SIMPLE AND COMPOUND INTEREST

RIZEL A. BONGHANOY
Subject Teacher
 What Am I!
Read and analyze the statements. Choose your answers among the
concepts/words listed below:

Principal Simple Interest Interests rate term

Write your answer on the blank provided for each number.

1. I am the which is calculated by multiplying the

principal, the rate of interest and the time in years.
2. I am the , and simple interest is computed based on
me and the time in years.
3. I am the , usually I am in percent and also called
as the rate of increase of interest.
4. I am the , and I am the length of time between the
origin and maturity dates.
 SIMPLE INTEREST

 You know, it’s quite difficult to pursue our dreams, especially in some trying times like what our country is experiencing on
the COVID - 19 pandemic. Dreaming is just a dream the realization of it is the product of our perseverance, patience, and
determination. For now, continue your studies, develop your skills, and cultivate your talents because those are your weapons
in life.

 I hope that you somehow encountered some math of investment terms like simple interest, loans, savings, investments,
maturity value, money, resources, and the like. This lesson will help you understand simple interest. Different terminologies
about the simple interest that you c an use for the succeeding lesson once you go deeper on the problem solving about simple
interest.
SIMPLE INTEREST
Borrower or debtor – person (or institution) who owes the money or avails of
the funds from the lender
Origin or loan date – date on which money is received by the borrower
Repayment date or maturity date – date on which the money borrowed or
loan is to be completely repaid
Time or term (t) – amount of time in years the money is borrowed or invested;
length of time between the origin and maturity dates
Principal (P) – amount of money borrowed or invested on the origin date
Rate(r) – annual rate, usually in percent, charged by the lender, or rate of
increase of the investment
Interest (I) – amount paid or earned for the use of money
Maturity value or future value (F) –amount after t years that the lender
receives from the borrower on the maturity date
SIMPLE INTEREST
To solve the problem in the Simply Saving activity which is a common scenario among Filipino
working students wherein many can relate.

You can solve this problem using the simple interest formula
𝐼𝑠 = 𝑃𝑟𝑡
where:
Is = Simple Interest
P = Principal or amount invested or borrowed r = simple interest rate
t = term of time in years
Here are the steps to find the simple interest: Step 1: Identify the
given and the unknown
P = ₱10,000.00
r = 2.75% or 0.0275
 Is =?
Step 2: Substitute the given to the formula
Is = Prt

For 6 months For 1 year

Is = (₱10,000.00) (0.0275) (0.5) Is = (₱10,000.00) (0.0275) (1)
= ₱137.50 = ₱275.00

For 18 months
Is = (₱10,000.00) (0.0275) (1.5)
= ₱412.50

Notice that the time was divided by 12 if the given is in months. You will also do
the same if the given is in days, the divisor will be 360 for ordinary interest or
Ex. 2- SIMPLE INTEREST
Problem Solving: Due to COVID-19 pandemic Miss Dada a female resident of Brgy. May Pagkakaisa
somewhere in Quezon Province thinks of a business that can provide for her needs as well as the need of her
neighbors so she can be of help even in this trying time.
Having no money at hand she decided to borrow from a bank as the start-up capital of ₱50,000.00 at 7%
simple interest rate payable within 5 years. Compute for the interest yield.
Solution. Simple Interest

Time (t) Principal (P) Interest Simple Interest Amount after (t) years
Rate (r) (Maturity Value)
Solution Answer

50,000 + 3,500 =
1 50,000 7% (50,000)(0.07)(1) 3,500
53,500

50,000 7% (50,000)( 0.07)(2) 50,000 + 7,000 =

2 7,000
57,000

50,000 7% (50,000)(0.07)(3) 50,000 + 10,500 =

3 10,500
60,500

50,000 7% (50,000)(0.07)(4) 50,000 + 14,000 =

4 14,000
64,000

50,000 7% (50,000)(0.07)(5) 50,000 + 17,500 =

5 17,500
67,500
Notice the simple interest remains constant throughout the year and you only multiply it
depending on the number of years that you are computing. Therefore, if you are a borrower
make sure that the interest on your loan is not too high for you, try to compute it first before
you apply for a loan. Compare first the interest and the term of the different lending
institutions before you decide to consider loan or investment.
Activity 1.1
Write the word TRUE if the statement is correct, otherwise write FALSE on a
separate answer sheet. If your answer is FALSE, write the word or phrase that will
make the statement correct.

1.Simple interest changes throughout the investment term.

