Module I.

Simple Interest

MODULE I

SIMPLE INTEREST
LEARNING OBJECTIVES

 Gain an understanding on the concept of simple interest.

 Understand how simple interest is applied to business practice.
 Acquire basic knowledge on how to compute for simple interest.
 Understand the concept of time and interest as applied to investments.
 Understand the concept of bank discount and how it is applied to business
practice.
 Gain an understanding on how promissory notes are discounted.

In business practice, an investor who invests capital in a profitable venture

(investment) expects not only an eventual return of the amount he invested but

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 Module I. Simple Interest

rather, expects an additional payback. In a simpler sense, a creditor or investor

who lends an amount of money to a debtor expects not only the amount he lent
at maturity or payment date, but also an additional amount to compensate the
return he had given up (opportunity cost) had he invested it into an alternative
profitable undertaking. This additional payment of the debtor (receipt in the
point of view of the creditor-investor) is called interest. Interest therefore, is
regarded as a compensation that a borrower of capital or a debtor pays to a
lender for its use. In simple parlance, it is money’s rent; and since investment
involves investor-investee relationship, interest can be viewed as an expense to
the debtor and income on the part of the creditor. It is to be noted that while this
manual is intended for understanding investments, it is also worthwhile to
understand the duality of its nature, as in this case, the point of view of the
debtor is introduced.

Generally, interest is of two types: simple and compound. In this module, we

will only be dealing with simple interest and compound interest will be
discussed lengthily in the succeeding module.

SIMPLE INTEREST

Simple interest is an interest computed on the amount, commonly known as the

principal, P the borrower received at the time the loan is obtained, and is added
to that amount when the loan becomes due on its term or time, t at a certain
interest rate, r.

Thus, simple interest is computed only once for the entire period of the
investment. However, the recognition of an interest in accounting (whether
expense or income, as the case may be) is applied on the basis of accrual. Hence,
an interest (accrued or incurred) for 3 years is applied evenly for the entire
period.

At maturity date, the borrower repays the amount originally borrowed and the
interest. This accumulated amount of the loan is called maturity value. Some
creditors however prefer to collect the interest in advance. The interest deducted
in advance is called bank discount (discussed separately). Simple interest is
usually employed to investments (loans) whose time period is less than a year.

The simple interest on a principal, P is proportional to the time, t, P is invested.

Hence, the amount of interest earned for each period is constant. With regards to
a longer term, e.g. more than a year, the interest per year is multiplied to t to get
the total interest on the investment. From these premises, the formula for
interest, I is derived as:

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Formula 1: Simple Interest

I = Prt

where:
I interest
P principal/original amount borrowed
r interest rate
t time/term

The triangular diagram below is useful in manipulating Formula 1 for solving

other unknown variables like P, r and t. To use it, cover the unknown variable
and regard vertical line as multiplication and horizontal line as division. For
example, I/Pr will be left if you cover t. This shows that t = I/Pr.

It should be noted that interest rate, unless otherwise stated is assumed to be a

rate applied per annum.

Figure I.1. Simple Interest Formula

Note: Different Mathematics of Investment book authors use different letters to

name the variables in the simple interest formula. In this case, we use I for
simple interest/interest as the case may be (other uses SI, Int), P for the
principal amount, r for the interest rate (which other uses i) and t to
represent time or the term of the investment.

It should be noted that basic knowledge in algebra, as in the case of

formula derivation is needed.

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Example 1: Yaneth Joyce invests P10,000 for a year. The investment bears
interest rate of 9%. How much does it earn after its term? How
much interest would the investment yield if its term is 4 years, in 5
years?

Solution: a. We use Formula 1, I = Prt; with t = 1, P = 10,000 and r = 9%

I = (10,000)(0.09)(1)
I = 900

b. with t = 4

I = (10,000)(0.09)(4)
I = 3,600

c. with t = 5

I = (10,000)(0.09)(5)
I = 4,500

Since simple interest applied to a loan is constant, simple interest can be

alternatively computed as:

Interest earned in a year is 900. Interest in 4 years is 4(900) = 3,600

and interest in 5 years is 5(900) = 4,500.

Example 2: Mark Melvin accumulated an interest amounting to P4,500 on a loan

extended to Mark Joseph at a rate of 12% for 3 years. How much was
borrowed by Mark Joseph from Mark Melvin?

Solution: Given that t = 3, r= 12% and I = 4,500, then from I = Prt

P = I/rt
P = 4,500/[(0.12)(3)]
P = 12,500

Example 3. Melchor, Jr. borrowed P12,000 from Mary Jane to be paid after 2
years. At what interest rate would make Melchor, Jr. liable for an
interest of P1,800 at the end of the term of the loan made by him?

Solution: Since P = 12,500, I = 1,800 and t =2; using I = Prt:

r = [I/Pt] x 100
r = [1,800/(12,000)(2)] x 100

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r = 7.5%

Example 4: Lloyd Russell extended a P10,000 amount of loan to Hershey at a

certain interest rate. If the investment had accumulated an interest
of P800 each year for 2 years, what interest rate must have been
agreed by them?

Solution: Since P = 10,000, I = 800 per year, hence I = 1,600 for 2 years term
and t =2; using I = Prt:

r = [I/Pt] x 100
r = [1,600/(10,000)(2)] x 100
r = 8%

Example 5: Kuya Elmo extended a P5,000 loan to Kuya Boni at an interest rate
of 8%. If Kuya Elmo received a total interest of 2,000 at the date of
maturity, how long is the agreed term?

