BUSANA1 Chapter 1 : Simple Interest & Simple Discount

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BUSANA1 Chapter 1 : Simple Interest & Simple Discount

© All Rights Reserved

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Discount

Presented by:

Ms. Mikee Sim

Outline

Simple Interest

Exact and Ordinary Interest

Actual and Approximate Time

Simple Discount

Promissory Notes

Discounting Promissory Notes

Definition of Terms

Lender / Creditor the person or institution that

makes the funds available to those who need it.

Borrower the person or institution that avails of

the funds from the lender.

Interest a certain sum of money that the lender

charges the borrower for the use of the funds.

TYPES OF INTEREST:

Simple Interest

Compound Interest

Simple

Interest

Three Factors:

Principal

Interest Rate

Time or Term of the

loan / investment

Formula:

I=Prt

I = Interest

P = Principal

r = rate

t = term of the loan in

years

money borrowed or

invested.

Interest Rate is the

rate charged by the

lender or rate of increase

of the investment.

Expressed in decimals

Time or Term of the loan

the number of years

the sum of money was

borrowed or invested.

Simple

Interest

Three Factors:

Principal

Interest Rate

Time or Term of the

loan / investment

Formula:

I=Prt

I = Interest

P = Principal

r = rate

t = term of the loan in

years

when P10,000 is borrowed for 2

years with an interest rate of

3%?

Given:

P = P10,000

r = 0.03

I=?

t=2

Solution:

I = (10,000)(0.03)(2)

I = P600

Answer:

The interest charged for the use

of P10,000 for 2 years is P600.

Maturity

Value or

Future

- The sum of the

principal and the

Amount

interest

Formula:

F=P+I

F=P+Prt

F=P(1+

rt)

lending firm that charges 6% per

year. How much will she pay the

lending firm after 5 years?

Given:

P = P40,000

r = 0.06

F=?

t=5

Solution:

F = 40,000 [ 1 + (0.06)(5) ]

F = 40,000 (1.3)

F = P52,000

Answer:

Lucy will have to pay P52,000 after

5 years.

Simple

Interest

Two categories:

Exact Interest

Ordinary Interest

number of days

te =

365

number of days

to =

360

if P3,500 is invested at 15% interest

rate in 245 days, (a) using exact

interest;

(b) using ordinary interest.

Given:

P = P3,500

r = 0.15

I=?

t = 245

Solution (a):

Ie = P r t e

Ie = 3,500 (0.15) 245

Ie = P352.40

365

Answer:

The simple interest earned

P352.40 using exact interest.

is

Simple

Interest

Two categories:

Exact Interest

Ordinary Interest

number of days

te =

365

number of days

to =

360

if P3,500 is invested at 15% interest

rate in 245 days, (a) using exact

interest;

(b) using ordinary interest.

Given:

P = P3,500

r = 0.15

I=?

t = 245

Solution (b):

Io = P r t 0

Io = 3,500 (0.15) 245

Io = P357.29

360

Answer:

The simple interest earned

P357.29 using ordinary interest.

is

Maturity

Value or

Future

Two categories:

Exact Interest

Amount

Ordinary Interest

number of days

P5,000 be in 48 days if interest rate is

at 20%, (a) using exact interest and

(b) using ordinary interest.

Given:

P = P5,000

r = 0.20

F=?

t = 48

Solution (a):

F = P ( 1 + r te )

te =

365

number of days

to =

360

F = 5,000

48

1 (0.2) 365

F = P5,131.51

Answer:

P5,000 will accumulate to P5,131.51

using exact interest.

Maturity

Value or

Future

Two categories:

Exact Interest

Amount

Ordinary Interest

number of days

te =

365

number of days

to =

360

P5,000 be in 48 days if interest rate is

at 20%, (a) using exact interest and

(b) using ordinary interest.

