PRE1_SIMPLE INTEREST AND COMPOUND INTEREST Flashcards
What does each letter stands for:
I =
P =
r =
t =
F =
I = Interest Amount
P = Principal Amount
r = Rate of Interest per year in decimal; r = R/100
t = Time Periods involved
F = Final Amount
the person or institution that makes the funds available to those who need it.
Lender / Creditor
the person or institution that avails of the funds from the lender.
Borrower
a certain sum of money that the lender charges the borrower for the use of the funds.
Interest
is the sum of money borrowed or invested.
Principal (P)
The amount of money that you pay to borrow money or the amount of money that you earn on a deposit.
Interest (I):
The duration for which the money is borrowed/deposited.
Time (T):
is the rate charged by the lender or the rate of increase of the investment.
Rate of Interest (R)
Simple Interest Formula
I = Prt
Calculate time, solve for t
t = I / Pr
Calculate rate of interest in decimal, solve for r
r = I / Pt
Calculate Principal Amount, solve for P
P = I / rt
Calculate Interest, solve for I
I = Prt
Calculate Final Amount
(F) = P + I or F = P (1 + rt)
Note
- Base formula I = Prt, where P is the Principal amount of money to be invested at an Interest Rate r% per period for t Number of Time Periods. Where r is in decimal form; r=R/100. r and t are in the same units of time.
- If the loan is for less than 1 year, use the fraction of a year.
Rafael deposits P20,000 in a savings account that pays interest at the rate of 5% per year. How much is the interest and what will be the total amount after two years?
Given: P = P20,000 r = 5% or 0.05 t = 2
Solution: I = (20,000) (0.05) (2) = P2,000
F = P + I = 20,000 + 2,000 = P22,000
The interest is P2,000. The total amount of Rafael’s money after 2 years is P22,000.
At what annual interest rate is P500 one year ago equivalent to P600 today?
Given: F = P600 P = P500 I = 100 t = 1 year
Solution: r = 100/(500)(1)
r = 0.20 or 20% interest rate
Determine the principal that would have to be invested to provide P200 simple interest at the end of 18 months if the interest rate is 7.5%.
Given: I = P200 r = 7.5% or 0.075
t = 18 months (18/12 or 1.5)
Solution: P = 200/(0.075)(1.5)
P = P1,777.78
How long will it take for an investment of P5, 000 to grow to P7, 500 if it earns 10% simple interest per year?
Given: F = P7,500 P = P5,0000
I = P2,500 r = 10% or 0.10
Solution: t = 2,500/(5,000)(0.10)
t = 5 years
Anastasia-Grey Company deposited P100, 000 in a bank account on Oct 12 and withdraws a total of P115,000 exactly on October 12 of the next year. What is the annual interest rate at which the company was paid?
Given: P = P100,000 F = P115,000
I = P15,000 t = 1 year
Solution: r = 15,000 / (100,000) (1)
r = 0.15 or 15%
based on 360 day per calendar year
ORDINARY INTEREST
based on 365 day per calendar year
EXACT INTEREST
based on actual / exact number of days per month. (ex. January 31 days, February 28 or 29 days for leap year, March 31and so on)
ACTUAL TIME
it assumes 30 days per month
APPROXIMATE TIME