SIMPLE INTEREST

Most individuals need funds for worthwhile purposes. One of their options is borrowing. On the other
hand, a business or person may want to invest in lending. The one who invests the money is the lender
or creditor and the one who owes the money is the borrower or debtor. The lender or creditor expects
a sum in addition to what he has lent and this is called interest – the income he has earned. However on
the part of the borrower or debtor, the interest is his cost for the use of the money. Interest may be
computed by either of the two common methods: simple or compound.

Interest – is the money paid for the use of someone else’s money.
- it is the amount to be added to the money borrowed at the time the loan is due.
Simple interest – is computed based on the original principal.
- the computation is based on annual basis.
- amount borrowed is the amount received.
Compound interest – is the interest computed based on an increasing principal.
( to be discussed in week 3 )
Simple Interest Formula :

I = Prt

where : I = simple interest

P = principal
r = simple interest rate
t = time or term

Principal - is the amount of deposit made by the depositor or the face amount lent to the borrower on
the loan date.
- is the amount borrowed
Rate or simple interest rate - is the annual rate of interest, usually expressed in per cent ( % ).
Time or term - is the length of time for which the money is borrowed or lent.
- the term for simple interest computation is usually annual or yearly.
Maturity Value or Amount - is the sum of the principal ( original amount borrowed ) and the interest.
Maturity date - is the date when the loan becomes due.
Formulas :

I = Prt P = I/rt P = MV - I P = ___A___

1 + rt
I = MV - P r = I/Pt t = I / Pr

Maturity Value or Amount = Principal plus Simple Interest

MV or A = P + I MV or A = P ( 1 + rt )

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Example : Lucy borrowed P250,000.00 at a simple interest rate of 8 % for one year.
Requirements : a. Compute the simple interest.
b. How much must Lucy pay on the maturity date ?

Given :
P = P250,000.00
r = 8%
t = 1 year

Solution :
a.) I = Prt b.) MV or A = P + I
= 250,000 x 8 % x 1 = 250,000 + 20,000
= 250,000 x 0.08 x 1 MV or A = P270,000.00
I = P20,000.00
or or
I = MV - P MV or A = P ( 1 + rt )
= 270,000 - 250,000 = 250,000 [ 1 + ( 8
% x 1) ] I = P20,000.00 = 250,000 [
1 + ( 0.08 x 1) ]
= 250,000 ( 1.08 )
MV or A = P270,000.00

THE CONCEPT OF TIME

The time t in the simple interest formula I = Prt is the period between the loan date and the maturity
date. Time maybe less than one year. It can be expressed in months or days. If the time is expressed in
months, the divisor should be 12 [ ex. t = 8 months ( t = 8/12 ); t = 9 months ( t = 9/12 )]. If time is
given in months and only the loan date is stated, the maturity date shall coincide with the loan date ( ex.
loan date = Jan. 15, 2020 term = 3 months maturity date is April 15, 2020 ). If the time is in days, apply
the four-time combinations.

Kinds of Simple Interest :

1. Ordinary Interest - considering 360 days in one year.
2. Exact Interest - considering 365 days in a year or 366 in a leap year.

Example :
If Erich borrowed P120,000.00 at 12 % interest for 73 days, how much would be the interest
using the exact and ordinary interest methods ?

Exact Interest Method

Interest = Principal x rate x time
= 120,000 x 12 % x 73/365
Interest = P2,880.00

Round off the final result only.

Using your scientific calculator, press 73 ÷ 365 x 0.12 x 120,000 =

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Ordinary Interest Method

Interest = Principal x rate x time

= 120,000 x 12 % x 73/360
Interest = P2,920.00

Round off the final result only.

Using your scientific calculator, press 73 ÷ 360 x 0.12 x 120,000 =

THE FOUR- TIME COMBINATIONS

1. Ordinary Interest – Actual Time

2. Ordinary Interest – Approximate Time
3. Exact Interest - Actual Time
4. Exact Interest – Approximate Time

ACTUAL AND APPROXIMATE TIME

Example : 1. Find the actual and approximate time from January 25 to June 12, 2021.

Actual Time Approximate Time

January 31 - 25 = 6 January 30 - 25 = 5
February = 28 February = 30
March = 31 March = 30
April = 30 April = 30
May = 31 May = 30
June = _12_ June = _12_
138 days 137 days

Note : For actual time, consider all days in every months.

For approximate time, consider all months to have 30 days.
If time has no specific year, consider it the same year.
If time has only one specific year stated, consider it the same year.

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Example 2
Find the simple interest of P50,000.00 invested at 6 % from January 25 to June 12, 2021 using
the four-time combinations.

Given : P = P50,000.00 r = 6% term : actual = 138 days approximate = 137 days

Ordinary Interest - Actual Time ( BANKER’S RULE ) Exact Interest - Actual Time
I = Prt I = Prt
= 50,000 x 6 % x 138/360 = 50,000 x 6 % x 138/365
= 50,000 x 0.06 x 138/360 = 50,000 x 0.06 x 138/365
I = P1,150.00 I = P1,134.25

Ordinary Interest - Approximate Time Exact Interest - Approximate Time

I = Prt I = Prt
= 50,000 x 6 % x 137/360 = 50,000 x 6 % x 137/365
= 50,000 x 0.06 x 137/360 = 50,000 x 0.06 x 137/365
I = P1,141.67 I = P1,126.03

NOTE : ROUND – OFF THE FINAL RESULT ONLY.

IF NO SPECIFIC METHOD IS REQUIRED, USE THE BANKER’S RULE.
If NO INTEREST METHOD STATED ON THE PROBLEM, USE ORDINARY INTEREST.
IF YEAR IS NOT STATED, USE THE CURRENT YEAR.

FINDING THE MATURITY DATE

Example : loan date = March 1, 2020 term = 150 days maturity date = July 29, 2020

Illustration : 150 – 30 = 120 - 30 = 90 - 31 = 59 - 30 = 29

150 - March 31-1 = 30

April = 30
May = 31
June = 30
July = 29
Note : If the difference or result after subtracting is 31 or less, that represents the date of that month
for the maturity date.

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ACTIVITY

A. Determining the Number of Days

Loan Date Due Date Number of Days

Actual Time in Days Approximate Time in Days

1. September 5 December 28 a. e.

2. January 22 October 10, 2021 b. f.

3. December 8, 2020 May 1, 2021 c. g.

4. August 14 December 16, 2021 d. h.

B. Determining the Maturity Date Using Actual Time

Loan Date Term Maturity Date

1. May 22, 2021 45 days a.

2. July 20, 2020 130 days b.

3. October 8, 2020 85 days c.

4. March 3 78 days d

C. Finding the Simple Interest and Maturity Value

Principal Rate Time Simple Interest Maturity Value

1. P525,000.00 11.75 % 3 years a. e.

2. P350,000.00 8.2 % 10 months b. f.

3. P125,000.00 9¼% 2 ¼ years c. g.

4. P80,000.00 13 % 128 days d. h.

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D. Problem Solving: Solve the problems below.
1. Find the ordinary and exact interest on a 120-day loan of P565,000.00 that has an annual interest
rate of 15 %. Which gives the lender a greater return , ordinary or exact interest ? By how much ?
2. A sum of P84,000.00 is invested from January 5, to September 12 of the same year at 14 ½ % simple
interest. Find the simple interest using the four-time-combinations.