06/28/2025 05:25 AM
P50,000
ACTS Computer College | Sta. Cruz, Laguna 2
BUSINESS
MATHEMATIC
S
Lender/ Borrower/ Origin/
Creditor Debtor Loan Date
Repayment
Time/ Term Principal (P)
/Maturity
(t)
Date
Simple
Rate (r) Interest (I)
Interest
Maturity/
Future
Value
Simple Interest
Interest in which only the original principal bears interest for the
entire term of the loan. Computed only on the principal you have
invested or borrowed.
Annual Simple Interest
Is = Prt
where
Is = simple interest
P = principal, or the amount invested or borrowed
r = simple interest rate
t = term or time in year
Example 1: A bank offers 0.25% 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?
Given: P = 1,000,000 I = 0.25% = 0.0025 t = 1 year
Find: Is
Solution: Is = Prt
Is = (1,000,000)(0.0025)(1)
Is = 2,500
Answer: The interest earned is P 2,500.
Principal (P) Rate ( r ) Time (t) Interest
(a) 2.5% 4 1,500
36,000 (b) 1.5 4,860
250,000 0.5% (c) 275
Complete the table below by finding the unknown.
Solution:
(a) The unknown principal can be obtained by
P=
P=
P =15,000
Principal (P) Rate ( r ) Time (t) Interest
(a) 2.5% 4 1,500
36,000 (b) 1.5 4,860
250,000 0.5% (c) 275
Complete the table below by finding the unknown.
Solution:
(b) The unknown rate can be obtained by
r=
r=
r =0.09 or 9%
Principal (P) Rate ( r ) Time (t) Interest
(a) 2.5% 4 1,500
36,000 (b) 1.5 4,860
250,000 0.5% (c) 275
Complete the table below by finding the unknown.
Solution:
(c) The unknown time can be obtained by
t=
t=
t =0.22 years
Maturity (Future) Value
F = P + Is
where F = maturity (future) value
P = principal
Is = simple interest
Substituting Is by Prt gives F = P + Prt, = P(1 + rt)
Maturity (Future) Value
F = P(1 + rt)
where F = maturity (future) value
P = principal
r = interest rate
t = term/ time in years
Example 4: Find the maturity value if 1 million pesos is deposited in a bank at an
annual simple interest rate of 0.25% after (a) 1 year (b) 5 years?
Given: P = 1,000,000 r = 0.25% = 0.0025
Find: (a) maturity or future value F after 1 year
(b) maturity or future value F after 5 years
Solution:
(a) When t = 1, the simple interest is given by
Method 1: Method 2: To directly solve the
Is = Prt future value F,
Is = (1,000,000)(0.0025)(1) F = P(1 + rt)
Is = 2, 500 F = (1,000,000)(1 + 0.0025(1))
The maturity or future value is F = 1,002,500
given by Answer: The future or maturity
F = P + Is value after 1 year is P1,002,500.
F = 1,000,000 + 2,500
F = 1,002,500
Example 4: Find the maturity value if 1 million pesos is deposited in a
bank at an annual simple interest rate of 0.25% after (a) 1 year (b) 5
years?
Given: P = 1,000,000 r = 0.25% = 0.0025
Find: (a) maturity or future value F after 1 year
(b) maturity or future value F after 5 years
(b) When t = 5,
Method 1: Method 2: To directly solve the
Is = Prt future value F,
Is = (1,000,000)(0.0025)(5) F = P(1 + rt)
Is = 12, 500 F = (1,000,000)(1 + 0.0025(5))
F = 1,012,500
The maturity or future value is
Answer: The future or maturity
given by
value after 1 year is P1,012,500.
F = P + Is
F = 1,000,000 + 12,500
F = 1,012,500
Compound Interest
Computed on the principal, plus whatever interest has already been
added. It is usually used on long-term accounts or loans. Essentially works
much faster than simple interest.
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
Example 1. Find the maturity value and the compound interest if P10,000 is
compounded annually at an interest rate of 2% in 5 years.