Solution: Since P = 5,500, I = 2,000 and r =8%; using I = Prt,

t = I/Pr
t = 2,000/[(5,000)(0.08)]
t = 5 years

THE MATURITY VALUE

Maturity Value, MV is the amount received (by the creditor, investor) or paid
(by the debtor, investee), as the case may be, after the period of the investment.
The determination of MV when P, r and t are known is called accumulating P. To
accumulate P for t years at the rate r means to find the amount that would be
payable (debtor) or receivable (creditor) at the end of t years if P is invested at
the rate r.

Maturity Value is also called the Future Value, Accumulated Amount or Final
Amount. Hence, as far as simple interest is concerned, the principal, P is the
investment’s present value.

The formula for Maturity Value is as follows:

Formula 2: Maturity Value

MV = P + I

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From the above formula, we can deduce that:

MV = P + (Prt)

Applying factoring in algebra, we have ;

MV = P(1+rt)

where:
MV maturity value
I interest
P principal/original amount
r interest rate
t time/term

Example 6. Jana borrowed P5,000 from Jerry at a simple interest rate of 9% for
two years. Compute for the interest. After two years, what would
be the loan’s maturity value?

Solution: We use Formula 1 to find the interest, I = Prt; with t = 2, P = 5,000

and r = 9%

I = (5,000)(0.09)(2)
I = 900

To find the maturity value, we use Formula 2.

MV = 5,000 + 900
MV = 5,900

Example 7: Henson borrowed P200,000 from BJ at an interest rate of 8% per

annum to last for 3 years. At the date of maturity, how much would
BJ’s expected cash inflow?

Solution: The problem asks about the value of the investment at maturity
date. It is the expected cash inflow of BJ (outflow from Henson’s
point of view).

With t = 3, P = 200,000 and r = 8%

MV = 200,000[1 + (0.08)(3)]
MV = 248,000

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THE CONCEPT OF TIME

The time t in the simple interest formula I = Prt is the time or period between the
time the investment is made and the date of maturity or return date. In our
previous examples, time is exactly expressed as whole year or years. However,
there are instances wherein time t is a fraction of a year, expressed in months or
it could also be expressed in days.

If the time is expressed in months, we express it as a fraction of a year (or years,

as the case maybe), assuming year to contain 12 equal months, i.e. t = 4 months =
4/12 year or 0.33 year. If time is expressed in days, there are two ways on how to
compute for the time: Exact/Actual and Approximate/Estimated time
computation. These two methods are more commonly known as the Exact
Interest Method (Exact/Actual) and the Ordinary Interest Method
(Approximate/Estimated).

Exact/Actual time is the counted exact number of days in a given month while
Approximate/Estimated time assumes that all months has 30 days, hence a year
contains a total of 360 days.

Example 8: If Mark Melvin borrowed P130,000 from Mark Joseph at 7% interest

for 45 days, how much would be the interest using exact and
ordinary interest methods?

Solution: a. Exact interest method (Actual/Exact)

I = Prt
I = 130,000 x 0.07 x 45/365
I = 1,121.92
b. Ordinary interest method (Approximate/Estimated)

I = Prt
I = 130,000 x 0.07 x 64/360
I = 1,617.78

Note that the ordinary interest method yielded a higher interest compared to the
exact interest method.

There are investment problems which provide only the dates when the
investment was made and when it is due. In these cases, the following rules are
observed:

1. Actual time is determined by counting every day excluding the loan

date until the maturity date.

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2. Approximate time is obtained by assuming that each month has 30

days, hence in a year, there are 360 days.

Example 9. Find the time(exact and approximate) from January 11, 20XX to
August 23, 20XX assuming that 20XX is not a leap year.

Solution: To find the actual time, the number of days in each of the twelve
months of the year (ignoring leap year) is shown in the table:

The Number of Days in Each Month of the Year

Month Days Month Days Month Days

January 31 May 31 September 30
February 28* June 30 October 31
March 31 July 31 November 30
April 30 August 31 December 31

* In case the date falls on a leap year, February contains 29 days.

Table I.1 Actual number of days in a year

When determining the number of days between two dates, the current practice is
to ignore the beginning date but include the ending date.

In such case, in our example, time is computed therefore as:

31-11 20 days January

28 February
31 March
30 April
31 May
30 June
31 July
23 August
Exact time 224 days

Example 10: Find the approximate time from June 30, 20Y to March 26, 20Y+1.
Solution: Since approximate time proposes that months in a year has an
equal number of days, which is 30 days; hence, a year has 360 days.

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To find the approximate time in the example:

30 days July Y
30 August Y
30 September Y
30 October Y
30 November Y
30 December Y
30 January Y+1
30 February Y+1
26 March Y+1
Approximate time 266 days
Alternatively, approximate time can be computed using the following formula:

Formula 3: Approximate time

360(Y2 - Y1) + 30(M2 - M1) + (D2 - D1)

where:
Y2;1 year of second date; first date
M2;1 month of second date; first date
D2;1 day of second date; first date

Assuming that the given dates fall on years 2019 and 2020 respectively.

Thus, 360(2020-2019) + 30(3-6) + (26-30) = 266 days.

