Doing business involves constantly computing or solving number problems. A
successful businessman knows how to properly compute for interest rates and
monthly amortization on products bought on installment. Business—related problems
usually require a combination of several mathematical operations. It is best that you
read the module on basic math and review addition, subtraction, multiplication and
division. If you feel that you are already familiar with these operations, you are ready
for the topics covered in this module.
In this lesson, you will learn how to compute some business-related problems.
After studying this lesson, you should be able to:
♦ compute simple and compound interest for loans; and
♦ calculate monthly amortization for installment schemes
Are you now ready to study business math? Read the story below.
Philip runs a sari-sari store. He plans to expand his business so he decided to get
a loan from his cousin, Marco.
Do you know how to compute for simple interest? Do you know why an interest
is charged for money borrowed?
Interest Rates
Simple Interest
If you borrow a car from a car rental company or if you live in someone else’s
house or apartment, you have to pay rent. Like paying rent for the use of a car or a
house, you also have to pay rent for the money you borrowed. This is called interest.
People like Marco earn by charging interest on loans. Banks earn most of their
income from the interest that people pay for the amounts they borrow. How much
interest one has to pay depends on three factors: the principal, the time and the
The principal is the initial amount borrowed. For example, if Marco lends
Phillip P10,000, that amount would be the principal of his loan. The time, also known
as term is the number of units expressed as days, months or years for which the
principal was borrowed. In Marco’s case, he gives out loans with a term of 6 months.
The interest rate or simply rate, is the percentage of the principal amount that the
borrower has to pay for a term. For example, to get 5% of P100, multiply P100 by
.05. 5% of P100 is P5.00.
To get 30 % of P100, multiply P100 by .30. 30% of P100 is P30.00. This is the
amount that a person has to pay as interest for the principal in a term.
How is simple interest computed?
How much interest do I have to pay in 6 months if I borrowed P6,000?6
The formula for simple interest is:
I = PRT
Where I = interest
P = principal (the amount of money borrowed)
R = rate at which the interest is to be paid
T = term or length of time the debt (money owed) has to be
paid
A formula is also known as a mathematical equation. It is used to compute
for needed values. To compute for interest, the formula I = PRT is used. You need to
substitute the given values for the principal, rate and term to compute for the interest.
Let us apply this formula to answer Phillip’s question.
Study the computation for simple interest below.
I = PRT P = P6,000 (principal amount borrowed)
R = .05 (this means 5%)
T = 6/12 (for a term of 6 months in one year)
I = P6,000 × .05 × 6/12 (or 1/2)
I = P150
Phillip has to pay Marco P150 in interest after 6 months for the P6,000 he
borrowed! How much money does he have to pay Marco after 6 months?
To compute for the total amount of money the lender (one who lends money or
gives out loans) should receive after the term of the loan, the formula is:
A = P + I
Where A = total amount of pesos the lender should receive
P = principal
I = interest (Marco’s earnings)
How much interest do I have to pay in 6 months at a simple interest rate of 5% for every P6,000?
Do you remember the principal amount the Phillip plans to borrow? If you
answered P6,000, you are correct. You already have the value for the interest based on
the previous computation. That would be P150. You have to substitute these values
using the formula to compute for the total amount the lender should receive after the
term.
Substituting these values. . .
A = P6,000 + P 150
A = P6,150
Phillip should pay Marco a total of P6,150 after 6 months.
Were you able to follow the computation for the interest and the total amount at
the end of the term?
will be continued ...
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