MATHEMATICS OF INVESTMENT
COMPREHENSIVE EXAM REVIEWER
Simple Interest Methods · Add-On Interest · Discounted Interest
PART I — SIMPLE INTEREST
Simple interest is computed only on the original principal for the entire period of the loan or investment.
It is calculated using the formula below.
The Simple Interest Formula
I = P × r × t
Variable Meaning
I Interest earned or charged (in pesos/dollars)
P Principal — the original amount borrowed or invested
r Annual interest rate expressed as a decimal (e.g., 10% = 0.10)
t Time expressed in years
To find the Amount (F) = maturity value: F = P + I or equivalently F = P(1 + rt)
Ordinary vs. Exact Interest
The two methods differ only in how time (t) is calculated. All other variables remain the same.
ORDINARY INTEREST EXACT INTEREST
Also called Banker's Rule / 30/360 Actual/365
Days per month 30 days (fixed) Actual calendar days
Days per year 360 days 365 days (366 in leap year)
Formula for t t = total days ÷ 360 t = total days ÷ 365
Result Slightly HIGHER interest Slightly LOWER interest
Favors Lender / Bank Borrower
KEY: Ordinary interest uses a 360-day year (dividing by 360 gives a larger fraction = more interest). Exact
interest uses the actual 365-day calendar year.
Actual Days Per Month (for Exact Interest)
Month Days Month Days
January 31 July 31
February 28 (29 leap yr) August 31
March 31 September 30
April 30 October 31
May 31 November 30
June 30 December 31
Converting Time Periods to Years
Since r is always an annual rate, t must always be expressed in years. Here are the standard
conversions:
Period Meaning Ordinary t Exact t
Monthly (1 month) 30 days / 1 month 30/360 = 1/12 30/365
Quarterly (3 months) 90 days / 3 months 90/360 = 1/4 90/365
Semi-Annual (6 180 days / 6 months 180/360 = 1/2 180/365
months)
Annual (12 months) 360 / 365 days 360/360 = 1 365/365 = 1
PART II — WORKED EXAMPLES BY TIME PERIOD
Given: P = ₱20,000 | r = 12% per annum. Compute the interest and amount due under both Ordinary
and Exact methods for each time period.
A. Monthly (1 Month = 30 days)
ORDINARY INTEREST (30/360)
Given: P = ₱20,000 r = 12% = 0.12 t = 30/360
t = 30 ÷ 360 = 0.08333 years
I = P × r × t
I = 20,000 × 0.12 × (30/360)
I = 20,000 × 0.12 × 0.08333
I = ₱200.00
F = P + I = 20,000 + 200 = ₱20,200.00
EXACT INTEREST (30/365)
Given: P = ₱20,000 r = 12% = 0.12 t = 30/365
t = 30 ÷ 365 = 0.08219 years
I = 20,000 × 0.12 × (30/365)
I = ₱197.26
F = P + I = 20,000 + 197.26 = ₱20,197.26
Difference: ₱200.00 - ₱197.26 = ₱2.74 (Ordinary is higher)
B. Quarterly (3 Months = 90 days)
ORDINARY INTEREST (90/360)
Given: P = ₱20,000 r = 12% = 0.12 t = 90/360 = 1/4
I = 20,000 × 0.12 × (90/360)
I = 20,000 × 0.12 × 0.25
I = ₱600.00
F = 20,000 + 600 = ₱20,600.00
EXACT INTEREST (90/365)
Given: P = ₱20,000 r = 12% = 0.12 t = 90/365
I = 20,000 × 0.12 × (90/365)
I = 20,000 × 0.12 × 0.24658
I = ₱591.78
F = 20,000 + 591.78 = ₱20,591.78
Difference: ₱600.00 - ₱591.78 = ₱8.22
C. Semi-Annual (6 Months = 180 days)
ORDINARY INTEREST (180/360)
Given: P = ₱20,000 r = 12% = 0.12 t = 180/360 = 1/2
I = 20,000 × 0.12 × 0.5
I = ₱1,200.00
F = 20,000 + 1,200 = ₱21,200.00
EXACT INTEREST (180/365)
Given: P = ₱20,000 r = 12% = 0.12 t = 180/365
I = 20,000 × 0.12 × (180/365)
I = 20,000 × 0.12 × 0.49315
I = ₱1,183.56
F = 20,000 + 1,183.56 = ₱21,183.56
Difference: ₱1,200.00 - ₱1,183.56 = ₱16.44
D. Annual (1 Year = 360/365 days)
ORDINARY INTEREST (360/360 = 1 year)
Given: P = ₱20,000 r = 12% = 0.12 t = 1
I = 20,000 × 0.12 × 1
I = ₱2,400.00
F = 20,000 + 2,400 = ₱22,400.00
EXACT INTEREST (365/365 = 1 year)
Given: P = ₱20,000 r = 12% = 0.12 t = 1
I = 20,000 × 0.12 × 1
I = ₱2,400.00
F = 20,000 + 2,400 = ₱22,400.00
NOTE: For full years, Ordinary and Exact produce identical results.
