MATH IF (MATHEMATICS OF THE MODERN WORLD)

MODULE
Simple Interest, Bank Discount and Promissory Notes

Section 1
Simple Interest,
Maturity Value,
Number of Days
between Dates,

Section 2
Finding Principal,
Rate and Time

Section 3
Simple interest Notes, Bank Discount Notes
and Proceeds

Section 3
Discounting Promissory Notes Before Maturity

COLLEGE OF BUSINESS AND ACCOUNTANCY

 COURSE DESCRIPTION

The course deals with nature of mathematics, appreciation of its practical,

intellectual, and aesthetic dimensions, and appreciation of mathematical tools in
daily life. The course then proceeds to survey ways in which mathematics provides a
tool for understanding and dealing with various aspects of present day living, such as
managing personal finances and making social choices. These aspects will provide
opportunities for actually doing mathematics in a broad range of exercises that bring
out the various dimensions of mathematics as a way of knowing, and test the
students’ understanding and capacity. The course also deals with business
mathematics, including mathematics of buying, selling and consumer loans useful for
students’ basic understanding of invoices, trade discounts, shipping terms, markups,
markdowns, credit terms and loan agreements. This will reinforce and supplement
students’ practical knowledge in basic and financial accounting.

COURSE OUTLINE

Course Content/Subject Matter

Week 1-3 A. Simple Interest, Bank Discount and Promissory
Notes
Week 4-6 B. Compound Interest

Week 7-8 C. Annuity Part 1

Week 9 D. Midterm Exam

Week 10-11 E. Annuity Part 1

Week 12 F. Sinking Fund and Amortization

Week 13-14 G. Mathematics of Buying

Week 15-16 H. Mathematics of Selling

Week 17 I. Depreciation

Week 18 J. Final Exam

One week (or an equivalent K. Allotted for the Midterm and the Final Exams
of three hours)

RATIONALE
 The goal of the course is for students to develop the computational skills they
will need to be successful in the world of business along with a better understanding
of business concepts and situations that require a mathematical solution.
Specifically, the students are expected to understand the concepts on simple
interest, simple discount, compound amount, basic concepts on annuities and able
to apply this concept in various business transactions in which calculation are
required

INSTRUCTIONS TO USERS

Read the main content of the module under developmental activities sections and
answer the problems indicated in the closure activities.

The learners should have a good background on the following concepts

1. Whole numbers, decimals, fractions, and percent

2. Rules in manipulating equations and formulas.
3. Fluency in calculator use is required.

MODULE 1 LEARNING OBJECTIVES

1. Calculate simple interest and bank discount.

2. Manipulate simple interest and bank discount formula.
3. Apply simple interest and bank discount concepts in discounting promissory
notes.
 1
Section Simple Interest

Section Objectives:
1. Solve for simple interest.
2. Calculate maturity value.
3. Use the actual number of days and approximate number of days to find
the number of days from one date to another.
4. Find exact and ordinary interest.

Objective 1: Solve for simple interest.

Simple interest is interest charged on the entire principal for the entire length of the
loan. It is found using the formula shown in the following box. Principal is the loan amount,
rate is the interest rate, and time is the length of the loan in years.

Finding Simple Interest

Simple interest = Principal * Rate * Time
I=P x R x T

When using the formula I = PRT:

1. Rate (R) must first be changed to a decimal or fraction.
2. Time (T) must first be converted to years.
So, for example, a rate of 7.5%, should be changed to .075 and a time of 6 months should be
changed to 6/12=0.5 year before using I = PRT.
Example 1:

To start her business, Jessica Hernandez needs to borrow P 85,000 for 9 months. Her
bank would not lend her the money since she has no experience or assets. She found an
individual who would lend her the money at 18.5%, However, her uncle agreed to cosign on
a loan for her, meaning that he would have to pay the loan if Jessica failed to do so. On this
basis, the bank would lend the money at 10%, simple interest. Find the interest at (a) 18.5%,
and b) 10%. (c) Then find the amount saved using the lower interest rate.
Solution:
(a) I =PRT
I = P 85,000 * .185 * 9/12 Convert 18.5% to .185

I = P 11,793.75 simple interest

(b) I =PRT
I = P 85,000 * .10 * 9/12 Convert 10% to .10 (or .1)

I = P 6375 simple interest

(c) Difference = P 11,793.75 – P 6375 = P 5418.75

Quick Check 1:

Find the interest on a loan of P 14,680 for 6 months at 9%.

OBJECTIVE 2: Calculate maturity value.
The amount that must be repaid when the loan is due is the maturity value of the loan. Find
this value by adding principal and interest.

Finding Maturity
Maturity value = Principal + Interest
M=P+I
Alternatively,
M=P+I
= P + PRT
M = P( 1+ RT)

Example 2:
Tom Swift needs to borrow P 28,300 to remodel his bookstore so that he can serve coffee to
customers as they browse or sit and read. He borrows the funds for 10 months at an interest
rate of 9.25%. Find the interest due on the loan and the maturity value at the end of 10
months.
Solution:
Interest due is found using I = PRT, where T must be in years 10 months = 10/12 year and
R=9.25% =0.0925
Interest = PRT
I = P 28,300 * 0.0925 *10/12
= P 2181.46 (rounded)
Maturity value = P + I
M = P 28,300 + P 2181.46 = P 30,481.46
Alternatively,
Maturity value = P (1+RT)
M= P 28,300 (1+.0925*10/12)
=P 30,481.46
Quick Check 2
Find the maturity value of a loan of P 48,600 at 9, for 8 months.
OBJECTIVE 3: Use the actual number of days and approximate number of days to find
the number of days from one date to another.
Up to this point, the period of the loan was given in months, but it can also be given
in days. Or a loan may be due at a fixed date, such as April 17, and we may have to figure out
the number of days until the loan must be paid off.

Actual Number of Days. To compute the actual number of days, count every day up to the
repayment date.
Approximate Number of Days. To compute the approximate number of days, assume every
month has 30 days.

Example 3:
Find the approximate and actual number of days of the following.
(a) March 24 to July 22
(b) April 4 to October 10
(c) March 15 to Dec 30

Solution:

a. March 24 to July 22

Actual Approximate
Month Number of Days Number of Days
March 7 6
April 30 30
May 31 30
June 30 30
July 22 22
Total 120 118

Note: For March, under actual number of days, there are 7 days between March 24 to March 31. While under
approximate number of days, there are only 6 days since we assumed that there are only 30 days in a month.
 b. April 4 to October 10

Actual
Number of Approximate
Month Days Number of Days
April 26 26
May 30 30
June 30 30
July 31 30
August 31 30
Septembe
r 30 30
October 10 10
Total 188 186

c) March 15 to Dec 20
Actual
Number of Approximate
Month Days Number of Days
March 16 15
April 30 30
May 31 30
June 30 30
July 31 30
August 31 30
Septembe
r 30 30
October 31 30
November 30 30
December 20 20
Total 280 275
OBJECTIVE 4: Find exact and ordinary interest
A simple interest rate is given as an annual rate, such as 7, per year. Since the rate is
per year, time must also be given in years or fraction of a year when using I = PRT. If time is
given in number of days, first change it to a fraction of a year.

Finding Time in Fraction of a Year

E x a c t i n t e

Number of days∈the loan period

T=
Number of days∈a year

calculations require the use of the exact number of days in the year, 365 or 366 if a leap year.
Ordinary interest, or banker’s interest, calculations require the use of 360 days. Banks
commonly used 360 days in a year for interest calculations before calculators and computers
became widely available. Today, many institutions, the government, and the Federal Reserve
Banks and Central Banks use the exact number of days in a year in interest calculations.
However, some banks and financial institutions still use 360 days. You need to be able to use
both.

For Exact interest: Use 365 days (or 366 days if a leap year).
P∗R∗Actual Number of Days
I=
365
P∗R∗Approximate Number of Days
I=
365

Using the concept in counting of number of dates between dates and two ways to
compute the interest (Exact and Ordinary method). We can calculate the Simple Interest in
four ways.

For Ordinary interest: Use 365 days (or 366 days if a leap year).
This is known as
the Banker’s Rule
Example 5:
Radio station KOMA borrowed P 148,500 on May 12 with interest due on August 27.
If the interest rate is 10%, find the interest on the loan using (a) exact interest and (b)
ordinary interest using actual number of days and approximate number of days.

Solution:

Number of days between May 12 to August 27.

Actual
Number of Approximate Number
Month Days of Days
May 19 18
June 30 30
July 31 30
August 27 27
Total 107 105

a. Exact Interest
The exact interest is found from I = PRT with P = P 148,500, R = 0.10, and T
=107/365.

 
P∗R∗Actual Number of Days P∗R∗Approximate Number of Days
  I= I=
365 365
( P 148,500)∗(0.10)∗107 ( P 148,500)∗( 0.10)∗105
I= I=
365 365
I = P 4353.29 (rounded) I = P 4,271.92 (rounded)

b. Ordinary Interest

Find ordinary interest with the same formula and values, except T = 107/360.
  
P∗R∗Actual Number of Days P∗R∗Approximate Number of Days
  I= I=
360 365
( P 148,500)∗(0.10)∗107 ( P 148,500)∗( 0.10)∗105
I= I=
360 365
I =P 4,413.75 (rounded) I = P 4,331.25 (rounded)

Note: Use banker’s rule throughout the remainder of the book unless stated
otherwise.

Quick Check 5
Find the exact and ordinary interest for a 200-day loan of P 19,500 at 9, to the nearest cent.
Then find the difference between the two interest amounts using actual and approximate
number of days.