Example 11: Count the actual and approximate time from June 15, 2019 to
February 2, 2020. The computation of exact and approximate time
in the given example is compared in the table that follows:

Actual time Approximate time

June, 2019 30-15 15 June, 2019 30-15 15
July 31 July 30
August 31 August 30
September 30 September 30
October 31 October 30
November 30 November 30
December 31 December 30
January, 2020 31 January, 30
2020
February 2 February 2

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232 days 227 days

Our computation shows that the actual time is longer than the approximate time.
But take note that what we have counted is only the numerator. With regards to
the denominator, we could use, as discussed previously, the exact and ordinary
interest method using 365-days and 360-days respectively.

It may then be deduced that where only the loan date and maturity date are
given, there are four possible time combinations to solve for the interest.
Depending on what the problem asks, any of the following fractions is
substituted to variable t in the simple interest formula I = Prt. These are as
follows:

Actual time 232 3 Actual time 232

1. = =
Exact interest 365 . Ordinary interest 360

Approximate time 227 4 Approximate time 227

2. = =
Exact interest 365 . Ordinary interest 360

When the type of interest is not specified in any problem, Banker’s Rule (Actual
Time/Ordinary Interest) is applied and this is commonly used in business
practice. Why?
The reason behind is that this method is the most favorable for the lender than
the other methods because the exact number of days is usually larger than the
approximate time (although exceptions do exist) and the divisor is only 360 days.
With this amount of time, the Banker’s Rule yields the highest interest among the
four methods of computing time.

BANK DISCOUNT

In some instances, the creditor would want a guaranty that interest when due are
collected in full, thus, some creditors collect interest in advance for the amount
borrowed by the debtor. This advance interest is called bank discount. A bank
discount is an interest computed on the maturity value of the loan and is
deducted from that amount at loan date to arrive at net proceeds to be received
by the borrower.

Take note that the word discount as used in relation to investment problems is
relatively different with its other uses in commercial transactions. For example,
the word discount frequently refers to a reduction in price to encourage prompt
payment or bulk purchases. In accounting for bonds, bonds payable is said to
have been issued at a discount if its present value at issuance date is less than its
maturity value (investor’s point of view).

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Bank discount, discount or simple discount is seldom used in transaction

extending over more than a year. Interest is computed as usual but it is then
subtracted from the principal and this amount is loaned to the borrower, hence it
is called discount. Pawnshops usually employ this discounting method.

Illustration: If Wimbledon goes to a bank and apply for a loan of P2,000 for a
year at a rate of 5%, then the bank will give him the amount P2,000
as the principal. At the end of the year, he will repay the bank the
amount borrowed of P2,000 and interest of P100, hence, he would
have to pay a total amount of, P2,100.

However, if he borrows the same at a bank discount rate of 5%,

then the bank will collect P100 in advance as interest and the bank
will only give him P1,900 as loan proceeds. At the end of the year,
he will only repay the principal amount of P2,000. No payment for
interest will be made at the maturity date, because it was collected
in advance. However, in essence, the payment is still worth P2,100
inclusive of principal and interest.

In computing for the bank discount, we need to identify the maturity value, time
(or discount period) and the bank discount rate.

The formulas related to bank discount are as follows:

Formula 4: Simple Discount

I = MV x r x t
P = MV-I
P = MV(1-rt)

where:
I bank discount
MV maturity value
P proceeds from the loan
r discount rate
t time

Example 12: Darwin applied for a loan of P200,000 at Pinoy National Bank at
12% discount rate for 8 months. Determine the amount of interest
collected in advance. What was Darwin’s proceeds from the loan?

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The maturity value is the amount applied for by the borrower. This is the amount
the borrower is expected to pay at maturity date. In this case, MV = P200,000.
The proceeds is the amount of money that is received, net of discount.

The bank discount rate expressed as a percentage is converted to decimal and the
time is expressed as a fraction of a year.

Solution: Using Formula 4, I = MV x r x t, with MV = P200,000, r = 12% and

t = 8 months.

a. To compute for the bank discount

I = MV x r x t
I = 200,000 x 0.12 x 8/12
I = 16,000

b. To compute for the proceeds from the loan

P = MV – I
P = 200,000 – 16,000
P = 184,000

or using the formula P = MV(1-rt)

P = 200,000[1-(0.12 x 8/12)]
P = 184,000

PROMISSORY NOTES

In actual practice, investments are usually supported by instruments to bind the

contract between parties. For example, for every loan extended to a debtor, it is
necessary that a contract be executed supported by an instrument to bind the
indebtedness of the debtor to the lender. Once the debtor agrees and signs in the
agreements stipulated in the contract, he certifies that he has an obligation to
fulfill, and that is to pay the amount borrowed at the agreed payment time. This
contract of indebtedness is usually supported by a promissory note.

A promissory note, as defined in the Negotiable Instruments Law, “is an

unconditional promise in writing by one person to another, signed by the maker,
engaging to pay on demand, or at a fixed or determinable future time, a sum certain in
money to order or to bearer”. The definition specifies the elements of a promissory
note. The features of a promissory note are discussed lengthily in this section.

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Generally, promissory note is of two types namely simple interest and bank
discount notes. In order for us to solve problems involving promissory notes, it
is important that we know the elements of a promissory note.

We first illustrate a simple interest promissory note:

SIMPLE INTEREST NOTE

Example 13: On January 03, 2010, Michael Johns borrowed P5,000 from City
Hunter Co.. The loan was approved at 10% simple interest for 3
years.

