11

General Mathematics
Quarter 2 – Module 2:
Problems Involving Simple and
Compound Interest
General Mathematics – Grade 11
Alternative Delivery Mode
Quarter 2 – Module 2: Problems Involving Simple and Compound Interest
First Edition, 2020

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 What I Need to Know

This module was designed and written for the learners. After going
through this module, the learner is expected to:
1. compute interest, maturity value, future value, and present value in
simple and compound interest environment (M11GM-IIa-b-1); and
2. solve problems involving simple and compound interest (M11GM-IIb-2).

What I Know

Pre-test: Choose the letter of the correct/best answer. Write your answer
on separate sheet/s of paper.

1. What is the computed return from the present value for a given duration of
a transaction?
a. present value c. simple interest
b. future value d. compound interest
2. What is the total amount to be received or paid for a certain obligation?
a. present value c. simple interest
b. future value d. compound interest
3. If P = ₱10 000, r = 4% annually, and t = 24 months, find the simple interest.
a. ₱500 c. ₱700
b. ₱600 d. ₱800
4. What is the result when the interest is added to the principal periodically,
and their sum becomes the principal for the following period?
a. converted interest c. compound amount
b. compound interest d. converted amount
5. Find the compound amount if ₱8 500 is invested at 12% compounded semi-
annually for three years.
a. ₱10 000 c. ₱12 057.41
b. ₱12 500.56 d. ₱16 000.41

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 Lesson
Problems Involving Simple
1 and Compound Interest
An investment or a certain amount of money can earn a simple interest
or a compound interest. In this lesson, we will investigate, analyze, and solve
problems involving simple and compound interests.

What’s In
Let us go back and analyze the given situation in Module 1.
Suppose you won ₱10,000 and you plan to invest it for 5 years. A
cooperative group offers 2% simple interest rate per year. A bank offers 2%
compounded annually. Which will you choose and why?
Solution.
Investment 1: Simple Interest
Time Principal Interest Amount after t years
(t) (P) Rate (r) Simple Interest (IS) (Maturity Value) (F)
1 2% (10 000)(0.02)(1)= 200 10 000 + 200 = 10 200.00
2 2% (10 000)(0.02)(2)=400 10 000 + 400 = 10 400.00
3 10 000 2% (10 000)(0.02)(3)=600 10 000 + 600 = 10 600.00
4 2% (10 000)(0.02)(4)=800 10 000 + 800 = 10 800.00
5 2% (10 000)(0.02)(5)=1000 10 000 + 1 000 = 11 000.00

Investment 2: Compound Interest

Time Amount Interest Amount after t years
(t) at the Rate (r) Compound Interest (Maturity Value)
start of (IC) (F)
year (t)
1 10 000 2% (10 000)(0.02)(1)=200 10 000+200=10 200.00
2 10 200 2% (10 200)(0.02)(1)=204 10 200+204=10 404.00
3 10 404 2% (10 404)(0.02)(1)=208.08 10 404+208.08=10 612.08
4 10 612.08 2% (10 612.08)(0.02)(1)=212.24 10 612.08+212.24=10 824.32
5 10 824.32 2% (10 824.32)(0.02)(1)=216.49 10 824.32+216.49=11,040.81

Simple interest remains constant throughout the investment term. In

compound interest, the interest from the previous year also earns interest.
Thus, the interest grows every year.

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 What’s New

A. SIMPLE INTEREST

Using Table 1 presented in the previous page, we observed that an annual

simple interest rate is based on the three factors, namely:
a. Principal which is the amount invested or borrowed;
b. Simple interest rate usually expressed in percent; and
c. Time or term of loan in years.

Also, simple interest is computed as follows:

Annual simple Interest

Is = Prt

where, Is = simple interest

P = principal, or the amount invested or borrowed
r = simple interest rate
t = term or time in years
The maturity value F is computed as:

Maturity (Future)Value
F = P + Is

where, F = maturity (future) value

P = principal, or the amount invested or borrowed
Is = simple interest
Since Is = Prt, then:
F = P + Prt
F = P(1 + rt)

What is It

Here are some examples that will help you to better understand simple
interest.

