LESSON 1

SIMPLE INTEREST AND SIMPLE DISCOUNT

TOPICS
1. Terminologies and Notations
2. Simple Interest
3. Ordinary and Exact Interest
4. Actual and Approximate Time
5. Interest between Dates
6. Present Value
7. Simple Discount
8. Promissory Note
LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. Differentiate simple interest and simple discount
2. Derive alternative formulas under simple interest and simple discount
3. Compute simple interest using actual or approximate time
4. Analyze problems critically and be able to come up with a good
solution
5. Determine whether the promissory note is an interest-bearing or non-
interest- bearing note
6. Solve real-world problems on simple interest and simple discount

TOPIC 7: SIMPLE DISCOUNT

At simple discount, the interest is computed based on the final amount and is
paid at the beginning of a specified period of time. Thus, this interest is paid in advance.

Let 𝐹 be the amount of the loan. The proceeds 𝑃 is the amount received by the
borrower after removing the interest on the loan. The amount removed by the lender is
so-called interest-in advance 𝐼𝑎 and the rate used to compute this is the simple discount
rate 𝑑. The term of discount is denoted by 𝑡.
The following is the formula used to compare for the interest-in advance.

𝐼𝑎 = 𝐹𝑑𝑡
 and the following are the derived formulas:
𝐼𝑎
Discount rate: 𝑑=
𝐹𝑡

𝐼𝑎
Term of loan: 𝑡=
𝐹𝑑

𝐼𝑎 𝑃
Amount of loan: 𝐹= or 𝐹 =
𝑑𝑡 1−𝑑𝑡

Proceeds: 𝑃 = 𝐹 − 𝐼𝑎 or 𝑃 = 𝐹(1 − 𝑑𝑡)

Illustrative Examples:

Example 1.

Ms. Sim borrowed ₱150,000 from SSS for a term of one year. The interest
charged is 10% simple discount rate. Find the proceeds of the loan.

Solution:

Given:
𝐹 = ₱150,000
𝑑 = 10% = 0.10
𝑡 = 1 year

Required: 𝑃
𝐼𝑎
Formulas: 𝑑= where 𝐼𝑎 = 𝐹 − 𝑃
𝐹𝑡

Computations:

𝐼𝑎 = 𝐹𝑑𝑡 = 150,000(0.10)(1) = ₱15,000

𝑃 = 150,000 − 15,000 = ₱135,000

or 𝑃 = 150,000[1 − (0.10)(1)] = 150,000(0.9) = ₱135,000

Thus, Ms. Sim will receive ₱135,000 as proceeds of her loan.

Example 2.

How much should Rona borrow to have ₱15,000 today if she promised to pay it
3
in 2 years at 6 % discount rate?
7
Solution:

Given:
𝑃 = ₱15,000
3
𝑑 = 6 % = 0.064285714
7
𝑡 = 2 years

Required: 𝐹
𝑃
Formula: 𝐹 =
1−𝑑𝑡

Computation:
15,000
𝐹= = ₱17,213.11
1−(0.064285714)(2)

Thus, Rona needs to borrow ₱17,213.11.

Example 3.

Determine the discount rate if ₱32,000 is the proceeds of a loan of ₱43,000 due
in 16 months.

Solution:

Given:
𝑃 = ₱32,000
𝐹 = 43,000
4
𝑡 = 16 months = years
3

Required: 𝑑
𝐼𝑎
Formulas: 𝑑 = where 𝐼𝑎 = 𝐹 − 𝑃
𝐹𝑡

Computation:
43,000−32,000
𝑑= 4 = 19.19%
43,000(3)

TOPIC 8: PROMISSORY NOTE

A promissory note is a written agreement by the borrower, to settle an amount,

to a lender within the designated time in the future. It can be sold to a bank or other
lending institution at a specified discount rate since it is a negotiable paper.
 The following are the terms and notations used in solving promissory note
problems:

Face Value
Face value is the term used to denote the principal amount of the
promissory note and is denoted by 𝐹𝑣 .

Date of Note and Maturity Date

The date when the note was written is the date of note and is denoted by
𝐷𝑛 , while the date indicating when the note will be settled is called the maturity
date. This is denoted by 𝑀𝑑 .

