Calculating Simple Interest on a 5 Million Peso Deposit

A bank offers a 3.5% annual simple interest rate for a particular deposit. If 5 million pesos is deposited in this savings account, how much interest will be earned over a given period? This article will elucidate the calculation process and provide a thorough explanation.

Simple Interest Formula and Application

The formula for calculating simple interest is as follows:

Simple interest (SI) (P x R x T) / 100

Where:

P principal amount (5 million pesos) R rate of interest (3.5%) T time period (in years)

To find the interest earned over 2 years, the formula is applied as follows:

SI (5000000 x 3.5 x 2) / 100 350000 pesos

Interest Calculation for One Year

Assuming the deposit is for one year:

SI (P x R x T) / 100

SI (5000000 x 3.5 x 1) / 100 175000 pesos

This indicates that the depositor will earn 175,000 pesos as interest over one year.

Understanding Simple Interest

Simple interest is a straightforward method of calculating interest, where no compounding is involved. The interest is calculated on the principal alone, not on the accumulated interest from previous periods.

In this example, the interest of 3.5% is applied to the principal of 5,000,000 pesos annually. Since 3.5% is a percentage, the decimal form is 0.035.

Calculating the annual interest:

Annual Interest 5000000 x 0.035 175000 pesos

To find the interest for two years, the annual interest is multiplied by the number of years:

Total Interest for 2 years 175000 x 2 350000 pesos

Future Value Calculation

The future value (FV) can also be calculated using the simple interest formula. The future value is the principal plus the interest earned:

FV PV (1 I x N)

Where:

PV present value (5,000,000 pesos) I interest rate (0.035) N number of periods (2 years)

FV 5000000 x (1 0.035 x 2) 5350000 pesos

This means that after two years, the depositor will have a total of 5,350,000 pesos.

Conclusion

Understanding how simple interest works is crucial for managing deposits and investments. By applying the simple interest formula and calculations, depositors can accurately determine the interest earned over various time periods.

For detailed calculations and financial management, consider using financial calculators like the HP 12C, available for free on both app stores under the name 'Touch RPN'. This tool can help you perform complex financial calculations with ease.