Summary: P = ₱20,000 at 12% per annum
Period Days Ordinary I Exact I Difference
Monthly 30 ₱200.00 ₱197.26 ₱2.74
Quarterly 90 ₱600.00 ₱591.78 ₱8.22
Period Days Ordinary I Exact I Difference
Semi-Annual 180 ₱1,200.00 ₱1,183.56 ₱16.44
Annual 365 ₱2,400.00 ₱2,400.00 ₱0.00
PART III — ADD-ON INTEREST
Add-on interest is a method of calculating interest where the total interest for the entire loan period is
computed upfront based on the original principal, then added to the principal to get the total amount to
be repaid. This total is then divided equally among the payment periods (usually monthly installments).
Key Concept
Unlike simple interest where you may pay back in one lump sum, add-on interest is used in installment
loans. The borrower repays the loan in equal periodic payments. Because the borrower is gradually
reducing the principal (paying it off) but interest is still charged on the original full amount, the effective
interest rate is significantly HIGHER than the stated add-on rate.
Formulas
Step 1: I = P × r × t (Total Interest)
Step 2: F = P + I (Total Amount Due)
Step 3: Monthly Payment = F ÷ (number of payments)
Example 1 — Monthly Installments
PROBLEM
A borrower takes a loan of ₱60,000 at 10% add-on interest for 2 years.
Find: (a) Total interest (b) Total amount due (c) Monthly payment
SOLUTION
Given: P = ₱60,000 r = 10% = 0.10 t = 2 years
Step 1 — Compute Interest:
I = P × r × t = 60,000 × 0.10 × 2
I = ₱12,000.00
Step 2 — Compute Amount Due (F):
F = P + I = 60,000 + 12,000
F = ₱72,000.00
Step 3 — Compute Monthly Payment:
Number of payments = 2 years × 12 months = 24 payments
Monthly Payment = 72,000 ÷ 24
Monthly Payment = ₱3,000.00 per month
Example 2 — Quarterly Installments
PROBLEM
A car loan of ₱120,000 at 8% add-on rate for 3 years, paid quarterly.
Find: (a) Total interest (b) Amount due (c) Quarterly payment
SOLUTION
Given: P = ₱120,000 r = 8% = 0.08 t = 3 years
I = 120,000 × 0.08 × 3 = ₱28,800.00
F = 120,000 + 28,800 = ₱148,800.00
Number of quarterly payments = 3 × 4 = 12 payments
Quarterly Payment = 148,800 ÷ 12 = ₱12,400.00 per quarter
IMPORTANT: In add-on loans, the effective annual rate (EAR) is approximately DOUBLE the stated rate. A
10% add-on rate is roughly equivalent to 18–20% effective annual interest. Always disclose this to borrowers.
PART IV — DISCOUNTED INTEREST (BANK DISCOUNT)
Discounted interest (also called bank discount) is a method where the interest (called the discount) is
deducted from the loan amount IN ADVANCE. The borrower receives a smaller amount (the proceeds
or cash proceed) but is required to repay the full face value (amount due) at maturity.
Critical Distinction
ORDINARY / ADD-ON INTEREST DISCOUNTED INTEREST
Interest paid at END (maturity) Interest deducted at BEGINNING
Borrower RECEIVES full principal (P) Borrower RECEIVES proceeds (P - D)
Borrower REPAYS principal + interest Borrower REPAYS full face value (F)
Interest is based on P (principal) Discount is based on F (face/maturity value)
Key Definitions
FACE VALUE (F) / Amount Due: The amount written on the promissory note. This is what the
borrower must repay at the end of the loan period. It is the total amount due at maturity and represents
the principal plus interest (or in discounting, it is the starting figure from which the discount is deducted).
BANK DISCOUNT (D): The interest deducted in advance by the bank or lender. It is computed based
on the face value (F), not the amount received. Formula: D = F × d × t, where d is the discount rate.
PROCEEDS (P) / Cash Proceed: The actual amount the borrower receives after the discount has
been deducted from the face value. It is the net cash in hand at the start of the loan. Formula: P = F - D
= F(1 - dt).
Proceeds = what you GET. Face Value (Amount Due) = what you REPAY.
Formulas
D = F × d × t (Bank Discount)
Proceeds (P) = F - D OR P = F(1 - dt)
F = P ÷ (1 - dt) (Finding Face Value given Proceeds)
Example 1 — Basic Bank Discount
PROBLEM
A ₱50,000 promissory note is discounted at a bank at 15% for 9 months.
Find: (a) Bank discount (b) Proceeds received by borrower
SOLUTION
Given: F = ₱50,000 (face/amount due) d = 15% = 0.15 t = 9/12 = 0.75 yr
Step 1 — Compute the Bank Discount:
D = F × d × t
D = 50,000 × 0.15 × 0.75
D = ₱5,625.00
Step 2 — Compute Cash Proceeds:
Proceeds = F - D = 50,000 - 5,625
Proceeds = ₱44,375.00
INTERPRETATION: The borrower receives ₱44,375 TODAY but must repay ₱50,000 at maturity.
