VALUATION CONCEPTS

AND METHODS
Simple Interest and Bank Discount
 OBJECTIVES
 Define simple interest, bank discount and its
related terms
 Use the simple interest formula and the bank
discount in solving various investment
problems
 INTRODUCTION
Individuals, whether engaged in business or not,
occasionally find themselves in need of funds for
worthwhile purposes. One recourse they usually resort is
borrowing. On the other hand, a business or person who
has excess money may want to invest this through lending.

This module includes areas of investment of which we are

going to compute for the values of loans and debts using
various mathematical tools. This module discusses simple
interest and bank discounts, its uses, and other related
topics as applied in different investment problems.
 BODY
Definition of Terms
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.
Lender/Creditor The one who invests the money.
Borrower/Debtor The one who owes the money.
Simple Interest An interest computed on the amount the borrower received at the time the loan
is obtained and is added to that amount when the loan becomes due.
Compound Interest The interest is computed more than once during the time period of the loan.
Principal The amount of deposit made by a depositor or the face amount lent to the
borrower on loan date.
Interest rate The amount to be paid on top of the principal; expressed on percentage.
Time The length of time for which the money is borrowed or lent; expressed in years
or fractional part of the year.
Loan date The date when the loan was obtained
Maturity date The date when the loan becomes due.
Ordinary Interest Method Using 360-day denominator when time (t) is expressed in days.
Exact Interest Method Using 365-day denominator when time (t) is expressed in days; 366 day for leap
year.
Actual time Used to find the number of days as numerator to determine the time (t) by
counting every day excluding the loan date until the maturity date. It is used
when only the loan and maturity dates are given.
Approximate Time Used to find the number of days as numerator to determine the time (t) by
assuming that each month has 30 days. It is used when only the loan and
maturity dates are given.
Banker’s Rule The interest method adopted by banks to determine the interest payment of
borrowers; the combinations of time (t) computation method.
I = PRT The simple interest formula.
Maturity Value 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.
Bank Discount An interest computed on the maturity value of the loan and is deducted from
that amount at loan date to determine the net amount to be received by the
borrower.
Bank discount rate Equivalent to interest rate in the side of the lender.
Proceeds The amount the borrower is to receive.
BD = MV x R x T The bank discount formula.
 SIMPLE INTEREST
Illustration 1: Luz borrowed Php280,000 at a
simple interest rate of 9% for one year. Compute
for the simple interest and maturity value of the
loan.

Finding Simple Interest

Interest = Principal x Rate x Time
I = PRT
I = 280,000 x .09 x 1
I = Php25,200
 SIMPLE INTEREST
Finding the Maturity Value
 
After one year, Luz’s loan matures and she is
obliged to pay the maturity value of the loan. This
is the sum of the principal she received on loan
date and the interest.
Maturity Value = Principal + Interest
MV = P + I
MV = 280,000 + 25,200
MV = Php305,200
 SIMPLE INTEREST
Solving the maturity value using direct method

Maturity value = Principal (1 + Rate x Time)

MV = P (1 + rt)
MV = 280,000 { 1 + (.09 x 1)}
MV = Php305,200
 SIMPLE INTEREST
THE CONCEPT OF TIME
Illustration 2: If Esperanza borrowed Php140,000 at 7% interest for 64 days,
how much would the interest be using the exact and ordinary interest methods?
 
Exact Interest Method
Interest = Principal x Rate x Time
Interest = 140,000 x .07 x 64/365
Interest = Php 1,718.36
Ordinary Interest Method
Interest = Principal x Rate x Time
Interest = 140,000 x .07 x 64/360
Interest = Php 1,742.22

*Note that ordinary interest method yields a higher interest that exact interest method.
 SIMPLE INTEREST
When only the loan date and maturity date are given, the number of days may be
counted as either actual time or approximate time.
 
Illustration 3a: Count the actual time and approximate time from April 8, 2021 to
Sept. 20, 2021.