To bind the contract of loan, the following promissory note was

issued by Michael Johns:

The features of the note are the following:

1. The borrower/maker of the note is the party making the promise to pay
(Michael Johns).
2. The payee/lender of the note is the party to whom the promise is made (City
Hunter Co.).
3. The face value/amount borrowed of the note is the sum of money specified
(P5,000).
4. The rate of interest stated as an annual rate based on the face value of the note
(10%).
5. The term of the note is the length of time between the date of issue and when
the note matures (3 years).
6. The due date/date of maturity is the date on which the note is to be paid.
7. The maturity value is the amount payable on the due date of the note.

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The simple interest on the promissory note could be computed easily by using
the Simple Interest Formula with some modifications; that is, the face value, FV
is substituted to the principal, P in the formula. Thus, I = Prt becomes I = FV x r x
t.

I = FV x r x t
I = 5,000 x 0.10 x 3
I = 1,500

The maturity value, MV is computed by adding the interest and the face value of
the note:

MV = FV + I
MV = 5,000 + 1,500
MV = 6,500
On the date of maturity, meaning the payment date, Michael Johns will have to
pay City Hunter Co. the amount of P6,500.

BANK DISCOUNT NOTE

Example 14: On June 10, 2009, Zaldy Bugarin requested a loan from Northwest
Bank. The loan was approved for P100,000 at 10% bank discount
for 75 days on June 13, 2009 . To bind the contract of loan, the
following bank discount note was issued by Zaldy:

The features of the note are the following:

1. The borrower/maker of the note is the party making the promise to pay
(Zaldy Bugarin).
2. The payee/lender of the note is the party to whom the promise is made
(Northwest Bank).
3. The face value/amount borrowed of the note is the maturity value of the loan
(P100,000)

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4. The discount rate stated as an annual rate based on the face value of the note
(10%).
5. The term of the note is the length of time between the date of issue and when
the note matures (75 days).
6. The due date/date of maturity is the date on which the note is to be paid.
7. The face value is the amount payable on the due date of the note.
8. The proceeds of the loan is computed by subtracting the advance interest from
the face value.

The amount of bank discount on the promissory note could be computed easily
by using the Simple Discount Formula with some modifications; that is, the face
value, FV is substituted to the maturity value, MV in the formula. Thus, BD =
MV x r x t becomes BD = FV x r x t.
BD = FV x r x t
BD = 100,000 x 0.10 x 75/360
BD = 2,083.33

Solving for the proceeds:

P = FV – BD
P = 100,000 – 2083.33
P = 97, 916.67

Since discount is deducted, on the date the loan is obtained, Zaldy, the maker of
the note received only P97,916.67 as proceeds of the loan. It is the amount he
applied for, the face value of the note that is due upon maturity.

EFFECTIVE RATE OF A BANK DISCOUNT NOTE

In a simple interest note, the borrower receives the full face value, whereas with
a bank discount note the borrower receives only the proceeds. Because proceeds
are less than the face value, the stated discount rate is not the true or effective
rate of the note.

Effective interest rate is computed using the formula:

Formula 5: Effective Interest Rate-Bank Discount Note

EIR = BD ÷ [P x t]

where:
EIR effective interest rate
BD bank discount

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P proceeds from the loan

t time

Example 15: What is the effective rate of a bank discount note for P200,000, at a
bank discount rate of 12% for a period of 5 months?

Solution: To find the effective interest rate, the bank discount and proceeds
should be known first. Hence, to compute:

a. the bank discount:

BD = FV x r x t
BD = 100,000 x 0.12 x 5/12
BD = 5,000

b. the proceeds:

P = FV - BD
P = 100,000 – 5,000
P = 95,000

c. the effective interest rate:

EIR = BD ÷ [P x t]
EIR = 5000 ÷ [95,000 x 5/12]
EIR = 0.12632 or 12.63%

Hence, the true or effective interest rate is 12.63%.

DISCOUNTING NOTES BEFORE MATURITY

In usual business practice, a business requires its lenders promissory notes to

bind the indebtedness between them. A business usually accepts notes, usually
short-term as payments for goods and services. However, there are also instances
when the payee opts to sell the notes to a third party, usually a bank or a
financial institution.

For example, the payee needs immediate cash to finance operations; he may sell
his notes receivable to have cash. It is obvious that the responsibility of
collection, in case of absolute sale will be vested upon the third party. In financial
accounting parlance, it is called receivable financing. This process in a more
limited sense is referred to as discounting of notes. Moreover, since the notes

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were sold, the original bearer of the notes will then expect a lesser amount of
proceeds compared to what he could have, had he waited for the notes to
mature.

When a note is discounted at a bank, the original payee receives the proceeds of
the discounted note while the new payee receives the maturity value of the notes.
The time used to compute the proceeds is from the date the note is discounted to
the maturity date. This is known as the discount period.

DISCOUNTING A SIMPLE INTEREST NOTE

Example 16: Mars Co. received P300,000 simple interest note which bears 6%
interest for 6 months from one of its customers. After 3 months, due
to financial difficulty, Mars Co. discounted the note at Banco de
Oro at a discount rate of 7%. Compute for the proceeds Mars Co.
received from the sale of the note.

Solution: a. Solve for the maturity value of the simple interest note:

MV = P (1 + rt)
MV = 300,000 [1 + (0.06 x 6/12)]
MV = 309,000

b. Count the unexpired portion of the term---the discount period. In

this case, 3 months had expired, therefore only 3 months are left.

c. Solve for the bank discount.