Given:

P = P5,000

r = 0.20

F=?

t = 48

Solution (b):

F = P ( 1 + r to )

F = 5,000

48

1 (0.2) 360

F = P5,133.33

Answer:

P5,000 will accumulate to P5,133.33

using ordinary interest.

Actual Time

and

Origin date

Approximate

Maturity date

Time

Actual time is obtained

by counting the actual

number of days between

the two given dates.

Approximate time is

obtained by counting

the actual number of

days between the two

given dates but on the

assumption that each

month has 30 days.

Find

the

actual

time

and

approximate time between April

15, 2008 and December 21 of the

same year.

Given: Origin date: April 15, 2008

Maturity date: Dec. 21, 2008

Actual time = ?

Solution (a):

Mont

h

Apr

May

Jun

Jul

Aug

No.

of

days

30

15 =

15

31

30

31

31

Mont

h

Sep

Oct

Nov

Dec

Total

Answer:

No.

30

31

30

21

250

of are 250 actual days from

There

days15, 2008 to December 21,

April

2008.

Actual Time

and

Origin date

Approximate

Maturity date

Time

Actual time is obtained

by counting the actual

number of days between

the two given dates.

Approximate time is

obtained by counting

the actual number of

days between the two

given dates but on the

assumption that each

month has 30 days.

Find

the

actual

time

and

approximate time between April

15, 2008 and December 21 of the

same year.

Given: Origin date: April 15, 2008

Maturity date: Dec. 21, 2008

Approximate time = ?

Solution (b):

Mont

h

Apr

May

Jun

Jul

Aug

No.

of

days

30

15 =

15

30

30

30

30

Mont

h

Sep

Oct

Nov

Dec

Total

Answer:

No.

30

30

30

21

246

of are 246 approximate days

There

days

from

April 15, 2008 to December

21, 2008.

Actual Time

and

Origin date

Approximate

Maturity date

Time

Actual time is obtained

by counting the actual

number of days between

the two given dates.

Approximate time is

obtained by counting

the actual number of

days between the two

given dates but on the

assumption that each

month has 30 days.

How

much

should

Mr.

Buenaobra pay if he borrowed

P10,000 on June 25, 2008 and if

the principal plus interest are to

be paid on November 18, 2008

at 15% interest, using

a.Exact

interest

for

the

approximate time;

b.Ordinary interest for the

approximate time;

c.Exact interest for the actual

time;

d.Ordinary interest for the

F=P(1+rt)

actual time?

and

Origin date

Approximate

Maturity date

Time

Actual time is obtained

by counting the actual

number of days between

the two given dates.

Approximate time is

obtained by counting

the actual number of

days between the two

given dates but on the

assumption that each

month has 30 days.

How

much

should

Mr.

Buenaobra pay if he borrowed

P10,000 on June 25, 2008 and if

the principal plus interest are to

be paid on November 18, 2008

at 15% interest?

Given: Origin date: June 25, 2008

Maturity date: Nov. 18,

2008

P = P10,000

F =No

? Tota

Mont

Jun rJu= 0.15

Au Se Oc

h

l

g

p

t

v

l

Actual

time

No.

of

days

30

25 =

5

3

1

31

Mont

Jun

Ju Au

h

l

g

Approximate

time

No.

of

30

25 =

3

0

30

30

31

18

146

Se Oc

p

t

No

v

Tota

l

30

18

143

30

Actual Time

and

Approximate

Origin date

Maturity date

Time

Actual time :146 days

Approx. time: 143

days

F=P(1+rt)

pay if he borrowed P10,000 on

June 25, 2008 and if the

principal plus interest are to be

paid on November 18, 2008 at

15% interest?

Given: Origin date: June 25, 2008

Maturity date: Nov. 18, 2008

P = P10,000

r = 0.15

F=?

Solution (a):Exact interest for the

approx. time?

F = P ( 1 + r te )

F = 10,000

F = P10,587.67

143

1

(

0

.