Section 1 Exercise. Provide a short solution as shown by the solved problem in item 1.
Find simple interest and maturity value to the nearest cent.
Interest Maturity Value
1. P 3800 at 11%, for 6 months P 4009 P 209 P 4009
I= PRT= P 3800*0.11*6/12=P 209
M=P+I=P 3800+209=P 4009

2. P 10,200 at 9.5%, for 10 months _____________ ______________

3. P 5500 at 8%, for 1 year _____________ ______________

4. P 18,500 at 7.5%, for 1 ¼ years _____________ ______________

Find the exact and approximate number of days from the first date to the second
1. February 15 to April 24 _____________ ______________

2. May 22 to August 30 _____________ ______________

3. December 1 to March 10 of the following year _____________ ______________

4. October 12 to February 22 of the following year _____________ ______________

Find (a) the exact interest and (b) the ordinary interest for each of the following to the nearest
cent. Then find (c) the amount by which the ordinary interest is larger.

1. P 185,000 at 7.5% for 180 days a. ___________________

b. ___________________
c. ___________________

2. P 29,500 for 11.25% for 120 days a. ___________________

b. ___________________
c. ___________________

3. P 52,610 at 8 ½ %, for 82 days a. ___________________

b. ___________________

c. ___________________

4. P 52,000 at 8 ¾ % for 200 days a. ___________________

b. ___________________
c. ___________________

Find the date due, the amount of interest (use banker’s rule and rounded to the nearest cent if necessary),
and the maturity value
 Date Loan Face Term of Date Loan Maturity
Was Made Value Loan Rate Is Due Value
1. Mar. 12 P 4800 220 days 9% __________ __________

2. Jan. 3 P 12,000 100 days 9.8% __________ __________

3. Nov. 10 P 6300 180 days 9¼% __________ __________

4. July 14 P 20,400 90 days 11 ¾ % __________ __________

Solve the following application problems. Round dollar amounts to the nearest cent.

1. Wells Fargo Bank borrows $ 25,000,000 at 4% for 90 days from a bank in Chicago Find
(a) the interest and (b) the maturity value

.
.

2. On October 15, IBM borrows $ 45,000,000 at 8% from a bank in San Francisco and
agrees to repay the loan in 120 days using ordinary interest. Find (a) the due date and (b)
the maturity value.

3. Joe Simpson’s property tax is $ 3416.05 and is due on April 15. He does not pay until
July 23. The county adds a penalty of 9.3%simple interest on his unpaid tax. Find the
penalty using exact interest.

2
Section Finding Principal, Rate and Time
.

Section Objectives
1. Find the principal.
2. Find the rate.
3. Find the time.

Principal (P), rate (R), and time (T) were given for all problems in Section 9.1, and
we calculated interest. In this section, interest is given, and we solve for principal, rate, or
time.

OBJECTIVE 1 Find the principal. The principal (P) is found by dividing both sides of the
simple interest equation I = PRT by RT.

The various forms

of the simple interest equation can be remembered using the circle sketch shown above. In
the sketch, I (interest) is in the top half of the circle, with P (principal), R (rate), and T (time)
in the bottom half of the circle. Find the formula for any one variable by covering the letter in
the circle and then reading the remaining letters, noticing their position. For example, cover
I
P and you are left with RT .

Interest I
P= ∨P=
Rate x Time(¿ years) RT

Example 1: Gilbert Construction Company borrows funds at 10%, for 50 days to finish
building a home. Find the principal that results in interest of P 50,000.
Solution
Write the rate as 0.10, the time as 50/360, and then use the formula for principal

I
P=
RT
P 50,000
P= =P 3,600,000
50
( 0.10)( )
360

The principal is P 3,600,000. Check the answer using I = PRT. The principal is P P
3,600,000, the rate is 10%, and the time is 54/360 year. The interest should be, and is, P
50,000.

3,600,000∗0.10∗50
I =PRT =P =P 50,000
360

Quick Check 1
A 90-day loan with a rate of 12, results in interest of P 285. Find the principal.

Example 2:
 Frank Thomas took out a loan to pay his college tuition on February 2. The loan is
due to be repaid on April 15. The interest on the loan is P 151.20 at a rate of 10.5%. Find the
principal.

Solution
First find the number of days.

Month Actual Number of Days

Days remaining in February
February 26
March 31
April 15
Total 72 Days from February 2 to April 15

Next find the principal.

I
P=
RT
P 151.20
P= =P 7200
72
( 0.105)( )
360
The principal is P 7200. Check the answer using the formula for simple interest.
7200∗0.105∗72
I =PRT =P =P151.20
360

Quick Check 2
A loan made on May 12 must be repaid on December 18. Find the principal given that the
rate is 9%, and the interest at maturity is P 1551.
Principal (P) can also be determined if Maturity Value is given instead of I.

From the formula,

M = P( 1+ RT)
The formula for P is,
M
P=
( 1+ RT )

Example 3:

How a father must invest today at 15% simple interest in order to have P 245, 000 for the
education of his son five years later?

Solution:

In the problem, R=15%, T=5 years, and M= P 245,000 and P is unknown.

M
P=
( 1+ RT )

P 245 , 000
P=
( 1+(0.15)(5 years))

¿ P 140,000

The father needs to invest P 140,000 at present to gain a total amount of P 245,000 pesos five
years after.
OBJECTIVE 2: Find the rate.

Solve the formula I = PRT for rate (R) by dividing both sides of the equation by PT. The rate
found in this manner will be the annual interest rate.

Interest I
R= ∨R=
Principal x Time(¿ years) PT

Example 4:
An exchange student from the United States living in Brazil deposits P 5000 in U.S. currency
in
a Brazilian bank for 45 days. Find the rate if the interest is P 75 in U.S. currency.

Solution
I
R=
PT
P75
R= =0.12
45
( P5000)( )
360

Convert 0.12 to a percent to get 12,. Check the answer using the simple interest formula.

Quick Check 3
A 120-day loan for P 15,000 has interest of P 412.50. Find the rate.
Example 5:
Blaine Plumbing kept extra cash of P 86,500 in an account from June 1 to August 16. Find
the rate if the company earned P 365.22 in interest during this period of time. Round to the
nearest
tenth of a percent.
Solution:
Find the number of days

Month Actual Number of Days

June 29
July 31
August 16
Total 76
There are 76 days from June 1 to August 16.
I
R=
PT
P 365.22
R= =0.0200(rounded)
76
( P86,500)( )
360
The rate of interest is 2.0%

Quick Check 4
A loan of P 37,000 made on February 4 results in interest of P 770.83. If the loan is due on
May 15, find the rate to the nearest tenth of a percent.
OBJECTIVE 3 Find the time. The time (T) is found by dividing both sides of the simple
interest equation I = PRT by PR. Note that time will be in years, or fraction of a year.

Interest I
T (¿ years)= ∨T =
Principal x Rate PR

The preceding formula gives time in years, but we often need time in days or months. Find
these as follows.

I
T ( ¿ days )= x 360 ( Using Ordinary Interest )
PR

I
T ( ¿ days )= x 365 ( Using Exact Interest )
PR

Example 5:
Roberta Sanchez deposited P 18,600 in an account paying 3%, and she earned P217 in
interest. Find the number of days that the deposit earned interest using Ordinary and Exact
Interest method.

Solution:
I I
 Ordinary Interest T ( ¿ days )= x 360  Exact Interest T ( ¿ days )= x 360
PR PR
P 217 P 217
¿ x 360 ¿ x 365
( P 18,600)(0.03) ( P 18,600)(0.03)
=140 days =142 days (rounded)
Quick Check 5
A loan for P 22,000 results in interest of P 1283.33 at 10.5%. Find the time to the nearest day.

Section 2 Exercises. Provide a short solution as shown by the solved problem in item 1.
Find the principal in each of the following. Round to the nearest cent.
Rate Time (in days) Interest Principal
1. 10% 80 P 112 __________________

2. 6% 24 P 62.40 __________________

3. 8½% 120 P 4420 __________________

4. 10.5% 140 P 87.20 __________________

5. 9.5% 120 P 186 __________________

Find the rate in each of the following. Round to the nearest tenth of a percent.
 Principal Time Interest Rate
1. P 7600 200 days P 498.22 __________________

2. P 15,600 90 days P 312 __________________

3. P 42,800 60 days P 677.67 __________________

4. P 20,000 90 days P 625 __________________

5. P 8000 4 months P 200 __________________

Find the time in each of the following. In Exercises 1–3 round to the nearest day; in
Exercises 4 and 5, round to the nearest month.

Principal Rate Interest Time

1. P 36,000 9%, P 585 ________________________

2. P 24,000 11% P 454.70 ________________________

3. P 20,000 8% P 1200 ________________________

4. P 3500, 10 ¼ % P 143.50 ________________________

5. P 8400 7¼ P 357 ________________________

In each of the following application problems, find principal to the nearest cent, rate to the
nearest tenth of a percent, or time to the nearest day.
 1. Hoyt Axton earned P 244.80 interest in 9 months in a short-term savings account that
paid 3.2, per year. Use the simple interest formula to estimate the amount initially
invested.

2. Joan Gretz invested P 3600 in a mutual fund containing bonds. Find the rate if she
earned P 237.50 in interest in 250 days.

3. Hot Air Balloon Tours, Inc. must pay the bank P 23,515.27 in interest 300 days after
making a loan of P 328,120 to purchase hot air balloons.

4. James Smith lets an P 1800 mortgage payment go 70 days overdue and is charged a
penalty of P 59.50. Find the rate of interest that was charged as a penalty.

5. Jan Rice signed a promissory note for P 6400 at 11 ½ %, interest with interest charges
of P 425.24. Find the term of the note to the nearest day.

