—_&y Simple Interest and Simple Discount 1.1. Simple Interest Simple interest is interest on the amount invested or borrowed at a given rate and for a given time. It is usually associated with loans or investments which are short- term in nature. It is computed entirely on the original principal by simply multiplying together the principal, rate, and time. This leads to the simple interest formula. , T= Prt Where I — simple interest P — principal (in pesos) r — interest rate per period of time, expressed as percent or a fraction t - time (in years) between the date the loan is made and the date it matures or becomes repayable to the lender The maturity value, F, the total amount the borrower would need to pay-back, is given by the formula [F = P + I]. Also [F = P + Prt], leading to [F = P(1 + rt) Interest is charged as a percent of the principal for a definite period of time. Rates are stated in terms of one year unless otherwise specified. A stated rate of 12% means 12% of the principal for one year. Illustrative Examples: 1. Find the interest on a loan of 1,000 for one year if the interest rate is 12%. Solution: P=P1000 9 r=12%=12 t=lyear I =Prt (P1,000)(.12)(1 year) (P1,000)(.12)(1) = P120 If the term is 2 years, then the interest is: P.= P1000 r=12%=.12 t I = Prt (P'1,000)(.12)(2 years) = P240 years4 ‘MATHEMATICS OF INVESTMENT ————— 2. A credit union has issued a 3-year loan of 50,000 at a rate of 10%. * What amount will be repaid at the end of the third year? Solution: P= P50,000 r=10%=.10 t=3 years I = Prt ‘ = (P50,000)(.10)(3) = P15,000 The amount to be repaid is the principal plus the interest, F=P+I 50,000 + 15,000 = P65,000 Or since the problem is asking for the amount, we can go immediately to solving for F and not anymore solving for I. Using P = 50,000, r = 10% = .10, t = 3 years, we have 10,000 [1 + (.10)(3)] 50,000 (1 + .30) 10,000 (1.30) = 765,000 3. A P5,000 savings account earned 700 interest in 2 years. What was the rate of interest given? Solution: P=P5,000 I=P700 t=2years From I = Prt, we have _t _?t 7 700 ~ (6,000)(2 years) =.07 =7% 4. At the end of 2 years, P36,000 in interest was paid on an 18% simple- “interest loan. How much was borrowed? Solution: I = 36,000 r=18%=.18 t From I = Prt, 2 yearsStrve INTEREST AND SiMPLe Discount 5 =e Pt _ 36,000 ~ (.18)(2)) _ 36,000 5. Edward needs 20,000 to buy office furniture for his new office in Las Pitas. He wants to limit the interest he will pay when he borrows the amount in a bank to 1,100 only. If the bank charges 11% interest, after how long must Edward pay his obligation? Solution: P =20,000 I=f1,100 r=1%=.11 From I = Prt I t=— Pr ___1,100 (20,000)(.11) = 5 year or 6 months 6. Find the interest on a loan of 5,000 at 18% simple interest and which was paid after 6 months. Solution: P = 75,000 r= 18% =.18 t= 6 months = I=Prt = (s,oo0x8( 3) = P450Whi Teenie AND Simenss Didcount W 1.2. Ordinary and Exact Interest Ther are tines when money fn borrowed for a certain number of days only, U the number of monthy ts placed over 12 (12 months in one year), the number of days Ih placed over 360 oF 365, (360 dayn In one year for ordinary interest, based on 12 months In one year; and 366 days In one year for exact Interest), Unless otherwiie spectiied, ordinary Interest 16 computed when the term of the loan Is given In days, that Is why, It ii not the most commonly-used method, ‘To compute ordinary Intercat, we use the formul while to compute exact Interest, we use}, © Pr} 7 compute © erent, a 368 }|° Where 1 Is the number of days of a given term, Mlustrattve Examples: 1, Hind the ordinary and exact interest on 15,000 if it is invested at 12% for 60 days. a. Ordinary Interest P» P15,000 re 1h 2 D = 60 days vo(B) =(P 15,009.12.) Solution: 1 = (15, 00.122) = 300 b. Exact Interest P = 15,000 r= 12% = 12 D = 60 days D ne) 60 = 15,000.10 2) Solution: I, = 295.8912 MATHEMATICS OF INVESTMENT ooo YY 2. To renovate a portion of her house, Mrs. Lorenzo made a loan of 48,009 from a bank that charges 16% interest. How much did she pay the bank after 120 days using the ordinary-interest method? P = 48,000 r= 16% =.16 D = 120 days Solution: n(@) = (ras,oon1.0( 2) 1 bed (48,000x.16)(2) = P2,560 The amount Mrs. Lorenzo needed to pay the bank consisted of the original amount of loan plus interest. Therefore, she needed to pay the final amount, F, thus, F=P+I, 48,000 + 2,560 = P50,560 3. Find the maturity value of 4,250 at 9% for 90 days using exact interest method. P= P4250 r= 9% = 09 D = 90 days Solution: The maturity value is the value of F. rfl) 90 = 4201 + »(2)| = 4,250(1.02219178) = P4,344.32 