Interest Rate
If the note is an interest-bearing note, then the simple interest rate at
which the note will be paid is denoted by r.

Lender or Payee
The person to whom the payment stipulated in the promissory note is
called lender or the payee.

Maker’s Signature
The signature that appears on the promissory note is called the maker’s
signature. The maker is the one who writes the note.

Term of Discount, Term of Note, and Discounting Date

The term of discount refers to the actual number of days from the
discounting date until the maturity date. This is denoted by 𝑇𝑑 . The term of note
is the actual number of days from the date it was written to its maturity date. This
is denoted by 𝑡𝑛 . The discounting date is the exact date the note was discounted
and this is denoted by 𝐷𝑑 .

Bank Discount
Bank discount refers to the amount to be deducted from the maturity
value at a specified discount rate and term of discount. This is denoted by 𝐵𝑑 .

Proceeds
Proceeds refers to the amount a lender is willing to pay the borrower
before the maturity date of the note. This is denoted by 𝑃.
Two Kinds of Promissory Notes

1. Interest-bearing note
Interest bearing note is the note where the interest rate is stipulated so
that the face value is not equivalent to the maturity value.

₱50,000 SAN JOSE, OCCIDENTAL MINDORO, PHIL. February 10, 2021

Eighty-five days after date, I promise to pay to the order of Ms. Mary Ann
[Link] the amount of fifty thousand pesos (₱50,000) with interest at 9% per annum.

(Sgd) Ms. Jennylyn G. Francisco

2. Non-interest-bearing note
This is the note where the face value is equivalent to the maturity value
but does not necessarily mean that the original debt did not bear interest.

₱40,000 SAN JOSE, OCCIDENTAL MINDORO, PHIL. February 11, 2021

One hundred fifty days after date, the undersigned promises to pay to
the order of Ms. Angelina C. Paquibot the amount of forty thousand pesos (₱40,000)
including all interest due on maturity, payable at Development Bank of the Philippines,
San Jose, Occidental Mindoro.

(Sgd) Ms. Christine Joy C. Iglesias

Two Types of Promissory Note

There are two types of promissory note. One of this is the so-called simple
interest note. This is the type of note written on the origin date and redeemable on the
maturity date with maturity value equivalent to the value plus interest. The principal
amount of this note is called the face value of the note.

The other type of note is the bank discount note. This note bears an amount
called the maturity value. The interest on the note has been computed and charged in
advance. The amount received by the maker of the note, on the date it was written, is
called the proceeds.
Formulas

The following are the formulas used to solve problems involving promissory
notes.

Interest
𝐼 = 𝐹𝑣 𝑟𝑡𝑛

Term of Discount
𝑡𝑑 = 𝑀𝑑 − 𝐷𝑑

Maturity Date
𝑀𝑑 = 𝐷𝑛 + 𝑡𝑛

Maturity Value
𝑀𝑣 = 𝐹𝑣 + 𝐼
𝑀𝑣 = 𝐹𝑣 (1 + 𝑟𝑡𝑛 )

Bank Discount
𝐵𝑑 = 𝑀𝑣 𝑑𝑡𝑑

Proceeds
𝑃 = 𝑀𝑣 − 𝐵𝑑
𝑃 = 𝑀𝑣 (1 − 𝑑𝑡𝑑 )

Face Value
𝐹𝑣 = 𝑀𝑣 − 𝐼
𝑀𝑣
𝐹𝑣 =
1+𝑟𝑡𝑛

Illustrative Examples:

Example 1.

A four-month simple interest note with a face value of ₱40,250 bears a simple
interest of 12.5%. Find its maturity value.

Solution:

Given:
𝐹𝑣 =₱40,250
𝑟 = 12.5% = 0.125
1
𝑡𝑛 = 4 months = year
3
 Required: 𝑀𝑣

Formula: 𝑀𝑣 = 𝐹𝑣 (1 + 𝑟𝑡𝑛 )

1
Computation: 𝑀𝑣 = 42,500 [1 + (0.125) ] = ₱41,927.08
3

Thus, the maturity value of this simple interest note is ₱41,927.08.

