INTEREST AND MONEY-TIME

RELATIONSHIPS

WILLIE C. BUCLATIN
• Interest is the amount of money paid for the
use of borrowed capital or the income
produced by money which has been loaned.
 SIMPLE INTEREST
• Is calculated using the principal only, ignoring
any interest that had been accrued in
preceding periods.

• In practice simple interest is paid on short-

term loans in which the time of the loan is
measured in days.
 I = Pni
F = P+I = P+Pni
F = P(1+ni)
Where:
• I = interest
• P = principal interest
• n = number of interest periods
• F = accumulated amount or future worth
• i = rate of interest per interest period
• Ordinary simple interest is computed on the
basis of 12 months of 30 days or 360 days a
year.
1 interest period = 360 days
• Exact simple interest is based on the exact
number of days in a year, 365 days for an
ordinary year and 366 days for a leap year.

1 interest period = 365 or 366 days

 Sample Problem
• Determine the ordinary simple interest on
P700 for 8 months and 15 days if the rate of
interest is 15%.
 Sample Problem
• Determine the exact simple interest on P500
for the period from January 10 to October 28
at 16% interest.
 Sample Problem
• What will be the future worth of money after
14 months, if a sum of P10,000 is invested
today at a simple interest of 12% per year?
 COMPOUND INTEREST
• In calculation of compound interest, the
interest for an interest period is calculated on
the principal plus total amount of interest
accumulated in previous periods. Thus,
compound interest means interest on top of
interest.
 Compound Interest

F = P (1+i)n
The quantity (1+i)n is commonly called the “single
payment compound amount factor” and is
designated by the functional symbol F/P, i%, n. Thus,
F = P(F/P, i%, n)

The symbol, F/P, i%, n is read as “ F given P at i

percent in n interest periods”.
•  

-n

The quantity (1+i)-n is called the “single payment

present worth factor” and is designated by the
functional symbol P/F, i%,n.
Thus, P = F(P/F,i%,n); the symbol P/F,i%,n is read
as “P given F at i percent in n interest periods.
 RATES OF INTEREST
•A.)  Nominal Rate of Interest
Specifies the rate of interest and a number of
interest periods in one year

Where:
i = rate of interest per interest period
r = nominal interest rate
m = number of compounding periods per year
 RATES OF INTEREST
• If the nominal rate of interest is 10%
compounded quarterly, then i = 10% /4 = 2,5%,
the rate of interest per interest period.
 RATES OF INTEREST
•B.)  Effective rate of interest
Is the actual or exact rate of interest on the
principal during one year. If P1.00 is invested at a
nominal rate of 15% compounded quarterly,
after one year this will become,
P1 (1+i)n = )4 = 1.1586
The actual interest earned is 0.1586, therefore
the rate of interest after one year is 15.86%
• If
  the given is compounded semiannually,
quarterly or monthly – convert it first to
effective rate to make it annually.

The formula is:

Or
m -1
 Sample Problem
• Find the nominal rate which if converted
quarterly could be used instead of 12%
compounded quarterly. What is the
corresponding effective rate?
• Solution:
Let r = the unknown nominal rate
For two or more nominal rates to be equivalent,
their corresponding effective rates must be equal
 continuation…. sample problem
•  Nominal rate Effective rate

r% compounded quarterly )4 - 1
12% compounded monthly )12 – 1

continue the solution……..

r = ____________________
 Sample Problem
• Find the amount at the end of two years and
seven months if P1,000 is invested at 8%
compounded quarterly using simple interest
for anytime less than a year interest period.

Solution:
 Sample Problem
• P2,000 loan was originally made at 8% simple
interest for 4 years. At the end of this period
the loan was extended for 3 years, without the
interest being paid, but the new interest rate
was made, 10% compounded semi-annually.
How much should the borrower pay at the end
of 7 years?

Solution:
 ASSIGNMENT
• At a certain interest rate compounded
quarterly, P1,000 will amount to 4,500 in 15
years. What is the amount at the end of 10
years? (30pts)