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Interest is the amount paid or earned for the use of money. An amount of money that
is borrowed for a period of time is called loan. A person or institution who invests the money
or makes the funds available is called lender or creditor while the person or institution who
owes or avails the fund from the lender is called borrower or debtor.
Let’s familiarize ourselves with other terms and variables that we will encounter as we
go on with our lesson.
Principal or present value (P) is an amount of money borrowed or invested on the
origin date.
Origin or loan date is the date on which money is received by the borrower. Repayment
date or maturity date is the date on which the money borrowed or loan is to be
completely repaid.
Time or term (t) is the length of time between the origin and maturity dates Rate (r) is
annual rate usually in percent, charged by the lender.
Maturity value or future value (F) is the amount after t years that the lender
receives from the borrower on the maturity date.
To understand more about the terms let’s consider the diagram below:
Principal (P) + Interest (I) = Maturity value/
Rate(r) Future value (F)

Origin date Time (t) Maturity date

Note: Rate is the charged amount for the use of money over a certain period usually in percent.
Interest has two types, simple interest and compound interest. Simple interest is an
interest that is computed on the principal and then added to it while compound interest is
an interest on the principal amount and also on the accumulated past interest. Let’s consider
below example as simple interest and compound interest is being illustrated.
Example: Suppose you won Php 5 000 and you plan you invest it for 5 years. A cooperative
group offers 5 % simple interest rate per year. A bank offers 5 % compounded annually.
Which will you choose and why?
Solution:
Investment 1: Simple Interest
Time Principal Interest Simple Interest Amount after t years
in (P) Rate (r) Solution Interest Maturity/
years Future Value
(I)
(t) (F)
1 5000 5% 5 000(0.05) (1) 250 5 000 + 250 = 5 250
2 5000 5% 5 000(0.05) (2) 500 5 000 + 500 = 5 500
3 5000 5% 5 000(0.05) (3) 750 5 000 + 750 = 5 750
4 5000 5% 5 000(0.05) (4) 1 000 5 000 + 1 000 = 6 000
5 5000 5% 5 000(0.05) (5) 1 250 5 000 + 1 250 = 6 250
Investment 2: Compound Interest (Annual)
Time Principal Interest Compound Interest Amount after t years
in (P) Rate (r) Solution Answer Maturity/
years Future Value
(t) (F)
1 5000 5% 5 000 (0.05) (1) 250 5000 + 250 = 5 250
2 5 250 5% 5 250 (0.05) (1) 262.5 5250 + 262.5 = 5 512.5
3 5 512.5 5% 5 512.5(0.05) (1) 275.63 5512.5 + 275.63 = 5 788.13
4 5 788.13 5% 5 788.13(0.05) (1) 289.41 5788.13 + 289.41 = 6
077.54
5 6 077.53 5% 6 077.53(0.05) (1) 303.88 6077.53 + 303.88 = 6
381.41

Simple interest remains constant throughout the investment term. In compound interest, the
interest from the previous year earns interest. Thus, the interest grows every year.
While both types of interest will grow your money over time, there is a big difference
between the two. Specifically, simple interest is only paid on principal, while compound
interest is paid on the principal plus all of the interest that has previously been earned.
As an investor or depositor, you definitely want to earn compound interest, as it adds up
greater over time.
In the real world, simple interest is rarely used. When you deposit money into an interest-
bearing account, or take out a line of credit, the interest that accumulates is added to the
principal, and the next interest calculation is done on both the principal and the interest.
To understand more about simple and compound interest let’s consider the following
information.
Problems related to simple interest may require solving for any of the variables
involved: interest, principal, rate, or time or the number of periods.
I represent the interest, P is the principal, r is the rate, and t is the time.
The triangle below will help you derive the formula use to solve for the principal, rate,
time, or interest. You simply cover the variable representing what is needed, and the
remaining variables give you a clue to form the formula needed to solve for the unknown.
(Note: The operations involve are multiplication and division. Multiplication for the variables found in the same
level and division for the variables found in upper and lower part of the triangle).

So, if interest or I is unknown, then the formula to be used is I = Prt. If the

𝐼 principal or P is unknown,
then the formula to be used is P = . If the rate or r is
𝑟𝑡 𝐼 unknown, then the formula
to be used is r = . And if time or t is unknown, then
𝑃𝑡
𝐼 the formula to
be used is t = .
𝑃𝑟
So, here are the steps in solving problems related to simple interest.
Step 1: Identify what is asked.
Step 2: Identify what are given.
Step 3: Identify which formula to be used.
Step 4: Substitute the given values to the formula.
Step 5: Solve the problem.
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?
Given: P = ₱ 1,000,000
r = 0.25% = 0.0025 t=
1
Find: Simple Interest (Is)
Solution: Is = Prt
Is = (1,000,000) (0.0025) (1)
I s = 2,500
Answer: The interest earned is ₱ 2,500
Example 2: When invested at an annual interest rate of 7.5%, the amount earned ₱ 15,400
of simple interest in two years. How much money was originally invested?
Given: I = ₱15,400 r
= 7.5% = 0.075
t=2
Find: Principal(P)
𝐼
Solution: P=
𝑟𝑡

