Week 9

Mathematics of Finance
Simple and Compound Interest
Overview:
The importance of financial knowledge in everyday living let alone advanced complex
applications in the real world of business and accounting cannot be doubted. Skills on this will
allow a person to have the knowledge on how to effectively control his/her finances, give
him/her vast employment opportunities, and allow him/her to contribute to individuals and to
the economy. The knowledge to make decision about debt, investment and future retirement
plans are all important basic tools necessarily in real life. This knowledge will give us awareness
to make critical decision about stocks, market, and mortgage and investment opportunities.
Clearly, the financial knowledge and tools acquired in the mathematics of finance will help
bring real life examples to workforce making the workplace smarter one.

Source: Quintos, R. et. Al. (2019). Mathematics in the modern world. Bulacan: St. Andrew
Publishing House.

Module Objectives:
After successful completion of this module, you should be able to:
* Learning objective 1: Identify the difference between exact and ordinary simple
interest;
* Learning objective 2: Calculate simple and compound interest problems; and
* Learning objective 3: Solve real – world problems related to interest.

Course Materials:
These are materials that will be provided for students to facilitate and/or demonstrate the learning.
These can include be reading materials, videos, samples or examples, case studies, simulations,
etc. These materials are added to the course in the order that the course specialist wants students
to use them. Brief guidance, as needed, should be provided.

Watch: Asynchronous Session

Aimstone. (2017, August 1). The Power of Compound Interest. [Video file].
YouTube. https://www.youtube.com/watch?v=8NC_OHBgV2Q
Read: Synchronous Session

SIMPLE
INTEREST
Simple interest is an interest that is
calculated on the balance owned
but not on previous interest or in
other words if interest is computed
on the original principal during the
whole life of the investment, the
interest due at the end of the time is
called simple interest. It is
computed entirely on the original
principal (P) multiplied by the rate of
interest (r) and the time (t). This
leads to the simple interest
formula.

SIMPLE INTEREST FORMULA EXAMPLE 1

i A couple despite the pandemic situation decided to
i = Prt P=
rt open their own online tutorial services on March 2,
i i 2021. They borrowed 10 million pesos in the bank for
t= r= all the necessary things needed in establishing their
Pr Pt
business and other start – up cost. They agreed to
where repay the bank in 5 years, with an interest rate of 8%
i is the simple interest per annum. Identify the principal, rate of interest,
P Principal time, and the due date.
t time between date of loan is
made and the date it matures or
SOLUTION
becomes repayable to the lender
Principal Php 10,000,000
r rate per period of time
Rate of interest 8%
expressed as percent or fraction
Time 5 years
Due date March 2, 2026
NOTES
Principal (P)
It is the original amount borrowed.
EXAMPLE 2
Rate of Interest (r) A businessman borrowed 10 million pesos from the
It is the percent that the borrower bank. If he agrees to pay an annual 8% annual rate of
pays for the use of the money interest, calculate the amount of interest in:
commonly expressed as annual a. 5 years
interest rate. b. 10 years
c. 15 years
Time
It is the length of time usually SOLUTION
expressed in years. a. i = Prt
i = (10,000,000)(0.08)(5) = Php 4,000,000
Maturity Date or Due Date
It is the date on which the loan is to b. i = Prt
be repaid. i = (10,000,000)(0.08)(10) = Php 8,000,000

Maturity Value c. i = Prt

It is denoted as A, the total amount i = (10,000,000)(0.08)(15) = Php 12,000,000
the borrower would need to pay
back.
EXAMPLE 3 EXAMPLE 6
Compute the simple interest of a loan Find the maturity value (M) of a 3 –
amounting to P150,000 payable in 6 months month loan of P5,600. The rate of
if the annual interest rate is 3.5%. interest is 8% per annum.

SOLUTION SOLUTION
i = Prt A= P+i
6
i = (150,000)(0.035) ( ) = Php 2,625 A = P + Prt = P(1 + rt)
12 3
A = 5600 {1 + 0.08 ∗ ( )}
12
EXAMPLE 4 A = Php 5,712
Markus Spa borrowed Php 35,000 from a
lender at a simple interest to be paid in two
years. If the interest paid to the loan is EXAMPLE 7
P6,650, what is the interest rate? An amount of Php 100,000 is invested in
an account that earns 2% simple
SOLUTION interest. Find the future value (A) of this
i
r= investment after 2 years?
Pt