Example 1. A bank offers 0.25% 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?

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 Given: P = 1,000,000 r = 0.25% = 0.0025 t = 1 year

Find: Is
Solution: IS = Prt

IS = (1,000,000)(0.0025)(1)

IS = 2,500
Answer: The interest earned is ₱2,500

Example 2. How much interest is charged when ₱50,000 is borrowed for 9

months at an annual interest rate of 10%?
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Given: P = ₱50,000 r = 10% = 0.10 t= year
12
Find: Is
Note: When the term is expressed in
Solution: IS = Prt months (M), it should be converted in
9
IS = (50,000)(0.10)( 12 ) years by t = M .
12
IS = (50,000)(0.10)(0.75)

IS = 3,750
Answer: The simple interest charged is ₱3,750.

Example 3. Complete the table below by finding the unknown.

Principal (P) Rate (r) Time (t) Interest (IS)

(a) 2.5% 4 1,500
36,000 (b) 1.5 4,860
250,000 0.5% (c) 275
500,000 12.5% 10 (d)

Solution:
IS
(a) The unknown principal can be obtained by P = .
rt
1,500
P=
(0.025)(4)
P = 15,000
IS
(b) The unknown rate can be computed by r = .
Pt
4,860
r = (36,000)(1.5)

r = 0.09 = 9%
I
(c) The unknown time can be calculated by t = S .
Pr
275
t=
(250,000)(0.005)
t = 0.22 year
(d) The unknown simple interest is given by I S = Prt.
IS = (500,000)(0.125)(10)
IS = 625,000

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 Example 4. Find the maturity value if 1 million pesos is deposited in a bank
at an annual simple interest rate of 0.25% after (a) 1 year, (b) 5 years.
Solution:

(a) The unknown maturity value can be obtained by F = P(1 + rt).

Given: P = 1,000,000 r = 0.25% = 0.0025 t = 1 year

F = P(1 + rt)

F = (1,000,000)(1+0.0025(1))

F = (1,000,000)(1.0025)
F = 1,002,500

Answer: The future/maturity value after 1 year is ₱1,002,500.

(b) The unknown maturity value can be obtained by F = P(1 + rt).

Given: P = 1,000,000 r = 0.25% = 0.0025 t = 5 years

F = P(1 + rt)

F = (1,000,000)(1+0.0025(5))
F = (1,000,000)(1.0125)

F = 1,012,500

Answer: The future/maturity value after 1 year is ₱1,012,500.

B. COMPOUND INTEREST

Many bank savings accounts pay compound interest. In this case, the interest
is added to the account at regular intervals, and the sum becomes the new basis for
computing interest. Thus, the interest earned at a certain time interval is
automatically reinvested to yield more interest.

The following table shows the amount at the end of each year if principal P is
invested at an annual interest rate r compounded annually. Computations for the
particular example P = ₱100,000 and r = 5% are also included.

Year Principal = P Interest rate = r, Principal = ₱100,000

(t) compounded annually Int. rate = 5%, compounded annually
Amount at the end of the year Amount at the end of the year
1 P(1 + r) = P(1 + r) 100,000 x 1.05 = 105,000
2 P(1 + r)(1 + r) = P(1 + r)2 105,000 x 1.05 = 110,250
3 P(1 + r)2(1 + r) = P(1 + r)3 110,250 x 1.05 = 115,762.50
4 P(1 + r)3(1 + r) == P(1 + r)4 115,762.50 x 1.05 = 121,550.625

Observe that the amount at the end of each year is just the amount from the
previous year multiplied by (1 + r). In other words, 1 + r is multiplied each time the
year ends. This results in the following formula for the amount after t years, given
an annual interest rate of r :

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Maturity (Future) Value and Compound Interest
F = P(1 + r)t
where,
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term/time in years
The compound interest IC is given by
IC = F - P

Example 1. Find the maturity value and the compound interest if ₱10,000 is
compounded annually at an interest rate of 2% in 5 years.