Example 2 — Finding Face Value from Desired Proceeds
PROBLEM
A borrower needs ₱80,000 cash now. The bank charges a discount rate of 12%
for a 6-month loan. What face value must the note carry?
SOLUTION
Given: Proceeds = ₱80,000 d = 12% = 0.12 t = 6/12 = 0.5 yr
F = P ÷ (1 - dt)
F = 80,000 ÷ (1 - 0.12 × 0.5)
F = 80,000 ÷ (1 - 0.06)
F = 80,000 ÷ 0.94
F = ₱85,106.38
Amount Due (Face Value) = ₱85,106.38
Bank Discount = F - P = 85,106.38 - 80,000 = ₱5,106.38
Example 3 — Quarterly Periods
PROBLEM
A note with face value ₱100,000 is discounted at 9% for 3 quarters (9 months).
Find: (a) Discount (b) Proceeds
SOLUTION
Given: F = ₱100,000 d = 9% = 0.09 t = 3 quarters = 9/12 = 0.75 yr
D = 100,000 × 0.09 × 0.75
D = ₱6,750.00
Proceeds = 100,000 - 6,750
Proceeds = ₱93,250.00
PART V — AMOUNT DUE & CASH PROCEEDS: FULL
DEFINITIONS
Amount Due (Maturity Value / Face Value)
Definition: The Amount Due is the total sum of money that a borrower is legally obligated to pay at the
end of the loan period. It represents the complete fulfillment of the debt obligation.
Depending on the type of loan, the Amount Due is calculated differently:
Loan Type Formula Notes
Simple Interest Loan F = P + I = P(1 + rt) Interest added to principal
Add-On Interest Loan F = P + (P × r × t) Same formula, repaid in
installments
Discounted Loan F = face value (given) Borrower repays this; receives
less
Cash Proceeds (Net Proceeds)
Definition: Cash Proceeds is the actual net amount of money that the borrower physically receives at
the beginning of a discounted loan. It is always LESS than the face value because the bank deducts
the interest (discount) in advance.
Cash Proceeds is primarily a concept in discounted interest / bank discount transactions. It answers the
question: 'How much do I actually get in my hands today?'
Cash Proceeds = Face Value - Bank Discount
Cash Proceeds = F - D = F(1 - dt)
Comparing Amount Due vs. Cash Proceeds at a Glance
AMOUNT DUE CASH PROCEEDS
Also called Maturity value, Face value (F) Net proceeds, Proceeds (P)
Timing End of loan — future obligation Beginning of loan — received
now
Which is larger? Always larger Always smaller
Applies to All loan types Discounted loans only
Formula F = P + I (simple/add-on) P = F - D (discount loans)
Comprehensive Example — All Concepts Together
PROBLEM
Compare two loan options for ₱50,000 needed today at 12% for 1 year:
Option A: Simple interest loan (ordinary method)
Option B: Discounted interest (bank discount) loan
OPTION A: SIMPLE INTEREST LOAN
Borrower RECEIVES: ₱50,000 (full principal)
Interest: I = 50,000 × 0.12 × 1 = ₱6,000
Amount Due at maturity: F = 50,000 + 6,000 = ₱56,000
Cash Proceeds: ₱50,000 (gets full amount upfront)
Repays: ₱56,000 at the end of 1 year
OPTION B: DISCOUNTED INTEREST LOAN (to receive ₱50,000)
Borrower NEEDS to receive: ₱50,000 (this is the proceeds target)
Find Face Value: F = 50,000 ÷ (1 - 0.12 × 1) = 50,000 ÷ 0.88
F = ₱56,818.18 (Amount Due / Face Value)
Bank Discount: D = 56,818.18 × 0.12 × 1 = ₱6,818.18
Cash Proceeds = 56,818.18 - 6,818.18 = ₱50,000 ✓
Repays: ₱56,818.18 at the end of 1 year
CONCLUSION: Discounted loan costs ₱818.18 MORE than simple interest
because interest is charged on the face value, not the proceeds received.
RULE OF THUMB: Discount rates always produce a higher effective cost than equivalent simple interest
rates, because the discount is deducted from a larger base (face value) while the borrower only uses the
smaller proceeds.
QUICK REVIEW CHEAT SHEET
CONCEPT FORMULA / KEY FACT
Simple Interest I=P×r×t
Amount Due (Simple) F = P + I = P(1 + rt)
Ordinary Interest t = days ÷ 360 (30-day months)
Exact Interest t = days ÷ 365 (actual calendar days)
Monthly t (Ordinary) t = 30/360 = 1/12
Quarterly t (Ordinary) t = 90/360 = 1/4
Semi-Annual t (Ordinary) t = 180/360 = 1/2
Annual t t=1
Add-On Interest I = Prt; F = P+I; Payment = F ÷ n
Bank Discount D=F×d×t
Cash Proceeds Proceeds = F - D = F(1 - dt)
Find Face Value F = Proceeds ÷ (1 - dt)
Ordinary > Exact? YES — always, because 1/360 > 1/365
Discount vs Simple? Discount costs MORE — charged on face value
— END OF REVIEWER —