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Simple and Compound Interest

This document discusses basic concepts related to the time value of money, including simple and compound interest. It provides examples of calculating future value, present value, simple interest, and compound interest. The key differences between simple and compound interest are explained. Activities at the end provide practice calculating time value of money concepts.

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Phill Samonte
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135 views46 pages

Simple and Compound Interest

This document discusses basic concepts related to the time value of money, including simple and compound interest. It provides examples of calculating future value, present value, simple interest, and compound interest. The key differences between simple and compound interest are explained. Activities at the end provide practice calculating time value of money concepts.

Uploaded by

Phill Samonte
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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BASIC LONG-TERM

FINANCIAL CONCEPTS
At the end of this lesson, you are expected
to calculate future value and present value
of money:
 distinguishing simple and compound
interest
 solve exercises and problems in
computing for time value of money with
the aid of present and future value tables
Simple and Compound
Interest
Businesses and individuals borrow money if
in need of cash. When they borrow money,
they incur debt. The lender earns money
through interest and the borrower gets the
money he needs but in return, he needs to
pay the money he borrowed plus the
interest.
What is the time value
of money?
The time value of money (TVM) is the
concept that money you have now is worth
more than the identical sum in the future
due to its potential earning capacity. This
core principle of finance holds that
provided money can earn interest, any
amount of money is worth more the sooner
it is received.
People invest their money to receive
returns in the future. The TIME VALUE
concept helps individuals or
businesses to analyze what will be the
value of money in the present and in
the future.
The PRESENT VALUE is the original amount
borrowed, the FUTURE VALUE is the principal
plus the total INTEREST earned over a stated
period, the interest is the amount of money paid
for the use of borrowed money. Present value
and future value are both involved in the time
value of money. Both consider three factors:
principal, interest rate, and time.
 SIMPLE INTEREST
Simple interest is computed based
on the principal amount (original
amount) and based on the annual time.
It is computed by multiplying together
the principal, rate, and time.
To find the FUTURE VALUE (maturity
value) at the end of the term, add the
principal amount and the interest earned.
Example 1:
You invested Php 20,000.00 for
three years at 5% simple interest
rate. How much will you get after
three years?
EXAMPLE 2:
Alex paid Php 1,537.50 with a loan
made 3 months before at 10%
simple interest. Find the principal
amount of the loan and the
interest generated.
Example 3:
The interest on a loan of
Php 20,000.00 is Php 3,200.00.
If the rate is 8%, when is the loan
due?
Example 4:
Determine the simple interest
rate if an investment of
Php 25,000.00 accumulates
Php 27,625.00 in 18 months.
ACTIVITY 1: Compute the following
using a simple interest assumption:

1. Liza borrowed Php 18,000.00 at


11% interest for 3 years. How much
money did she have to pay?
2. Mario borrowed from his friend
Php 15,000.00 to buy a new laptop.
His friend charged 5% for the
borrowed amount payable after
two years. How much will be the
interest and the future value?
COMPOUND INTEREST
Compound interest is simply
earning interest on interest. It means
that the interest earned is added to
the principal, and the new principal
draws interests.
Example 5:
You invested Php 20,000.00 for
three years at 5% compound
interest rate. How much will you
get after three years?
Example 6:
Your father paid Php 176,234.17
with a loan made 5 years ago at
12% compound interest. What is
the principal amount of the loan
and the interest generated?
ACTIVITY:
Compute the following using a
compound interest assumption:
1. Nadine borrowed Php 18,000.00 at
11% interest for 3 years. How much
money did she have to pay?
2. Henry borrowed from his friend
Php 15,000.00 to buy a new laptop.
His friend charged 5% for the
borrowed amount payable after two
years. How much will be the interest
and the future value?
Activity 4 Compute for the
present value of the following
using the present value interest
factor found in Table 4.1 and
Table 4.2.
1. Karen is expecting to get
Php 500,000.00 in 10 years after
depositing her savings in a time
deposit account with 2% interest
per annum.
2. Maria obtained a housing loan
payable in 5 years at a total
amount of Php 1,000,000.00
with an annual interest rate of
7%.
COMPOUNDING FREQUENCY is the
number of times an interest is
computed on a certain principal in one
year. The conversion period per year
could be annually, semi-annually,
quarterly, or monthly. The equation is
j = 𝑖/𝑚.
Example 7:
Find the maturity value and
interest if Php 15,000.00 is deposited
in a bank at 3% interest compounded
quarterly for five years.
SIMPLE INTEREST VERSUS COMPOUND
INTEREST
Simple interest is the interest paid on
the initial principal only, while compound
interest is the interest paid on both the
principal and the amount of interest
accumulated in prior periods.
Using the previous example, let us compare
simple and compound interest. What did you
notice with the principal amount and the
interest amount? In simple interest, the
interest is earned on the initial principal only,
but in compound interest, the interest is earned
on both the principal and the amount of
interest accumulated in previous periods.
WRITTEN WORK:
Directions: Solve the problem. Write your answers
on a separate sheet of paper.
You want to invest your savings worth
Php 7,000.00 for the next 5 years. Bank A offers
simple interest at a rate of 6%. Bank B offers a
compound interest rate of 6% yearly. Which
bank are you going to invest your money with?
Explain through computations.

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