P=
P = 102, 666.67
Answer: The amount invested is ₱ 102, 666.67

Suppose the problem asks the maturity or future value. How will you solve it? Maturity
value or amount refers to the sum of the principal and interest. It is the future value of the
principal amount expressed given the formula:
F = P + Is
where: F is the maturity value or future value
P is the principal
I is the simple interest.
By expanding the basic simple interest formula, the maturity value may be computed using
the following alternative formula:
F = P + Is Definition of maturity value
F = P + (Prt) Substitution of I = Prt
F = P(1 + rt) Distributive property
Example 3: Anthony borrowed ₱150 000 from a lending company where he needs to
pay an interest rate of 3% annually. Find the a.) simple interest for 2 years.
b.) maturity value of the loan.
a. Given: P = ₱150 000 r = 3%
= 0.03
t = 2 years Find: Interest (Is) Solution: Is = Prt

Is = (150 000) (0.03) (2)

Is = 9000
Therefore, the simple interest after two years is ₱ 9,000.00

b. Given: P = ₱150 000 r = 3%

= 0.03
t = 2 years
Find: Maturity value of the loan (F) Solution:
F = P(1+rt) or F=P+I
F = 150 000[1+(0.03) (2)] F = 150 000 +
9000
F = 159 000 F = 159 000
Therefore, the maturity value of the loan after two years is ₱159,000.00

TIPS: Do not be confused between interest and maturity value. Interest is the product of the
principal, the rate, and the time. Maturity value is the sum of the present value and the
interest.

Now, let’s proceed to compound interest. Compound interest is calculated as the

difference between the compound amount and the original or principal amount.
It is calculated as:
Ic = F – P
where: F is the maturity value or future value
P is the principal or present value
Ic is the compound interest.
If the maturity/future value is unknown, we use the formula:
𝐅 = 𝐏(𝟏 + 𝐫)t but if the present value is unknown, we use the
formula:
𝑭
P = F (1 + r)-t or P = (𝟏+𝒓)𝒕 where: F is

the maturity value or future value P is the principal

or present value r is the interest rate

t is the term in years

Example 4: If ₱ 20,000 is deposited in a savings account at an annual rate of 5%,
what will be the amount in the account at the end of 3 years if the interest is
compounded annually?
Given: P = ₱ 20,000 r = 5%
= 0.05 t=3
Find: Maturity value (F)
Solution:
F = P(1 + r)t
F = 20000(1+0.05)3
F = 20000(1.05)3
F = 20000(1.1576)
F = 23,152.00
Answer: The amount after 3 years if the interest is compounded annually is
₱ 23,152.00; therefore, the compound interest earned is ₱ 3,152.00 Example
5: Find the maturity value and the compound interest if ₱ 20, 500 is compounded
annually at an interest rate of 3% in 7 years. Given: P = ₱ 20,500
r = 3% = 0.03 t
=7
Find: a. Maturity value (F)
b. Compound interest (Ic)
Solution:
(a) F = P(1 + r)t
F = 20 500(1+0.03)7
F = 20 500(1.03)7
F = 20 500(1.2299)
F = 25 212.95
(b) Ic = F – P
Ic = 25 212.95 – 20 500
Ic = 4 712.95
Answer: The maturity value is ₱ 25 212.95 and the compound interest is
₱ 4 712.95.

Example 6: What amount must be deposited by a student in the bank that pays
2% compounded annually so that after 12 years he will have ₱ 100 000?
Given: F = ₱ 100 000 r
= 2% = 0.02 t = 12
 Find: Present value or Principal (P)
Solution:
𝐹
P= (1+𝑟)𝑡

P=

P=
P = 78 851.92
Answer: The student must deposit ₱ 78 851.92 to have an amount of
₱100 000 after 12 years.

Activity 1: Which is which?

Directions: Use an arrow in connecting the statement/statements to which they belong.
Connect the dot to the arrowhead using lines.
Simple Interest is dependent on: ● ➢ Accrual is linear
➢ Accrual is exponential
➢ Interest earns interest
➢ Principal
➢ Principal remains the same at the
beginning of all the periods
➢ Principal increases by the interest
Compound Interest is dependent on: amount at the end of each period
● ➢ Rate of Interest
➢ Time Period

Activity 2: Compare and Contrast

Directions: Study the given table, note the differences and similarities you can have as you
compare them if 0.4% is the rate used for an amount of ₱ 30,000 invested for 8 years. You
can write on additional sheet of paper if space is not enough.
Simple t Compound Interest
Interes
Year Principal Interest Year Principal Interest
1 30,000 120 1 30,000 120
2 30,000 120 2 30,120 120.48
3 30,000 120 3 30,240.48 120.96
4 30,000 120 4 30,361.44 121.45
5 30,000 120 5 30,482.89 121.93
6 30,000 120 6 30,604.82 122.42
7 30,000 120 7 30,727.24 122.91
 8 30,000 120 8 30,860.15 123.40
Total 960 Total 973.55

Similarities:______________________________________________________________________
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Differences:______________________________________________________________________
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Activity 3: Test Your Knowledge

Directions: Answer the following problems on simple and compound interest by following
the step by step procedure as shown in the examples.

1. Find the simple interest on a loan of ₱ 95,000 if the loan is given at a rate of 15% and is
due in 3 years.

2. Find the future value and the compound interest if ₱ 50,000 is compounded annually at
an interest rate of 2 % in 5 years