3
Section Promissory Notes, Bank Discounts and Proceeds
Section Objectives
1. Define the basic terms used with notes
2. Find the bank discount and proceeds.
3. Find the face value.
4. Comparing Discount Notes and Simple Interest Notes
5. Find the effective interest rate

OBJECTIVE 1: Define the basic terms used with notes

A promissory note is a legal document in which one person or firm agrees to pay a
certain amount of money, on a specific day in the future, to another person or firm. An
example of a promissory note follows.

Maker or payer: The person borrowing the money.

(Madeline Sullivan in the sample note)
Payee: The person who loaned the money and who will receive the payment
(Charles D. Miller in the sample note)
Term: The length of time until the note is due (90 days in the sample note)
Face value or principal: The amount being borrowed
($27,500 in the sample note)
Maturity value: The face value plus interest, also the amount due at maturity
Maturity date or due date: The date the loan must be paid off with interest
(June 4 in the sample note)
Find the interest and the maturity value on the loan in the sample note above.
Interest = Face value * Rate * Time
Interest = P 27,500 * .12 *90/360 = P 825
Maturity value = Face value + Interest
Maturity value = P 27,500 + P 825 = P 28,325

Madeline Sullivan must pay P 28,325 to Charles D. Miller on June 4, the maturity
date of the note.
A simple discount notes, which are simply a different way to set up a promissory
note based on simple interest calculations. Any note that uses simple interest calculations
with a lump-sum payment can be set up either as a simple interest note or as a simple
discount note. One type of note is not better than the other type of note. They merely
represent two different ways to discuss the same thing. We study both because some banks
use simple
interest notes while others use simple discount notes.

As we saw earlier, simple interest notes involve principal (face value or loan amount),
interest rate, time, interest, and maturity value. Simple discount notes involve proceeds (loan
amount), discount rate, time, bank discount (interest), and face value (or maturity
value). Face value in a simple interest note is the amount loaned to the borrower, but it is the
maturity value in a simple discount note. Simple discount notes are also called interest-in-
advance notes, since interest is subtracted before funds are given to the borrower. A basic
difference between the
two types of notes is that simple interest is calculated based on principal, whereas simple
discount is calculated based on maturity value,

Simple Interest versus Simple Discount Notes

    Repayment
Type of Note Loan Amount Interest
    Amount
Face value + =
Simple interest Interest Maturity Value
(Principal)
+ Discount = Face value
Simple discount Proceeds (Interest
    (Maturity value)
)

Note: Simple interest is calculated on the principal, while simple discount is calculated on the maturity value.
OBJECTIVE 2: Find the bank discount and proceeds.
The formula for finding the bank discount is a form of the basic percent equation. The
formula is similar to the one used to calculate simple interest, but different letters are used
since the ideas differ slightly.

Calculating Bank Discount

Bank discount = Face value * Discount rate * Time
Then, if P is the proceeds,
Proceeds (loan amount) = Face value - Bank discount or
P=M-B
Stated in another way,
Face value = Proceeds (loan amount) + Bank discount or
M=P+B
Note: Time must be given in years.

Example 1:
Jim signs a simple discount note with a face or maturity value of P35,000 so that he can
purchase a computer for his online business. The banker discounts the 10-month note at 9%.
Find the amount of the discount and the proceeds.

Solution:
Jim does not receive P 35,000 from the bank—that is the amount he must repay when the
loan matures. Use M = P 35,000, D = 9,, and T = 10/12 in the formula B = MDT to find the
discount, which is the interest that must be paid at maturity.
Bank discount = M x D x T
B = P 35,000 x 0.09 * 10/12 = P 2625

The discount of P2625 is the interest charge on the loan. The proceeds that Jim actually
receives when making the loan is found using P = M - B.
P=M-B
P = P 35,000 – P 2625 = P 32,375
Peterson signs the discount note with a face value of P 35,000, but receives P 32,375. Ten
months later he must pay P 35,000 to the bank. The difference is interest.
1Eee
Quick Check 1
A simple discount loan has a maturity value of P 15,800, discount rate of 9%, and time of 180
days. Find the bank discount and proceeds.

Example 2:
To finance a new electronic sign to put in front of a retail store, Mustang Auto signs a 6-
month, simple discount note with a face value of P 45,000. Find the proceeds if the discount
rate is 10.5%
Solution
The bank discount (B) is not known, but we do know that B = MDT. Therefore, we can
substitute
MDT in place of B.
P=M-B
P = M – MDT Substitute MDT in place of B.

P = M (1–DT) Factor out M

P = P 45,000 (1- 0.105 *6/12) Substitute values.

P = P 42637.50
Mustang Auto receives P 42637.50 but must pay back P 45 000 in 6 months.

Quick Check 2
A 220-day loan with a face value of P 40,000 has a discount rate of 12%. Find the proceeds.
OBJECTIVE 3: Find the face value.
If the loan amount (proceeds) of a simple discount note is known, use the following
formula to find the corresponding face value.

Calculating Face Value to Achieve Desired Proceeds

P
M=
1−DT
where
M = Face value of the simple discount note
P = Proceeds received by the borrower
D = Discount rate used by the bank
T = Time of the loan (in years)

Example 3:

Tina Watson purchased a classic 1961 Corvette and plans to rebuild it. She needs to
borrow P 18,000 for 180 days. Find the face value of the 10%, simple discount note that
would result in proceeds of P 18,000 to Watson.

Solution

Use the formula.

P
M=
1−DT

Replace P with P 18,000, D with .10, and T with 180/360.

P 18,000
M=
0.10∗180
1−
360

= P 18,947.37 (rounded)
The face value of the note is P 18,947.37. However, Watson receives only P 18,000 from the
bank when the note is signed. She must repay P 18,947.37 to the bank in 180 days.

Quick Check 3
A 300-day note has proceeds of P 48,000 and a discount rate of 8.8%. Find the maturity
value.

Objective 4: Comparing Discount Notes and Simple Interest Notes

Example 4:

Jane Benson of Benson Automotive has been offered loans from two different banks. Each
note
has a face value of P 750,000 and a time of 90 days. One note has a simple interest rate of
10%,
and the other a simple discount rate of 10%. Benson wants to know which is the better deal.

Solution:
Find the interest owed on each.

Simple Interest Note   Simple Discount Note

I = PRT B = MDT

I = P 750,000 * .10 *90/360 I = P 750,000 * .10 *90/360

I = P 1875 B = P 1875

The amount of interest is the same in both notes. Now find the amount the borrower would
receive.
 Simple Interest Note   Simple Discount Note
Proceeds = M - B
Face value = P 750,000 = P 750,000 – P 18,750
= P731, 250

The borrower has the use of P 75,000 with the simple interest note, but only P 73,125
with the simple discount note. Yet the amount of interest is identical. So, the simple interest
note is the better deal for Benson in this situation. However, it is NOT true that a simple
interest note is always better than a simple discount note. You must compare the terms of
each to discover which is better. Find the maturity value of each note as follows.

Simple Interest Note   Simple Discount Note

M=P+I
Maturity Value= Face Value
= P 75,000 + P 18, 750
= P 750, 000
= P 768, 750

The differences between these two notes can be summarized as follows.

Simple Interest Note   Simple Discount Note

Face value P 750 000 P 750 000

Interest P 18, 750 P 18, 750

Amount available to
P 750 000 P 731 250
borrower

Maturity value P 768 750 P 750 000

OBJECTIVE 5: Find the effective interest rate.
The effective rate of interest is also called the annual percentage rate, the APR,
and the true rate. It is the interest rate that is calculated based on the actual amount received
by the borrower. The discount rate of 10%, stated in Example 4 is called the stated rate, or
nominal rate, since it is the rate written on the note. It is not the effective rate, since the
10%, applies to the maturity value of P750,000 and not to the proceeds of P 731, 250 actually
received by the borrower. The next example shows how to find the effective rate for Example
4.

Example 4:

Find the effective rate of interest (APR) for the simple discount note of Example 4.

Solution
Find the effective rate (APR) by using the formula for simple interest: I = PRT. In this case,
I = P 18, 750 (the discount), P = 731,250 (the proceeds), and T = 90/360.

I
R=
PT

P18,750
R= =0.1026=10.26 %( rounded)
90
( P731,250)( )
360

Thus, the 10.26% effective rate of the simple discount note is higher than the 10, effective
rate of the simple interest note showing that the simple interest note is better for the borrower
in this situation.

Quick Check 4
Find the effective rate (APR) for a loan with a loan amount of P 31,000, a time of 90 days,
and interest of P 891.

Section 3 Exercises:
Find the discount to the nearest cent, then find the proceeds
Face Discount Time Proceeds or
Value Rate (Days) Discount Loan Amount
1. P 7800 9% 120 __________________

2. P 15,000 10.25% 90 __________________

3. P 19,000 10% 180 __________________

4. P 12,500 11% 150 __________________

5. P 22,400 8¾% 75 __________________

Find the maturity date and the proceeds for the following. Round to the nearest cent

Face Discount Date Time Maturity Proceeds or

Value Rate Made (Days) Date Loan Amount

1. P 64,000 9.5% Mar. 22 90 ________ ____________

2. P 9500 12% Oct. 12 100 ___________ ____________

3. P 10,000 10 ¼ % July 12 150 ___________ ____________

4. P 24,000 10% Dec. 10 60 ___________ ____________

 5. P 8000 10.5% Nov. 4 165 ___________ ____________

Solve each of the following application problems. Round rate to the nearest tenth of a percent,
time to the nearest day, and money to the nearest cent.

