SIMPLE INTEREST SAMPLE PROBLEMS
Problem:
A price tag of 1,200 is payable in 60 days but if paid in 30 days it will have a 3% discount. Find the rate of
interest.
Solution:
Discount Rate (d) = 3%
Future Amount (F60) = 1,200.00
Discount Amount:
D = F60nd
D = 1,200(3%) = 36
Amount to be paid in 30 days (F30):
F30 = F60 – D
F30 = 1,200 – 36 = 1,164
Interest Rate:
i = Prt, use P = F30
i = F30(r)
36 = 1,164(r)
r = 0.3711
r = 37.11%
Problem:
A man borrowed from a bank under a promissory note that he signed in the amount of 25,000.00 for a
period of one year. He received only the amount of 21,915.00 after the bank collected the advance interest and
an additional amount of 85.00 for notarial and inspection fees. What was the rate of interest that the bank
collected in advance?
Solution:
Future Amount (F) = 25,000.00
Principal Amount (P) = 21,915.00 + 85.00
Principal Amount (P) = 21,000.00
Interest:
I=F–D
I = 25,000.00 – 22,000.00
I = 3,000.00
Interest Rate:
i = x 100
.
i= , .
x 100
i = 13.64%
Using a different approach:
Discount Rate:
D = Fnd
3000 = 25,000.00(1)(d)
d = 0.12
Interest Rate:
i=
.
i= .
i = 0.1364
i = 13.64%
Problem:
Find the exact simple interest on 1,000.00 which was deposited on January 8, 1990 and to be withdrawn
on October 8, 1992 if interest rate is 10%.
Solution:
Principal Amount (P) = 1,000.00
Interest Rate (i) = 10%
Check for leap year:
1990 ÷ 4 = 497.5 - - ordinary year
1991 ÷ 4 = 497.75 - - ordinary year
1992 ÷ 4 = 498 - - leap year
For year 1990 (Jan. 8 – Dec. 31)
Jan. 8 – 31 23 days
Feb. 28 days
Mar. 31 days
Apr. 30 day
May 31 days
June 30 days
July 31 days
Aug. 31 days
Sep. 30 days
Oct. 31 days
Nov. 30 days
Dec. 31 days
357 days
n90 = = 0.97808 yrs
For year 1991 (Jan. 1 – Dec. 31)
365 days
n91 = 1 yr
For year 1990 (Jan. 8 – Dec. 31)
Jan. 31 days
Feb. 29 days
Mar. 31 days
Apr. 30 day
May 31 days
June 30 days
July 31 days
Aug. 31 days
Sep. 30 days
Oct. 8 8 days
282 days
n92 = = 0.77049 yrs
n = n90 + n91 + n92
n = 0.97808 + 1 + 0.77049
n = 2.74857
Interest:
I = Pin
I = 1,000 (0.1) (2.74857)
I = 274.85
COMPOUNDED INTEREST SAMPLE PROBLEMS
Problem: CE Board Nov. 1998
How many years will 100,000.00 earn a compound interest of 50,000.00 if the interest rate is 9%
compounded quarterly?
Solution:
Principal Amount (P): 100,000.00
Interest (I): 50,000.00
Interest Rate (i): 9%
Number of compounding per year (m): 4
Future Amount:
F=P+I
F = 100,000.00 + 50,000.00
F = 150,000.00
Solve for n:
F = P(1 + )mn
.
150,000.00 = 100,000.00(1 + )4n
, .
, .
= (1 + 0.0225)4n
1.5 = (1.0225)4n
Log 1.5 = Log 1.02254n
Log 1.5 = 4nLog 1.0225
.
4n =
.
4n = 18.223
n = 4.56 yrs
Problem:
At a certain interest rate compounded quarterly, 1,000.00 will amount to 4,500.00 in 15 yrs. What is the
amount in 10 yrs?
Solution:
Future Amount (F15): 4,500.00
Principal Amount (P): 1,000.00
Number of years (n): 15 yrs
Number of compounding per year (m): 4
Interest rate:
F = P(1 + )mn
F15 = P(1 + )4n
4,500.00 = 1,000.00(1 + )4(15)
4.5 = (1 + )4(15)
1.02538 = 1 +
= 0.02538
i = 10.15%
Amount after 10 years
F = P(1 + )mn
F10 = P(1 + )4n
F10 = 1,000.00(1 +0.02538)4(10)
F10 = 2,725.68
Problem:
120,000.00 is borrowed now at 12% interest compounded semi-annually. The first payment is 40,000.00
and will be made after 3 years from now. What will be the balance left after the first payment?
Solution:
Principal Amount (P): 120,000.00
First Payment: 40,000.00
Interest Rate(i): 12%
Number of compounding per year: 2
Future Amount:
F = P(1 + )mn
.
F = 120,000.00(1 + )2(3)
F = 170,222.29
Balance After First Payment (B):
B = F – 40,000.00
B = 170,222.29 – 40,000.00
B = 130,222.29
COMPOUNDED CONTINUOUSLY SAMPLE PROBLEMS
Problem: CE Board Nov. 2000
A man wishes to have 1,000,000.00 in a certain investment fund at the end of 20 years. How much should
he invest in the fund that will pay 7% compounded continuously?
Solution:
Future Amount (F): 1,000,000.00
Interest Rate (i): 7%
Number of years (n): 20
Principal Amount:
F = Pein
1,000,000.00 = Pe0.07(20)
, , .
P= .
P =246,596.96
Problem:
Compute the difference in the future amount of 500 compounded annually at nominal rate of 5% and if
it compounded continuously for 5 years at the same rate.
Solution:
Principal Amount (P): 500
Interest Rate (i): 5%
Future Amount (Annual Compounding)
F = P (1 + i)n
F = 500(1 + 0.05)5
F = 638.14
Future Amount (Continuous Compounding)
F = Pein
F = 500e0.05(5)
F = 642.01
Difference = 642.01 – 638.14
= 3.87
