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Simple Interest and Principal Explained

- The document discusses the concepts of simple interest, including the key components of principal, rate, and time. - It provides the simple interest formula: Interest = Principal x Rate x Time. - An example calculation is shown to find the interest and maturity value on a $2,000 loan at 12% interest for 2 years.

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wilhelmina roman
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200 views15 pages

Simple Interest and Principal Explained

- The document discusses the concepts of simple interest, including the key components of principal, rate, and time. - It provides the simple interest formula: Interest = Principal x Rate x Time. - An example calculation is shown to find the interest and maturity value on a $2,000 loan at 12% interest for 2 years.

Uploaded by

wilhelmina roman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Lesson 5

•Simple Interest
PRINCIPAL
is the amount borrowed.

RATE (Interest rate)


Is the cost of using money expressed as a p
ercentage of the principal for a given period of
time, which is usually per year.

TIME
• Is the term of period of loan
SIMPLE INTEREST FORMULA

I = Prt
Where: I - interest (amount paid for the u
se of money)
P - principal (amount borrowed/
lend/ invested)
r - rate (percent of interest being ch
arged)
t - time (no. of periods for which th
e money will be borrowed/lent/invested
The rate and the time should always agre
e, that is, if rate is per annum time shoul
d be in years , if rate is per month, time s
hould be in months and if rate is per days
time should be in days.
To find the maturity value or future va
lue F ( total amount due upon maturity)
•

F=P+ 1
If we substitute our basic formula for inte
rest in formula 2. We will have.

F= P + 1
F = P + Prt
• F = P [ 1+ rt ]
Example:

Tessa borrowed ₱ 2,000 at 12% interest for 2 years.


Find the interest (I) and the maturity value (F).
Given:
P= ₱ 2000
r= 12%
t= 2 years

Find: I and F
•
Solutions:
a. Interest (I)
I = Prt
= 2000 × 12% / yrs × 2 yrs
I = ₱ 2000 × 12 / 100 × 2
I = ₱ 480

b. Maturity Value ( F )
F = P+1
Note: If we are not asked for the amount
of interest , but only for the maturity valu
e, we can use of formula (3).

F = P ( 1 + rt )
= ₱ 2000 [ 1 + ( 12% ) ( 2 ) ]
= ₱ 2000 [ 1 + ( . 12) ( 2 ) ]
= ₱ 2000 [ 1 + 0.24 ]
• F = ₱ 2,480
Knowing the maturity value it would be ver
y easy to get the interest. We simply deduct
the Principal ( P ) from the maturity value (
F ).
thus:

I=F-P
= ₱ 2, 480 - ₱ 2000
• = ₱ 480
ACTUAL TIME
AND
APPROXIMATE TIME
Approximate Time
like ordinary interest assumes that eac
h of 12 months in a year has 30 days (360
days in a year)

Actual Time
• counts the exact number of days; hen
ce, a year taken as composed of 365 day
s.
Find the actual time and the approximate time
between April 22 and August 25.

a. Actual Time
April has 30 days
- 22 8
Days in
April
May 31
125
June 30
days
July 31
b. Approximate Time

Months Days
8 ( August ) 25 (Aug.25)
- 4 ( April ) -22 (April22)
= 4 mon. = 3 days
× 30 days/ mo.
= 120 days
+ 3 days
• = 123 days
ORDINARY INTEREST
And
EXACT INTEREST
• When time is expressed in days, interest coul
d either be ordinary interest or exact interest
. For ordinary interest, one year is taken as 3
60 days.
• I = P × r × D/360
• Where D is the number of days
• For exact interest one year is taken as 365 da
ys.
• I = P × r × D/365

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