# Math of Investment - Interest methods

**Topics:**Central bank, Monetary policy, Federal Reserve System

**Pages:**5 (404 words)

**Published:**February 1, 2014

Lleva, Aldwin G.

BSACCTY-1B

SAQR #4

Interest

Method

Definition/Background/

Applicability

Who Uses them

Related Formulas & Equivalent Meaning of Symbols

Sample Problem + Solution

Sources of Reference, Info or Book used

Principal/

Proceeds +

Present Value

Interest

Amount =

Sum/Maturity Value

Future Value

A. Simple Interest Method

A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods.

P =Principal

I =Interest

R =Rate

T =Time(in years)

I =Interest Amount

P =Principal

R =Rate

T =Time

M =Maturity Value

P =Principal

I =Interest

R =Rate

T =Time

₱8700.00 at 3.25% for 3 years

I =PRT

I =(8700)

(0.0325)(3)

I = ₱848.25

http://www.investopedia.com/terms/s/simple_interest.asp

Math Of Investment (Calculator-Based) by Zorilla, Partible, Esller, Mendoza, Bansa, Apuyan

B. Discount Interest Method

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window.

Pr = Proceeds

M = Maturity Value

B = Bank Discount

B = Bank Discount

D = Discount Rate

T = Time (in years)

M = Maturity Value

Pr = Proceeds

B = Bank Discount

D = Discount Rate

T = Time

M = ₱32000

D= 10%

T= 1.5 years

B=MDT

B = (32000)(0.10)(1.5)

=₱4800

http://www.investopedia.com/terms/d/discountrate.asp

Math Of Investment (Calculator-Based) by Zorilla, Partible, Esller, Mendoza, Bansa, Apuyan

C. Add-on Interest Method

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window.

P =Principal

I =Interest

R =Rate

T =Time(in years)

I =Interest Amount

P =Principal

R =Rate

T =Time

M =Maturity Value

P =Principal

I =Interest

R =Rate

T =Time

₱5000 at 12% add-on interest rate for 36 months

I = (5000)(0.12)(36/12)

=₱1800+5000

=₱6800/36

=₱188.8889(monthly payment)

http://www.investopedia.com/terms/a/add-on_interest.asp

Math Of Investment (Calculator-Based) by Zorilla, Partible, Esller, Mendoza, Bansa, Apuyan

D. Compound Interest Method

Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.

P =Present Value

M =Compound Amount

i =Rate per conversion period

n = number of conversion periods

I –Compound Interest

M= Compound amount or maturity value

P= original principal

P =Present Value

M =Compound Amount

i = Rate per conversion period

n = number of conversion periods

P = ₱20000

r = 6%

n = 3

M = P(1+i)n

=20000(1+0.06)3

=23820.32

=23820.32-20000

= ₱3820.32

http://www.investopedia.com/terms/c/compoundinterest.asp

Math Of Investment (Calculator-Based) by Zorilla, Partible, Esller, Mendoza, Bansa, Apuyan

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