15

)

365

Actual Time

and

Approximate

Origin date

Maturity date

Time

Actual time :146 days

Approx. time: 143

days

F=P(1+rt)

pay if he borrowed P10,000 on

June 25, 2008 and if the

principal plus interest are to be

paid on November 18, 2008 at

15% interest?

Given: Origin date: June 25, 2008

Maturity date: Nov. 18, 2008

P = P10,000

r = 0.15

F=?

Solution (b): Ordinary interest for the

approx. time?

F = P ( 1 + r to )

F = 10,000

F = P10,595.83

143

1

(

0

.

15

)

360

Actual Time

and

Approximate

Origin date

Maturity date

Time

Actual time :146 days

Approx. time: 143

days

F=P(1+rt)

pay if he borrowed P10,000 on

June 25, 2008 and if the

principal plus interest are to be

paid on November 18, 2008 at

15% interest?

Given: Origin date: June 25, 2008

Maturity date: Nov. 18, 2008

P = P10,000

r = 0.15

F=?

Solution (c): Exact interest for the

actual time?

F = P ( 1 + r te )

146

1

(

0

.

15

)

365

F = 10,000

F = P10,600

and

Approximate

Origin date

Maturity date

Time

Actual time :146 days

Approx. time: 143

days

F=P(1+rt)

pay if he borrowed P10,000 on

June 25, 2008 and if the

principal plus interest are to be

paid on November 18, 2008 at

15% interest?

Given: Origin date: June 25, 2008

Maturity date: Nov. 18, 2008

P = P10,000

r = 0.15

F=?

Solution (d): Ordinary interest for the

actual time?

F = P ( 1 + r te )

F = 10,000

F = P10,608.33

146

1

(

0

.

15

)

360

Simple

Discount

Formula:

collected or deducted in

advance from the amount

of loan.

Proceeds of the loan,

Id = F d t

Pr

after

the

interest

is

deducted.

Three factors:

Maturity value of the

loan, F

Discount rate, d

Time/term of the loan,

t

Formula:

Pr = F - I d

Pr = F F d t

Pr = F ( 1 - d t )

Simple

Discount

Id = F d t

Pr = F - Id

Pr = F ( 1 dt)

from a loan worth P20,000 after 3

years with a discount rate of 6%? How

much will be the proceeds of the

loan?

Given: F = P20,000

d = 0.06

Id = ?

t = 3 years Pr = ?

Solution:

Id = F d t

Pr = F I d

Id = 20,000 (0.06)(3)

Pr = 20,000

3,600

Id = P3,600 Pr = P16,400

Answer:

The interest that will be deducted in

advance is P3,600 and the borrower

will receive P16,400 on the origin

date.

Simple

Discount

Id = F d t

Pr = F - Id

payable in two years at 12% discount

rate. How much will Samson receive

on the origin date? How much will he

pay on the maturity date

Given: F = P12,000

d = 0.12

Pr = ?

t = 2 years

Solution:

Pr = F ( 1 d t )

Pr = 12,000 [ 1 ( 0.12 ) ( 2 ) ]

Pr = F ( 1 dt)

Pr = P9,120

Answer:

Samson will get P9,120 out of the

P12,000 that he loaned. He will,

however pay P12,000 on the maturity

date since the interest was already

deducted.

Promissory

Notes

Is a written promise

May 8, 2008

term

drawn by a person or

an institution (drawer)

30 days after date, I promise to pay

to another person or

ABC Lending Corporation the sum of four

institution (drawee) to

thousand three hundred pesos (P4,300) plus a

pay a certain amount

12% interest per annum.

face value

of

money

at

a

drawee

Mary-Anne Raymundo

specified time and interest rate

interest rate.

maturity date

Two

types

of

promissory notes:

Simple Interest Note

Bank Discount Note

June 7,

2008

drawer

Promissory

Notes

Is a written promise

drawn by a person or

an institution (drawer)

to another person or

institution (drawee) to

pay a certain amount

of

money

at

a

specified time

and

face value

interest rate.

term of discount

undersigned promises to pay XYZ Bank for the

use of ten thousand two hundred pesos

(P10,200) at 10% discount rate.

drawee

discount rate

maturity date

Two

types

of

promissory notes:

Simple Interest Note

Bank Discount Note

December 30,

2008

drawer

Discounting

Notes

the procedure of selling

the notes to individuals

or other institutions

before its maturity date.

