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Simple Interest & Simple

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

Principal is the sum of


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

How much interest is charged


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)

Lucy borrowed P40,000 from a


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

Determine the simple interest earned


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

Determine the simple interest earned


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

How much will the maturity value of


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

How much will the maturity value of


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?

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)

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
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)

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
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)

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
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

Actual Time
and
Approximate
Origin date
Maturity date
Time
Actual time :146 days
Approx. time: 143
days

F=P(1+rt)

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
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:

Is the simple interest


collected or deducted in
advance from the amount
of loan.
Proceeds of the loan,

Id = F d t

Pr

- The amount that is left


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)

How much interest will be deducted


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

Samson wants to borrow P12,000


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

Simple Interest Note

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.

Bank Discount Note


term of discount

Sixty (60) days after the above date, the


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

October 31, 2008

December 30,
2008

Ronnie del Rosario


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

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
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

Trake Inc. received a P150,000 bank


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

Id = P2,500 0.05P r = P147,500


12

Answer:
Trake Inc. will receive P147,500 from the
sale of the bank discount note.