Course Code and Title: MAT100 – MATHEMATICS IN THE MODERN WORLD

Lesson 12 Week 12
Topic: SIMPLE INTEREST - PROBLEMS AND SOLUTIONS

SIMPLE INTEREST - PROBLEMS AND SOLUTIONS

INTRODUCTION:

Business concerns and individuals in need of cash or financial credit borrow money and agree
to pay certain percentage for the privilege of using the borrowed amount. When a person or an
institution borrows money, a debt is incurred, but, if used wisely, the credit created can help both the
borrower and the lender: the lender’s money earns interest, the borrower gets something he needs,
a house, or, if invested in a business venture may result in profit, for money lent or borrowed earns
interest.

For example, depositing money in a savings account at a bank is like lending money to the
bank which pays interest, while if one borrows money from a bank, the borrower pays the interest.
The price of borrowed money, in the form of interest rates, not only affects individuals and businesses,
but also the economic well-being or economy of a nation.

LESSON OBJECTIVES:

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

• state and illustrate the formulas used in simple interest;

• compute simple interest or rate as well as other unknowns in investment
formula;
 • solve real-life problems involving simple interest; and
• understand and solve problems logically with perseverance.

LESSON PRESENTATION:
SIMPLE INTEREST

Interest can be defined as money paid for the use of borrowed money. It is called the most
important regulator of the pace of business and prosperity of a nation. Whether one will be managing
a household budget, a business concern or a nation’s economy, one should be concerned with
interest. We will start with simple interest which is the interest computed on a yearly basis.

To compute for simple interest, the following are to be considered:

The PRINCIPAL - or the ORIGINAL SUM of money borrowed;

The RATE - - - - - the rate of interest in % (percent) on a yearly basis; and

The TIME - - - - - or term of the loan which is repaid expressed in years.

Simple interest is computed entirely on the PRINCIPAL or ORIGINAL amount and is based on
an annual or yearly time period. It is computed simply by multiplying together the principal, rate,
and time. In symbols,
I = Prt Where: I = simple interest in pesos
P = principal amount in pesos
r = interest rate in %
t = time in years

Suppose the principal P is invested at the rate r for t years, then the interest I is computed
based on the original principal during the whole time. Multiply the principal with the product of rate r
and time t, that is I = Prt. It also follows that
𝑰 𝑰
t = 𝑷𝒓 and r = 𝑷𝒕

To determine the FINAL AMOUNT or MATURITY VALUE at the end of the term, simply
add the principal and the interest earned.
F=P+I Where: F = final amount
P = principal
I = interest
 Note that the time unit will be in terms of year, unless specified.

However, the maturity value or final amount can be derived. Let F be the Final amount
resulting from the investment of P for 1 year and I be the interest and rate at the end of t years. That
is:
F=P+I
= P + Prt
= P (1 + rt)
Thus, if F = P + I and I = Prt, therefore, F = P + Prt (replacing I by Prt), then factoring
F = P (1 + rt). This is the Derived Simple Interest Formula. To determine the interest I, use
I = F – P.

FOR TIME CONVERSION:

If the time t is in terms of: a) months, then divide by 12
b) semiannual periods, then divide by 2
c) quarterly periods, then divide by 4
d) bimonthly periods, then divide by 6
e) semimonthly periods, then divide by 24
For example, 0.25 year is equivalent to 0.25 x 12 = 3 months

Illustration: Convert 2.6 years in terms of the number of (a) months, (b) semiannual periods.
(a) To convert the number of years to months, multiply by 12
1
2.6 x 12 = 31.2 or 31 5 months

(b) To convert the number of years to semiannual periods, multiply by 2

2.6 x 2 = 5.2 semiannual periods

Illustration: Converting 1.15 years in months, then

8 4
1.15 x 12 = 13.8, or 1310 , or 13 5
months

If the time (term or period) t is expressed in days, then there are 2 kinds of time to convert
𝐷
the number of days D in years. The t becomes 365
for exact interest. Ordinary interest is based on

a 360-day year and a 30-day month, while exact interest is based on a 365-day year.
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝐷
a) t = 365
= 365
, for exact interest
 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝐷
b) t = = , for ordinary interest
360 360

EXAMPLE: If ₱10,000 investment earns ₱1,800 in 10 months, find the rate.

