Borrowers often need capital to sustain their businesses but do not always have enough of their own, so they take out loans and must pay interest on the borrowed amounts. The principal is the amount borrowed, the rate is the interest rate expressed as a percent of the principal per time period, usually per year, and the term is the length of the loan period. The basic formula for calculating interest is: Interest = Principal x Rate x Time. The perspective also differs between borrower and lender - it is an expense for the borrower but income for the lender.

2. • In business, capital is very important.However, not all
business owners always have enoughcapital to sustain their
business. More oftenthannot, they have to borrow money
for use in thebusiness. It is in thiscontextthatinterestplays
an importantrole. Borrowers need to pay intereston the
money thatthey borrow.

3. If you borrow P 1,000.00 at an interest rate of 1% per monthfor
1 month,you will have to pay theamountthatis equal to the
principal multipliedby the rate by theterm.
◘ Determinethe;
a.Principal–
b.Rate–
c.Term–
P1000
1%
1month

4. • Principal is the amount borrowed.
• Rate (interest rate) is the cost of using the
money expressed as a percent of the principal
for a given period of time, which is usually per
year. It is generally regarded as the cost of
borrowing or lending out money or the cost of
credit.
• Time is the term of period of the loan.
If youborrowP1,000.00ataninterest
rateof1% permonthfor1 month,you
will haveto paythe amountthatis equal
tothe principalmultiplied bythe rateby
the term.
a.Principal–P1000
b.Rate–1%
c.Term–1month

5. • The amount of money charged for the use
of borrowed money is interest expense
from the point of view of the borrower.
Borrower/
Debtor
Lender/
Creditor
Point of view - Debtor

6. • The amount of money earned on invested
money or money lent is Interest Income
Borrower/
Debtor
Lender/
Creditor
Point of view - Creditor

7. BasicFormula
I =Prt
where I –Interest (amount paid for the useof money)
P –principal (amount borrowed/lent/invested)
r– rate(percent of interest being charged)
t – time (number of periods for which the money will be borrowed/ lent/
invested)

8. Example
Tessa borrowed P2,000.00 at 12% interest
for 2 years. Find the interest.
Given: P = P2,000 r=12% T= 2 years
I = Prt
I = (P2,000) (12%) (2)
I = P480

9. Example
• Eunice lent P3,000 at 14% for 6 mos.