4, Find the interest on 8,000 if it is invested at 83 % for 100 days. P = P8,000 = 83% = 0875 D = 100 days12 Martiematics OF INVESTMENT. Se sealers pele erie ie lean reel 2. To renovate a portion of her house, Mrs, Lorenzo made a loan of 48,000 from a bank that charges 16% interest, How much did she pay the bank after 120 days using the ordinary-interest method? P= 48,000 r= 16% = 16 D~ 120 days Solution: vn) = (ras,o00y16( 2) = (48, oooy.16 3) = P 2,560 The amount Mrs. Lorenzo needed to pay the bank consisted of iginal amount of loan plus interest. Therefore, she needed to pay the final amount, F, thus, F=P+I, = P48,000 + P2,560 = P50,560 3. Find the maturity value of P4,250 at 9% for 90 days using exact interest method. P=P4250 r= 9% = .09 D = 90 days Solution: The maturity value is the value of F. rfl = 4,250 1 + .09| *.) ry “(365 = 4,250(1.02219178) = 4,344.32 4, Find the interest on 8,000 if it is invested at 8 for LOO days. 4 P = 8,000 re Bah 0875 D100 days:SIMPLE INTEREST AND SIMPLE DiscOUNT 13 = Solution: 1 =») 0 (360 =6, 000.0875 a) 360 = P194.44 5. Find the time if the ordinary simple interest on 6,000 at 10% is 200. P = P6,000 I= 200 r= 10% =.10 For 360 days per year, t= <2, hence, D = (360) Solution: I tel Pr 7 200 (6,000)(.10) = : year or D = 120 days 6. What is the interest rate at which 4,260 is invested if it earned an exact simple interest of 94.54 after 90 days? P = 4,260 I= P9454 D-=90 days Solution: oe D pf (ss) 94.54 oe 20.) (rs, 260 2) r= = .09 or 9% If, instead of giving the term as a certain number of days, the date ofthe loan and its maturity date are given, how is interest computed? This will be discussed in the next topic.14 MATHEMATICS OF INVESTMENT a 1.3 Approximate and Exact Time Illustrative Examples: There are two ways of finding time between the two dates given. One method is to find approximate time and the other is to find actual time. 1. On May 4, 2002, Julie borrowed 22,000 at 10% interest. Interest and principal were due on September 6, 2002. What was the total amount paid by her on that date? P = P22,000 r= 10% = .10 1 = May 4 to September 6, 2002 Solution: To find the interest due on September 6, 2002, we will first find the time between May 4 and September 6, 2002. a. Approximate Time Year Month Day 2002 9 6 2002 5 4 4 2 This means 4 months and 2 days. To find‘the number of days: (4 x 30 days) + 2 days = 120 + 2 days = 122 days. [Note: we consider one (1) month = 30 days}. Using approximate time, the total amount paid by Julie on September 6, 2002 can be obtained by the following solution: fo) 122 = 2,001 + ao()] 22,000(1.033888889) ‘ = P22,745.56 b. Actual Time The actual number of days between May 4 and September 6, 2002 can be obtained by the following solution: May (31-4) 27 7 June 30 July 31 ‘August 31 September 6 125 daysSimpte INTEREst AND SimpLt Discount 15 Appendix I: “Number of Days of the Year” may also be used to find actual number of days, especially when the two given dates involve longer time. September 6 249 May 4 124 125 days To find now the total amount paid by Julie on September 6, 2002, using actual time, we have Fe oft + {3)} 360 = m2 + ao 3)| 360 = 22,000(1.034722222) = P 22,763.89 2. Find the number of days from February 24, 2001 to June 14, 2001. a. Approximate Time Year Month Day We cannot subtract 24 from 14, so 2001 6 14 we need to borrow 1 month from 6 2001 2 24 months. One month = 30 days, so we add 30 to 14. Solution: Year Month Day 2001 5 44 2001 2 24 3months 20 days x 30 90 days + 20 days = 110 days b. Actual Time Solution: 1. February (28-24)= 4 March 31 April 30 May 31 June 4 110 days 2. June 14165 Feb, 24 55 110 days16 MATHEMATICS OF INVESTMENT ——— 3. Find the number of days from April 12, 2002 to October 25, 2003. a. Approximate Time Solution: Year Month Day 2003 10 25 2002 4 12 4 1 year 6 months 13 days x 360 days _x 30 days 360 + 180 + 13 = 553 days b. Actual Time Solution: 1. April (80 - 12) 2002 18 February 28 May 31 March 31 June 30. April 30 July 31 May 31 August 31 June 30 September 30. July 31 October 31 August 31 November 30 September 30 December 31 October 25 January 2003 31 561 days 2. October 25, 2003 298+ 365 = 663 Since October 25 is “April 12, 2002 cps in a different year SE days We add 365 days. 4. Find the actual time between November 10, 1999 to March 15, 2000. a. November (30 - 10) 1999 20 December 31 January 2000 31 February 29 (because year 2000 is a leap year) March 15 ; 126 days b. Using Appendix I, let’s find the actual number of days when the 2 dates involve a leap year. March 15 74 + 366 = 440 November 10 - 314 126 days