GE 104-Math in the Modern World

MODULE 6
Mathematics of Finance

Preliminaries:

Module Title: Mathematics of Finance

Course Title: Mathematics in the Modern World

Course Number: GE 104

Course Description: Nature of mathematics, appreciation of its

practical, intellectual and aesthetic dimensions, and application of
mathematical tools in daily life.

Total Learning Time: 9 hrs

Overview:

Interest is the fee paid for the borrowed money. We receive interest
when we let others use our money (for example, by depositing money in a
savings account or making a loan). We pay interest when we use other
people’s money (such as when we borrow from a bank or a friend). Are you a
“receiver” or a “payer”?
In this module, you will learn how to compute simple interest and simple
discount. You will be provided with illustrative examples for you to have a
picture how to solve problems. So, hopefully you have the interest in mastering
the concepts in this module and answer the exercises provided for you.

Learning Outcomes:
At the end of this module, you are expected to:
1. Differentiate simple interest from simple discount
2. Compute simple interest using actual and approximate time.
3. Compute ordinary and exact interest.
4. Solve problems on simple interest and simple discount using
appropriate formulas.

Indicative Content
Module 1. Mathematics of Finance
 Simple Interest
 Ordinary and exact interest
 Actual and approximate time
 Interest between dates
 Simple discount
 GETTING STARTED

Pre- Assessment:
Answer the following questions:
1. If you deposit ₱500.00 at a rate of 7% for 2 years, how much interest will you earn?
a. ₱40.00 b. ₱50.00 c. ₱60.00 d. ₱70.00
2. Dan has ₱25,320 in savings that earns 12% per year. How much interest will earn in
4 years and 6 months?
a. ₱3,038.00 b. ₱3,038.40 c. ₱13,060.00 d. ₱13,672.80
3. How long should Cathy invest the amount of ₱90,000.00 to earn an interest of
₱4,500.00 at 7 ½ % simple interest?
a. 7 months b. 8 months c. 9 months d. 10 months
4. Find the principal in an account that a rate of 7.5% for 1 year earns ₱900.00 in
interest.
a. ₱10,000.00 b. ₱11,000.00 c. ₱12,000.00 d. ₱13,000.00
5. Marie borrows ₱3,000.00 for 1 year. At the end of the year, she has paid ₱210.00 in
interest. Find the rate of interest.
a. 6% b. 7% c. 8% d. 9%
6. Mrs. Yap loaned ₱4,500.00 with a yearly interest of 8%. How much interest did she
pay after 6 months?
a. ₱450.00 b. ₱360.00 c. ₱250.00 d. ₱180.00
7. How much final amount would Miss Trixie receive if she invests ₱75,000.00 for 3
years at 7 3/4% simple interest?
a. ₱17,437.50 b. ₱92,437.50 c. ₱102,436.50 d. ₱171,437.50
8. Mark paid an interest of ₱2,800.00 on a loan for 2 years at 9.5%. How much was
the original loan?
a. ₱13,746.84 b. ₱14,376.84 c. ₱14,736.84 d. ₱14,637.84
9. Determine the approximate time from June 9, 2019 to January 4, 2020.
a. 203 days b. 204 days c. 205 days d. 206 days
10. Find the actual time between March 16, 2019 to November 29, 2019?
a. 228 b. 238 c. 251 d. 258

SIMPLE INTEREST

Interest refers to the amount paid for the use of money. It is usually
represented by I and it is dependent on three factors.
a. Principal (P) – refers to the amount of money invested, deposited or borrowed.
b. Rate of interest (r) - refers to the percentage of the principal per year and
generally expressed in terms of percent.
c. Time (t) – refers to the length of time the money is invested or borrowed. Time is
usually expressed in years, when time is given in months, then the number is
divided by 12.
To find simple interest we use the following formula:
I = prt
where:
I = Interest
P=Principal
r= rate (usually expressed in percent)
t=time (expressed in years)

Example 1.
GE 104- Math in the Modern World 2
 Francis deposited ₱5,000 in a bank paying 6% simple interest rate for 5 years.
Compute the interest.
Solution:
Given: P= 5,000 r= 6% or 0.06 t= 5 yrs I=?
I = Prt = 5,000(0.06)(5) = 1,500
Example 2.
John borrowed ₱5,200 in a bank charging 12% per annum for a period of 6
years and 6 months. How much interest will he pay at the end of the term?
Solution:
Given: P= 5,200 r= 12% or 0.12 t= 6 yrs and 6 months or 6.5 yrs
I = Prt = 5,200(0.12)(6.5) = 4,056
From the formula for the simple interest, the following formulas can be derived.
These formulas can be used if the problem requires other than interest.
P t r
To find the final amount or maturity value F
a) F = P + I
b) F = P + Prt = P(1+rt)