Given: P = 10,000 r = 2% = 0.02 t = 5 years
Find: (a) maturity value F
(b) compound interest Ic
Solution:
(a) F= P(1+r)t
F = (10,000)( 1 + 0.02)5
F = 11,040. 081
(b) Ic = F – P
Ic = 11,040.81 – 10,000
Ic = 1,040.81
Answer: The future value F is P11,040. 81 and the compound interest is
P1,040.81.
Present Value P at Compound Interest:
The present value or principal of the maturity value F due in t years any
rate r can be obtained from the maturity value formula F= P(1+r)t.
Solving for the present value P,
P(1+r)t = F
or
where
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term/ time in years
Example 1. What is the present value of P50,000 due in 7 years if
money is worth 10% compounded annually?
Given: F = 50,000 r = 10% = 0.1 t = 7 years
Find: P
Solution: The present value P can be obtained by
P = 25,657.91.
Answer: The present value is P25,657.91.
Compounding More than Once a Year
Sometimes, interest may be compounded more than once a year.
Consider the
following example.
Example 1. Given a principal of PhP 10,000, which of the following
options will yield greater interest after 5 years:
OPTION A: Earn an annual interest rate of 2% at the end of the year,
or
OPTION B: Earn an annual interest rate of 2% in two portions—1%
after 6 months, and 1% after another 6 months?
OPTION B: Interest is compounded semi-
annually, or every 6 months.
OPTION A: Interest is compounded
Under this option, the interest rate every six
annually
months is 1% (2% divided by 2).
Time (t) in years Principal = PhP 10,000 Time (t) in years Principal = PhP 10,000
Annual Int. rate = 2%, Annual Int. rate = 2%,
compounded annually compounded semi-annually
Amount at the end of the year
Amount at the end of 1/2 10,000 ´ 1.01 = 10,100
the year
1 10,100´ 1.01 = 10,201
1 10,000 × 1.02 = 10,200
1 1/2 10,201´ 1.01 = 10,303.01
2 10,200 × 1.02 = 10,404 2 10,303.01 ´ 1.01 = 10,406.04
3 10,404 × 1.02 =
10,612.08 2 1/2 10,406.04 ´ 1.01 = 10,510.10
4 10,612.08 × 1.02 = 3 10,510.10 ´ 1.01 = 10,615.20
10,824.32
3 1/2 10,615.20 ´ 1.01 = 10,721.35
5 10,824.32 × 1.02 =
11,040.81 4 10,721.35 ´ 1.01 = 10,828.56
4 1/2 10,828.56´ 1.01 = 10,936.85
5 10,936.85´ 1.01 = 11,046.22
Answer: Option B will give the higher interest after 5
[Link] all else is equal, a more frequent compounding will
result in a higher interest, which is why Option B gives a
higher interest than Option A. The investment scheme in
Option B introduces new concepts because interest is
compounded twice a year, the conversion period is 6
months, and the frequency of conversion is 2. As the
investment runs for 5 years, the total number of conversion
periods is 10. The nominal rate is 2% and the rate of
interest for each conversion period is 1%.
Definition of Terms:
• Frequency of conversion (m) – number of conversion periods in one year
• Conversion or interest period– time between successive conversions of interest
• Total number of conversion periods n
n = mt = (frequency of conversion) × (time in years)
• Nominal rate (i(m)) – annual rate of interest
• Rate (j) of interest for each conversion period
Note on rate notation: r, i(m), j
In earlier lessons, r was used to denote the interest rate. Now that an interest rate can
refer to two rates (either nominal or rate per conversion period), the symbols i (m) and j will
be used instead.
The formula for the maturity value F when principal P is invested at an annual interest
rate j compounded annually is F= P(1+j)t. Because the rate for each conversion period is
then in t years, interest is compounded mt times. The following formula is obtained.
Maturity Value, Compounding m times a year
where F = maturity (future) value
P = principal
i (m) = nominal rate of interest (annual rate)
m = frequency of conversion
t = term/ time in years