10 5
Given: P = ₱10,000, I = ₱1,800, t = 10 months = = year.
12 6

Find: rate
𝑰
Formula to be used: r = 𝑷𝒕
𝑰 1,800
SOLUTION: To solve for r: r = 𝑷𝒕 = 5 = 0.216 = 21.6%
10,000 ( )
6

Answer: r = 21.6%
EXAMPLE: Find the interest and the final amount due on ₱5,500 at a simple interest of 15½% for
9 months.
9 3
Given: P = ₱5,500, r = 15½% = 0.155 t =9 months = 12 = 4 year.
Find: Interest and Final Amount
Formula to be used: I = Prt and F = P + I
3
SOLUTION: To solve for I : I = 5,500 (0.155) ( 4) = 639.38
F: F = 5,500 + 639.38 = 6,139.38
Answer: I = ₱639.38 and F = ₱6,139.38

Another method that may be used is the Derived Interest Formula.

F = P (I + rt)
3
= 5,500 [I + (0.155) ( )]
4

= 5,500 (1.11625)
F = ₱6,139.38

TWO KINDS OF INTEREST RATES

Since the number of days D is expressed in 2 ways, then there are 2 varieties of interest rates.
𝐷 𝐷
a) Exact interest for D days, 𝐼𝑒 = Pr b) Ordinary interest for D days 𝐼𝑜 = Pr
365 360

Where: 𝐼𝑜 = ordinary interest

𝐼𝑒 = exact interest
P = principal amount
r = rate of simple interest
Illustration: If P = ₱20,000, r = 12% or 0.12, t = 40 days, then the ordinary interest for 40 days is:
𝐼𝑜 = Prt
 40
= (20,000) (0.12) (360) = ₱266.67

Time Between Two Dates

There are two ways of computing the number of days between two dates:
1. Actual Time – the number of days is obtained by counting all the days, inclusive between
the 2 given dates including the last day but not the first day.
2. Approximate Time – assume that every month counts 30 days.

EXAMPLE: Find the approximate and the actual number of days from March 15, 1993 to Dec.20 of
the same year.
SOLUTION: Approximate number of days
Year Month Day
1993 12 20
Less: 1993 3 15
0 9 5
= (9 x 30) + 5 = 270 + 5 = 275 days
Actual number of days: By actual counting (Start counting on the 2nd day of the term)
March ………………………16 August ………………31
April ……………………… 30 September ………………30
May …………………….. 31 October ……………...31
June …………………….. 30 November ………………30
July …………………….. 31 December ………………20 = 280 days

By using the table: From January 1 to December 20 354 days

Less: From January 1 to March 15 ̶ 74
280 days
Although both methods give the same actual number of days, using the table is preferred
than the actual counting (due to its convenience).
In finding simple interest between two dates, there are four types of interest available:
1. Ordinary interest at actual number of days (BANKER’S RULE – commercial practice)
𝑎𝑐𝑡𝑢𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝐼𝑜 = Pr ( 360
)

2. Exact interest at actual number of days

𝑎𝑐𝑡𝑢𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝐼𝑒 = Pr ( )
365

3. Ordinary interest at approximate number of days

𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝐼𝑜 = Pr ( )
360

4. Exact interest at approximate number of days

𝑎𝑐𝑡𝑢𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝐼𝑒 = Pr ( 365
)
 𝑇𝐴𝐵𝐿𝐸 1. The number of each day of the year