1. Jessica Hernandez was unable to collect funds owed her from a customer that declared bankruptcy. The
shortage of cash forced Hernandez to sign a P 12,200 note at a discount rate of 11, to pay her bills. She
was told the interest would be P 931.94. Find the length of the loan in days.

Answer: _____________________
2. Wyatt Construction borrowed P 157.25 million during the construction phase of adding a wing to a
casino in Las Vegas. Management signed a 270-day note with a face value of P 170 million. Find the
discount rate.

Answer: _____________________
3. A regional manager at Trugreen, Inc. authorizes the borrowing of P 98,300 for trucks and sprayers
needed to spray yards with fertilizers and pesticides. The simple discount note has a 9.25, rate and
matures in 150 days. Find the face value of the loan needed.

Answer: _____________________
4. Cathy Cox has poor credit but she found a bank that will lend her P 4200 when she uses some
collateral. Still, the bank charges a 12, discount rate. Find (a) the proceeds if the note is for 10 months
and (b) the effective interest rate charged by the bank.

Answer: _____________________
 5. As a borrower, would you prefer a simple interest note with a rate of 11, or a simple discount note at a
rate of 11? Explain using an example.

Section 4 Discounting a Note Before Maturity

Section Objectives
1. Understand the concept of discounting a note.
2. Find the proceeds when discounting simple interest notes.
3. Find the proceeds when discounting simple discount notes.

A note is a legal responsibility for one individual or firm to pay a specific amount on
a specific date to another individual or firm. Notes can be bought and sold just as an
automobile can be bought and sold. The clipping taken from a newspaper shows firms that
buy notes. This section shows how to find the value of a note that is sold before its maturity
date.

OBJECTIVE 1 Understand the concept of discounting a note.

Businesses sometimes help their customers purchase products or services by
accepting a promissory note rather than requiring an immediate cash payment. For example, a
company that manufactures boats, a retailer that sells the boats, and a bank may do business
as follows:

1. Boat manufacturer sells boats to a retailer and accepts a promissory note instead of cash.
2. Boat manufacturer needs cash and sells the note to a bank before it matures.
3. Retailer pays the maturity value of the note to the bank when due.
 The bank deducts a fee from the maturity value of the note when it buys the note from
the manufacturer. The fee is interest for the number of days, called the discount period, that
the bank will hold the note until it is due. The fee charged by the bank is the bank discount
or just discount. The discount rate is the percent used by the bank to find the discount. The
process of finding the value of the note on a specific date before it matures is discounting the
note. Both simple interest notes and simple discount notes can be discounted before they
mature.

OBJECTIVE 2: Find the proceeds when discounting simple interest notes.

The amount of cash actually received by the boat manufacturer on the sale of a
promissory note is the proceeds. The bank then collects the maturity value from the maker of
the note, the retailer, when it is due.

Calculate the Proceeds When Discounting a Simple Interest Note

1. First, understand the simple interest note by finding:
(a) the due date of the original note and
(b) the maturity value of the original note (M = P + I, where I = PRT).
2. Then discount the simple interest note.
(a) Find the discount period, which is the time (e.g., number of days) from
the sale of
the note to the maturity date of the note.
(b) Find the discount using the formula
B=M*D*T
= Maturity value * Discount rate * Discount period
(c) Find the proceeds after discounting the original note using P = M - B.
Example 1:
Jameson Plumbing takes a simple interest, 180-day note
from a contractor with a face value of P 64,750 and a rate
of 10.5%. The company sells the note to a bank 50 days
later at a discount rate of 12%. Find the proceeds to the
plumbing company.

Solution

Step 1: Find the maturity value. The face value equals the proceeds, since this is a simple
interest note.

Maturity value = Principal + Interest on the simple interest note

Maturity value = P 64,750 + PRT Since I = PRT
Maturity value = P 64,750 + P 64,750 * .105 *180/360
= P 68,149.38 (rounded)
Step 2 The note is discounted after 50 days, so the discount period is 180 - 50 = 130 days.
This means that the buyer of the note will own it for 130 days before the note is
paid off.
Use the formula B = MDT, with M = P 68,149.38, D = .12, and T = 130/360 to find the
discount.
Bank discount = MDT
= P 68,149.38 * .12 *130/360
= P 2953.14
Proceeds = Maturity value of simple interest note - Bank discount
Proceeds = P 68,149.38 - P 2953.14
= P 65,196.24

So, the following occurs:

1. A contractor signs a 180-day simple interest note with a face value of P 64,750 to
Jameson Plumbing.
2. After 50 days, Jameson Plumbing sells the note to a bank and receives P 65,196.24
in cash.
3. The bank receives P 68,149.38 on the maturity date of the loan.

Quick Check 1
A simple interest note has a face value of P 28,000, a rate of 9,, and a time to maturity of 240
days. It is discounted after 80 days at a rate of 11%. Find the maturity value of the simple
interest note and the proceeds at the time of the discount.

Example 2:

Blues Recording holds a 200-day simple interest note from a rock group that agreed to pay
them to record an album and produce 1000 CDs. The 12% simple interest note is dated
March 24 and has a face value of P 48,000. Blues Recording wishes to convert the note to
cash, so they sell it to a bank on August 15. If the bank requires a discount rate of 12.5% find
the proceeds to the recording studio.
Solution:

Go through the two steps of discounting a note.

Step 1 Find the maturity value. The note is dated March 24 and is due in 200 days.
Due date: March 24 + 200 days = October 10
Since this is a simple interest note, the proceeds are given but the maturity value must
be found. First find the interest on the note if held until maturity.

I = PRT = P 48,000 * .12 *200/360 = P 3,200

Maturity value: P 48,000 + P 3,200 = P 51,200.

Step 2 Now discount this simple interest note.

(a) Find the discount period. The discount period is the number of days from
August 15, which is the date the note is discounted (sold) to the bank, to the due
date of the note (October 10).

There are 56 days between August 15 to October 10

Blues Recording holds the 200-day note for 200 - 56 = 144 days before they sell it.
The buyer of the note holds it for 56 days before the rock group must pay off the note.

(b) Find the bank discount. Find the discount by using the formula B = MDT, where
M = P 51,200, D = 12.5,, and T is 56/360.

Bank discount=MDT
= P 51,200 * .125 *56/360
= P 995.56
(c) Find the proceeds. Proceeds are found by subtracting the bank discount from the
maturity value.
P=M-B
P = P 51,200 - P 995.56
 = P 50,204.44

Date Transaction
March 24 Rock group signs 200-day simple interest note for
P 48,000.
August 15 Blues Recording sells note to bank for P 50,204.44.
October 10 Bank receives P 51,200 from payer (rock group).

Quick Check 2
On March 27, Dayton Finance loans Jorge Rivera P 9200 for 150 days at 11, simple
interest. The finance company sells the note on April 24. Find the maturity value of the
simple interest note and the proceeds to Dayton Finance if the note is sold at a discount
rate of 12%.

OBJECTIVE 3 Find the proceeds when discounting simple discount notes.

Calculate the Proceeds When Discounting a Simple Discount Note

1. First, understand the simple discount note by finding:
(a) the due date of the original note,
(b) the discount of the original note using B = MDT, and
(c) the proceeds from the original note using P = M - B.
The maturity value (face value) of the note is written on the note itself and is the
value needed in step 2(b) below.
2. Then discount the simple discount note.
(a) Find the discount period, which is the time (e.g., number of days) from the
sale of
Example
3

Example 3:
Benson Automotive used excess cash to purchase a P 100,000 Treasury bill with a
term of 26 weeks at a 3.5, simple discount rate. However, the firm needs cash exactly 8
weeks later and sells the T-bill. During the 8 weeks, market interest rates changed slightly so
that the bill was sold at a 3, discount rate. Find (a) the initial purchase price of the T-bill, (b)
the proceeds received by the firm at the subsequent sale of the T-bill, and (c) the effective
interest rate.

Solution
(a) Find the discount and proceeds. The discount that Benson Automotive receives when
buying the T-bill is found as follows.
B = MDT
= P 100,000 * .035 *26/52
= P 1750
The cost to the company is the maturity value minus the discount.

P=M-B
= P 100,000 - P 1750
= P 98,250

Therefore, the U.S. government receives P 98,250 from the sale of the T-bill.

(b) Find the discount period, discount, and proceeds. Now follow the steps in the table to
find the proceeds Benson Automotive receives for selling the T-bill. The discount period is
18 weeks, since the T-bill is sold 26 - 8 = 18 weeks before its due date.
The discount at the time of the sale is as follows.
B = MDT
= P 100,000 * .03 *18/52
= P 1038.46
Finally, the proceeds equal the maturity value of the T-bill (P 100,000) less the discount at
the time of the sale.
P=M–B
= P 100,000 - P 1038.46
= P 98,961.54
(c) Benson Automotive paid P 98,250 to buy the T-bill and received P 98,961.54 for it
8 weeks later.
Interest received = P 98,961.54 - P 98,250
= P 711.54
P711.54
R= =0.0471=4.71 %( rounded)
8
( P 98,250)( )
52

The company would have earned 3.5, on the T-bill had it left the Treasury bill
invested until maturity. Instead, the company sold it after market interest rates rose, but
before the T-bill matured. This caused the company to end up with an effective interest rate
somewhat higher
than the 3.5%.

