Simple Interest

Abstraction: Key Concepts of Simple Interest

Application: Apply What You Have Learned!

Diving Deep into Simple Interest

Now that we've dipped our toes into the world of interest, it's time to explore simple interest in detail. This straightforward method of calculating interest is commonly used for short-term loans and investments.
Get ready to:

Define simple interest, understanding its core principles.
Compute simple interest, maturity value, and present value using the appropriate formulas.
Solve real-world problems involving simple interest, applying your knowledge to practical situations.

By the end of this lesson, you'll have a solid foundation for understanding how interest affects your finances, whether you're saving, investing, or borrowing money. Let's get started!

Activity: Simply Saving!

Using the idea that you learned in Lesson 1, try to answer the problem below. If you find difficulty solving the problem, that is fine. Continue reading this lesson and soon you will find the appropriate solution.

A working student in one of the biggest fast-food restaurants in Lucena City wants to save for the upcoming school year. He wants to deposit his money into a Filipino owned bank so that even in a simple way he can help his fellow Filipino. Supposed his monthly salary is ₱10,000.00 and it was deposited to an account that earns a simple interest of 2.75% per annum.

Find the simple interest after 6 months, one year, and 18 months.

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Analysis: Understanding Simple Interest

Do you consider how the interest earned would change if the principal, interest rate, or time period were different? What if the initial deposit was ₱15,000 instead of ₱10,000? What if the interest rate was 5% instead of 2.75%?

Answer it in the commentbox!

This lesson delves into the concept of simple interest, a fundamental concept in finance. Let's break it down!

Abstraction: Key Concepts of Simple Interest

Simple interest is the cost of borrowing money or the return earned on an investment over a specific period. It's calculated solely on the principal amount, making it a straightforward interest calculation method.

The Formula: Your Simple Interest Toolkit

The simple interest formula is your go-to tool for calculations:

Where:

I = Interest earned or paid
P = Principal (initial amount borrowed or invested)
r = Interest rate (usually expressed as a decimal)
t = Time (period of the loan or investment, typically in years)

Putting the Formula to Work

This formula allows you to calculate any of the variables (I, P, r, or t) if you know the other three. Here's how:

Finding Interest (I): Simply plug in the values for P, r, and t.
Finding Principal (P): Rearrange the formula: P = I / (rt)
Finding Rate (r): Rearrange the formula: r = I /(Pt)
Finding Time (t): Rearrange the formula: t = I /(Pr)

Real-World Applications: Simple Interest in Action

Simple interest is used in various financial scenarios, including:

Short-term loans: Think of car loans or payday loans.
Simple savings accounts: Some savings accounts might offer simple interest.
Calculating interest on bonds: While bonds often involve compound interest, simple interest calculations can be used for certain bond yields.

By mastering the simple interest formula and understanding its applications, you'll be well-equipped to tackle a range of financial problems.

Want to calculate your earnings with simple interest? Here's a video lesson to understand more about how it works!

Time to put your simple interest skills to the test! This assessment focuses on calculating simple interest, maturity value, and present value. Get ready to solve problems and demonstrate your mastery of this fundamental concept.

Application: Apply What You Have Learned!

Instruction: Use online resources, critical thinking, and the provided information to answer the following questions. Justify your answers with explanations and calculations. Upload your documents on this google drive link: Module 1 Lesson 2 Activity Outputs

(Note: Make sure your file name will be your Section-Year-Surname-Given_Name-Module#-Lesson#-Output#, for example: [GAS11-DelaCruz-Juan-Module1-Lesson1-Output1]. Wrong file name will subject to score deduction.)

Research different short-term loan options available online or in your community. Compare interest rates, fees, and repayment terms. What factors should you consider when choosing a short-term loan?
Research different savings accounts offered by banks and credit unions. Compare interest rates, fees, and other features. What factors should you consider when choosing a savings account?
Research different types of bonds and their characteristics. How do bond yields and interest rates relate to each other? What are the risks and rewards of investing in bonds?

Scenario 1: Short-Term Loan

Imagine you need a short-term loan of ₱5,000 to cover an unexpected expense. A lender offers you a simple interest loan with a 6% annual interest rate, to be repaid in 1 year.

Questions:

How much interest will you pay on this loan? Use the simple interest formula (I = Prt) to calculate the total interest.
What will be the total amount you need to repay (maturity value)? Add the calculated interest to the principal amount.
If you could negotiate a lower interest rate of 5%, how much would you save on interest? Recalculate the interest using the new rate and compare it to the original interest amount.

Scenario 2: Savings Account

You decide to deposit ₱2,000 into a savings account that offers a 1.5% annual simple interest rate.

Questions:

How much interest will you earn in 3 years? Use the simple interest formula to calculate the interest earned.
If you want to earn ₱100 in interest, how long will you need to keep your money in the account? Rearrange the simple interest formula to solve for time (t).

Scenario 3: Bond Investment

A bond with a par value of ₱10,000 has a coupon rate of 4% and pays simple interest annually.

Questions:

How much interest will you receive each year? Calculate the annual interest payment using the coupon rate and par value.
If you hold the bond for 5 years, what will be the total interest earned? Multiply the annual interest payment by the number of years.

Nailed simple interest calculations? Get ready to unlock the power of compounding in Lesson 3!

Lesson 3: Compound Interest (Compounded Annually)

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