Interest is money paid for borrowed capital.

Simple Interest, I = Pin F = P + Pin F = P(1 +in) Where: I = interest P = Principal present worth n = number of interest period i = rate of interest per interest period F = accumulated amount or future amount worth Types of Simple Interest: 1. Ordinary Simple Interest based on 30 days per month or 360 days per year (also known as the bankers year) 2. Exact Simple Interest based on the exact number of days in a year, 365 days for an ordinary year and 366 days for a leap year. Note: A year is a leap year if it is divisible by 4 except when it is divisible by 100 but not by 400. For example: 1996 (leap year) 1900 (not a leap year) 2000 (leap year)

Compound Interest: In calculations of compound interest, the interest for an interest period is calculated on the principal plus the total amount on interest accumulated in previous periods. Thus, compound interest means interest on top of interest. F = P(F/P, i%, n) or F = P(1+i)n P = F(1+i)-n or P =F(P/F, i%, n) Where: (F/P, i%, n) = (1+i)n = single payment compound amount factor (SPCAF) (P/F, i%, n) = (1+i)-n = single payment present worth factor (SPPWF) Rate of Interest:

a. Nominal Rate of Interest it specifies the rate of interest and a number of interest periods in one year. It is the annual interest rate ignoring the effect of any compounding. r = im or i = r/m where: i = rate of interest per interest period r = nominal interest rate m = number of compounding periods per year example: 1. The nominal rate of interest is 20% compounded quarterly, so, i=20%/4 = 5% per period, or, i=20%/yr compounded quarterly x (1 yr/4quarter) = 5% per quarter c.q.

2. 12% compounded semi-monthly, i=12%/24 = 0.5% per semi-monthly c.s.m., or, i=12% per yr x (1 yr/24 semi-monthly) = 0.5% per semi-monthly csmquarter c.q.

b. Effective Rate of Interest (ERI) is the actual rate of interest on the principal for one year. Formula: ERI = (1+i)m-1 = (1 +r/m)m-1 F=P[(1 +r/m)m] Illustration: If P1.00 is invested at a nominal rate of 10% c.q., after one year this will become, F=P(1 +r/m)m = 1(1+(0.10/4))4 = P1.1038128, then, The actual interest earned is, I = F-P = 1.1038128 1 = P0.1038128, Therefore, the actual interest rate after one year is, ERI = ieff= (P0.1038128/P1)x100% = 10.3818%, it means, F=P+I or I = F P For n=1, Pieff = P(1 +r/m)m P ERI = ieff = e = (1+r/m)m 1 or Analysis by Theory of Equivalence: F = P(1 +r/m)m F =P(1+ ieff)1

but F = F, therefore: P(1 +r/m)m = P(1+ ieff)1 ERI = ieff = e = (1+r/m)m 1 Note: For two or more nominal rates to be equivalent, their corresponding effective rates must be equal.

Equation of Value: An equation of value is obtained by setting the sum of the values on a certain comparison or focal date of one set of obligations equal to the sum of the values on the same date of another set of obligations. Discount is interest deducted in advance. D = F- P Where: D = discount P = present worth F = Future worth The rate of discount is the discount on one unit of principal for one unit of time. P = F(1+i)-1

D=FP Fd = F F(1+i)-1 d = 1 (1+i)-1 i = d / (1-d) where: d = rate of discount i = rate of interest Note: in general, D = Fdn Where: n = number of periods

and

EXERCISES: 1. Determine the exact and ordinary simple interest on P500 for the period from January 15 to December 30, 2012 at 10% interest. A.47.95, 48.61 B. 48.61, 45.32 C. 48.54, 49.75 D. 47.81, 47.92 2. The sum of Php 12,000 is to be invested at a rate of 9% compounded quarterly. What is the total money at the end of 8 years. . A. 2,200.25 B. 25,400.10 C. 24,457.24 D. 23,600.25
3. Find the nominal rate which if converted quarterly could be used instead of 10% compounded

monthly. . A. 2.5% c.q.