r=
6650 SOLUTION
(35,000)(2) A= P+i
r = 0.095 or 9.5% A = P(1 + rt)
A = 100,00{1 + 0.02(2)}
A = Php 104,000
EXAMPLE 5
A couple obtains a loan of P100,000 at a
simple annual interest rate of 8% to be paid EXAMPLE 8
one year after the loan is received. How much An electric company charges their
savings in interest payments will the couple customers 9% simple interest (annually)
make if they pay the loan 2 months before the for late payments. You receive a bill of
date of maturity? P8,000. If you pay the bill one month
past the due date, find
STEP 1 a. The amount of penalty
Solve for the interest payment after 1 year b. How much you owe the electric
i = Prt company
i = (100,000)(0.08)(1)
i = Php 8,000 STEP 1
Solve for the interest
STEP 2 i = Prt
Interest payment when the loan is paid 2 1
months before the date of maturity i = 8000(0.09) ( )
12
i = Prt i = P60
10
i = (100,000)(0.08) ( )
12 STEP 2
i = P6,666.67 Solve for the maturity value
A= P+i
STEP 3 A = 8000 + 60
By paying 2 months ahead of maturity A = Php 8,060
date, the couple saves P1,333.33 in
interest payment.
Interest Savings = 8,000 − 6666.67
Interest Savings = P1,333.33
EXAMPLE 9
Find the interest and the amount (maturity value) on ₱880 at 8 ½ % per annum for 3 years.

STEP 1
Solve for the interest, i
P = ₱880
r = 8 ½ % = 0.085
t = 3 years

i = Prt
i = 880(0.085)(3)
i = P224.40

STEP 2
Solve for the maturity value, A
A= P+i
A = 880 + 224.40
A = Php 1,104.40

EXAMPLE 10
Find the interest and the amount (maturity value) on ₱1,990 at 7 1/4 % simple interest for
19 months.

Note
We have to express 19 months as a fraction of a year, so that t = 19 month/ 12 months/
year
Therefore, we have
19
t= years
12

STEP 1
Solve for the interest, i
P = ₱1,990
r = 7 ¼ % = 0.0725
19
t= years
12

i = Prt
19
i = 1990(0.0725) ( )
12
i = P228.44

STEP 2
Solve for the maturity value, A
A= P+i
A = 1990 + 228.44
A = Php 2,218.44
EXAMPLE 11
Find the interest and the amount (maturity value) on ₱1,400 at 11% simple interest for 3
years and 3 months.

Note
We have to express 3 years and 3 months as a fraction of year. Since, in a year we have
12 months, then, we multiply 3 years by 12 to get 36 plus the remaining 3 months and we
get 39 months. So that, t = 39 months/12months/year. Therefore, we have
39
t= years
12

STEP 1
Solve for the interest, i
P = ₱1,400
r = 11 % = 0.11
39
t= years
12

i = Prt
39
i = 1400(0.11) ( )
12
i = P550.50

STEP 2
Solve for the maturity value, A
A= P+i
A = 1400 + 550.50
A = Php 1,950.50

EXAMPLE 12
If a principal of ₱2,500 earns interest of ₱185 in 4 years and 8 months, what interest rate
is in effect?

Note
We have to express 4 years and 8 months as a fraction of year. Since, in a year we have
12 months then, we multiply 4 years by 12 to get 48 months and add the remaining 8
months and we get 56 months. So that, t = 56 months/12months/year. Therefore,
56
t= years
12

P = ₱2,500
i = 185
56
t=( )
12

i = Prt
56
185 = 2500(r) ( )
12
185 = 11666.67r
r = 0.0159
r = 1.59%
EXAMPLE 13
If money is invested on 10% simple interest, how much money should be invested to have
₱ 40,000 in 5 years?

A = ₱ 40,000
r = 10 % = 0.10
t = 5 years

Substituting;
A= P+i
A = P + Prt
40000 = P + P(0.10)(5)
40000 = P + 0.50P
40000 = 1.50P
40,000
P=
1.50
P = 26,666.67

EXAMPLE 14
Rizza’s savings earned ₱105 after a year. If her account balance after earning interest
showed ₱3,605, how much rate interest did the bank offer for her savings?

STEP 1
Solve for the principal, P
i = 105
A = 3605

A= P+i
3605 = P + 105
P = 3605 − 105
P = 3,500

STEP 2
Solve for the interest rate, r
i = Prt
105 = 3500(r)(1)
105
r=
3500
r = 0.03 or 3%
EXAMPLE 15
A loan shark gave Kevin a personal loan that was charged ₱630 interest after 3 months.
The rate of interest of the loan was 7% per month. How much was the personal loan?