Quick Check 3
A 240-day discount note has a maturity value of P 24,000 and a discount rate of 8,. It
is sold after 100 days at a discount rate of 10.5%. Find the maturity value of the original
discount note and the proceeds at the time of the sale.
Section 4 Exercises:
Find the maturity value of each of the following simple interest notes. Each note is then discounted
at 12%. Find the discount period, the discount, and the proceeds after discounting.
Date Loan Face Length Maturity Date of Discount
Was Made Value of Loan Rate Value Discount Period Discount
Proceeds

1. Feb. 7 P 6200 90 days 10.5% __________ Apr. 1 _____ ________ _________

2. June 15 P 9200 140 days 12% __________ Oct. 22 _____ _______ _________

3. July 10 P 2000 72 days 11% __________ Aug. 2 _____ ______ _________

4. May 29 P 5500 80 days 10% __________ July 8 _____ ________ ___________

Solve the following application problems. Round interest and discount to the nearest cent.

1. First Bank loaned P 360,000 for 180 days to a company purchasing a rock-crushing machine. The bank
sold the 7, simple interest note 120 days later at an 8, discount rate. Find (a) the bank discount and (b)
the proceeds.

Answer: _____________________

2. Cook and Daughters Farm Equipment accepts a P 5800 simple interest note at 12, for 100 days, for a
small used tractor. The note is dated May 12. On June 17, the firm discounts the note at the bank, at a
13, discount rate. Find (a) the bank discount and (b) the proceeds.

Answer: _____________________

3. Hanson’s Jewelry signed a 180-day simple discount note with a face value of P 250,000 and a rate of 9,
on March 19. The lender sells the note at an 8, discount rate on June 14. Find (a) the proceeds of the
original note, (b) the discount period, (c) the discount and (d) the proceeds at the sale of the note on
June 14.
 Answer: _____________________

4. To build a new warehouse, Alco Fence Co. signed a P 300,000 simple interest note at 9, for 150 days
with National Bank on November 20. On February 6, National Bank sold all of its notes to Bank One.
Find (a) the maturity value of the note and (b) the proceeds to National Bank given a discount rate of
10.5% A National Tire and Battery outlet borrowed P 48,500 on a 200-day simple interest note to
expand the battery store. The note was signed on December 28 and carried an interest rate of 9.8,. The
note was then sold on March 17 at a discount rate of 10,. Find (a) the maturity value of the note and (b)
the proceeds to the seller of the note on May 17.

Answer: _____________________

I. SYNTHESIS

There are similarities and differences between simple interest and simple discount
calculations
> Both types of notes involve lump sums repaid with a single payment at the end of a
stated period of time.
>The length of time is generally 1 year or less.

The following table compares simple interest and simple discount notes.
References

Ballada, Ballada, Math in the Business World, 2019, 1st edition

Ballada, Ballada, Investment Mathematics, 2012 issue

Mathematics in the Modern World

Mathematics of Investment 5th Edition by Asuncion C. Mercado Del Rosario, copyright

2011, Del Ros Publishing House

Clendenen G., Salzman S. Business Mathematics 13ed 2015, Pearson Publishing,

Section 1
Relation of Compound Interest to Simple Interest

Section Objectives:
1. Use the simple interest formula I = PRT to calculate compound interest.
2. Identify interest rate per compounding period and number of compounding periods.
3. Use the formula M = P(1 + i) n to find compound amount.
4. Use the table to find compound amount.

Present value is the value of an investment today, right now. Money left in an
investment usually grows over time. The amount in an investment at a specific future date is
called the future amount, compound amount, or future value. The future value depends
not only on the amount initially invested, it also depends on the following:
1. Compound interest—Compound interest results in a greater future value than simple
interest.
2. Interest rate—A higher rate results in a greater future value.
3. Length of investment—An investment held longer usually results in a greater future
value.
To see the effects of these, compare the future values of a P 10,000 investment using the
following table:
 Investments A and B show the value of compound interest over simple interest.
 Investments B and C show the value of a higher interest rate.
 Investments C and D show the value of a longer investment period.

Investment Term Annual Rate Interest Future Value

A. Simple interest 6 years 5% P 3,000 P 13,000
B. Compound interest 6 years 5% P 3,401 P 13,401
C. Compound interest 6 years 8% P 5,869 P 15,869
D. Compound interest 10 years 8% P 11,589 P 21,589

The graph shows the power of compound interest over time using an investment of P 10,000
earning 5% and 8% per year compared to the same amount accumulated via simple interest.

Comparison of Simple interest and Compound

Interest
80000

70000

60000

50000

40000

30000

20000

10000

0
0 5 10 15 20 25 30

Simple Interest 5% Compound Interest at 5%

Compound Interest at 8%

OBJECTIVE 1 Use the simple interest formula I =PRT to calculate compound interest.
Compound interest is interest calculated on previously credited interest in addition
to the original principal. Compound interest calculations often require that interest be
calculated and credited to an account more than once each year.

Example 1
Regina Foster wants to compare simple interest to compound interest on a P 200,000
investment.
(a) Find the interest if funds earn 6, simple interest for 1 year.
(b) Find the interest if funds earn 6, interest compounded every 6 months for 1 year.
(c) Find the difference between the two.
(d) Find the effective rate for both.

Solution
(a) Simple interest on P 200,000 at 6, for 1 year is found as follows.
I = PRT = P 200,000 * .06 * 1 = P 12,000
(b) Interest compounded every 6 months means that interest must be calculated at the
end of each 6-months using I = PRT. Add interest to principal before proceeding.

Interest for first 6 months: PRT = P 200,000 * .06 * 6/12 = P 6000

Principal at end of first 6 months = Original principal + Interest

= P 200,000 + P 6000 = P 206 000
The new principal of P 2060 earns interest for the second 6 months.
Interest for second 6 months = PRT = P 206000 * .06 * 6/12
= P 6180
Principal at end of 1 year = P 206000 + P 6180 = P 212180

The interest earned in the second 6 months (P 6180) is larger than that earned in the
first 6 months (P 60), since the first interest amount of P 60 is also earning interest
during the second 6 months.

Total compound interest = P 6000 + P 6180 = P 12180

(c) Difference in interest = P 12180 - P 12000= P 180

 Compound interest results in more interest. The difference here of P 180 seems trivial,
but compound interest results in huge differences over time.

(d) The effective interest rate is the interest for the year divided by the original
investment.

Effective Interest Rate

Funds earning 6, simple interest P 12000÷P 200000 = 0.06=6%
Funds earning 6, compounded every 6 months P 12180÷P 200000 =0.061= 6.1,
(rounded)

Although they have the same nominal rate (6%), the compound interest investment
has a larger effective interest rate due to compounding.

Finding Future Value (Compound Amount)

1. Use I = PRT to find simple interest for the period.
2. Add principal at the end of the previous period to the interest for the current period to
find the principal at the end of the current period.

Quick Check 1
P 15,000 is invested for 1 year. Find the future value based on (a) simple interest of 8, and
(b) 8, interest compounded every 6 months. (c) Then find the difference between the two.
Example 2
The Simons need P 5000 in 4 years for a down payment on a new car. They invest P
3800 in an investment that pays 6, interest compounded annually. (a) Find the excess of
compound interest over simple interest at the end of 5 years. (b) Will they have enough
money to meet their goal?

Solution
First calculate interest using I = PRT and round to the nearest cent. Then find the new
principal
by adding the interest earned to the preceding principal

Compound
Yea Interes
r P x R x T t P + I Amount
380,0 380,0 22,8
1 00 x 0.06 x 1 = 22,800 00 + 00 = 402,800
402,8 402,8 24,1
2 00 x 0.06 x 1 = 24,168 00 + 68 = 426,968
426,9 426,9 25,6
3 68 x 0.06 x 1 = 25,618 68 + 18 = 452,586
4 452,5 x 0.06 x 1 = 452,5 + 27,1 479,741
 86 27,155 86 55 =
479,7 479,7 28,7
5 41 x 0.06 x 1 = 28,784 41 + 84 = 508,526
508,52 380,0 128,52
Compound Interest = 6 - 00 = 6
PRT 114,000.0
Simple Interest = = 380,000*0.06*5 = 0
128,52 114,000. 14,525.7
Difference = 6 - 00 = 2

Quick Check 2
Find the future amount at the end of 2 years for an P 80,000 investment that earns 7% per
year

OBJECTIVE 2 Identify interest rate per compounding period and number of

compounding periods.
The compounding period is the time over which interest is calculated and added to
principal. It can be annually (once a year), semiannually (two times a year), quarterly (four
times
a year), monthly (12 times a year), etc. The number of compounding periods is the number of
the compounding periods per year, or in the life of the loan when talking about a loan.

Interest Compounded at Number of Compounding

Compounded the End Every Periods in 1 Year
Annually Year 1
Semi-annually 6 months 2
Quarterly 3 months 4
Monthly 1 months 12
 Daily 1 day 365

The interest rate per compounding period is the interest rate applied to each
compounding period. It is found by dividing the annual interest rate by the number of
compounding periods in a year. The total number of compounding periods is the number per
year times the number of years as shown. So, a loan compounded semiannually for 4 years
will be compounded every 6 months for 4 years, or 8 times.

Number of
    Compounding Term Rate per Total Number of
Rate Periods per Year Compounding Compounding Period
(j) Compounded m  t Period (i=j/m) (n=m*t)
Semi-
8% annually 2 4 years 8%/2=4% 4 years x 2 = 8
12% Monthly 12 2 ½ years 12%/12=1% 2 ½ x12=18
4% Quarterly 4 5 years 4%/4=1% 5 years x 4 =20

Quick Check 3
Find the interest rate per compounding period and the number of compounding periods for
each.
(a) 5% compounded semiannually, 3 years
(b) 6% per year, compounded monthly, 2 ½ years
(c) 2% per year, compounded quarterly, 5 years
OBJECTIVE 3 Use the Compound Amount formula to find compound amount.

