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Simple and Compound Interest

This document defines key terms related to simple and compound interest such as principal, interest rate, and maturity value. It provides an example comparing the accumulated interest over 5 years of investing 10,000 pesos at a 2% interest rate compounded annually versus a 2% simple interest rate. The compound interest yields higher returns, accumulating to 1,040.81 pesos versus 1,000 pesos from simple interest due to interest being earned on prior interest amounts as well.

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506 views14 pages

Simple and Compound Interest

This document defines key terms related to simple and compound interest such as principal, interest rate, and maturity value. It provides an example comparing the accumulated interest over 5 years of investing 10,000 pesos at a 2% interest rate compounded annually versus a 2% simple interest rate. The compound interest yields higher returns, accumulating to 1,040.81 pesos versus 1,000 pesos from simple interest due to interest being earned on prior interest amounts as well.

Uploaded by

アンジェロドン
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Simple and

Compound
Interest
Quick Question

"What are some ways to


take care of hard-earned
money?"
2
Definition of Terms
▰ Lender or creditor - person (or institution) who
invests the money or makes the funds available
▰ Borrower or debtor - person (or institution) who
owes the money or avails of the funds from the
lender
▰ Origin or loan date - date on which money is
received by the borrower 3
Definition of Terms
▰ Repayment date or maturity date - a date on which the
money borrowed or loan is to be completely repaid
▰ Time or term (t) - amount of time in years the money is
borrowed or invested; length of time between the origin
and maturity dates
▰ Principal (P) - amount of money borrowed or invested on
the origin date
4
Definition of Terms
▰ Rate (r) - annual rate, usually in percent, charged
by the lender, or rate of increase of the investment
▰ Interest (I) - amount paid or earned for the use of
money
▰ Simple Interest (Is) - interest that is computed on
the principal and then added to it
5
Definition of Terms
▰ Compound Interest (Ic) - interest is
computed on the principal and also on the
accumulated past interests
▰ Maturity value or future value (F) - amount
after t years; that the lender receives from
the borrower on the maturity date
6
Example 1

▰ “Suppose you won 10,000 pesos 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. 7
Solution (Simple Interest)
Principal Interest Simple Interest Amount after t years
Time (t)
(P) Rate (r) Solution Answer (Maturity Value)

1 2% (10000)(0.02)(1) 200 10,000 + 200 = 10,200.00

2 2% (10000)(0.02)(2) 400 10,000 + 400 = 10,400.00

3 10,000 2% (10000)(0.02)(3) 600 10,000 + 600 = 10,200.00

4 2% (10000)(0.02)(4) 800 10,000 + 800 = 10,800.00


10,000 + 1,000 =
5 2% (10000)(0.02)(5) 1,000
11,000.00
8
Solution (Compound Interest)
Principal Interest Compound Interest Amount after t years
Time (t)
(P) Rate (r) Solution Answer (Maturity Value)

1 10,000 2% (10000)(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% (10,400)(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

9
“ Among the two
solutions presented,
which will you
choose and why?”

10
Now, let us compare
“ the accumulated
interest of the 2
investment after 5
years”

11
Final Intersets

▰ Simple Interest (in pesos):


11,000 - 10,000 = 1,000
▰ Compound Interest (in pesos):

11,040.81 - 10,000 = 1,040.81


12
Comparing the
“ tables, what 2

have you
observed?”
13
THANKS!

14

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