FOR TODAY

Business Math
Simple Interest
Compound Interest
SIMPLE INTEREST
• Definition. The simple interest I is the amount
𝐼 = 𝑃𝑅𝑇
• Where
• P: the principal amount (amount borrowed)
• R : the annual simple interest rate (the percentage of
principal payable for a period of time)
• T : time in years

• Remark: Under simple interest, the amount of interest is

jointly proportional to the money borrowed (or
deposited) and the time until the money borrowed is
returned.
Examples
• 1. Allan wants to borrow P1,200,000 in bank to buy a new
car at an annual simple interest rate of 5%. After three
years, how much interest does need to pay?

• 2. Find the amount of simple interest when P2500 is being

borrowed at 3.5% per annum for 3.5 years?

• 3. What is the simple interest rate per annum, if Liza

borrowed P10,000 and paid P10250 after 2 years?
FUTURE VALUE
• Definition: The future value A(t) (or accumulated value) of
an amount P invested is the value of P including all
interest earned at some future time t.
• Theorem: If P is borrowed (or invested) at an annual
simple interest r, then its future value at time t, denoted by
A(t) is given by
𝐴 𝑡 = 𝑃(1 + 𝑟𝑡)
• From example 1, how much does he need to pay the
bank after 3 years?
• From example 2, what is the future value of the amount
borrowed after 3.5 years?
• Example 4. JM invested P10000 at an annual interest rate
of 4.5%. Determine its future value after 1 yr, 2 yrs, and 3
yrs.

• Example 5. Jose deposited P1000 today in a bank

providing 3% simple interest per year. He wants to have
some savings worth P1450 in the future. If he will not
withdraw any amount, how long must he wait?
Present Value
• Definition. The present value of an amount A is the amount
needed now to accumulate A in time t.
• Theorem: The present value under simple interest of A at an
𝐴
annual simple interest r is given by 𝑃 = .
1+𝑟𝑡

• Example 6. Find the present value of the following at the given

annual simple interest rate.
• A. P10,000 after 2 years at 2.5% interest rate per year.
• B. P5,000 after 1.5 years at 6% interest rate per year.

• Example 7. How long will it take for P10000 to double if no

withdrawals are made, given an annual simple interest of 6.5%.
Complete the table below
A P R T

5000 5% 2 yrs

7000 6000 3 yrs

10000 8500 6.2%

10500 6000 4 yrs

8000 7.5% 2 yrs

20000 16500 1.25%

COMPOUND INTEREST
• Definition. The compound interest on P is the amount of
interest charged to the amount P and the interest earned
on previous time periods.
• Note:
• 1st year : A(1)= P + rP = P(1 + r)
• 2nd year : A(2) = P(1 +r) + rP(1+r) = 𝑃(1 + 𝑟)𝑡
• And so on…
• t years : A t = 𝑃(1 + 𝑟)𝑡
• Theorem: The future value of P (or invested) at an annual
compound interest rate r at time t is given by
A t = 𝑃(1 + 𝑟)𝑡
Theorem:
• The compound interest on P borrowed (or invested) at an
annual compound interest rate r at time t is given by A − 𝑃 =
𝑃 [ 1 + 𝑟 𝑡 − 1]
• Consider example 1 when the interest rate is compounded
annually i., e., Allan wants to borrow P1,200,000 in bank to buy
a new car at an annual compound interest rate of 5%. After
three years, how much does need to pay and what is the
amount of interest.
• 2. Find the amount of compound interest per annum when
P2500 is being borrowed at 3.5% per annum for 3.5 years?
• 3. What is the compound interest rate per annum, if Liza
borrowed P10,000 and paid P10250 after 2 years?
Compounding periods
• Interest can be compounded more frequently than once a year.
• Example when interest is compounded semiannually, there will
be two compounding periods in a year. For
• Quarterly - 4 times
• Monthly - 12 times
• Bimonthly - 6 times
• Weekly - 52 times
• Theorem: The future value of P borrowed (or invested) at an
annual interest rate r compounded m times a year is given by
𝑟 𝑚𝑡
𝐴 𝑡 = 𝑃(1 + )
𝑚
NOTE: 𝑚𝑡 is the total number of compounding periods in a year.
Example
• Find the future value of P10000 in 10 years at 7% interest
rate that is compounded,
• A. semiannually
• B. quarterly
• C. monthly
• D. daily
• E. bimonthly
• F. weekly
•Thank you
•for your
Attention!