BD = MV x r x t
BD = 309 x 0.07 x 3/12
BD = 5,407.5

d. Solve for the proceeds.

P = MV – BD
P = 309,000 – 5,407.5
P = 303, 592.5

Thus, Mars Co. received P303, 592.5 as proceeds from the discounted note. Take
note that he received a lesser amount compared to the expected maturity value
of P309,000. The difference could be regarded as compensation for the bank
buying the note. After the maturity date, the customer would pay to BDO the
amount of P309,000.

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DISCOUNTING A BANK DISCOUNT NOTE

Example 17: Miles Co. received a bank discount note from a customer with face
value of P50,000 for 5 months. After a month, the note was
discounted at Allied Bank at a discount rate of 9%. What are the
proceeds Miles Co. will receive from discounting of the note?

Solution: a. Count the unexpired portion of the term---the discount period. In

this case, 4 months were left.

b. Solve for the discount.

BD = MV x r x t
BD = 50,000 x 0.09 x 4/12
BD = 1,500

c. Solve for the proceeds.

P = MV – BD
P = 50,000 – 1,500
P = 48,500

Hence, Miles Co. received P48,500 from the discounted note.

The procedures involved in discounting a non-interest bearing note a similar to

those of a bank discount note. The face value of the non-interest bearing note is
the same as its maturity value, hence, same procedures are followed.

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SELF EVALUATION QUESTIONS

1. What is interest?

2. Why is interest called money’s rent?

3. What are the two main types of interest?

4. Explain how simple interest is applied in business practice.

5. State the simple interest formula.

6. Explain the concept of time with respect to simple interest.

7. What are the four time combinations?

8. Discuss why Banker’s Rule is preferred in business practice?

9. What is a bank discount?

10. How does bank discount apply in business?

11. Define promissory note.

12. What are the elements of a promissory note?

13. Define and explain discounting of notes?

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14. What procedures are observed in discounting notes?

15. Explain why the effective rate is different from the nominal rate when
notes are discounted?

PROBLEM 1. Simple Interest, Maturity Value and Manipulating the Simple

Interest Formula

1. Fill in the missing values.

I P r t MV
5,000 8,333.33 12% 5 years 13,333.33
1,000 40,000 8% 0.3125 41,000
years
3,000 70,000 5.79% 267 days 73,000
21,937.5 65,000 9% 3.75 years 86,937.5

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2. Hershey pays an interest of P350 five months after borrowing a certain

amount. How much did she borrowed if the simple interest rate of 5.75%?
Compute for the maturity value.

Solution:
Since I=350, t= 5 months, r= 5.75%, hence, P=I/rt.

P=I/rt
P=350/(0.0575 x (5/12))
P=350/(0.0575 x 0.416667)
P=14,608.68

MV=P+I
MV=14,608.68 + 350
MV= 14,958.68

Therefore, Hershey borrowed 14,608.68 and the maturity value is

14,958.68.

3. Find the simple interest on a P80,000 loan at 14.25% for 2 years and 3
months. Determine the maturity value.

Solution:
Since P=80,000, r=14.25%, t=2.25 years (2 years and 3 months),
hence, I=Prt

I=Prt
I=80,000 x 0.1425 x 2.25
I= 25,650

MV= P+I
MV= 80,000+25,650
MV=105,650

Therefore, the simple interest is 25,650 and the maturity value after 2
years and 3 months is 105,650.

4. Russell invested P3,000 in fund with interest rate of 3.75%. How much
interest would she earn after 10 months? What is the amount payable at
maturity?

Solution:

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 Module I. Simple Interest

Since P=3,000, r= 3.75%, t=10 months, hence, I=Prt.

I=Prt
I=3,000 x 0.0375 x (10/12)
I=3,000 x 0.0375 x 0.83333
I=93.75

MV=P+I
MV=3,000 + 93.75
MV=3,093.75

Therefore, Russell would earn an interest of 93.75 after 10 months and

the amount payable at maturity is 3,093.75

5. Venus Raj invested in a fund which pays 12% per annum. The amount of
investment is P50,000. How long would it take for the investment to
double? How much is the total interest earned after the term? Determine
the maturity value.

Solution:

(using the Rule of 72 Formula)

t=72/r
t=72/12%
t=6
Therefore, it will take 6 years to double the investment.

Since P=50,000 r=12% t=6 years, hence, I=Prt

I=Prt
I=50,000 x 0.12 x 6
I=36,000
MV= P+I
MV=50,000 + 36,000
MV= 86,000

Thus, the total interest after the term would be 36,000 and the maturity
value would be 86,000.

6. An interest of P7, 000 was earned in an investment of P60,000 for 3 years.

What was the agreed interest rate?

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 Module I. Simple Interest

Solution:
Since P=60,000, I=7,000, t=3 years, hence, r=I/Pt

r=I/Pt
r=7,000/ (60,000 X 3)
r=3.889%

Therefore, the agreed interest rate was 3.889

7. For borrowing P20,000 for 3 years and seven months, a lender charges a
borrower P1,050. What simple interest rate does the lender used?

Solution:
Since P=20,000, t=3.58 years (3 years and 7 months), I=1,050,
hence, r=I/Pt

r=I/Pt
r=1,050/ (20,000 x 3.58)
r=1.47%

Therefore, the lender used a simple interest of 1.47%.