STEPS IN DISCOUNTING A

SIMPLE INTEREST NOTE:

1. Find the maturity value

of the simple interest

note.

2. Determine the

discount period or

discount term. This is the

time from the date the

note is discounted to the

maturity date.

3. Find the proceeds

using the discount rate

and the discount period.

Johnson

issued

a

simple

interest note worth P15,000 to

William on October 12, 2008

which matures after 2 months

with an interest rate of 15%. If

William decides to sell it to Gina

on November 15, 2008, what

will be the proceeds of the note

if Gina charges 16% interest?

Given: P = P15,000

months

r = 0.15

0.16

Pr = ?

t = 2

d=

Discounting

Notes

the procedure of selling

the notes to individuals

or other institutions

before its maturity date.

STEPS IN DISCOUNTING A

SIMPLE INTEREST NOTE:

1. Find the maturity value

of the simple interest

note.

2. Determine the

discount period or

discount term. This is the

time from the date the

note is discounted to the

maturity date.

3. Find the proceeds

using the discount rate

and the discount period.

Given: P = P15,000

months

r = 0.15

0.16

Pr = ?

Solution:

Step 1

t = 2

d=

2

F = P ( 1 +

r

t

)

1 (0.15) 12

F = 15,000

F = P15,375

Discounting

Notes

the procedure of selling

the notes to individuals

or other institutions

before its maturity date.

STEPS IN DISCOUNTING A

SIMPLE INTEREST NOTE:

1. Find the maturity value

of the simple interest

note.

2. Determine the

discount period or

discount term. This is the

time from the date the

note is discounted to the

maturity date.

3. Find the proceeds

using the discount rate

and the discount period.

Given: P = P15,000

months

r = 0.15

0.16

Pr = ?

t = 2

d=

Solution:

Step 2

Discount Date: November 15

Maturity Date: December 12

November (30-15)

15

December

12

27 days

Notes

the procedure of selling

the notes to individuals

or other institutions

before its maturity date.

STEPS IN DISCOUNTING A

SIMPLE INTEREST NOTE:

1. Find the maturity value

of the simple interest

note.

2. Determine the

discount period or

discount term. This is the

time from the date the

note is discounted to the

maturity date.

3. Find the proceeds

using the discount rate

and the discount period.

Given: P = P15,000

t

months

r = 0.15

d = 0.16

Pr = ?

Solution:

Step 3

Id = F d t

Id = 15,375

0.16

27

360

Id = P184.50

Pr = F Id

Pr = 15,375 184.50

Pr = P15,190.50

Answer: William will receive

P15,190.50 for selling the simple

interest note issued to Gina.

Discounting

Notes

the procedure of

selling the notes to

individuals or other

institutions before its

maturity date.

STEPS IN

DISCOUNTING A

BANK NOTE:

1. Determine the

discount period. This

is the time from the

date the note is

discounted to the

maturity date.

2. Find the proceeds

using the discount

rate and the discount

discount note for 6 months at 5%

simple discount. After 2 months, Trake

Inc. decides to sell the note to the

bank. How much proceeds will Trake

Inc. get from the sale of this note?

Given: F = P150,000

d = 0.05

Pr = ?

Solution:

Id = F d t

Id = 150,000

Pr = F I d

Pr = 150,000 2,500

12

Answer:

Trake Inc. will receive P147,500 from the

sale of the bank discount note.

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