Formulas for Compounding Interest

Maturity value/Future Value: F =P(1 +i)n
Interest: I=F-P
where
P = initial investment
n = total number of compounding periods
i = interest rate per compounding period

Example 3:
An investment managed by Bank of America pays 7% interest per year compounded
semiannually. Given an initial deposit of P 4500, (a) use the formula to find the compound
amount after 5 years, and (b) find the compound interest.

Solution
Interest is compounded at 7% /2 = 3.5% every 6 months for 5 years * 2 periods per year =10
periods. Therefore, 3.5% is the interest rate per compounding period (i) and 10 is the
number of compounding periods (n).

M = P(1 + i)n
= P 4500 * (1 + .035)10
= P 4500 * (1.035)10
= P 6347.69 (rounded)
The compound amount is P 6347.69.
 I=M-P
= P 6347.69 - P 4500 = P 1847.69
The interest is P 1847.69

Quick Check 4
Use the formula for maturity value to find the compound amount and interest on a P 9000
investment at 2, compounded semiannually for 5 years.
OBJECTIVE 4 Use the table to find compound amount.
The value of (1 + i)n in the formula M = P(1 + i)n can be calculated using a calculator,
or it can be found in the compound interest table below. The interest rate i at the top of the
table is the interest rate per compounding period. The value of n down the far left (or far
right) column of the table is the total number of compounding periods. The value in the body
of the table is the compound amount, or maturity value, for each P 1 in principal.

Compound Amount Table Factors

 Finding Compound Amount (Future Value)
Compound amount = Principal * Table Factor

Example 5:
In each case, find the interest earned on a P 2000 deposit.
(a) For 3 years, compounded annually at 4%
(b) For 5 years, compounded semiannually at 6%
(c) For 6 years, compounded quarterly at 8%
(d) For 2 years, compounded monthly at 12%

Solution
(a) In 3 years, there are 3 * 1 = 3 compounding periods. The interest rate per compounding
period is 4% / 1 = 4%
Look across the top of the compound interest table above for 4% and down the
side for 3 periods to find 1.12486.

Compound amount = M = P 2000 * 1.12486 = P 2249.72

Interest earned = I = P 2249.72 - P 2000 = P 249.72

(b) In 5 years, there are 5 * 2 = 10 semiannual compounding periods. The interest rate per
compounding period is 6%/ 2 = 3%. In the compound interest table, look at 3% at the
top and 10 periods down the side to find 1.34392.

Compound amount = M = P 2000 * 1.34392 = P 2687.84

Interest earned = I = P 2687.84 - P 2000 = P 687.84

(c) Interest compounded quarterly is compounded 4 times a year. In 6 years, there are
6 * 4 = 24 quarters, or 24 periods. Interest of 8% per year is 8%/4 = 2% per quarter. In
the compound interest table, locate 2, across the top and 24 periods at the left, finding the
number 1.60844.

Compound amount = M = P 2000 * 1.60844 = P 3216.88

Interest earned = I = P 3216.88 - P 2000 = P 1216.88

(d) In 2 years, there are 2 * 12 = 24 monthly periods. Interest of 12% per year is 12/12 = 1%
per month. Look in the compound interest table for 1% and 24 periods, finding the number
1.26973.

Compound amount = M = P 2000 * 1.26973 = P 2539.46

Interest earned = I = P 2539.46 - P 2000 = P 539.46

Quick Check 5
Find the interest earned on a P 5000 deposit for 4 years at 6, compounded semiannually.
Section 1 Exercises. Provide a Concise solution as indicated in the example.

Use the formula for compound amount, not the table, to find the compound amount and
interest. Round to the nearest cent
Compound Amount Interest
1. P 12,000 at 8% compounded annually for 4 years P 16,325.87 P 4325.87
Compound interest is 8% per year for 4 years.
F = P 12,000 * (1 + .08) 4= P 16,325.87
I = P 16,325.87 - P 12,000 = P 4325.87

2. P 14,800 at 6% compounded semiannually for 4 years ________ _________

3. P 28,000 at 10% compounded quarterly for 1 year ________ ________

4. P 20,000 at 5% compounded quarterly for ¾ year _________ ________

Use values from the compound interest table on page 402 to find both the compound
amount and the compound interest. Round the compound amount to the nearest cent.

Compound Amount Interest

1. P 32,350 at 6% compounded annually for 4 years __________ __________
 2. P 18,000 at 1% compounded annually for 10 years __________ __________

3. P 12,300 at 3% compounded semiannually for 4 years__________ __________

4. P 12,500 at 8% compounded quarterly for 5 years __________ __________

Find the simple interest for the period indicated. Then use table values to find the
compound interest. Finally, find the difference between compound interest and simple
interest. Round each to the nearest cent. (Interest is compounded annually.)

Number Simple Compound

Principal Rate of Years Interest Interest Difference

1. P 5400 6% 4 _________ __________ _____________

2. P 9200 5% 6 _________ __________ _____________

3. P 1200 8% 15 _________ __________ _____________

4. P 4625 4% 10 _________ __________ _____________

Solve the following application problems. Round to the nearest cent. Use any method.

1. Vickie Ewing deposits her savings of P 2800 in an investment paying 6%

compounded quarterly and she leaves it there for 5 years. Find (a) the compound
amount and (b) the interest.

2. John Crandall deposited P 6000 in an account at a bank that pays 5% compounded

semiannually for 4 years. Find (a) the compound amount and (b) the interest.

3. A firm in the UK places £42,000 (forty-two thousand pounds) in a bond paying 6,

compounded quarterly and leaves it there as collateral for a loan. Find (a) the balance
in the account after 1 year and (b) the interest.

4. A firm in the UK places £42,000 (forty-two thousand pounds) in a bond paying 6,

compounded quarterly and leaves it there as collateral for a loan. Find (a) the balance
in the account after 1 year and (b) the interest.

5. Jan Reus sold her home and has P 18,000 to invest. She believes she can earn 8,
compounded quarterly. Find the compound amount if she invests for (a) 3 years and
(b) 6 years. (c) Then find the additional amount earned due to the longer time period.
 Section 2 Present Value and Future Value
Section Objectives:
1. Define the terms future value and present value.
2. Use table and formula to calculate present value.

OBJECTIVE 1 Define the terms future value and present value.

Future value is the amount available at a specific date in the future. It is the amount
available after an investment has earned interest. All of the values found in Sections 1 were
future values.
In contrast, present value is the amount needed today so that the desired future value
will
be available when needed. For example, an individual may need to know the present value
that
must be invested today in order to have a down payment for a new car in 3 years. Or a firm
may need to know the present value that must be invested today in order to have enough
money to purchase a new computer system in 20 months. The bar chart shows present value
as the value today and future value as the value at a future date.

OBJECTIVE 2 Use tables to calculate present value.

First, find the interest rate per compounding
period (i) and the total number of compounding periods (n) of the investment. Then
use these values to find the appropriate value in the Present Value Table Factor. Finally,
use the formula to find present value.

Finding Present Value

Present value P = Future value * Table Factor

Table Factors
for Present
Value
Example 1:
Betty Clark needs to replace two pumps at her gas station in 3 years at an estimated
cost of P 12,000. What lump sum deposited today at 5, compounded annually must she
invest to have the needed funds? How much interest will she earn?

Solution
Step 1: The interest rate is 5, per compounding period for 3 compounding periods
(years in this case). Look across the top of the table for 5, and down the left
column for 3 to find 0.86384.
Present value = P 12,000 * .86384 = P 10,366.08
Step 2 Interest earned = P 12,000 - P 10,366.08 = P 1633.92.
Step 3 Check the answer by finding the future value of an investment of P 10,366.08
in an account earning 5, compounded annually for 3 years. Use the table above
to find 1.15763.
Future value = P 10,366.08 * 1.15763 = P 12,000.09
The reason it is not exactly P 12,000 is rounding in the table value

Example 2
The local Harley-Davidson shop has seen business grow rapidly. The owners plan to
increase the size of their 6000-square-foot shop in one year at a cost of P 280,000.
How much should be invested in an investment earning 6, compounded
semiannually to have the funds needed?

Solution
The interest rate per compounding period is 6%/2 = 3%, and the number of
compounding
Periods is 1 year * 2 periods per year = 2. Use the table to find .94260.
Present value = P 280,000 * .94260 = P 263,928
 The difference between the P 280,001.22 and the desired P 280,000 is due to
rounding.

Quick Check 1
In 5 years, Great Lakes Dairy estimates it will need P 350,000 for a down payment to
purchase a nearby farm. Find the amount that should be invested today to meet the down
payment if funds earn 8, compounded quarterly.

Example 3
Radiux Inc. wishes to partner with a Korean company to purchase a satellite in 3
years. Radiux plans to make a cash down payment of 40, of its anticipated P 8,000,000 cost
and borrow the remaining funds from a bank. Find the amount Radiux should invest today in
an investment
earning 6, compounded annually to have the down payment needed in 3 years.

Solution
First find the down payment to be paid in 3 years.
Down payment = .40 * P 8,000,000 = P 3,200,000
This is the future value needed exactly 3 years from now. Using the present value of a dollar
table on page 420 with 3 periods and 6% per period gives
P= P 3,200,000 * .83962 = P 2,686,784
Radiux must invest P 2,686,784 today at 6, interest compounded annually to have the
required
down payment of P 3,200,000 in 3 years.

Quick Check 2
Mom and Pop Jenkins plan to buy a new car in 2 years and want to make a down payment
of 25, of the estimated purchase price of P 32,000. Find the amount they need to invest to
make the down payment if funds earn 6, compounded quarterly.

