Mathematics of Investment

Chapter I: Simple Interest and Simple Discount

Outcomes:

The students shall be able to:

1. Find simple interest of the amount invested

2. Compute for ordinary and exact interest of the amount invested
3. Evaluate approximate and exact time of the amount invested
4. Compute for simple discount from the maturity amount of an obligation
5. Find the different features of a promissory note

Introduction:

When people need to get funds for some purposes, one of the ways they usually resort to is borrowing.
The person or institutions which lends the money would also wish to get something in return for the use
of the money. The person who borrows money for any purpose is a debtor or borrower, and the person
or institution which loans the money is the lender.

The payment for the use of borrowed money is called interest. The capital or sum of money invested is
called the principal. The fractional part of the principal that is paid on the loan is the rate of interest and
is usually express as percent. The time or term of the loan is the number of units (days, months, years)
of the time for which the money is borrowed and for which interest is calculated. The sum of the
principal and the interest which is accumulated at a certain time is referred as the Final Amount or
Maturity Value. The amount receive by the borrower is the Present Value or proceeds of the loan.

1.1 Simple Interest

Simple Interest is defined as the product of Principal, rate, and time. I = P x r x t. where:

I = simple interest in pesos

P = principal in pesos

r = rate or percent of the principal which is to be paid per unit of time.

t = units of time usually expressed in years or fractional parts of a year.

Other formulas can be derived from the above:

𝐼 𝐼 𝐼
P= ; r= ; t=
𝑟𝑡 𝑃𝑡 𝑃𝑟

Maturity Value Formula:

F=P+i
F = P + (Prt)
F = P (1 + 1rt) or F = P(1 + rt) *factor out P

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Final Amount formula:

FA = P + I ; I = FA – P

Commonly, in business, the interest rate is expressed as percent. In computing the interest it is
necessary to convert the rate into a fraction or decimal equivalent such as 6% = 6/100 = 0.06.

The term of the loan is the period during which the borrower has the use of all or part of the borrowed
money. The term or time may be stated in any of the following ways:

1. When the time is expressed in number of year(s), our formula will be:
I = P x r x number of year(s).
2. When the time is expressed in number of month(s).
I = P x r x number of month(s)
12
3. When the time ex expressed in number of days, there are two (2) ways of computing interest,
namely:
a. Ordinary Interest (Io)
Io = P x r x number of days
360
b. Exact Interest (Ie)

Ie = P x r x number of days
365
4. When the time is expressed between dates, there are four (4) ways of computing interest,
namely:
a. Io-Act. Time = P x r x Actual number of days (Known as banker’s Rule, use in computing the interest on savings deposits.
360
b. Io-App. Time = P x r x Approximate number of days
360

c. Ie-Act. Time = P x r x Actual number of days

365
d. Io-App. Time = P x r x Approximate number of days
365

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Illustrative Examples:

1. Find the interest and amount of P550 at 5 ½ % simple interests for 4 years.
I=Prt FV = P + I
= P550 x 0.55 x 4 = 550 + 121
= P121 = P671
2. Find the interest and amount of P1,500 at 6 ¼ % simple interest for 10 months.

I = P x r x number of months FV = P + I
12 = P1,500 + 78.12
I = P1,500 x 0.0625 x 10/12 = P1,578.12
I = P78.12
3. Find the interest and amount on P850 at 4 ¾ % simple interest for 3 years and 7 months.
I = P850 x 0.0475 x 3 7/12 FV = P + I
= P850 x 0.0475 x 43/12 = P850 + 144.68
= P144.68 = P994.68
4. If a principal of P1,250 earns interest of P172 in 2 years and 9 months, what interest rate, is in
effect?

r= I
Pt
r = 172
1250 x 2.75
r = 5%
5. A principal earns interest of P196 in 3 years and 6 months at a simple interest rate of 6 ½ %. Find
the principal invested.
P= I = 196
rt 0.05 x 3.5
= 196
0.2275
= P861.54
6. How long will it take for P800 to earn P240, if it is invested at 6 ½ % simple interest?
t= I *4.62 years = 4 years
Pt 0.62 x 12 mos. = 7.44 or 7 months
= 240 0.44 x 30 days = 13.2 or 13 days
800 x 0.065 0.2 x 24 hrs. = 4.8 or 4 hours
= 240 0.8 x 60 mins. = 48 or 48 minutes
52
= 4.62 years or 4 years and 7 months*
7. Jessie Mae borrowed P12,500 from a bank at 9 ½ % simple interest for 3 years and 6 months.
How much did Jessie Mae pay back the bank?
I=Pxrxt FV = P + I
= P12,500 x 095 x 3.5 = P12,500 + 4,156.25
= P4,156.25 = P16,656.25

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Exercise 1.1
1. Find the missing value.
a) I = P 512 ; r=8¼% ; t = 5 years
b) P = P3,400 ; I = P 883 ; r = 5 3/8 %
c) P = P4,800 ; I = P1,878 ; t = 5 years and 5 months
d) P = P 3,950 ; r=6¾% ; t = 3 years and 6 months
2. In what time will P875 double itself at the rate of 7% simple interest?
3. What amount must be repaid on August 1, 1990, if P3650 is borrowed on August 1, 1988 at 6 ¼ %
simple interest?
4. Camilo borrowed P15,600 for 2 years and 8 months and paid P2,150 interest. What was the
simple interest rate?
5. Pamela loans P8,700 at 4 3/8 % simple interest, how long will it take her to get P510 interest?

Exercise 1.1
6. Find the missing value.
e) I = P 512 ; r=8¼% ; t = 5 years
f) P = P3,400 ; I = P 883 ; r = 5 3/8 %
g) P = P4,800 ; I = P1,878 ; t = 5 years and 5 months
h) P = P 3,950 ; r=6¾% ; t = 3 years and 6 months
7. In what time will P875 double itself at the rate of 7% simple interest?
8. What amount must be repaid on August 1, 1990, if P3650 is borrowed on August 1, 1988 at 6 ¼ %
simple interest?
9. Camilo borrowed P15,600 for 2 years and 8 months and paid P2,150 interest. What was the
simple interest rate?
10. Pamela loans P8,700 at 4 3/8 % simple interest, how long will it take her to get P510 interest?