Mathematics of Investment

Topics: Interest, Compound interest, Debt Pages: 4 (945 words) Published: February 26, 2014
MATHEMATICS OF INVESTMENT

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 interest rate.

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?

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

How much interest do I have to pay in 6 months at a simple interest rate of 5% for every P6,000?

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

You have to pay P150 in interest after 6 months for the P6,000 you borrowed! How much money do you have to pay after 6 months? To compute for the total amount of money the lender (one who lends...
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