2.Simple interest computation will always be based on the original principal.
3.Interest is the amount of money invested or borrowed originally.
4.Simple interest is the product of the principal, rate of interest, and time.
5.In ordinary interest, the interest is computed based on 365 days.
Activity 1.2
Match the corresponding term/formula in column B with its definition in column
A. Write letter only on the blank provided for each number.
A B

1. It is the amount that is charged a. 𝐼𝑠 = 𝑃𝑟𝑡

for the privilege of borrowing money.

2. It refers to a person or b. Principal

institution who owes money.

3. It is the amount of money c. 𝐹 = 𝑃(1 + 𝑟)𝑡

originally invested or borrowed.

4. It is the formula for computing d. Lender/Creditor

simple interest.

5. It refers to the e. Interest

person/institution who made the funds
available.

f. Borrower/Debtor
Activity 1.3

Solve the following problems.

1. A couple with three children are peacefully living in a barangay near the City
proper. The husband is a government employee while the wife is a rug sewer.
They always remind their children about this: “Bilhin ang kailangan at huwag
kailanganin ang hindi kayang bilhin”. Because of this teaching, the children open
a joint account to a certain cooperative to have a better investment. The total
amount they earned in selling rugs, was put in their account in the cooperative
to help their parents. Their total earnings amounting to ₱5,000.00 will earn an
interest rate of 7.5% per year. Help them to compute for the simple interest
earned and maturity value, if their money will be invested in 3 years.
COMPOUND INTEREST
 Match Me! Reveal Me, for the second time!

Match the terminologies in column B to its definition or statement in column A.

Write your answer on the blanks provided below the trivia question inside the
box. Your answer should reveal one of the products that we should be proud of
as a Filipino. Finally, answer the guided questions that follow.

A B

1. It is the amount paid or earned for the use of O . Borrower/Debtor

money.

2. It refers to the person or institution who owes N. Compound Interest

money or avails of the funds from the
lender.

3. It is the interest computed on the T. Interest

principal and also on the accumulated past interest

4. It is the percentage of the principal that C . rate of interest

will be changed for a specified period of time.

5. It refers to maturity value. U . Future Value

 Be hospitable and helpful, please!
Read and analyze each item and write the word GENEROUS if your
answer is true and write HELPFUL if otherwise. It is hoped that these two
words will remind you of Filipino values, so whenever you see true
kindness and good deeds be generous to share it with others and be
helpful if you see someone on difficult (false) situation.
1.Simple interest is computed using the formula Is = Prt.
2.Compound interest is computed on the principal and also on
the accumulated past interests.
3.An amount of ₱10,000.00 will yield more interest if it is invested in a
bank
that offers a simple interest of 10% annually than a bank that offers a
10% compound interest annually if it will be invested for three years.
4.Compound interest works best over a short period of time.
5.A borrower or debtor prefers compound interest rather than simple
interest.
6.In compound interest, the interest from the previous years also
earns interest.
7.It is better to deposit in a bank that offers simple interest than a bank
that offers compound interest.
Compound interest (𝑰𝒄) is the interest computed on the principal and also on the accumulated past
interest, so compound interest is a way to earn money because you don’t just earn using your original
money, but also the interest you earned.

To give you a deeper concept of compound interest, reflect the following questions: Have you ever lent
money to someone like a friend, sibling, or relative? If so, would you let them pay more than or less than
or just equal to what you lent to them? Since you consider to help them, probably you will answer just
an equal amount is ok even though your money has been used for a period of time. But , I’m sure some
will answer that you should receive more than the amount they borrowed and no one will say that you
should receive less than the amount they borrowed. I know you have your own perspective in life but let
us see if compound interest will change your view in life regarding loans or borrowings, savings, and
investment.

Are you familiar with credit cards? We have what we called “Perma-Debt” which means a continuous
outstanding balance of a credit card where they pay the monthly minimum that fits in their budget to
lessen the burden of interest monthly but tries to add some debt again in the following month so the
debts never end. So why did I tell you this? If you are a debtor compound interest is not good for you.
Better yet pay your debt in full the soonest possible so that the burden of interest will not be on your
shoulder. Conversely, if you are an investor, compound interest is your best buddy and it is better to
invest in a long period of time for you to have a greater return of your investment through interest
earned. So, if you have the means or a way to save and invest early, you must consider it as soon as
possible for you to gain more money in the future.
Now, that you already know how to solve simple interest. Study the example below and compare this to
the example given in Lesson 1. (Note: Same problem was given here to compare the interest earned in
simple and compound interests)
Example
Problem Solving: Due to COVID-19 pandemic Miss Dada a female resident of
Barangay May Pagkakaisa somewhere in Quezon Province thinks of a business that
can provide for her needs as well as the need of her neighbors so she can be of help
even in this trying time.
Having no money at hand she decided to borrow from a bank as the start-up capital
of ₱50,000.00 at 7% interest rate compounded annually and payable within 5 years.
Compute for the interest yield.
Solution.
Amount at Compound Interest Amount at the end of
Time (t) Interest
the start of year year t (Maturity Value)
Rate (r)
t Solution Answer

