Math

REVIEW QUESTIONS
1. What are the two most common methods businesses use in computing interest?
The two most common methods of calculating interest are simple interest and compound
interest.
2. What are the factors being considered in computing for the simple interest? State
the simple interest formula.
There are only 3 common factors to be considered with regards to simple interest.
 Principal. This is the amount of money being borrowed.
 Rate of Interest. This is the percent to be used to calculate the additional amount to be
paid along with the principal.
 Time.
I = Prt
8. Define promissory note. Who are the original parties to a promissory note?
A promissory note is a written and signed promise to repay a sum of money in exchange for a
loan or other financing. All promissory notes constitute three primary parties. These include
the drawee, drawer and payee.
REVIEW QUESTIONS
1.What is the concept of present value?

The concept of present value is critical in many financial applications, such as the valuation
of pension obligations, decisions to invest in fixed assets, and whether to purchase one type
of investment over another. In the latter case, present value provides a common basis for
comparing different types of investments. The concept of present value is especially
important in hyperinflationary economies, where the value of money is declining so rapidly
that future cash flows have essentially no value at all. The use of present value clarifies this
effect.
4.State the present value formula.

The present value formula is PV=FV/(1+i)n, where you divide the future value FV by a factor of
1 + i for each period between present and future dates.
5.Illustrate how present value is computed when the total number of compounding periods
includes a fractional part.

When the total number of compounding periods includes a fractional part, present value is
computed using the concept of discounting. The formula involves dividing the future value by
the factor (1 + r)^n, where "r" is the interest rate per period and "n" is the total number of
compounding periods, including the fractional part. The fractional part adjusts the discounting
for the partial compounding period. Adjusting the interest rate per period to reflect the fractional
portion is common practice for accurate present value computation.
REVIEW QUESTIONS
1.What is annuity? Cite some examples of annuities.

An annuity is a contract between you and an insurance company that requires the insurer to make
payments to you, either immediately or in the future.
Examples of annuities are regular deposits to a savings account, monthly home mortgage

payments, monthly insurance payments and pension payments.
3.Differentiate annuity certain, perpetuity and contingent annuity.
Under an annuity certain, the payments are to continue for a specified number of payments, and
calculations are based on the assumption that each payment is certain to be made when due. With
a contingent annuity, each payment is contingent on the continuance of a given status, as with a
life annuity under which each payment is contingent on the survival of one or more specified
persons. A special case of the annuity certain is the perpetuity, which is an annuity that continues
forever.
4.Contrast ordinary amnuity, amuity due, and deferred annuity.
An ordinary annuity makes (or requires) payments at the end of each period. For example,
debentures/bonds/Fixed income receipts generally pay interest at the end of every six months.
With an annuity due, by contrast, payments come at the beginning of each period. Rent, which
landlords typically require at the beginning of each month, is a common example. when the
annuity commences immediately after investment it will be called an immediate annuity. On the
other hand, when people invest in lump sum or through the accumulation by a series of
investments and start receiving annuity payments at a future date it is called a deferred annuity.
The difference between them is the timing of receipt of the annuity-like whether at the end of the
period or at the beginning of the period. The value of annuity due is normally lesser than the
value of ordinary annuity as seen in the earlier Para. The difference is actually due to interest
accrual of one period.
REVIEW QUESTIONS
1. Explain the time value of money concept.
The time value of money is the concept that money is worth more in the present than in the
future due to its potential earning capacity, or alternatively, to inflation.
The time value of money is based on the premise that money today is worth more than the same
amount of money in the future. This is because money in the present can be invested in
something and grow, while money in the future cannot because we still don’t have access to it.
Time value of money is important because of its use in a variety of financial decisions, such as
investment planning, retirement planning, and mortgage payments.
3. How is the interest rate per period determined?

The interest rate per period is determined based on market conditions, risk assessment,
borrower's creditworthiness, loan term, competition, and monetary policy. It varies across
financial products and institutions.
8. Differentiate nominal rate from effective rate.
An interest rate takes two forms: nominal interest rate and effective interest rate. The nominal
interest rate does not take into account the compounding period. The effective interest rate does
take the compounding period into account and thus is a more accurate measure of interest
charges.
REVIEW QUESTIONS
3.State the future value of an annuity due formula.

Future Value = Payment × [(1 + r)^n - 1] / r × (1 + r)
2. When solving for the present value of an annuity due, how is the ordinary annuity
table factor modified to determine the annuity due table factor?
To determine the annuity due table factor from the ordinary annuity table factor:
Take the ordinary annuity table factor for the given interest rate and number of periods.
Multiply the ordinary annuity table factor by (1 + r), where "r" is the interest rate per period. The
resulting value gives the annuity due table factor. By multiplying the ordinary annuity table
factor by (1 + r), the adjustment accounts for the beginning-of-period payments in an annuity
due. This modification recognizes the time value of money and reflects the immediate impact of
the first payment in an annuity due.

5. State the present value of an annuity due formula.
Present Value = Payment × [(1 - (1 + r)^(-n)) / r] × (1 + r)

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REVIEW QUESTIONS

1.What is the concept of present value?

4.State the present value formula.

1.What is annuity? Cite some examples of annuities.

Examples of annuities are regular deposits to a savings account, monthly home mortgage

3.Differentiate annuity certain, perpetuity and contingent annuity.

4.Contrast ordinary amnuity, amuity due, and deferred annuity.

1. Explain the time value of money concept.

3. How is the interest rate per period determined?

8. Differentiate nominal rate from effective rate.

3.State the future value of an annuity due formula.

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