Objective 2 Compute Present Value using present Value formula

Formula for Present Value

F
Present Value : P= n
=F(1+i)−n
(1+i )

where
P = initial investment
n = total number of compounding periods
i = interest rate per compounding period

Solve a) Example 1 and 2 using the present value formula

a) The interest rate is 5% (i) per compounding period for 3 compounding periods (n)
F
P=
( 1+i )−n
12000
P=
( 1+0.05 )3
12000
P=
1.157625
¿ 10,366.08(rounded)
b) The interest rate per compounding period is 6%/2 = 3%, and the number of
compounding periods is 1 year * 2 periods per year = 2.

P=F ( 1+i )−n

−2
P=280,000 ( 1+0.03 )
280,000∗0.94260(rounded)
¿ 263,928(rounded)

Quick Check 3
Solve quick check number 2 using present value formula.
Objective 3. Find Present and Future Value for n periods when n is not a whole
number.
When deriving the compound interest formula, the time is assumed to be an integer.
However, when n is not a whole number and there is a fractional part of the period, the usual
practice is to allow simple interest for this fractional part in computing the final amount. This
method will be illustrated in the following examples.

Example 4:
Find the compound amount at the end of 3 years and 5 month if P 20,000 is invested
at 8% compounded semi-annually.

Solution:
The interest rate per period is 8%÷2=4% compounded semi-annually and P=20,0000
The total time in this case is 6 whole periods ( 3 years*2=6) and 5 months left over or
fraction of a period. The compound amount at the end of 6 whole periods is:
F = P 20000(1+0.04)6
= P 25, 306.38
The interest for the remaining 5 months, using I=PRT
I= (P 25,306.38)(0.08)(5/12)
= 843.55
Therefore, the final amount at the end of 3 years and 5 months is:
F= P 25,306.38 + 843.55
= P 26,149.93 (rounded)
Alternatively, this can be computed as
F=P(1+i)n(1+ RT)
F= ( 25,000)(1+0.04)6 (1 + 0.08*5/12) = P 26, 149.93

Quick Check 4
Find the compound amount of P 95,500 for 2 years and 10 months at 16% compounded
quarterly.

Example 5
Find the amount to be invested today in order to accumulate P 300,000 after 5 years
and 4 months if the money will grow at 10% compounded quarterly.

Solution:
Given a final amount of F=300,000 , i=10%÷4=2.5% and there are 21 quarters and 1
excess month within 5 years and 4 months. We are going to add 2 more months to make the
fractional part be equivalent to 1 quarter making n=22. Compute the present value using n=22

P= F(1+i)-n
= P 300,000(1+0.025)-22
=P174, 259.40
Note that this value is lower than the true present value because of the additional 2 months. In
order to compensate for the true value of P, we are going to compute the simple interest of
the initial value of P.
I = PRT
= (P 174, 259.40)(0.10)(2/12)
= P 2904.32 (rounded)
The true present value is
P = P 174, 259.40 + P 2904.32
= P 177, 163.72 (rounded)

Quick Check 6
If P 275,000 is due in 4 years and 11 months, what is its equivalent present value if interest is
12% compounded semiannually?
Objective 4 Nominal Rate and Effective rates.

The effective rate of interest is the equivalent annual rate of interest which is
compounded annually. Further, the compounding must happen more than once every year.
Let’s look at an example for better clarity:
Peter invests P 10,000 for one year at the rate of 6% per annum. The interest is
compounded semi-annually. Calculate the interest earned in the first six months (I1).
I1 = P 10,000 x 0.06 x 6/12 = P 300.
Since the interest is compounded, the principal for the next 6 months = 10,000 + 300 = P
10,300. Therefore, the interest earned in the next six months (I2) is,
I2 = 10,300 x 0.06 x 6/12 = P 309.
Hence, the total interest earned during the year I = I1 + I2 = 300 + 309 = P 609. We
know the formula for interest is I = PRT … where ‘I’ is the interest, ‘P’ is the principal
amount, ‘T’ is the time period, and ‘R’ is the rate of interest. In the case of this example, R =
E or the effective rate of interest. Therefore, we have,
I P 609
E= = =0.069=6.9 %
PT P 10,000∗1

Effective rates can also be derived using compound amount formula.

Interest earned ∈one year

E=
Principal at the beginning of the year
F−P
E=
P
P(1+i)n−P
E=
P
E ¿(1+i )n−1
j m
E ¿(1+ ) −1
m
Solving the previous example using this formula, where j=6%, m=2 (semi-annually)
0.1 2
(
E ¿ 1+
2 ) −1
E=1.069−1=0.069=6.09 %

Quick Check 7
Find the effective rate of an investment of P 100,000 if the money is yields 8%
compounded quarterly for one year.
.

Section 2 Exercises
Find the present value of the following using table factors. Verify your answer using the present value
formula. Round to the nearest cent. Also, find the amount of interest earned.

Amount Needed Time (Years) Interest Compounded Present Value Interest Earned

1. P 12,300 3 6% annually ___________ ____________

2. P 14,500 2½ 8% quarterly ___________ ____________

3. P 9350 4 5% semiannually ___________ ____________

4. P 850 10 9% semiannually ___________ ____________

5. P 18,853 11 6% quarterly ___________ ____________

Solve the following application problems. Round to the nearest hundredths.

1. A P 50,000 loan was secured on August 15, 2010 at an interest rate of 16% compounded
semi-annually. What will be the accumulated amount if it is due on March 15, 2011?

2. A man borrowed P 200,000 at an interest rate of 25%, compounded quarterly. If he intends to

pay the accumulated amount in 5 years and 7 months, how much will he pay?

3. Determine the nominal interest rate compounded quarterly if the effective interest rate is 9%
per annum (correct to two decimal places).

4. Cebela is quoted a nominal interest rate of 9.15% per annum compounded every four months
on her investment of P 85 000. Calculate the effective rate per annum.

5. Miranda invests P 80, 000 for for her son's study fund. Determine how much money she will
have at the end of the year and the effective annual interest rate if the nominal interest of 6%
is compounded quarterly.
 6. An investment company advertised that they are paying 12% compounded monthly. If an
investor transfers P 100,000 to this investment company from another investment company
that pays 12%compounded quarterly, how much additional interest a year will he get, if there
is any?

Section 3Manipulating Compound Amount Formula

Finding the Interest rate. In the Basic formula F= P(1+i)n , the interest rate can be
derived and it is given by

Formula for Interest Rate per compounding period

n F
i=
P
−1
√
Where
F= Final Amount
P = initial investment
n = total number of compounding periods
i = interest rate per compounding period

Example 6
If P 50,000 amounts to P 70,000 in 5 years with interest compounded semi annually,
what is the nominal rate of interest?
Solution
In the problem, P= P 50,000; F= P 70,000 and n=5years*2=10, the interest per period
is then given by
F
i=
√
n

P
−1

P 70,000
i=
√
10

P 50,000
−1

i=1.0342−1
 i=0.0342=3.42% semiannually
The nominal rate is i=j/m, therefore j=i*m
j=3.42∗2=6.84 % (rounded)

Quick Check 8
If P 40,000 accumulates to P 100,000 in 10 years, find the nominal rate if the interest is
computed quarterly?

Finding the time. In the compound amount formula, time is associated with n, the
number of compounding period. Since n=m*t, then, t= n/m. The formula for n is given by:

Formula for n
F
log( )
P
n=
log(1+i)

Where
F= Final Amount
P = initial investment
i = interest rate per compounding periods

Example 7
How long will it take P 20,000 to amount to P35,000 at 10% compounded quarterly?
Solution
Given P=P20,000, F=P35,000 and i=10%÷4=2.5%
F
log( )
P
n=
log (1+i)
 FP 35,000
log ( )
P 20,000
n=
log(1+0.025)
n=¿22.66 quarters

Therefore, time is t=n/m=22.66/4=5.67 years.

Quick Check 9
How long will a principal of P 60,000 reach to an amount of P85,000 if it earns 6%
compounded semiannually?
Section Exercises
Solve the following application problems. Round to the nearest hundredths.

1. If you deposit $8000 into an account paying 7% annual interest compounded

quarterly, how long until there is $12400 in the account?

2. At 3% annual interest compounded monthly, how long will it take to double your
money?

3. If you deposit $5000 into an account paying 6% annual interest compounded monthly,
how long until there is $8000 in the account?

4. A man invested P 150,000 on his first child’s birth. If he wishes to double the amount
he invested after 7 years, at what rate compounded quarterly should she invest?
 5. If P100,000 pesos earned an interest of P12500 in 3 years, at what nominal rate was it
invested compounded semiannually?

6. How long will it take any investment to double its amount if invested to an account
paying 8% compounded quarterly?

SYNTHESIS

Formulas under compound interest topics

Compound amount = Principal * Table Factor

F =P(1 +i)n

Present value P = Future value * Table Factor

F
P= n
=F(1+i)−n
(1+i )

Effective rates
Interest earned ∈one year
E=
Principal at the beginning of the year

Formula for Interest Rate per compounding period

n F
i=
P√−1

Formula for time (n)

F
log( )
P
n=
log(1+i)
References

Ballada, Ballada, Math in the Business World, 2019, 1st edition

Ballada, Ballada, Investment Mathematics, 2012 issue

Mathematics in the Modern World

Mathematics of Investment 5th Edition by Asuncion C. Mercado Del Rosario, copyright

2011, Del Ros Publishing House

Clendenen G., Salzman S. Business Mathematics 13ed 2015, Pearson Publishing,

MATH IF (MATHEMATICS OF THE MODERN WORLD)

MODULE 3
Introduction to Annuities

Section 1
Ordinary Annuity
 COLLEGE OF BUSINESS AND ACCOUNTANCY
Section 1 1 Ordinary Annuity
Section Objectives:
1. Define the basic terms involved with annuities.
2. Find the amount of an annuity via Table Factors and Future Value Formula
3. Use the formula to find the present value of an ordinary annuity.

