Simple and
Compound
Interest
General Mathematics Week
6
Learning Competencies:
At the end of the lesson, the learners should be
able to:
1.Define simple and compound interest;
2.Compute simple interest, compound interest,
maturity value and present value; and
3.Solve problems involving simple and
compound interest.
What You Know
(Edmodo – jumpstart activity)
Definition of Terms
Lender or
Creditor
person (or institution)
who invests the money or
makes the funds
available.
Definition of Terms
Borrower or
Debtor
person (or institution)
who owes the money or
avails of the funds from
the lender.
Definition of Terms
Origin or Loan
Date
date on which money is
received by the borrower.
Definition of Terms
Repayment Date
or Maturity Date
date on which the money
borrowed or loaned is to
be completely repaid.
Definition of Terms
Time or term
(t)
amount of time in years the
money is borrowed or
invested; length of time
between the origin and
maturity dates.
Definition of Terms
Principal or
present value (P)
amount of money borrowed
or invested on the origin
date.
Definition of Terms
Rate of interest
or simply rate (r)
annual rate, usually in
percent, charged by the
lender, or rate of increase of
the investment.
Definition of Terms
Interest (I)
amount paid or earned for
the use of money.
Definition of Terms
Maturity Value or
Future Value (F)
amount after t years that the
lender receives from the
borrower on the maturity
date; equal to the sum of
principal and the interest
earned.
Simple Interest (𝐼¿¿ 𝑠)¿
For every financial transaction, whether you
borrowed or invested a certain amount P, a
corresponding percentage of the principal called interest
is being paid. Simple Interest (Is) is the interest charged
on the principal alone for the entire duration or period t
of the loan or investment, at a particular rate r. After the
term of the loan or investment, the maturity value or
future value F is computed by getting the sum of the
principal and the interest due.
Formula
or
Formula
where
simple interest
principal
rate of interest or simply rate
time (in year)
future value (or maturity value)
Note: If the given time is in months, it can be converted to year(s)
by using the formula
Definition of Terms
Compound
Amount (F)
also called maturity value, it
is an accumulated amount
obtained by adding the
principal and the compound
interest.
Definition of Terms
Conversion
Period (m)
the number of times in a year
the interest will be
compounded.
The following are the
common conversion
periods in a year:
annually m=1
semi-annually m=2
quarterly m=4
monthly m = 12
Definition of Terms
Number of Conversion
Periods (n)
the total number of times
interest is calculated for the
entire term of the investment
or loan.
Definition of Terms
Annual Interest Rate
or Nominal Rate (r)
the stated rate of interest per
year.
Definition of Terms
Periodic Rate (i)
the interest rate per
conversion period.
Definition of Terms
Present value of F (P)
this is the principal P, that will
accumulate to F if there is an
interest at periodic rate i for n
conversion periods.
Compound Interest (𝐼¿¿𝑐)¿
is usually used by banks in calculating interest for
long-term investments and loans such as savings account
and time deposits. In this type of interest, the interest due at
stipulated interval is added to the principal and earns interest
thereafter. It implies that the principal increases over a period of
time, resulting to an increase in interest earned at every
compounding period. Thus, compound interest is an interest
resulting from the periodic addition of simple interest to the
principal amount or simply the difference between the compound
amount and the original principal.
Formula
or
Formula
where
Examples:
1.A bank offers 1.5% annual
simple interest rate for a
particular deposit. How much
interest will be earned if 1
million pesos is deposited in this
savings account for 1 year?
Examples:
2.) Find the compound
amount and interest
earned on ₱15,000.00
for 1 year at 7%
compounded semi-
annually and
“Suppose you won and you
plan to invest if for 5 years. A
cooperative group offers simple
interest rate per year. A bank
offers compounded annually.
Which will you choose and
why?”