Note
Since the interest rate is expressed monthly, no need to express 3 months as a fraction
of year.
i = 630
r = 7% or 0.07
t = 3 months

i = Prt
630 = P(0.07)(3)
630 = 0.21P
P = 3,000

EXAMPLE 16
Nina has a savings account balance of ₱38,400. She withdraws ₱1,800 to buy a gift for
her friend. How much interest does her new balance earn for a year if the bank’s interest
rate is 0.9% per annum?

P = 38,400 − 1,800
r = 0.9% or 0.009
t = 1 year

i = Prt
i = (38,400 − 1,800)(0.009)(1)
i = 329.40

EXAMPLE 17
Vince deposited ₱4,500 in his savings account with a balance of ₱1,300. At 0.5% interest
per annum, how much will his new balance earn at the end of a year?

P = 4500 + 1300
r = 0.5% or 0.005
t = 1 year

Substituting,
A= P+i
A = P + Prt
A = (4500 + 1300) + (4500 + 1300)(0.005)(1)
A = 5800 + (5800)(0.005)
A = 5,829.00
EXAMPLE 18
One year and six months ago, Nigel borrowed ₱25,000 from Sitti with the promise that
Nigel will pay Sitti the principal plus accumulated interest at 8 2/3% simple interest now.
What amount is due?

Note
We have to express 1 year and 6 months as a fraction of year since the rate of interest is
expressed annually. We multiply 1 year by 12 months to get 12 months and add the
remaining 6 months and we get 18 months. Therefore,
18
t= years
12

P = 25,000
2
r = 8 % or 0.0867
3
18
t= years
12

Substituting,
A= P+i
A = P + Prt
18
A = (25000) + (25000)(0.0867) ( )
12
A = 28,251.25
Types of Simple Interest
There are two types of simple interest namely, ordinary simple interest and exact
simple interest.

Ordinary Simple Interest

Ordinary Simple Interest is based on one banker’s year. A banker year is composed of 12
months of 30 days each which is equivalent to a total of 360 days in a year. The value of
t that is used in the preceding formulas may be calculated as
d
t=
360

where
d = number of days the principal was invested

Note
d
Count the exact number of days in a month then use t = to solve problems that use
360
ordinary simple interest.

Exact Simple Interest

Exact Simple Interest is based on the exact number of days given in a year. A normal year
has 365 days while a leap year (which occurs once every 4 years) has 366 days. Unlike
the ordinary simple interest where each month has 30 days, in this type of simple interest,
the number of days in a month is based on the actual number of days each month contains
in our Gregorian calendar. This method is used by government agencies, the Federal
Reserve Bank, and most credit unions.

To determine the year whether leap year or not, one has to divide the year by 4. If it is
exactly divisible be 4, the year is said to be a leap year otherwise it will be considered just
a normal year with 365 days. However, if the year is century year (ending with two zeroes,
e.g. 1700, 1800, …), the year must be divided by 400 instead of 4 to determine the year
whether or not a leap year. Hence, year 1600 and year 2000 are leap years.

Under this method of computation of interest, it must be noted that under normal year,
the month of February has 28 days while during leap year it has 29 days. Again, the values
of n to be used in the preceding formulas are as follows:
d
t= ⇒ under normal year
365

d
t= ⇒ for leap years
366

Note
d
Use t = 365 when the year is leap year but have not yet reached the 29th of February

Example
February 18, 2004, since the year is considered a leap year but have not yet reached the
𝑑
29th of February use 𝑡 = to solve problems that uses exact simple interest.
365
EXAMPLE 1
Francis wants to know which credit company offers lower interest at the same interest
rate of 9% if plans to borrow a quick cash of ₱30,000 for 90 days. Company A uses the
ordinary interest method to compute for the interest while Company B applies exact
interest method. Which company will he choose? What is the difference between the
interests offered by the two companies?

P = 30,000
r = 9% or 0.09
t = 90 days

90
For Company A: use t =
360
i = Prt
90
i = (30000)(0.09) ( )
360
i = 675

90
For Company B: use t =
365
i = Prt
90
i = (30000)(0.09) ( )
365
i = 665.75

Francis will have to choose Company B because Company B offers a smaller interest than
Company A with a difference of P9.25.

EXAMPLE 2
Jen borrowed ₱20,000 from her friend last November 15, 2019. She promised that she
would pay her friend on January 20, 2020 at 3% interest. Find the exact simple interest to
be paid by Jen.