OBJECTIVE 1 Define the basic terms involved with annuities.

In Module 2, we discussed lump sums that were invested for periods of time. In this
module, we talk about an annuity, or a series of equal payments made at regular intervals.
Monthly mortgage payments, quarterly payments by a company into an employee retirement
account, and monthly checks paid by Social Security to a retired couple are examples of
annuities. There are two basic types of annuities. One type grows as regular payments are
made and it accumulates compound interest. Regular payments into a retirement account or
college savings account are examples of this type of annuity. A second type of annuity
involves regular
payments made out of an accumulated sum. Monthly payments from a retirement fund are an
example. Retirement funds can in fact represent both types, with money being added on a
regular
basis while an employee is working, then with payments being made from the fund after the
employee retires. This section will cover annuities that accumulate funds, while Section 11.2
will include a discussion of annuities from which payments are made. The basic terms
involved
are the same for both types.
An ordinary annuity is one in which payments are made at the end of each period,
such
as at the end of each month. The payment period is the length of time between payments and
the term of the annuity is the total time needed for all payments. Interest calculations for
annuities are done using compound interest. The total amount in an annuity on a future date
is the amount, compound amount, or future value of the annuity. These terms are used
interchangeably.

The amount an annuity grows to can be found using compound interest techniques
from
the previous module. For example, suppose a firm makes deposits of P30,000 at the end of
each year for 6 years into an investment earning 8% compounded annually. Use the
compound interest tables in module 2 for 5 years and 8% to find the future value of the first
payment as follows:
P 30,000 * 1.46933 = P44,079.9
The future value of the annuity is the sum of the compound amounts of all six
payments. The annuity ends on the day of the last payment. Therefore, the last payment,
which is made at the end of year 6, earns no interest.
The future value of the annuity is P 220, 075.9.

Find the total amount deposited in the annuity and interest earned as follows:
Total deposits = 6 years * P 300,00 per year = P180,000
Interest earned = Future value of annuity - Total deposits
=P 220,075.9 – P 180,000
= P 40,075.9

OBJECTIVE 2 Find the amount of an annuity.

The amount of an annuity can also be found using the amount of an annuity table on
the next page. The number from the table is the amount or future value of an annuity with a
payment of P 1. The amount of an annuity with any payment is found as follows.

Finding Amount of an Annuity

Amount = Payment * Table Factor from amount of an annuity table

As a check, reconsider the annuity of P 30,000 at the end of each year for 6 years at
8% compounded annually. Locate 8% at the top of the table and 6 periods in the far left (or
far right) column to find 7.33593.
Amount = P 30,000 * 7.33593 = P 220,077.9
This amount is identical to the amount calculated earlier, but sometimes the estimates from
the table differ slightly from those found using a calculator.
Table Factors for an Amount of Annuity
Example 1
 A father deposits P10,000 every quarter for 5 years in a firm that pays 12%
compounded quarterly. Assuming no withdrawals are made, how much would be in his
account at the end of five years?

Solution
Deposits per quarter = 10,000
12%
Interest earned per quarter =3 % for 5 years x 4 = 20 quarters. Look across the
4
top of
the table for 3, and down the side for 20 periods to find 26.87037

Amount = P 10,000 x 26.87037= P 268,703.7

Total deposits = 20 quarters * P 10,00 per year = P 200,000
Interest earned = Future value of annuity - Total deposits
= P 268,703.7 – P 200,000
= P 68,703.7

Quick Check 1
At the end of every quarter, P 2000 is put into a educational plan that earns 6% compounded
quarterly. Find the future value in 5 years.

Future value of an ordinary annuity can also be determined using its formula and it is given
by:

Amount of an Annuity or Future Value of an Ordinary Annuity (FV OA)

(1+i)n−1
FV OA=Pmt ( i )
Where FV OA=Future value∨amount
Example 2
Mark Ezekiel wants to put up his Art Studio 5 years from now. If he deposits P 5,000
from his monthly salary for the next 5 years in an account that yields 12% compounded
monthly. How much does he have by that time?

Solution
Amount deposited at the end of each month is P 5000 for 5 years x 12 = 60 months
12%
Using Pmt= P5,000, n=60 and =1 %
12

(1+i)n−1
FV OA=Pmt ( i )
(1+ 0.01)60−1
FV OA=P 5,000 ( 0.01 ) =P 408,348.35(rounded)

Quick Check 2
Verify Quick Check 1 using the formula.

Objective 3. Use the formula to find the present value of an ordinary annuity.

The present value of an ordinary annuity is the total of the present values of all the
payments of the annuity. To get the present value, assume an annuity of n number of
payments at rate i per period. Calculate the present value of each payment to the start of the
annuity and take their sum. The total is the present value of the annuity.
There is also a corresponding table factor for Present Value of an Ordinary Annuity
given below.
 Finding Amount of an Annuity

Present Value of Ordinary Annuity = Payment * Present Value Table Factor

Example 3
An alumnus in a certain university wants to provide a P 250,000 research fellowship
fund at the end of each year for the next five years. If the University can invest the money at
10% compounded annually, how much should a man give now to setup the fund for the
scholarship?
Solution
Annual fellowship fund = P 250,000
10 %
Interest earned per year =10 % for 5 years x 1 = 5. Look across the top of
1
the table for 10, and down the side for 5 periods to find 3.79079
Present Value = P 250,000 x 3.79079= P 947,697.5

The amount P 947, 697.5 is the lump sum need to be deposited in an investment
earning 10% compounded annually to be able to provide P 250,000 pesos every end of
the year for 5 years. At the end of the 5th year of the scholarship, the fund is fully
exhausted. The fund was able to provide P 250,000 x 5= P 1,250,000 by investing P
947, 697.5

The present value of an ordinary annuity formula can also be used and it is given by:

Present Value of an Ordinary Annuity (FVOA)

1−(1+i)−n
PV OA=Pmt ( i )
Where PV OA=Present Value of an Ordinary Annuity
Pmt= periodic deposit∨ payment
n=number of deposits∨ payments made i=interest rate per compounding period

Example 4

A company wants to purchase a machine the will require a payment of

P100,000 at the end each 6 months for the next four years. How much should the
company invest at present to cover for the semiannual payment if the money can be
invested 12% compounded semiannually?
Solution

Amount to be paid at the end of each month is P 100,000 for 4 years x 2 = 8

12%
Using Pmt= P100,000, n=8 and =6 %
2

1−(1+i)−n
PV OA=Pmt ( i )
1−(1+0.06)−8
PV OA=P 100,000 ( 0.06 )
=P 620,979.38( rounded)

The value can verified using the table factor for present value. Given i=6% and n=8,
the corresponding table factor is 6.20979
Present Value = P 100,000 x 6.20979= P 620, 979
The difference in decimal places is due to the limit decimal places used by the table
factor.

Section Exercises
Find the amount of the following ordinary annuities rounded to the nearest cent. Find the total interest
earned.

Amount of Time Amount of Interest

Each Deposit Deposited Rate (Years) Annuity Earned
 1. P 900 annually 5% 18 __________ __________

2. P 2900 annually 8% 5 __________ __________

3. P 7500 semiannually 6% 10 __________ __________

4. P 9200 semiannually 8% 5 __________ __________

5. P 3500 quarterly 10% 7 __________ __________

Find the present value of the following annuities. Round to the nearest cent
Amount per Payment at Time Rate of Present
Payment End of Each (Years) Investment Compounded Value

P 1800 year 18 10% annually ______________

P 4100 year 7 6% annually ______________

P 2000 6 months 12 8% semiannually ______________

P 1700 6 months 14 5% semiannually ______________

P 894 quarter 6 4% quarterly ______________

Solve the following application problems.

1. Roman Rodriguez would like to know if he can retire in 35 years at age 60, when he
plan to fish a lot. Assume the total deposit into his retirement account at the
 community college is P 3800 at the end of each year and that the fund earns 6, per
year. Find (a) the amount of the annuity and (b) the interest earned.

2. Monique Chaney places P 250 of her quarterly child support check into an annuity for
the education of her child. She does this at the beginning of each quarter for 8 years
into an account paying 8, per year, compounded quarterly. Find the amount of the
annuity and (b) the interest earned.

3. In 4 years, Jennifer Videtto will need to purchase a delivery van for her plumbing
company. She estimates it will require a down payment of P 10,000 with payments of
P 950 per month for 36 months. (a) Find the total amount needed in 4 years assuming
12% compounded monthly. (b) Will she have enough if she invests P 2200 at the end
of every quarter for 4 years and earns 6, compounded quarterly?

4. Jessica Thames expects to receive P 18,400 per year based on her deceased husband’s
contributions to Social Security. Assume that she receives payments for 14 years and
a rate of 4% per year, and find the present value of this annuity.

SYNTHESIS

Formula for Future Value and Present Value of Ordinary Annuity

 (1+i)n−1
FV OA=Pmt (i )
Amount = Payment * Table Factor from amount of an annuity table

1−(1+i)−n
PV OA=Pmt ( i )
Present Value of Ordinary Annuity = Payment * Present Value Table Factor
References

Ballada, Ballada, Math in the Business World, 2019, 1st edition

Ballada, Ballada, Investment Mathematics, 2012 issue

Mathematics in the Modern World

Mathematics of Investment 5th Edition by Asuncion C. Mercado Del Rosario, copyright

2011, Del Ros Publishing House

Clendenen G., Salzman S. Business Mathematics 13ed 2015, Pearson Publishing,