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Simple and Compound Interests Handouts

This document discusses simple interest, compound interest, and other interest concepts. 1) Simple interest is calculated once on the principal amount for the entire loan period using the formula I=PRT. Compound interest is calculated multiple times, with each period earning interest on the previous interest. 2) The future value formula for compound interest is FV=P(1+r/n)^nt, where r is the interest rate, n is the number of compounding periods per year, and t is the number of years. 3) Other concepts discussed include ordinary and exact interest calculations, maturity value, annual percentage yield (APY), and annual percentage rate (APR).

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Ken Aguila
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234 views4 pages

Simple and Compound Interests Handouts

This document discusses simple interest, compound interest, and other interest concepts. 1) Simple interest is calculated once on the principal amount for the entire loan period using the formula I=PRT. Compound interest is calculated multiple times, with each period earning interest on the previous interest. 2) The future value formula for compound interest is FV=P(1+r/n)^nt, where r is the interest rate, n is the number of compounding periods per year, and t is the number of years. 3) Other concepts discussed include ordinary and exact interest calculations, maturity value, annual percentage yield (APY), and annual percentage rate (APR).

Uploaded by

Ken Aguila
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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SIMPLE AND COMPOUND INTERESTS

Part I: Simple Interests

Discussion:

1) Simple Interest – the interest is calculated only once for the entire rate of the loan.
a) Interest – the amount paid or earned for the use of money.
b) Principal – the amount invested or borrowed.
c) Rate – usually expressed in percent.
d) Time – time or term of the loan, in years.

𝑰 = 𝑷𝑹𝑻

I Interest
P Principal
R Rate
T Time

Examples:

1) Steve invested $10,000 in a savings bank account that earned 2% simple interest. Find the
interest earned if the amount was kept in the bank for 4 years.
2) Shelby borrowed $18,920 at 8% and paid $1,600 in interest. What was the length of the loan?
3) A total of $20,000 is invested. Part of it is at 6%, and part of it is at 6.5%. The total interest after
one year is $1,260. How much was invested at each rate?
4) A student purchases a computer by obtaining a simple interest loan. The computer costs $1,500,
and the interest rate on the loan is 12%. The loan is to be paid back in weekly installments after 2
years.
a) Calculate the amount of interest paid over the 2 years.
b) Calculate the total amount to be paid back.
c) Calculate the weekly payment amount.
5) In how much time will the simple interest on $3,500 at the rate of 9% per annum be the same as
the simple interest on $4,000 at 10.5% per annum for 4 years?

Part II: Compound Interests

Discussion:

1) Compound Interest – the interest is calculated more than once during the time period of the
loan. When compound interest is applied to a loan, each succeeding time period accumulates
interest on the previous interest, in addition to interest on the principal.

𝑰 = 𝑭𝑽 − 𝑷
I Compound Interest
FV Future Value
P Principal

2) Compound Amount (Future Value) – the total amount of principal and accumulated interest at
the end of a loan or investment.

𝒓 𝒏𝒕
𝑭𝑽 = 𝑷 (𝟏 + )
𝒏

FV Future Value
P Principal
r Rate
n Number of Times Compounded Per Year
t Time

TIME PERIOD n
Annually 1
Semi-Annually 2
Weekly 52
Monthly 12
Quarterly 4
Daily 360

3) Present Value – the amount of money that must be deposited today at compound interest to
provide a specified lump sum of money in the future.

Examples:

1) If you deposit $5,000 into an account paying 6% annual interest compounded monthly, how long
until there is $8,000 in the account?
2) John Anderson invested $1,200 in an account at 8% interest, compounded quarterly for 5 years.
a) What is the compound amount?
b) What is the amount of the compound interest?
3) Find the compound interest on $2,500 invested at 6%, compounded semi-annually for 8 years.
4) There is 80% increase in an amount in 8 years at simple interest. What will be the compound
interest of $14,000 after 3 years at the same rate?

Part III: Ordinary Interests, Exact Interests, and Maturity Value

Discussion:

1) Ordinary Interest (Banker’s Rule) – calculated on the basis of a 360-day year or a 30-day
month.

𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒐𝒇 𝒂 𝑳𝒐𝒂𝒏 𝑷𝑹𝑻


𝑰𝑶 = =
𝟑𝟔𝟎 𝟑𝟔𝟎
2) Exact Interest – calculated on the basis of a 365-day year.

𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝑫𝒂𝒚𝒔 𝒐𝒇 𝒂 𝑳𝒐𝒂𝒏 𝑷𝑹𝑻


𝑰𝑬 = =
𝟑𝟔𝟓 𝟑𝟔𝟓

3) Maturity Value – the total payback of principal and interest of an investment or a loan.

𝑴𝑽 = 𝑷 + 𝑰

𝑴𝑽 = 𝑷 + 𝑷𝑹𝑻

Examples:

1) On May 30, 2012, a businessman loans $15,000 in the bank for the expansion of his restaurant. It
was agreed that he will pay the amount with 6% rate of interest on August 10, 2012. What is the
ordinary simple interest to be paid?
2) Louie borrowed $1,800 from his aunt last December 25, 2010. He promised that he will pay his
aunt on February 14, 2011 at 8% interest.
a) Find the exact simple interest to be paid by Louie.
b) Find the maturity value.

Part IV: Annual Percentage Yield (APY) and Annual Percentage Rate (APR)

Discussion:

1) Annual Percentage Yield (APY) – a percentage rate reflecting the total amount of interest paid
on an account, based on the interest rate and the frequency of compounding for a 365-day
period. This is also known as the Effective Annual Rate (EAR), which takes compound interest
into account.

𝒓 𝒏
𝑨𝑷𝒀 = (𝟏 + ) − 𝟏
𝒏

𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒎𝒑𝒐𝒖𝒏𝒅 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒂𝒓𝒏𝒆𝒅 𝒊𝒏 𝟏 𝒀𝒆𝒂𝒓


𝑨𝑷𝒀 =
𝑷𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍

2) Annual Percentage Rate (APR) – the annual rate charged for borrowing or earned through an
investment, and is expressed as a percentage that represents the actual yearly cost of funds over
a term of a loan. This only considers simple interest.

𝟕𝟐𝑰
𝑨𝑷𝑹 =
𝟑𝑷(𝒏 + 𝟏) + 𝑰(𝒏 − 𝟏)

I Finance Charge on a Loan


P Principal
n Number of Months of the Loan
Examples:

1) Jill Quinn invested $7,000 in a certificate of deposit for 1 year at 6% interest compounded
quarterly. What is the annual percentage yield of Jill’s investment? Use both formulas.
2) Christina Pitt repaid a $2,200 installment loan with 18 monthly payments. The total finance
charge on the loan was $320. Determine the annual percentage rate of Christina’s loan.
3) An initial of $17,400 was borrowed, with 24 monthly payments. If the loan yielded to an annual
percentage rate of 7.12%, calculate the finance charge on the loan.

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