Example 2.

A bank discount note of ₱25,000 for 18 months charged a 12.5% interest-in-

advance. What were the proceeds of this note?

Solution:

Given:
𝑀𝑣 =₱25,000
𝑑 = 12.5% = 0.125
18
𝑡𝑑 = = 1.5 years
12

Required: 𝑃

Formula: 𝑃 = 𝑀𝑣 (1 − 𝑑𝑡𝑑 )

Computation: 𝑃 = 25,000[1 − (0.125)(1.5)] = ₱20,312.50

Therefore, the proceeds of the bank discount note is ₱20,312.50.

Discounting a Promissory Note

A holder of promissory note may sell the note, at a discount before its maturity, to
a third party. This discount is equivalent to the interest-in-advance and is computed
using the discount rate (𝑑), maturity value 𝑀𝑣 and the term of discount 𝑡𝑑 of the note.

Illustrative Examples:

Example 1.

A businessman has a note for ₱10,000 dated April 17, 2020. The note is due in
130 days with 18% simple interest. If he sells the note on June 6, 2020 at a bank
charging a discount rate of 15%, find the interest (𝐼); maturity value (𝑀𝑣 ); maturity date
(𝑀𝑑 ); term of discount (𝑡𝑑 ); bank discount (𝐵𝑑 ); and Proceeds (𝑃).
Solution:

Given:
𝐹𝑣 =₱10,000
𝑟 = 18% = 0.18
𝑡𝑛 = 130 days
𝑑 = 15% = 0.15
𝐷𝑛 = April 17, 2020
𝐷𝑑 = June 6, 2020

Required: 𝐼, 𝑀𝑣 , 𝑀𝑑 , 𝑡𝑑 , 𝐵𝑑 , and 𝑃.

Formulas: 𝐼 = 𝐹𝑣 𝑟𝑡𝑛
𝑀𝑣 = 𝐹𝑣 + 𝐼
𝑀𝑑 = 𝐷𝑛 + 𝑡𝑛
𝑡𝑑 = 𝑀𝑑 − 𝐷𝑑
𝐵𝑑 = 𝑀𝑣 𝑑𝑡𝑑
𝑃 = 𝑀𝑣 − 𝐵𝑑

Computations:

a. Interest
130
𝐼 = 10,000(0.18) ( ) = ₱650
360

b. Maturity Value
𝑀𝑣 = 10,000 + 650 = ₱10,650

c. Term of Discount
𝑀𝑑 =April 17, 2020 +130 days = 107 days +130 days = 80 days

d. Bank Discount
80
𝐵𝑑 = 10,650(0.15) = ₱355
360

e. Proceeds
𝑃 = 10,650 − 355 = ₱10,295

Thus, the interest is ₱650, the maturity value is ₱10,650, the term of
discount is 80 days, the bank discount is ₱355, and the proceeds of the
discounted note is ₱10,295.
Example 2.

3
A note of ₱25,400 matures in 160 days with interest at 15 %. The note is
4
3
discounted 55 days before the maturity date at a discount rate of 14 %. What are the
4
proceeds?

Solution:

Given:
𝐹𝑣 =₱25,400
3
𝑟 = 15 % = 15.75% = 0.1575
4
𝑡𝑛 = 160 days
3
𝑑 = 14 % = 14.75% = 0.1475
4
𝑡𝑑 = 55 days

Required: 𝑃

Formulas: 𝐼 = 𝐹𝑣 𝑟𝑡𝑛
𝑀𝑣 = 𝐹𝑣 + 𝐼
𝑃 = 𝐹𝑣 (1 + 𝑟𝑡𝑛 )(1 − 𝑑𝑡𝑑 )

Computations:

a. Interest
160
𝐼 = 25,400(0.1575) ( ) = ₱1,778
360

b. Maturity Value
𝑀𝑣 = 25,400 + 1,778 = ₱27,178

c. Proceeds
160 55
𝑃 = 25,400 [1 + 0.1575 ( )] [1 − 0.1475 ] = ₱26,552.55
360 360

Thus, the proceeds are ₱26,552.55.