Given: P = ₱10,000 r = 2% = 0.02 t = 5 years

Find: (a) maturity value F

(b) compound interest IC

Solution:

(a) F = P(1+r)t
F = 10,000(1+0.02)5

F = ₱11,040.81

(b) IC = F – P
IC = 11,040.81 – 10,000

IC = ₱1,040.81

Answer: The future value F is ₱11,040.81 and the compound interest is

₱1,040.81.

Example 2. Suppose your father deposited in your bank account ₱10,000 at

an annual interest rate of 0.5% compounded yearly when you graduate from
Kindergarten and did not get the amount until you finished Grade 12. How
much will you have in your bank account after 12 years?
Given: P = ₱10,000 r = 0.5% = 0.005 t = 12 years

Find: F

Solution: The future value F is calculated by

F = P(1+r)t

F = (10,000)(1+0.005)12

F = ₱10,616.78
Answer: The amount will become ₱10,616.78 after 12 years.

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Present Value P at Compound Interest:
The present value or principal of the maturity value F due in t years at any
rate r can be obtained from the maturity value formula F = P(1+r)t.

Solving for the present value P,

P(1+r)t = F
P(1+r)t F
=
(1+r) t (1+r)t

F
P= or equivalently P = F(1+r)-t
(1+r)t
Present Value P at Compound Interest
F
P = = F(1 + r)-t
(1+r)t
where,
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term/time in years
Example 3. What is the present value of ₱50,000 due in 7 years if money is
worth 10% compounded annually?
Given: F = 50,000 r = 10% = 0.1 t = 7 years
Find: P
Solution: The present value P can be obtained by
F
P= or P = F(1+r)-t
(1+r)t

P = 50,000 P = 50,000(1+0.1)-7
(1+0.1)7

P = 25,657.91 P = 25,657.91

Answer: The present value is ₱25,657.91.

Compounding More than Once a Year

Sometimes, interest may be compounded more than once a year. Consider the
following example.
Example 4. Given a principal of ₱10,000, which of the following options will
yield greater interest after 5 years?
OPTION A: Earn an annual interest rate of 2% at the end of the year, or
OPTION B: Earn an annual interest rate of 2% in two portions-1% after 6
months and 1% after another 6 months?

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Solution:
OPTION A: Interest is compounded annually.
Time (t) in years Principal = ₱10,000
Annual Int. rate = 2%, compounded annually
Amount at the end of the year
1 (10,000)(1.02) = 10,200
2 (10,200)(1.02) = 10,404
3 (10,404)(1.02) = 10,612.08
4 (10,612.08)(1.02) = 10,824.32
5 (10,824.32)(1.02) = 11,040.81

OPTION B: Interest is compounded semi-annually, or every 6 months.

Under this option, the interest rate every 6 months is 1% (2% divided by 2).
Time (t) in years Principal = ₱10,000
Annual Int. rate = 2%, compounded semi-annually
Amount at the end of the year
½ (10,000)(1.01) = 10,100
1 (10,100)(1.01) = 10,201
1½ (10,201)(1.01) = 10,303.01
2 (10,303.01)(1.01) = 10,406.04
2½ (10,406.04)(1.01) = 10,510.10
3 (10,510.10)(1.01) = 10,615.20
3½ (10,615.20)(1.01) = 10,721.35
4 (10,721.35)(1.01) = 10,828.56
4½ (10,828.56)(1.01) = 10,936.85
5 (10,936.85)(1.01) = 11,046.22

Answer: Option B will give the higher interest after 5 years. If all else is equal, a
more frequent compounding will result in a higher interest, which is why Option
B gives a higher interest than Option A.