Actual Time Approximate Time

April (30 – 8) 22 April (30 – 8) 22
  May 31 May 30
June 30 June 30
July 31 July 30
August 31 August 30
September 20 September 20
165 days 162 days
 
*Note that actual time is longer than approximate time.
 SIMPLE INTEREST
BANKER’S RULE
 
The following are the time combinations for the banker’s rule as applied in illustration 3a.
 

1. Actual Time 165

Exact interest 365
 
2. Approximate Time 162
Exact interest 365
 
3. Actual Time 165
Ordinary interest 360
 
4. Approximate Time 162
Ordinary interest 360
 SIMPLE INTEREST
Illustration 3b: Applying the four time combinations above, compute for the interest if Esperanza
was lent Php122,500 at 11% interest.
  Exact Interest using actual time Ordinary Interest using actual time
Interest = Principal x Rate x Time Interest = Principal x Rate x Time
Interest = 122,500 x .11 x 165/365 Interest = 122,500 x .11 x 165/360
Interest = Php 6,091.44 Interest = Php 6,176.04
   
Exact Interest using approximate time Ordinary Interest using approximate time
Interest = Principal x Rate x Time Interest = Principal x Rate x Time
Interest = 122,500 x .11 x 162/365 Interest = 122,500 x .11 x 162/360
Interest = Php 5,980.68 Interest = Php 6,063.75

*Note that ordinary interest using actual time is the most favourable since it yielded the highest interest.
 SIMPLE INTEREST
MANIPULATING THE SIMPLE INTEREST FORMULA
 
a) Principal is unknown

Illustration 4: A bank loaned Ana Flower Shop money at 8% simple

interest for 3 months. If the amount of interest was Php4,000, find the
amount of principal borrowed.
The principal formula may be derived by dividing both sides of the
principal interest formula I = PRT by RT, or P = I/RT. Solving the
problem,
Principal = I/RT
P = 4,000/ (.08 x 3/12)
P = 4,000/.02
P = Php200,000
 SIMPLE INTEREST
b) Rate is unknown

Illustration 5: If Ana Flower Shop applies for a Php175,000 in a

bank the interest of which is Php5,810 for 125 days, what interest
rate is being charged? Use the ordinary interest method.
The rate formula is arrived at by dividing both sides of the simple
interest formula I =PRT by PT, or R = I/PT. Solving the problem,
Rate = I/PT
R = 5,810/ (175,000 x 125/360)
R = 5,810/60,763.888
R = .095616
R = 9.56%
 SIMPLE INTEREST
c) Time is unknown

Illustration 6: What would be the time period of Ana Flower Shop’s

loan for Php266,000, at 11% ordinary interest, if the amount of
interest is P10,150?
Dividing both sides of the formula I = PRT by PR, the time formula
T = I/PR is arrived at.
Time = I/PR
T = 10,150/ (266,000 x .11)
T = 10,150/29,260
T = .3468899 years
T = .3468899 x 360
T = 124.8 or 125 days
 BANK DISCOUNT
 Illustration 7: Mirasol availed of a Php245,000 loan at 14%
discount rate for 9 months. Find the bank discount and
proceeds of the loan. Bank discount is the product of the
maturity value, discount rate and time.
 
Finding the bank discount

Bank discount = Maturity value x discount rate x time

BD = MV x R x T
BD = 245,000 x .14 x (9/12)
BD = Php25,725
 BANK DISCOUNT
Finding the proceeds

On loan date, Mirasol did not receive the entire

Php245,000. The bank discount of Php25,725 had to be
deducted as interest in advance. The proceeds formula
follows,

Proceeds = Maturity value – Bank discount

P = MV – BD
P = 245,000 – 25,725
P = Php219,275
 BANK DISCOUNT
Solving the proceeds using direct method

Proceeds = Maturity value (1 – Rate x Time)

P = MV (1 – RT)
P = 245,000 (1 – .14 x .75)
P = 245,000 (.895)
P = Php219,275
Thank You!