Let us count the days from November 15, 2019 to January 20, 2020 but use exact number
of days in each month.
November 15 to November 30 30 days – 15 days = 15 days
December 1 to December 31 31 days
January 1 to January 20 20 days
Total 66 days

P = 20,000
r = 3% or 0.03
t = 66 days

66
Use t =
365
since the year 2020 is considered a leap year but have not yet reached the 29th of February
i = Prt
66
i = (20,000)(0.03) ( )
365
i = 108.49
EXAMPLE 3
On May 30, 2019, a USL elementary teacher applied for an emergency loan of ₱ 50,000
for the expansion of her kitchen. It was agreed that she would pay the amount with 2.5%
rate of interest on August 10, 2019. Calculate the ordinary simple interest to be paid.

Let us count the days from May 30, 2019 to August 10, 2019 but use exact number of
days in each month.
May 30 – May 31 1 day (Loan started on May 30 and May has 31 days)
June 1 – June 30 30 days
July 1 – July 31 31 days
August 1 – August 10 10 days
Total 72 days

P = 50,000
r = 2.5% or 0.025
t = 72 days

72
Use t =
360
i = Prt
72
i = (50,000)(0.025) ( )
360
i = 250

EXAMPLE 4
How much is the maturity value of a ₱60,000 loan for 100 days at 5.5% interest using the
exact interest method?
P = 60,000
r = 5.5% or 0.055
100
t= year
365

Substituting,
A= P+i
A = P + Prt
100
A = (60000) + (60000)(0.055 ( )
365
A = 60,904.11
EXAMPLE 5 EXAMPLE 6
On April 12, Lian borrowed ₱5,000 from her Central Auto Parts borrowed ₱350,000 at
credit union at 9% for 80 days. The credit 4.5% interest on July 19, 2020 for 120 days.
union uses the ordinary interest method. a. If the bank uses the exact interest
a. What is the amount of interest on the method, what is the amount of
loan? interest of the loan?
b. What is the maturity value of the loan? b. What is the maturity value of the
c. What is the maturity date of the loan? loan?
c. What is the maturity date of the loan?
P = 5,000
r = 9% or 0.09 P = 350,000
t = 80 days r = 4.5% or 0.045
120
t= year
STEP 1 366
Solve for the amount of interest of the loan
80 STEP 1
Use t = If the bank uses the exact interest method,
360
i = Prt solve for the amount of interest of the loan
80 120
i = (5,000)(0.09) ( ) using t =
360 366
i = 100 i = Prt
120
i = (350,000)(0.045) ( )
STEP 2 366
Solve for the maturity value of the loan i = 5,163.93
A= P+i
A = 5000 + 100
A = 5100 STEP 2
Solve for the maturity value of the loan
A= P+i
STEP 3 A = 350,000 + 5,163.93
Determine the maturity date of the loan A = 355,163.93
Note
(The loan started on April 12 and April has
30 days) STEP 3
Determine the maturity date of the loan
April 12 to April 30 Note
30 days – 12 days = 18 days (The loan started on July 19 and July has 31
May 1 to May 31 31 days days)
June 1 to June 30 30 days
July 1 1 day July 19 to July 31 31 – 19 = 12 days
Total 80 days August 1 to August 31 31 days
September 1 to September 30 30 days
Therefore, the maturity date of the loan falls October 1 to October 31 31 days
on July 1. November 1 to November 16 16 days
Total 120 days

