Interest

The amount of money earned for the use of borrowed capital is called interest. From the
borrowers point of view, interest is the amount of money paid for the capital. For the
lender, interest is the income generated by the capital which he has lent.

There are two types of interest, simple interest and compound interest.

Simple Interest
In simple interest, only the original principal bears interest and the interest to be paid
varies directly with time.

The formula for simple interest is given by

$I = Prt$

The future amount is

$F = P + I$
$F = P + Prt$
$F = P(1 + rt)$

Where
$I$ = interest
$P$ = principal, present amount, capital
$F$ = future amount, maturity value
$r$ = rate of simple interest expressed in decimal form
$t$ = time in years, term in years

Ordinary and Exact Simple Interest

In an instance when the time t is given in number of days, the fractional part of the year
will be computed with a denominator of 360 or 365 or 366. With ordinary simple
interest, the denominator is 360 and in exact simple interest, the denominator is either
365 or 366. We can therefore conclude that ordinary interest is greater than exact
interest.

Note:
When simple interest (ordinary or exact) is not specified in any problem, it is assumed
as ordinary.

Ordinary simple interest is computed on the basis of bankers year.

Bankers year
1 year = 12 months

1 month = 30 days (all months)

1 year = 360 days

 Exact simple interest is based on the actual number of days in a year. One
year is equivalent to 365 days for ordinary year and 366 days for leap year.
A leap year is when the month of February is 29 days, and ordinary year
when February is only 28 days. Leap year occurs every four years.

Note:
Leap years are those which are exactly divisible by 4 except century years,
but those century years that are exactly divisible by 400 are also leap years.

If d is the number of days, then ...

In ordinary simple interest

$t = \dfrac{d}{360}$

In exact simple interest

$t = \dfrac{d}{365}$ (for ordinary year)

$t = \dfrac{d}{366}$ (for leap year)

Fifty Thousand Pesos Split into Two Simple

Interest Investment
Problem
A man wants to invest a sum of P50,000 in two investments. The first investment earns
a rate of interest 4 times that of the second investment. In 3 years the first investment
grows to P37,200. For 10 years, the second investment grows to P24,000.

1. Find the sum invested in each rate of interest.

A. P35,000 and P15,000
B. P35,500 and P14,500
C. P30,000 and P20,000
D. P32,000 and P18,000

2. Find the rate of interest of each.

A. 8% and 2%
B. 6% and 4%
C. 7% and 3%
D. 5% and 1%

Solution

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Let
$x$ = sum invested at greater interest
$y$ = sum invested at lesser interest
$i$ = interest of $y$
$4i$ = interest of $x$

$F = P(1 + rt)$

First investment:

F = P37,200, P = x, r = 4i, and t = 3 yrs

$372 = x(1 + 12i)$

$x = \dfrac{37,200}{1 + 12i}$

Second investment:

F = P24,000, P = y, r = i, and t = 10 yrs

$240 = y(1 + 10i)$

$y = \dfrac{24,000}{1 + 10i}$

$x + y = 50,000$

$\dfrac{37,200}{1 + 12i} + \dfrac{24,000}{1 + 10i} = 50,000$

$\dfrac{372}{1 + 12i} + \dfrac{240}{1 + 10i} = 500$

$\dfrac{372(1 + 10i) + 240(1 + 12i)}{(1 + 12i)(1 + 10i)} = 500$

$372(1 + 10i) + 240(1 + 12i) = 500(1 + 12i)(1 + 10i)$

$(372 + 3,720i) + (240 + 2,880i) = 500(1 + 22i + 120i^2)$

$612 + 6,600i = 500 + 11,000i + 60,000i^2$

$60,000i^2 + 4,400i - 112 = 0$

$i = 0.02 ~ \text{and} ~ -0.093$

Use i = 0.02 and 4i = 0.08

$x = \dfrac{37,200}{1 + 12(0.02)} = \text{P}30,000$

$y = \dfrac{24,000}{1 + 10(0.02)} = \text{P}20,000$

Answer for Part 1: [ C ]
Answer for part 2: [ A ]
Elements of Annuity
A = amount of periodic payment
P = present amount of all periodic payments
F = future worth of all periodic payments after the last payment is made
i = interest rate per compounding period
n = total number of payments
m = nominal rate (see compounded interest)
t = number of years