The investment scheme in Option B introduces new concepts because interest

is compounded twice a year, the conversion period is 6 months, and the frequency
of conversion is 2. As the investment runs for 5 years, the total number of
conversion periods is 10. The nominal rate is 2% and the rate of interest for each
conversion period is 1%. These terms are defined generally below.

Definition of Terms:

Frequency of conversion (m) – number of conversion periods in one year

Conversion or interest period – time between successive conversions of interest
Total number of conversion periods n
n = mt = (frequency of conversion) × (time in years)
Nominal rate (i(m)) – annual rate of interest
Rate (j) of interest for each conversion period
i(m) annual rate of interest
j= =
m frequency of conversion
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Note on rate notation: r, i(m), j

In earlier lessons, r was used to denote the interest rate. Now that an interest
rate can refer to two rates (either nominal or rate per conversion period), the symbols
i(m) and j will be used instead.
Examples of nominal rates and the corresponding frequencies of conversion
and interest rate for each period:
i(m) = Nominal Rate m = Frequency j = Interest Rate One conversion
(Annual Interest of Conversions per conversion period
Rate) period
2% compounded 1 1 year
0.02
annually; i(1) =0.02 = 0.02 = 2%
1

2% compounded semi- 2 6 months

0.02
annually; = 0.01 = 1%
2
i(2) = 0.02
2% compounded 4 3 months
0.02
quarterly; i(4) = 0.02 =0.005=0.5%
4

2% compounded 12 1 month
0.02
monthly; i(12)= 0.02 = 0.0016
12
= 0.16%
2% compounded daily; 365 0.02 1 day
i(365)= 0.02 365

From the previous discussion, the formula for the maturity value (F) when
principal (P) is invested at an annual interest rate (j) compounded annually is

F = P(1+j)t.
Because the rate for each conversion period is j =
i(m), then in t years, interest
m
is compounded mt times. The following formula is obtained.

Maturity Value, compounding m times a year

(𝑚) mt
F=P (1 + 𝑖 𝑚 )

where,
F = maturity (future) value
P = principal
i = nominal rate of interest (annual rate)
(m)

m = frequency of conversion
t = term/time in years

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 Example 5. Find the maturity value and interest if ₱10,000 is deposited in a
bank at 2% compounded quarterly for 5 years.

Given: P = 10,000 i(4) = 0.02 t = 5 years m=4

Find: a. F b. IC
Solution.
Compute for the interest rate in a conversion period by
i(4)
j= = 0.02 = 0.005
m 4
Compute for the total number of conversion periods given by
n = mt = (4)(5) = 20 conversion periods.
Compute for the maturity value using
F = P(1+j)n
= (10,000)(1 + 0.005)20
F = ₱11,048.96.
The compound interest is given by
IC = F – P = 11,048.96 – 10,000 = ₱1,048.96.
Example 6. Cris borrows P50,000 and promises to pay the principal and
interest at 12% compounded monthly. How much must he repay after 6 years?
Given: P = ₱50,000 i(12) = 0.12 t=6 m = 12
Find: F
Solution. You may also use the other formula to compute for the maturity
value.
(12) mt
F=P (1 + 𝑖 𝑚 )
0.12 (12)(6)
F = (50,000)(1 + 12 )
F = (50,000)(1.01)72

F = ₱102,354.97
Thus, Cris must pay ₱102,354.97 after 6 years.

Let us now learn how to find the present value when the interest is
compounded more than once a year.

Present Value P at Compound Interest

P= F
(𝑚) mt
P (1 + 𝑖 𝑚 )
where,
F = maturity (future) value
P = principal
i = nominal rate of interest (annual rate)
(m)

m = frequency of conversion
t = term/time in years

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Example 7. Find the present value of ₱50,000 due in 4 years if money is

invested at 12% compounded semi-annually.

Given: F = ₱50,000 t = 4 years i(2) = 0.12

Find: P

Solution.