8. It takes 5 years for an investment to double. If the investment is

compensated with a simple interest of P6,000, at what rate the money was
invested?

Solution:
(using the Rule of 72 Formula)
r= 72/t
r= 72/5
r=14.4

Therefore, the rate of the money invested was 14.4%.

9. Interest of P2,000 is earned after 6 years. The investment’s simple interest

rate is 8.25%. How much is the principal amount?

Solution:
Since I=2,000, t=6 years r= 8.25%, hence, P=I/rt

P=I/rt
P=2,000/ (0.0825 x 6)
P=4,040.40

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 Module I. Simple Interest

Therefore, the principal amount is 4,040.40.

10. Hubert borrowed P60,000 from Jessica. It bears 6% simple interest per
annum for 3.5 years. After the term, what would Hubert’s settlement with
Jessica? What amount of income would Jessica recognize for the first year?

Solution:
Since P=60,000, r=6% t=3.5 years, hence, I=Prt
After the term:
I=Prt
I=60,000 x 0.06 x 3.5
I=12,600

MV= P+I
MV=60,000+12,600
MV=72,600

For the first year:

I=Prt
I=60,000 x 0.06x 1
I=3,600

Therefore, after the term, Hubert will pay a total of 72,600 to Jessica and
Jessica would recognize an income of 3,600.

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 Module I. Simple Interest

PROBLEM 2. Concept of Time---Actual and Approximate

1. Find the time, in days, of each of the following notes using actual and
approximate time.

Approximate Actual
Date Remarks
time time
January 24, 2020-February 15, 2020 is a 381 days 388 days
2021 leap year
August 16, 2019-December 120 days 122 days
------
16, 2019
Year Y+1 is 358 days 364 days
May 03, Y-May 01, Y+1
a leap year
January 04, Y-February 09, Year Y is a 395 days 401 days
Y+1 leap year
April 12, Y-July 15, Y+2 ------ 814 days 824 days

2. Find the interest on P80,000 investment at 9% interest from July 29 –

December 3 of the same year using the four time combinations.
Solution:
Since P=80,000, r=9%, t=127days(actual), 124 days(approximate),
hence,

Actual time 127 3 Actual time 127

1. = =
Exact interest 365 . Ordinary interest 360

Approximate time 124 4 Approximate time 124

2. = =
Exact interest 365 . Ordinary interest 360

1. I=Prt
I=80,000 x 0.09 x (127/365)
I=80,000 x 0.09 x 0.3479
I=2,504.88
2. I=Prt
I=80,000 x 0.09 x (124/365)
I=80,000 x 0.09 x 0.3397
I=2,445.84
3. I=Prt
I=80,000 x 0.09 x (127/360)
I=80,000 x 0.09 x 0.3528
I=2,540.16
4. I=Prt
I=80,000 x 0.09 x (124/360)

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 Module I. Simple Interest

I=80,000 x 0.09 x 0.3444

I=2,479.68

3. Find the interest on P20,000 worth of investment at 10% for 267 days.

Solution:
Since P=20,000, r= 10%, t=0.7417 (267/360), hence, I=Prt

I=Prt
I=20,000 x 0.10 x 0.7417
I= 1,483.4

4. Using the four time combinations, find the interest on P10,500 from
October 13 to March 10 of the following year (a leap year) at 6 ¼% simple
interest.

Solution:
Since, P=10,500, r= 6.25%, t=149 days(actual), 143 days (approximate),
hence,

Actual time 149 3 Actual time 149

1. = =
Exact interest 365 . Ordinary interest 360

Approximate time 143 4 Approximate time 143

2. = =
Exact interest 365 . Ordinary interest 360

1. I=Prt
I=10,500 x 0.0625 x (149/365)
I=10,500 x 0.0625 x 0.4082
I=267.88
2. I=Prt
I=10,500 x 0.0625 x (143/365)
I=10,500 x 0.0625 x 0.3918
I=257.12
3. I=Prt
I=10,500 x 0.0625 x (149/360)
I=10,500 x 0.0625 x 0.4139
I=271.62
4. I=Prt
I=10,500 x 0.0625 x (143/360)
I=10,500 x 0.0625 x 0.3972
I=260.66

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 Module I. Simple Interest

5. Find the interest on P5,980 at 8.75% of simple interest from September 12,
Y to May 24, Y+1 using approximate time.

Solution:
Since P=5,980, r=8.75%, t=252 days, hence,

I=Prt
I=5,980 x 0.0875 x (252/360)
I=366.275

6. Diwane borrows P8,000 on September 1, 2018 and promises to pay the

principal with an exact simple interest of 9.3% on March 12, 2019. What
amount does Diwane pay to discharge his debt at the end of the term if
actual time is considered? 2019 is not a leap year.

Solution:
Since P=8,000, r= 9.3%, t=192 days, hence,

I=Prt
I=8,000 x 0.093 x (192/365)
I=391.36

Therefore, Diwane needs to pay 8,391.36 to discharge his debt at the end
of the term.
7. Zanjoe borrowed P9,850 on April 22, 2018. He repaid his debt with simple
interest of 7.25 % on November 5, 2019 (not a leap year). How much did
he pay at maturity date? Use approximate time.