50,000 + 3,500 =
1 50,000 7% (50,000)(0.07)(1) 3,500
53,500

53,500 7% (53,500)(0.07)(1) 53,500 + 3,745 =

2 3,745
57,245

57,245 7% (57,245)(0.07)(1) 57,245 + 4,007.15 =

3 4,007.15
61,252.15

61,252.15 7% (61,252.15)(0.0 61,252.15 + 4,827.65

4 4,827.65
7)(1) = 66,079.80

66,079.80 7% (66,079.80)(0.0 66,079.80 + 4,625.59

5 4625.59
7)(1) = 70,705.39
Compound interest includes the interest from the current year and added on the principal at the
start of the following year, which means that the previous interest earns interest as well, together
with the principal until fully paid. So the interest yielded on simple interest is lower than the
compound interest. The amount at the end of 5 years in simple interest is ₱67,500.00 while in
compound interest it is ₱70,705.39. Therefore, if you are a borrower make sure that the interest
on your loan is not too high if you will find a lender that offers simple interest better grab it that a
lender who offers compound interest. On the other hand, if you are an investor learn to invest
your money to an interest that will yield higher returns like compound interest. If you will be a
lender in the future, I hope that you will not be abusive regarding the interest, be reasonable, and
act generously by helping others who needed you the most.
Notice that the formula to find the future value in a compound interest is given by
𝐹 = 𝑃(1 + 𝑟)𝑡
where:
𝐹 = future value
𝑃 = principal amount
𝑟 = compound interest rate
𝑡 = time or time in years
Also, to find the compound interest just deduct the principal (P) from the computed future
value (F). In the next module, you will encounter a situation where interest will be compounded
more than once a year.
Maturity (future) Value and Compound Interest

F=P(1+r)𝑡

Where:
P=principal or present value
F= maturity(future)value at the end of the term
r= interest rate
t=term/time in years

the compound interest 𝐼𝑐 𝑖𝑠 𝑔𝑖𝑣𝑒𝑛 𝑏𝑦

𝐼𝑐 = 𝐹 − 𝑃
Activity 2.1
Write the word TRUE if the statement is correct, otherwise write FALSE on
a
separate answer sheet. If your answer is FALSE, write the word or phrase
that will make the statement correct.

1.Perma-debt decreases the amount of money available on hand to spend in

the future.
2.Compound interest works well if you save early for retirement or invest
early.
3.The longer it takes for you to pay a debt the smaller the interest you pay.
4.If borrowers pay at least the minimum payment every month of their debt,
their credit standing is not good.
5.If you are planning to invest, compound interest is better than the
simple interest.
Activity 2.2

Assuming that your father asks you about investment and wants to know the interest
that will be earned if he will invest ₱500,000.00 in a certain bank that offers an annual
compounding interest of 8% for 5 years.

Complete the table below to help your father.

Compound Interest
Amount at Interes Amount at the end
Time the start of t Rate of year t (Maturity
(t) year t (r) Value)
Solution Answer

(500,000)(0.08)(
1 500,000 8% 1)
2 540,000 8% 43,200

8% (583,200)(0.08)( 583,200 + 46,656 =

3 1) 629,856

8% 50,388.4 629,856 + 50,388.48

4 8 = 680,244.48

680,244.4 8% 54,419.5
5 8 6
Solve the following:
1.Supposed that a local farmer wants to borrow money from Landbank of the
Philippines to start the organic farming in his one (1) hectare of agricultural
land. The farmer needs ₱150,000.00 as start-up capital. The bank offers him
10% interest rate compounded annually. Compute for the total amount to be
paid every year for 5 years. Show your answer in tabular form.

2.A private school teacher plans to apply for a housing loan in the Home
Mutual Development Fund or Pag-ibig. It offers her a loan amounting to
₱1,500,000.00, considering all the rules and regulations regarding the policy
with 6.5% interest per annum payable within 15 years. Compare the
maturity value if interest will be paid using simple interest and/or compound
interest compounded yearly. Please use the model table shown in this
module to compute and compare the interest.