3.

- Simple interest and interest

composed

1
 WHAT IS SIMPLE INTEREST?

Simple interest is one where the

interests do not generate new ones in turn
interests. That is to say, when the interests
they do not add periodically to the capital.

2
 WHAT IS SIMPLE INTEREST?

Characteristics
1. The weather does not change throughout the
duration of the operation.
2. The interest rate is always applied
about the same capital.
3. Interests are always the same in
each period.

3
HOW IS SIMPLE INTEREST CALCULATED
Simple interest formula:

I Cti (1)

Defining:

I = simple interest
C = initial capital
t = time or period
i = interest rate

Note: time and the interest rate must always be expressed in the
the same units (years, months, days, semesters, etc.)
4
HOW TO CALCULATE FUTURE VALUE
WITH SIMPLE INTEREST?
M C I (2)
M C Cit
M C(1 it) (3)
Defining:
I = simple interest
C = capital inicial
t = time or deadline
i = tasa de interés
M = monto

Note: time and the interest rate must always be expressed in the same units.
units (years, months, days, semesters, etc.)
5
HOW TO CALCULATE PRESENT VALUE
WITH SIMPLE INTEREST?
M (4)
C
(1 it
Defining:
I = simple interest
C = initial capital
t = time or period
i = tasa de interés
M = monto
Note: time and interest rate must always be present.
expressed in the same units (years, months, days, semesters,
etc.)
6
 SIMPLE INTEREST
Example 1
What is the interest generated by a capital of $80,500 at the
monthly simple interest rate of 5%, if the money is
loan for 8 months.

C= $ 80,500 Solving and substituting:

t = 8 months
i = 5% monthly
I=?
I 80,500(8)(0.05) $32,200

Note that the interest rate and time are in the same
units, that is, months.
7
 SIMPLE INTEREST
Example 2
A person deposits $175,000 in a savings account.
that offers a rate of 3.5% per month. If this person
decide to withdraw your money 21 days later. How much do you receive?
in the end?
Data: Solving and substituting:
C= $ 175,000 M C(1 it)
t = 21 days/30 days
= 0.7 months
i = 3.5% monthly M 175,000 1 (0.035)(0.7) $179,287.5
M=?
Note that the interest rate and time are in the same units (months).
As an exercise, solve using time and the interest rate in days.
8
 SIMPLE INTEREST
Example 3
Un cliente recibió de una microfinanciera $180,000 tres
years after making the deposit, if the investment
it was agreed with the client at a simple interest rate of
9% annual. What was the amount of the investment made?

Data: Solving and substituting:

M= $ 180,000
t = 3 years (1 it
i = 9% annual
180,000
C=? C $141,732.28
[1 (0.09)(3)]

Note: Please note that the interest rate and the time are in the
same units (years). 9
 WHAT IS COMPOUND INTEREST?
It consists of an operation in which the
interest that is generated goes
increasing the original capital by
established periods, and in turn goes
generating additional new interest for
the following period.

10
 WHAT IS COMPOUND INTEREST?

In this case, the initial capital is not

constant over time since
increments at the end of each period. The interest
composed indicates that the interest is
accumulates to the capital, that is, the interest is
capitalize (or convert) period after
period.

11
 WHAT IS COMPOUND INTEREST?

The vast majority of operations

financial transactions are carried out at interest

composed, with the aim of having in

it accounts for the reinvestment of interest.

12
 WHAT IS COMPOUND INTEREST?

Four-month periods
Interest 1 Interest 2 Interest 3
0 1 2 3
Line
Of Time

Capital M=C1+I1 M=C2+I2 Final amount

initial M=C3+I3
C2 C3

13
 WHAT IS COMPOUND INTEREST?
Data Simple Interest M C(1 it)
Capital = C 1,000
Tipo de Interés = i 10%
Time = n 10
Compound interest M C(1 i ) n
Amount to Amount to
interest interest Interest Interest
Year simple compound simple compound
0 1,000 1,000 0 0
1 1,100 1,100 100 100
2 1,200 1,210 200 210
3 1,300 1,331 300 331
4 1,400 1,464 400 464
5 1,500 1,611 500 611
6 1,600 1,772 600 772
7 1,700 1,949 700 949
8 1,800 2,144 800 1,144
9 1,900 2,358 900 1,358
10 2,000 2,594 1,000 1,594
14
 WHAT IS COMPOUND INTEREST?