Solution:
Since P=9,850, r= 7.25%, t=553 days, hence,

I=Prt
I=9,850 x 0.0725 x (553/360)
I=1,096.98

Therefore, Zanjoe paid his debt amounting to 10,946.98 at maturity date.

8. Refer to Problem 7, would your answer change had you used actual time?
By how much increase/decrease?

Solution:
Since P=9,850, r= 7.25%, t=562 days, hence,

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 Module I. Simple Interest

I=Prt
I=9,850 x 0.0725 x (562/365)
I=1,099.56

Therefore, the answer would change using actual time. It increased by

2.57.

9. Five thousand pesos is due on February 20, 2016 (a leap year). It is agreed
that the debt will be settled on August 26, 2017 with exact simple interest
of 14% charged after the original due date. Using approximate time, find
the amount that must be paid on August 26, 2017.

Solution:
Since P=5,000, r= 14%, t=546 days, hence,

I=Prt
I=5,000 x 0.14 x (546/360)
I=1,061.67

Therefore, the amount that must be paid on August 26,2017 is 6,061.67.

10. Refer to Problem 9, find the amount that must be paid on August 26, 2017
using exact time.

Solution:
Since P=5,000, r= 14%, t=553 days, hence,

I=Prt
I=5,000 x 0.14 x (553/365)
I=1,060.55

Therefore, the amount that must be paid on August 26,2017 is 6,060.55.

PROBLEM 3. Bank Discount

1. Determine the bank discount if one borrows P30,000 at 12% simple

discount for 3 years and five months.
Solution:

I=MV x r x t

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 Module I. Simple Interest

I=30,000 x 12% x (3+(5/12))

I=30,000 x 0.12 x 3.4167
I=12,300.12

2. Discount P9,800 for 1 year and 9 months at 8 ¾% simple discount.

Solution:

I=MV x r x t
I= 9,800 x 8.75% x (1+(9/12))
I=9,800 x 0.0875 x 1.75
I=1,500.625

3. If P2,500 is the present value of P5,000 due at the end of 13 months, what
is the bank discount rate?
Solution:

r=I/MVt
r=2,500/ (5,000 x (13/12))
r=2,500/ (5,000 x 1.0833)
r=0.46155 or 46.16%

4. The discount on P2,987.5 is P500 at 9%. When is the amount due?

Solution:

t=I/MVr
t=500/ (2,987.5 x 9%)
t=500/ (2,987.5 x 0.09)
t=1.8596 or 1 year 10 months

5. When should P9,720 be due if the present value is P9,000 at a simple

discount rate 5 ¼%?
Solution:

t=I/MVr
t=9,000/ (9,720 x 5.25%)
t=9,000/ (9,720 x 0.0525)
t=17.637

6. What amount should be borrowed for 7 months at 9% simple discount if

P4,000 is needed now?
Solution:

MV=I/rt
MV=4,000/ (0.09 x (7/12)

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 Module I. Simple Interest

MV=76,190.48

7. Find the bank discount at the rate of 7% and the present value of a debt of
P7,800 which is due at the end of 6 months.
Solution:

I=MV x r x t
I= 7,800 x 7% x (6/12)
I= 7,800 x 0.07 x 0.5
I=273

8. How much should Hayden borrow for 3 years at 12% interest in advance
if he needs P8,000 to buy an appliance?
Solution:

MV=I/rt
MV=8,000/ (0.12 x 3)
MV=22,222.22

9. Mr. Yang needs P12,500 for the purchase of machinery. He is thinking of

applying for a loan at PNB. Should the bank offer him an amount with
advance interest of 12% for 2 years, what amount of loan would he have
to apply for to get the desired amount.
Solution:

MV=I/rt
MV=12,500/ (0.12 x 2)
MV=52,083.33

10. Niña Cadatal-Lazaro signed a P500,000 bank discount note at the Banco
de Oro. The discount rate is 13.5% and the term of the note is 11 months.
What is the amount of bank discount? What are Niña’s proceeds of the
loan?
Solution:

a. To compute for bank discount

I=MV x r x t
I=500,000 x 0.135 x (11/12)
I=61,875
b. To compute for proceeds of the loan

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 Module I. Simple Interest

P=MV-I
P=500,000 – 61,875
P=438,125

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 Module I. Simple Interest

PROBLEM 4. Discounting of Promissory Notes

1. Mr. Hwang has a note dated August 15, 2017 which calls for a payment of
P5,674.5 on July 26, 2018. On October 15, 2017, the note is discounted at
11% exact simple interest. How much cash did Mr. Hwang get as proceeds
of discounting his notes?
Solution:

a. Count the unexpired portion of the term—the discount period. In this

case, 61 days had expired therefore, there are 284 days
b. Solve for the bank discount.

BD = MV x r x t
BD = 5,674.5 x 0.11 x (284/365)
BD = 485.68

c. Solve for the proceeds.

P = MV – BD
P = 5,674.5 – 485.68
P = 5,188.82

2. On March 7, 2017, Budoy Maniego borrowed P200,000, cash from Ana

Manalastas carrying a 12% simple interest to be paid on July 5, 2017. On
April 26, 2017, Ana Manalastas decided to discount the note at Philippine
National Bank because she needed money for her travel to Singapore. The
note was discounted at the bank with a discount rate of 15%.

a. The term of the note is 118 days

b. The discount period is 69 days
c. The maturity value of the note is 207,866.67
d. The proceeds from PNB amounted to 194,250.00
e. The effective interest rate is 15.44%

3. You own BSA4 Enterprise and you received the following promissory
note.

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 Module I. Simple Interest

On April 20, 2011 you experienced financial distress and you decided to
discount your note at ChinaBank at 14% discount rate.

a. Determine the elements of the note:

1. Maker Dhaner G. Viray, CPA

2. Payee BSA4 Enterprise
3. Term 65 days
4. Discount period 39 days

b. Solve for the bank discount.