First, compute for the interest rate per conversion period given by

𝑖 (2) 0.12
j= = = 0.06
𝑚 2
The total number of conversion periods is n = tm = (4)(2) = 8.
The present value can be computed by substituting these values in the
formula.
F
P= .
(1+j)𝑛

50,000 50,000
Thus, P= = = ₱31,370.62
(1+0.06)8 (1.06)8

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 What’s More

ACTIVITY 1

Directions: Find the unknown principal P, rate r, time t, and simple

interest IS by completing the table. Use separate sheet/s of paper for your
answer.

Principal (P) Rate (r) Time (t) Simple Interest

(IS)
10,000 8% 15 (1)
(2) 2% 5 10,000
360,000 (3) 2 3,600
500,000 10.5% (4) 175,500

Activity 2

Directions: Find the unknown principal P, maturity value, and

compound interest IC by completing the table. Use separate sheet/s of paper
for your answer.

Principal (P) Rate(r) Time(t) Compound Maturity Value

Interest (IC) (F)
10,000 8% 15 (1) (2)
(3) 2% 5 (4) 50,000

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 What I Have Learned

Directions: Supply the necessary information about simple and

compound interest by completing the graphic organizers below. Use separate
sheet/s of paper for your answer.

What about it

Formulas to be used
SIMPLE
INTEREST Example

How to solve it

What about it

Formulas to be used
COMPOUND
INTEREST Example

How to solve it

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 What I Can Do
Direction: Read and analyze the given paragraph below. Use
separate sheet/s of paper for your answer.

Suppose that you have ₱80,000. You decided to deposit it on a bank

and will not withdraw from it for 10 years. A bank offers two types of interest
accounts. The first account offers 6% simple interest. The second account
offers 6% interest compounded semi-annually. Which account will you choose
if you want your money to earn more? Why?

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 Assessment

Post-test: Choose the letter of the correct/best answer. Write your

answer on separate sheet/s of paper.
1. Jose borrowed ₱50,000 for the renovation of his house. How much interest
will he need to pay if the loan will be paid for 3 years, and the interest rate is
9% annually?
a. ₱23,000 c. ₱15,500
b. ₱20,000 d. ₱13,500
2. Rich Garments Company wants to invest ₱130,000 at 5% interest per
annum. How many years will it take to have the expected interest of ₱20,000?
a. 1.08 years c. 3.08 years
b. 2.08 years d. 4.08 years
3. Find the total number of conversion periods in the entire transaction time
if the transaction is compounded monthly in 7 years.
a. 75 c. 84
b. 79 d. 90
4. Melissa will get a compounded amount from her educational plan worth
₱20,620.61 in 15 years at 12% compounded quarterly. What was the amount
in the beginning?
a. ₱3,000.90 c. ₱4,000.90
b. ₱3,500 d. ₱4,500
5. On Richard’s son’s 12th birthday, Richard wishes to invest a certain sum of
money in a trust fund which gives 12% interest compounded quarterly. How
much should he invest if he wishes the money to amount to ₱150,000 by the
time his son reaches 21 years old?
a. ₱15,754.86 c. ₱47,754.86
b. ₱37,754.86 d. ₱51,754.86

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 Answer Key

4. Ic = ₱4,713.46
5. D 3. P = ₱45,286.54
2. F = ₱31,721.69
4. B 1. Ic = ₱21,721.69
5. C 3. C Activity 2
4. C
3. D 2. C 4. t = 3.34
2. B 3. r = 0.5%
1. D
1. C 2. P = ₱100,000
Pre-test Post-test 1. IS = ₱12,000
Activity 1
What I Know Assessment
What’s More

References
Book:
Department of Education Leaner’s Material for General Mathematics
Orlando A. Oronce, 2016. General Mathematics. Quezon City: REX
Publishing

Website:
“Solving Problems Involving Simple and Compound Interest”.
https://link.quipper.com/en/organizations/547ffce1d2b76d000
2002c2f/curriculum#curriculum. October 27, 2020

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