For Leap year add 1 to the tabulated number after Feb. 28. The number designating is divisible by 4.
EXAMPLE: Orly borrowed ₱10,000 from Jim on Dec. 15, 1993 at 16% simple interest to be paid
on Feb. 21, 1994. If Jim wanted to be paid using the Banker’s Rule, how much is the
interest and how much is the final amount to be paid when the term expires?
Given: P = ₱10,000
r = 16% = 0.16
t = Dec. 15, 1993 to Feb. 21, 1994
Find: Io and F
SOLUTION: The Banker’s Rule is the ordinary interest at actual number of days
From Table 1
From Jan. 1 to Dec. 31, 1993 …….…………… 365 days
Less: From Jan. 1 to Dec. 15, 1993 ……. ̶ 349
From Dec. 15 to Dec. 31, 1993 ……………..... 16
Add: From Jan. 1 to Feb. 21, 1994 …..… + 52
Actual number of days from Dec. 15 to Feb. 21 = 68 days
𝐷
Banker’s Rule: 𝐼𝑜 = Pr
360
68
𝐼𝑜 = 10,000 (0.16) ( 360
)

Io = ₱302.22
F =P+I
F = 10,000 + 302.22
F = ₱10,302.22

EXAMPLE: Find the ordinary and exact interest at a) approximate and b) actual number of days
from Jan. 25, 1994 to Nov. 23 of the same year on ₱50,800 at 14% simple interest.
Given: P = ₱50,800
r = 14% = 0.14
t = Jan. 25, to Nov. 23, 1994
Find: a) Ordinary interest and exact interest at approximate number of days
b) Ordinary interest and exact interest at actual number of days
SOLUTION: a) Approximate number of days
10 +30 53

1994 11 23 1994 10 53
Less: 1994 1 25 1994 1 25
9 28
Approximate number of days = 9(30) + 28 = 298 days
 𝐷
𝐼𝑜 = Pr 360
298
= 50,800 (0.14) (360)

𝐼𝑜 = ₱5,887.16
𝐷
𝐼𝑒 = Pr 365
298
= 50,800 (0.14) (365)

𝐼𝑒 = ₱5,806.51

b) Actual number of days

From Table 1
From Jan. 1 to Nov. 23 ……………………….. 327
Less: From Jan. 1 to Dec. 25 …………………… ̶ 25
Actual number of days from Jan. 25 to Nov. 23 …… 302 days
𝐷
𝐼𝑜 = Pr 360
302
= 50,800 (0.14) ( )
360

𝐼𝑜 = ₱5,966.18
𝐷
𝐼𝑒 = Pr 365
302
= 50,800 (0.14) (365)

𝐼𝑒 = ₱5,884.45

SUMMARY:

Suppose that an investor lends money to a debtor. Then the latter must pay back the money
originally borrowed, and also an additional sum called interest. From the investor’s standpoint,
interest is income from invested capital. From the debtor’s viewpoint, interest is money paid for the
use of money.

The capital originally invested in a transaction is called the principal. At any time after the
investment of the principal, the sum of the principal and the interest due is called the amount. For
any specified time unit (which sometimes will not be one year), the ratio of the interest earned in one
time unit to the principal is called the interest rate.
REFERENCES:

Del Rosario, Asuncion (1994) “Mathematics of Investment”.

Orence, Orlando A. and Mendoza, Marilyn O. (2003) “ Exploring Mathematics II”. Rex Bookstore,
Incorporated.

Orines, Fernando B., Dilao, Soledad, Bernabe, Julieta G. (2005) " Advanced Algebra –
Trigonometry and Statistics Functional Approach." Vibal Publishing House Incorporated.

Orines, Fernando B., Dilao, Soledad, Bernabe, Julieta G. (2003) "Algebra II –Functional Approach."
Vibal Publishing House Incorporated.

Mapile, E. (Ed). (2017) Beginning Algebra. Academic Publishing House, Inc.

Ulpina, J. N., &Tizon, L. T,. (2017) Math Builders. JO-ES Publishing House, Inc