B. 10.08% c.m.

C. 10.08% c.q.

D. 8.10% cq

4. A man lends P600 at 6% simple interest for 4 years. At the end of this time., he invests the entire amount (principal plus interest) at 5% compounded annually for 12 years. How much will he have at the end of 16 years period? A. 1,336.12 B. 1,624.06 C. 1,309.72 D. 1,077.51 5. The accumulated amount after 3 years of P1,000 invested at the rate of 8% per year compounded continuously is A. 11,023.18 B. 1,023.18 C. 2,758.50 D. 1,71.25 6. A credit card company compounds monthly and charges an interest of 1 % per month. What is the effective interest per year? A. 18% B. 19.56% C. 4.35% D. 1.015% 7. What effective annual interest rate to the nominal interest rate of 6% compounded monthly? A. 0.005 B. 0.8167 C. 0.0617 D. 0.1067 8. An engineer borrowed money from a bank. He received from the bank P5,430.00 and promised to repay P6,500.00 at the end of 9 months. Determine the following: Rate of Discount A. 32.92% B. 16.46% C. 26.27% D. 19.71% Rate of Interest A. 19.71% B. 16.46% C. 26.27% D. 32.92% Rate of Interest for one year A. 16.46% B. 32.92% C. 19.71% D. 26.27% 9. A man possessed a promissory note, due 3 years hence, whose maturity value is Php 6,700.48. If the rate of interest is 10% compounded semi-annually, what is the value of this note now? A. 5400 B. 4800 C. 5000 D. 6000 In year zero, you invest P10,000.00 in a 15% security for 5 years. During that time, the average annual inflation is 6%. How much in terms of year zero pesos, will be in the account at maturity? A.15,386 B. 15,030 C. 13,382 D. 6,653 10. If $100 is placed in an account that earns 8% c.q., what will its worth be in 8 years?

11. You borrow $200 from a family member and agree to pay it back in six months. Because you are part of the family, you are only being charged simple interest at the rate of 1% per month. How much will you owe after six months? How much of this is interest? 12. $2,000 is deposited in a saving account that pay 10% compounded annually. How much will the account be worth in 15 years? 13. The average price of gold in 2010 is $400 per ten grams, while in 2000 it was $300. What was the average annual rate of increase in the price of gold over the 10-year period? 14. A father, whose dream is to see his son grow up to be an engineer, plans to invest certain sum towards his sons education upon his birth. He will need to withdraw$12,000 each year from the 21st to 24th year of his sons life. How much should he invest, if the rate of interest is 10% c.a.? 15. Rick wants to have earned $10,000 at the end of 6 years. How much must he deposit today in order to do so, if his rate of interest is fixed at 8% c.a.? 16. Peter needs to finance a business expansion program. One bank offers to lend the required $1M at a quoted annual rate of 10% c.q.. A second lender offers 9% c.d.. Assume that Peter will pay both interest q=and principal at the end of 1 year. What is the difference in the effective annual rates charged by the two banks? 17. A students average tuition fee is $1,000 per year over 20 years of student life. Find the total fees the student would pay at the end of 20 years, if the interest rate is 5% c.a.? 18. Mr. PBS is looking forward to retiring in 2010. He wants to invest some money so that he can earn $ 10,000 per year for the next 20 years of his life. If the rate of interest is 8% compounded annually, what is the amount of the current investment? 19. Mr. Smith has saved $1,200 each year for 20 years. A year after the saving period ended, Mr.Smith withdrew $7,500 each year for a period of five years. In the sixth and seventh years, he only only withdrew $4,500 per year. In eight year, he decided to withdraw the remaining money in his account. If the interest rate was 8% per year throughout the whole period, what eas the amount he withdrew at the end of eight year? A. B. C. D. 11.
A.

B.

C.

D.

12. A. B. C. D.