Therefore, the maturity date of the loan falls

on the 16th of November.
COMPOUND INTEREST

Compounding is the In other words, an investment earns compound

concept that any amount interest when the interest from each time period is added
earned on an investment can to the principal, and then earns interest in the following
be reinvested to create time periods. As the principal grows, the rate at which you
additional earnings that would earn interest grows as well, because you are earning
not be realized based on the “interest on interest”. Compounding makes a significant
original principal, or original difference in the final value of an investment.
balance, alone. The interest Compounding increases the amount you earn when
on the original balance alone investing, but increases the costs when you borrow
would be called simple money.
interest. The additional
The compound interest formula calculates the
earnings plus simple interest
amount of interest earned on an account or investment
would be equal to the total
where the amount earned is reinvested. By reinvesting the
amount earned from
amount earned, an investment will earn money based on
compound interest.
the effect of compounding.
ILLUSTRATION COMPOUND INTEREST FORMULA
Miss Garcia deposits P50,000 in a savings r nt
i = P (1 + ) − P
account earning 0.5% interest compounded n
annually. How much is in the account after 4 r nt
i = P [(1 + ) − 1]
years? n
where
STEP 1 P principal amount
Compounded annually means that the r annual rate of interest/ nominal rate
interest will be calculated once a year. of interest (in decimal)
During its first year, t number of years the amount is
i = Prt deposited
i = 50,000(0.005)(1) n the number of times the interest is
i = P250 compounded per year
i compound interest
At the end of one year, her money in the
bank will be EXAMPLE 1
A= P+i Miss Garcia deposits P50,000 in a savings
A = 50,000 + 250 account earning 5% interest compounded
A = 50,250 annually. How much is in the account after 4
years?
STEP 2
During its second year, STEP 1
i = Prt Compute for the interest earned
i = 50,250(0.005)(1) compounded annually after 4 years
i = P251.25 r nt
i = P (1 + ) − P
n
At the end of the second year, her money in 0.05 (1)(4)
the bank will be i = P (1 +
1
) −P
A= P+i i = 50,000[(1.005)4 − 50000]
A = 50,250 + 251.25 i = 10775.3125
A = 50,501.25
STEP 2
STEP 3 At the end of the fourth year, her money in
During its third year, the bank will be
i = Prt A= P+i
i = 50,501.25(0.005)(1) A = 50,000 + 1,007.525031
i = P252.50625 A = 51,007.525031 or 51,007.53

At the end of the third year, her money in the

bank will be EXAMPLE 2
A= P+i
Mr. Velasco invested P15,250 in a savings
A = 50,501.25 + 252.50625
account earning 8% interest compounded
A = 50,753.75625
semi - annually for 4 years and 6 months.
How much is the interest earned?
STEP 4
During its fourth year,
SOLUTION
i = Prt
r nt
i = 50,753.75625(0.005)(1) i = P [(1 + ) − 1]
i = P253.7687813 n
0.08 2(4.5)
i = 15,250 [(1 + ) − 1]
At the end of the fourth year, her money in 2
the bank will be i = 15,250[(1.04)9 − 1]
A= P+i i = 6,455.51
A = 50,753.75625 + 253.7687813 Hence, the interest earned compounded
A = 51,007.5250 or 51,007.53 semi – annually after 4 years and 6 months
is P6,455.51.
COMPOUND AMOUNT FORMULA c. P25,750 for 3 years and 5 months at
The formula for the compound amount, 8.25% compounded monthly
maturity value or accumulated value of the
principal P at the end of n periods is given r nt
by the formula: A = P (1 + )
n
5
A= P+i
0.0825 (12)(312)
r nt A = 25,750 (1 + )
A = P + P (1 + ) − P 12
n A = 25,750(1.006875)(41)
r nt
A = P (1 + )
n A = 34,101.63
where
P principal amount i= A−P
r annual rate of interest/ nominal rate i = 34,101.63 − 25,750
of interest (in decimal) i = 8,351.63
t number of years the amount is
deposited NOTES
n the number of times the interest is
Number of
compounded per year Interest
i compound interest Compounding Periods
Compounded
in a Year
EXAMPLE 3 Annually 1
Find the compound amount and compound
interest on the following: Semiannually 2
a. P10,000 for 5 years at 6%
Quarterly 4
compounded annually
b. P20,520 for 5 years and 9 months at Monthly 12
9% compounded quarterly
Daily 365 or 366(leap year)
c. P25,750 for 3 years and 5 months at
8.25% compounded monthly

SOLUTION EXAMPLE 4 (TRY)

a. P10,000 for 5 years at 6% compounded Find the compound amount and
annually compound interest if P24,000 is invested
for 2 years at 4% compounded:
r nt a. Annually
A = P (1 + )
n b. Semiannually
0.06 (1)(5) c. Quarterly
A = 10,000 (1 + )
1 d. Monthly
A = 13,382.26

i= A−P
i = 13,382.26 − 10,000
i = 3,382.26

b. P20,520 for 5 years and 9 months at 9%

compounded quarterly
r nt
A = P (1 + )
n
9
0.09 (4)(512)
A = 20,520 (1 + )
4
A = 34,232.11

i= A−P
i = 34,232.11 − 20,520
i = 13,712.11
Review: Mathematics in the modern world by Quintos, R. et.al. (2019)
Chapter VI Section 6.1 pp. 143 – 158

Mathematics in the modern world by Reyes, J.A. (2018)

Chapter 2 Section 2.1 pp. 139 – 147

Mathematics in the modern world by Almazan, E. et.al. (2018)

pp. 143 – 158

REFERENCES
Print References

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*These references were recommended during the GEC Training. but there are no new
editions available.