SIMPLE AND COMPOUND INTEREST

1. Business Finance
QUARTER III
Basic Long-Term
Financial Concepts
(Simple and Compound Interest)
Grade:12
2nd Semester
by: KAREN KATE R. SIBAYAN

2. CONTENT Basic Long-term Financial Concepts
CONTENT
STANDARDS
The learners demonstrate an understanding
of the basic concepts of risk and return, and
the time value of money
PERFORMANCE
STANDARDS
The learners are able to:
1.Distinguish simple and compound
interest;
2.Solve exercises and problems in
computing for time value of money with
the aid of present and future value tables;

3. CONTENT Basic Long-term Financial Concepts
Most Essential
Learning
Competencies
The learners:
1. calculate future value and present
value of money

4. Basic Long-term Financial Concepts
Topics:
Simple and Compound interest

5. Basic Long-term Financial Concepts
Interest - the cost of holding money. It is the amount charged by the
lenders to the borrowers/ users of money, and is usually paid at regular
intervals.
Difference of simple and compounded interest:
Simple Interest – the charging interest rate based on a principal over
number of years.
Interest = P x R x T
Example:
Mr. Zane invested Php500,000.00 for 5 years at 8% and the proceeds
from the investment will all be collected at the end of 5 years. Compute
the interest using the simple assumption.

6. Basic Long-term Financial Concepts
Example:
1.Mr. Zane invested Php500,000.00 for 5 years at 8% and
the proceeds from the investment will all be collected at
the end of 5 years. Compute the interest using the simple
assumption.
ANSWER:
Formula: Interest = P x R x T
Solution:
Interest=500,000.00x8%x5
=200,000.00

7. Basic Long-term Financial Concepts
Individual Exercises:
1.Mrs. Padlan invested Php200,000.00 for 2 years at 2% and the
proceeds from the investment will all be collected at the end of
2 years. Compute the interest using the simple assumption.
ANSWER:
Formula: Interest = P x R x T
Solution:
Interest=200,000.00x2%x2
=8,000.00

8. Long-term Financial Concepts
Compound Interest - the interest in the first compounding period is added on the
principal, which will then be the basis for the interest to be computed for the next
period
Compounding Frequency (m)- the number of times interest is computed on a
certain principal in one year.
Example: Using the previous example given compute, if the investment pays
annually how much is the interest with a compounding frequency of the following:
annually (1), semi-annually (2), quarterly (4), monthly (12), semi-monthly (24), and
daily (365).
LC18/W7/D1-2

9. Long-term Financial Concepts
Compound Interest
Example: Using the previous example given compute, if the investment pays annually
how much is the interest with a compounding frequency of the following: annually (1),
semi-annually (2), quarterly (4), monthly (12), semi-monthly (24), and daily (365).
Formula
Given: P=500,000 R= 8% or .08 T=5 years
LC18/W7/D1-2

10. Long-term Financial Concepts
Solution:
1. Annually
234,664.04
2. Semi-annually
240,122.14
3. Quarterly
242,973.70
4. Monthly
244,922.85
5. Semi-monthly
245,416.34
6. Daily
245,879.66
[500,000x(1+0.08/1) ]-500,000
=
[500,000x(1+0.08/2) ]-500,000
=
[500,000x(1+0.08/4) ]-500,000
=
[500,000x(1+0.08/12) ]-500,000
=
[500,000x(1+0.08/24) ]-500,000
=
[500,000x(1+0.08/365) ]-500,000
=
(5x1)
(5x2)
(5x4)
(5x12)
(5x24)
(5x365)
LC18/W7/D1-2
Given: P=500,000 R= 8% or .08 T=5 years

11. Group Exercises: Using the previous example given compute, if the
investment pays annually how much is the interest with a compounding frequency of
the following: annually (1), semi-annually (2), quarterly (4), monthly (12), semi-
monthly (24), and daily (365).
Solution: Given: P=200,000 R= 2% or .02 T=2 years
ANSWER
1. Annually
2. Semi-Annually
3. Quarterly
4. Monthly
5. Semi-Monthly
6. Daily

12. Group Exercises: Using the previous example given compute, if the
investment pays annually how much is the interest with a compounding frequency of
the following: annually (1), semi-annually (2), quarterly (4), monthly (12), semi-
monthly (24), and daily (365).
Solution: Given: P=200,000 R= 2% or .02 T=2 years
ANSWER
1. Annually P 8,080
2. Semi-Annually P 8,120.80
3. Quarterly P 8,141.41
4. Monthly P 8,155.22
5. Semi-Monthly P 8,158.69
6. Daily P 8,161.93

13. Story of the three servants…
One day, the Master was going on a trip and decided
to entrust his wealth to three of his most trusted servants.
The wealth shall be given to each servant based on the
Master’s assessment of their talents. To his first servant, he
entrusted PHP500,000. To his second servant, believing
that he can make wise choices as well, he also gave an
amount of PHP500,000. Finally, he called on his third
servant and gave him PHP500,000. The Master then went
on his journey and told the servants he will not be back
for a long time. Since the first servant was a very smart
person, he decided to invest the PHP500,000 given to him.
He was very pleased that he was quoted a long-term
investment for 5 years at 8 percent per annum
compounded annually, and decided to invest the money
in that institution.
LC20/W8/D1-2

14. The second servant saw what the first servant did and also
decided to invest the money. However, when given the choice by
the investment firm, he did not understand simple and compound
interest. In the end, he accepted the quote at 8% per annum simple
interest. The third servant saw them and thought that they were
being too much of a risk-taker and decided just to keep the money
locked in a vault in his home.
The Master returned after 5 years. He then called on the servants
and asked them what has become of the wealth he had entrusted
them. The first servant presented his PHP500,000 plus the interest
he earned worth 234,664.04 . The second servant presented his
PHP500,000 along with the interest 200,000 Lastly the third servant
returned his PHP500,000.
LC20/W8/D1-2

15. Get ½ sheet of paper and answer the
following:
Given the scenarios of the three
servants, what could be the moral
lesson of the story? Write the solution
on how they have come up with that
amount.

16. Summary of their earnings
Servant 1 Servant 2 Servant 3
Principal 500,000.00 500,000.00 500,000.00
Interest 234,664.04 200,000.00 0.00
Total
Returned
734,664.04 700,000.00 500,000.00
LC20/W8/D1-2

17. Solution:
 The first servant presented his PHP500,000
plus the interest he earned worth PHP500,000
x (1.08)5 – 500,000 = 234,664.04 . The second
servant presented his PHP500,000 along with
the interest earned at 500,000 x .08 x 5 =
200,000 Lastly the third servant returned his
PHP500,000.

18. Simple vs. Compound interest
Simple Compound
In the story above,
Principal = P500,000
Rate = 8%
Time = 5 years
Thus,
Interest = 500,000 x .08 x 5 = P200,000
In the story above,
Principal = P500,000
Rate = 8%
Time = 5 years
Compounding frequency = annually
Thus,
Interest = 500,000 x (1 + (0.08/1))(5x1) –
500,000 = PHP234,664.04
LC19W7/D3-4

19. Formulas to Remember in
Basic Long-Term Financial Concepts

20. Assignment/Additional Activities for
Application/Remediation:
*If the learners showed content mastery after the said activity, the
teacher will give the performance task as follow up evaluation. This
task could be considered as an assignment or may be submitted on a
certain deadline.
PERFORMANCE TASK: Learners will be asked to accomplish the
following:
Do pages 51-55 of your Business Finance Activity Sheets.

21. THANK YOU VERY MUCH!