES

At the end of this packet, you should be able to:

1. define the key terms;

2. calculate the amount of interest using simple interest formula;
3. calculate the principal, rate, time or interest when the other three quantities are
known;
4. differentiate ordinary interest and exact interest;
5. differentiate approximate time and exact time; and
6. calculate ordinary and exact interest using approximate time and exact time

Let’s Do This!
Ask anybody at least two from your elders if they had tried borrowing money from
a certain person or from any lending institutions. Ask the process on how did they pay
back the money borrowed or loaned.

ANALYSIS

Based on your interview, compare which of the two lending institutions or

individuals is offering less interest or of more advantage to the borrower. As a
student in this course you will then realize how to make a profit of the money you will be
investing in the future. Thus, when you apply for a loan, you have to weigh which interest
rate is better with the consideration of the term of your loan.
 PACKET 1∥ CHAPTER 1: SIMPLE INTEREST

Discussion

Topic 1

Definition of Simple Interest and Formula

In your own understanding, surely interest would mean or refer to a certain
amount you earn out of an amount you lend to others. Interest is the main income for
banks. It is associated with loans or investments which are short-term or long- term in
nature. Simple interest is computed based on the amount of principal, rate and time.
This leads to the simple interest formula

I = Prt

Where:
I - simple interest
P - principal
r - interest rate per period of time,
expressed as percent or a
fraction
t - time (in years) between the date
the loan is made and the date it
matures or becomes repayable
to the lender

If you want to find the total amount a person earns at the end of n years, you will
just simply add the amount of principal and the amount of interest. In symbol,

F=P+I

Where:

P- the principal
I - the amount of interest
F- the total amount of pesos earned

The given formula can still be refined into:

F = P + Prt, (since, I = Prt )

 PACKET 1∥ CHAPTER 1: SIMPLE INTEREST

So by factoring:

F = P (1 + rt)

In the formula, you can notice that interest rate is expressed as a percent or a
fraction. Time on the other hand is expressed in years or a fraction of a year. If it is
expressed in days, weeks, or months, these are usually changed or converted into the
equivalent fractions of the year.

Study the following examples:

1. Find the interest on a loan of P60,000 for one year if the interest rate is 8%.

i. Given: P = P60,000 r = 8% t = 1 year

ii. Required: Interest (I)

iii. Solution:

From the formula, I = Prt

Substituting all the given:

I = (P60,000) (.08) (1 yr)

= P4,800

iv. Answer:
Therefore, the amount of interest is P4,800.

2. A credit institution issued a 4–year loan of P400,000 at a rate of 6%, what

amount will be repaid at the end of the fourth year?

i. Given: P = P400,000 r = 6% t = 4 years

ii. Required: Accumulated amount or Final Amount (F)

iii. Solution:

F=P+I
= P (1 + rt)
= P400,000 [1 + (.06) (4 yrs.)]
= P400,000(1.24)
= P496,000

iv. Answer:

Therefore, the accumulated amount or amount to be repaid after the

 PACKET 1∥ CHAPTER 1: SIMPLE INTEREST

end of 4th year is P496,000.

1. Xandrie needs P200,000 to buy furniture for his new house. He wants to limit
the interest he will pay when he borrows the amount in a bank to P11,000 only. If
the bank charges 11% interest, after how long must Xandrie pay his obligation?

i. Given: P = P200,000 I =P11,000 r= 11%

ii. Required: time (t)

iii. Solution:
From I = Prt,

derive a formula to solve for t

I
t=
Pr

P 11,000
t= (substitute all the given)
( 200,000 ) (.11)

= 0.5 year or 6 months

iv. Answer:

Therefore, Daniel will pay his obligation after 6 months.

2. At what rate in simple interest must I invest my P120,000 in order to earn an

interest of P6,000 for 8 months?

i. Given: P = P120,000 I = P6,000 t = 8 months (8/12 years)

ii. Required: rate (r)

iii. Solution:

From I = Prt,

* derive a formula to solve for r

I
r =
Pt
P 6,000
= ( P 120,000 ) 8
( 12 ) (substitute the values of the given)
 PACKET 1∥ CHAPTER 1: SIMPLE INTEREST

(3)
= (20) 2

= .075 or 7.5%

iv. Answer:
Therefore, the interest rate is 7.5% for the money invested in order
to earn P6,000.

Practice!

Name: __________________________________ Date: ____________

Year, Course and Section: ___________________

Exercise No. 1.1

Directions: On a sheet of bond paper, answer the following problems. Show your
solutions neatly (strictly no erasures). Pass it to my email add
or if unavailable, take a picture and send it to our Messenger Group
Chat.

1. Find the interest on and the amount of:

a. P3,400 for 2 months at 6%
b. P35,000 for 2 years at 4%

2. Find the time necessary to yield P3,000 on P45,000 at 8% simple

interest.

3. A P50,000 savings account earned P7,000 interest in 2 years. What

was the rate of interest?

4. At the end of 2 years, P36,000 in interest was paid on an 18% simple

interest loan, how much was borrowed?

5. P25,000 is deposited to an account paying 4% simple interest. How

much is in the account after 5 years?
PACKET 1∥ CHAPTER 1: SIMPLE INTEREST
PACKET 1∥ CHAPTER 1: SIMPLE INTEREST