BD= FV x r x t
BD= 500,000 x 0.14 x (39/360)
BD= 7,583.33

c. How much would you be taking home as proceeds from

discounting the note?
P= FV – BD
P= 500,000 – 7,583.33
P= 492,416.67

d. Determine the effective rate.

EIR= BD/ (P x t)
EIR= 7,583.33/ (492,416.67x (39/360))
EIR=14.21%

4. Jollibee receives P7,345.32 for discounting a 120-day note 40 days before it

matures. Find the rate of the note in simple interest if its face value is
P7,000 and the bank discount is P105.35
Solution:

P= MV- BD

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 Module I. Simple Interest

P= 7,345.32 – 105.35
P= 7,239.97

EIR= BD/ (P x t)
EIR= 105.35/ (7,239.97 x (40/360)
EIR= 13.10%

5. Jimmy received a promissory note from Jonathan as payment for the

services rendered by him amounting to P9,670.50 dated June 24, 2018 and
due on April 28, 2019 with simple interest at 16%. Jimmy could no longer
wait for the note to mature because he needs cash so he decided to have
the note discounted at 15.2% on January 28, 2019. How much are the
proceeds? What is the true rate of borrowing?
Solution:

a. Solve for the maturity value of the simple interest note:

MV = P (1 + rt)
MV = 9,670.50 [1 + (0.16 x (304/360))]
MV = 10,977.01

b. Count the unexpired portion of the term---the discount period.

In this case, only 90 days are left.

c. Solve for the bank discount.

BD = MV x r x t
BD = 10,977.01 x 0.152 x (90/360)
BD = 417.13

d. Solve for the proceeds.

P = MV – BD
P = 10,977.01 – 417.13
P = 10,559.88

e. Solve for effective rate

EIR=BD/ (P x t)
EIR=417.13/ (10,559.88 x (90/360))
EIR= 15.80%

6. PR Bank charges 16% simple discount on short-term loans. Find the face
value of the note given to the bank if Mr. Jung receives P5,000 on January
15, 2019 and the maturity date of the note is July 20, 2020.

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 Module I. Simple Interest

Solution:

MV= P (1 + rt)
MV= 5,000 ( 1 +( 0.16 x (545/360))
MV= 6,211.11
7. Rosalinda draws a 150-day note to the order of Fernando Juan. Fernando
Juan wishes to obtain P5,600 for discounting the note immediately at a
discount rate of 11%. What should the face of the note be?
Solution:

MV= P (1 + rt)
MV= 5,600 ( 1 +( 0.11 x (150/360))
MV= 5,856.67

8. The face of a 9-month note with interest of 13.65% is P8,650. If the note is
sold 4 months before its maturity at 12%, what should the proceeds be?
Solution:

a.Solve for the maturity value of the simple interest note:

MV = P (1 + rt)
MV = 8,650 [1 + (0.1365 x (270/360))]
MV = 9,535.54

b. Count the unexpired portion of the term---the discount period.

In this case, only 4 months are left.

c. Solve for the bank discount.

BD = MV x r x t
BD = 9,535.54 x 0.12 x (120/360)
BD = 381.42

d. Solve for the proceeds.

P = MV – BD
P = 9,535.54 – 381.42
P = 9,154.12

9. On February 18, 2016 (a leap year), Levie Grace draws a note to the order
of Daniel promising to pay P5,090 at the end of 9 months. What proceeds
does Daniel receive if he discounts the note at 11.36% on September 21,
2017. Determine the effective rate.

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 Module I. Simple Interest

Solution:

a. Count the unexpired portion of the term---the discount period.

In this case, only 69 days are left.

b. Solve for the bank discount.

BD = MV x r x t
BD = 5,090 x 0.1136 x (69/360)
BD = 110.83

c. Solve for the proceeds.

P = MV – BD
P = 5,090 – 110.83
P = 4,797.17

d.Solve for effective rate

EIR=BD/ (P x t)
EIR=110.83/ (4,797.17 x (69/360))
EIR= 12.05%

10. On September 11, 2016, Paul John draws a note promising to pay Krystel
P3,684.50 with simple interest of 13% 300 days later. How much should
the creditor receive if he sells the note on February 3, 2017 at 14% exact
simple discount? What is the effective rate?

Solution:

a.Solve for the maturity value of the simple interest note:

MV = P (1 + rt)
MV = 3,684.50 [1 + (0.13 x (300/360))]
MV = 4,083.65

b. Count the unexpired portion of the term---the discount period.

In this case, 139 days had expired, therefore, there are only 161
days left.

c. Solve for the bank discount.

BD = MV x r x t
BD = 4,083.65x 0.14 x (161/365)

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 Module I. Simple Interest

BD = 252.18

d. Solve for the proceeds.

P = MV – BD
P = 4,083.65– 252.18
P = 3,831.47

E .Solve for effective rate

EIR=BD/ (P x t)
EIR=252.18/ (3,831.47x (161/365))
EIR= 14.92%

37