1|Simple and Compound Interests General Mathematics

SIMPLE AND COMPOUND INTERESTS To compute for the compound amount, we use
the formula
 Interest – the amount earned by the 𝒋 𝒕𝒎
depositor or the fee given by the bank for 𝑺 = 𝑷 (𝟏 + )
𝒎
using or investing their money. Interests can Where
be 𝒔𝒊𝒎𝒑𝒍𝒆 or 𝒄𝒐𝒎𝒑𝒐𝒖𝒏𝒅. 𝑺 is the compound amount (maturity or
 Principal – the amount being invested or final amount)
borrowed 𝑷 is the principal
 Maturity value or final amount – the total 𝒋 is the nominal interest (rate of interest per
amount to be received or paid for at the end year)
of the term which includes the principal and 𝒎 is the period (interval for compounding
interest or the number of times being compounded in a
year)
SIMPLE INTEREST 𝒕 is the term or time in years

The interest earned on the principal borrowed for Common compounding periods per annum:
a specific period of time is called  Semi-annually: 2 times
𝒔𝒊𝒎𝒑𝒍𝒆 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕. The basic formula for simple  Quarterly: 4 times
interest is:  Bi-monthly: 6 times
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 = 𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍 × 𝒓𝒂𝒕𝒆 × 𝒕𝒊𝒎𝒆  Monthly: 12 times

Or simply, Note that:

𝑰 = 𝑷𝒓𝒕 𝒂𝒎𝒐𝒖𝒏𝒕 𝒐𝒇 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕
= 𝒄𝒐𝒎𝒑𝒐𝒖𝒏𝒅 𝒂𝒎𝒐𝒖𝒏𝒕 − 𝒑𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍
The 𝒎𝒂𝒕𝒖𝒓𝒊𝒕𝒚 𝒗𝒂𝒍𝒖𝒆 or 𝒇𝒊𝒏𝒂𝒍 𝒂𝒎𝒐𝒖𝒏𝒕 is the sum Or
of the principal and interest earned, or 𝑰=𝑺−𝑷
𝑨=𝑷+𝑰

Examples:
1. Find the interest earned after 5 years if
₱200,000 is deposited in a savings account
which earns 5% simple interest.
2. What is the maturity value of a 400,000-peso
𝟏
debt payable in 2 years at 𝟖 %?
𝟒 𝟒
3. A 3-year investment had a maturity value of
₱642,500. If simple interest was applied at a
rate of 9.5%, what was the principal?
COMPOUND INTEREST
Another type of interest is 𝒄𝒐𝒎𝒑𝒐𝒖𝒏𝒅 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕
which is a result of periodic addition of simple
interest to the principal, and is generally used in
long-term borrowing like housing loans, car
loans, etc.
Examples:
1. What is the maturity value of a 350,000-
peso, five-year investment earning 5%
compounded monthly?
2. Tom needs to raise ₱800,000 in 18 months.
What amount should he be able to set
aside now and invest in a fund earning 2𝟓%
per month in order for him to reach his
target amount?
3. What will be the amount of interest after
five years if ₱50,000 is invested at 12%
compounded semiannually?

The final sum at the end of the period of

borrowing or on the due date is called the
𝒄𝒐𝒎𝒑𝒐𝒖𝒏𝒅 𝒂𝒎𝒐𝒖𝒏𝒕.