Interest rate and capitalization period

Interest can be converted into capital
anual, semestral, cuatrimestral, trimestral,
etc. This period is called
"capitalization period". To the number of
times that interest is capitalized during
a year is referred to as 'frequency of
conversion (number of periods).

15
 WHAT IS COMPOUND INTEREST?
Example 4
A financial investment pays 10%
quarterly compounding interest.
What is your conversion rate?
The question is answered: How many
How many quarters are there in a year? Answer: 4
What is the compounding period?
quarterly

16
 WHAT IS COMPOUND INTEREST?
The compound interest rate is expressed
generally on an annual basis, indicating
if necessary, your period of
capitalization.
30% annual compounded monthly
10% annual compounded semi-annually
14% annual capitalized quarterly

17
 What is compound interest?
IMPORTANT:
If the interest is expressed without any mention of
regarding its capitalization, it is understood that it is
an annual capitalization. Example: 30%
capitalizable quarterly.
It is necessary for the annual interest to be
converted at the applicable rate of
agreement with the capitalization period. This
it is achieved in the following way:
Iannual
i period
conversion frequency
18
HOW TO CALCULATE THE FUTURE VALUE
WITH COMPOUND INTEREST?
The amount at compound interest is the
result obtained from incrementing to the
original capital (present value or investment
initial) the compound interest generated.
To say, if one wishes to invest a certain amount today
amount...
How much is received at the end of a certain time,
taking into account a certain rate
of interest?
19
HOW TO CALCULATE FUTURE VALUE
WITH COMPOUND INTEREST?
The formula used to calculate the
future value in a transaction with interest
composed is:
n
M C(1 i)
Where:
M = Future amount that is desired to be known
C = Initial capital
i = Tasa de interés compuesta (periódica)
n = number of times it is compounded
periods 20
HOW TO CALCULATE FUTURE VALUE
WITH COMPOUND INTEREST?
Example 5:
A person deposits $20,000 in an account of
savings at an interest rate of 35% per year
capitalizable monthly. What will be the
total accumulated after two years?
As a first step towards the solution, one must
take into account that time and the interest rate
they must always be expressed in the
same units as now will depend on the
capitalization period (frequency of
conversion). 21
HOW TO CALCULATE FUTURE VALUE
WITH COMPOUND INTEREST?

22
HOW TO CALCULATE FUTURE VALUE
WITH COMPOUND INTEREST?
Applying the formula:

23
HOW TO CALCULATE FUTURE VALUE
WITH COMPOUND INTEREST?
Example 6:
A person borrows $50,000 from a
microfinance institution that charges a rate of
8% interest. How much will the entity receive?
within 5 years if the money capitalizes from
annual way?
5
M 50,000(1 0.08) 73,466

24
HOW TO CALCULATE PRESENT VALUE
WITH COMPOUND INTEREST?
To determine it, the equation is taken up again.
of future value with compound interest and is
clear the capital:

C
(1 i) n

25
HOW TO CALCULATE PRESENT VALUE
WITH COMPOUND INTEREST?
Example 7:
What amount should be deposited today in
a cooperative if one wishes to have a
amount of $20,000 in 3 years, if
The interest rate paid is 15%
capitalizable semiannually.
20,000
C 6 $12,959.2
(1 0.075)

26
 Exercise

Based on professional experience,

plantea dos situaciones financieras
different (simple interest and interest
composed) in which they are identified
the concepts seen and implemented
the studied calculations.

27
 SIMPLE INTEREST
What will be the total amount of interest that
produce a capital deposited of $50,000 at
a simple interest rate of 8% per year
for 5 years?
2. What is the amount produced by a capital of
5,000 that is deposited at simple interest
for 7 years at a simple interest rate
of 6% per year?
3. What is the capital that was invested at a rate
of simple interest at 2.5% semiannually for
9 months and what produced 15,000 in interest?
28
 COMPOUND INTEREST
A loan of $3,500 is requested at an interest rate
at an annual interest rate of 7.5%. After a year
And how much will he have to pay?
An investment of $4,000 that earns a rate
12% interest compounded
quarterly, how much do you receive after
two years?
An amount was deposited for six months.
at an interest rate of 3% per month
receiving $15,000. What was the capital?
What was deposited?
29
 WHAT DID WE LEARN?
1. Throughout the course, we learned to apply the
concepts of future value and present value in
the main financial operations, such as
the granting of loans and accounts of
savings or investment.
2. They learned to calculate and understand the
different interest rates such as: nominal,
effective, periodic, active, passive and real.
3. The accounts that make up the
main financial statements.
The primary indicators were revealed.
to evaluate the granting of a credit.