Example 3.
The simple interest received over a period of 5 years and 3 months on a loan of
₱22,000 is ₱11,300. Compute the rate of interest.
Solution:
Given: P= 22,000 I= 11,300 t= 5 yrs and 3 months or 5.25 yrs r=?
r = ( )
= 0.0978 or 9.78%
Example 4.
Ten years ago, Henry deposited an amount of ₱28,200 in a savings bank. His
deposit earned an amount of ₱15,000 over a period of 10 years. Compute the rate of
interest.
Solution:
Given: P= 28,200 I= 15,000 t= 10 yrs r=?
r = ( )
= 0.05319 or 5.32%
Example 5.
Marie borrowed ₱5,000 from a bank charging 12% simple interest. If she paid
an amount of interest equivalent to ₱1,200, for how long did she use the money?
Solution:
Given: P= 5,000 I= 1,200 r= 12% or 0.12 t=?
t = ( )
= 2 years
Example 6.
Mr. Charles paid an amount of ₱13,620 for a loan of ₱25,600 at 10.5% interest
rate. Find the duration of the term.
Solution:
Given: P= 25,600 I= 13,620 r= 10.5% or 0.105 t=?
t = ( )
= 5.07 years
Example 7.
Mr. Mark Cruz paid an interest of ₱2,800 on a loan for 2 years at 9.5%. How
much was the original loan?
Solution:
Given: I= 2,800 t=2 years r= 9.5% or 0.095 P=?
P =( = ₱14,736.84
)( )
Example 8.
How much final amount would Ms. Edna receive if she invests ₱75,000 for 3
years at 7 ¾ % simple interest?
Solution:
Given: P=75,000 t= 3 yrs r=7 ¾ % = 0.0775 F=?
F=P(1+rt) = 75,000[1+0.0775(3)] = 75,000(1.2325) = ₱92,437.50
GE 104- Math in the Modern World 3
Example 9.
Janice deposited an amount of ₱12,800 in a savings bank that gives 6.5%
simple interest for 8 years. How much would she have in her account at the end of 8
years assuming that no withdrawals were made?
Solution:
Given: P=12,800 r=6.5% 0r 0.065 t=8yrs F=?
F=P(1+rt) = 12,800 [1+ (0.065)(8)] = ₱19,456.00

Extract and Ordinary Interest

 Exact interest (Ie)-is used when interest is computed on the basis of 365 days in
a year or 366 days in a leap year.
 Ordinary interest (Io)- is used when the interest is computed on the basis of an
assumed 30-day/month or 360-days/year.

Example 1.
An amount of ₱28,100 was invested at 7% simple interest for 100 days.
Compute the value of the
a) Exact interest
b) Ordinary interest
Solution:
Given: P=28,100, r=7% or 0.07, t=100 days
a. Ie=Prt=28,100(0.07)(100/365)=538.90
b. Io=Prt=28,100(0.07)(100/360)=546.39

Example 2.
Ms. Salvador deposited an amount of ₱12,800 in a time deposit account at 8%
simple interest for 150 days. Compute the value of the:
a) Exact interest
b) The accumulated value at the end of the term
Solution:
Given: P=12,800 r=8% or 0.08 t=150/365
The exact interest is I e=(12,800)(0.08)(150/365) =₱ 420.82
a) The accumulated valued at the end of the term shall be
F= P+I e= 12,800+420.82= ₱13,220.82

Approximate and Exact Interest

Exact and ordinary interest is computed when the number of days is given.
However, when dates are given, the number of days can be determined in two ways.
a) Actual time-refers to the number of days between two dates. It is obtained by
counting the actual number of days of each month within the period of
transaction except the origin date.
b) Approximate time-refers to the assumption that each month has 30days. The
number of days is obtained therefore by counting each day of each month
within the period of the transaction except the origin date.

Note: If the problem does not specify the type of time, then the actual time is used.

Example 1.
GE 104- Math in the Modern World 4
 Determine the actual time and approximate time from April 11 to August 16 of
the same year using the two methods.
Solution:
a. Using the actual time b. Using the approximate time
April (30-11) = 19 April (30-11) = 19
May = 31 May = 30
June = 30 June = 30
July = 31 July = 30
August = 16 August = 16
Actual no. of days = 127 Approximate no. of days = 125

Example 2.
Determine the number of days from May 25, 2017 to October 12, 2017 using
actual time and approximate time.
Solution:
a. Using the actual time b. Using the approximate time
May (31-25) = 6 May (30-25) = 5
June = 30 June = 30
July = 31 July = 30
August = 31 August = 30
September = 30 September = 30
October = 12 October = 12
Actual no. of days = 140 Approximate no. of days = 137

Interest between Dates

Calendar dates are specified for some investment problems. Four methods are
used to determine the interest between these dates.

1. Ordinary interest using actual time (Banker’s Rule)

Oi (act) = Pr ( )
2. Ordinary interest using approximate time
Oi (app) = Pr ( )
3. Exact interest using actual time
Ei (act) = Pr ( )
4. Exact interest using approximate time
Ei (app) = Pr ( )
Note: The Banker’s rule should be used if the method is not specified in the
problem.

Example 1.

Trisha wonders how much would she get as interest in each of the four
methods if she deposits ₱85,000 from September 21, 2003 to February 15, 2004 at 12%
simple interest?

Solution:

Given: P=85,000

r=12%=0.12

t=from September 21, 2003 to February 15, 2004

GE 104- Math in the Modern World 5

 Actual Time Month Approximate Time
9 September 21 9
31 October 30
30 November 30
31 December 30
31 January 30
15 February 15
147 Total No. of Days 144

Oi (act) = 85,000(0.12)( ) = 4,165

Oi (app) = 85,000(0.12)( ) = 4,080

Ei (act) = 85,000(0.12)( ) = 4,107.95

Ei (app) = 85,000(0.12)( ) = 4,024.11

Thus, using the actual dates Trisha gets 4,165 ordinary interest and
4,107.95 exact interest. While using the approximate dates, Trisha gets 4,080
ordinary interest and 4,024.11 exact interest.

Simple Discount

If interest (I) is calculated on the principal (P) at the start of the interest period,
discount (D) is calculated on the amount (F) at the end of the period.
Discount (D) is a deduction from the maturity amount (F) of an obligation
allowed for paying it currently? The formula is
D= Fdt
D=Discount
F=Final amount or amount of maturity
d=discount rate
t=time or term of discount
To find P, use P=F-D or P=F(1-dt)
Derived formulas are:

Exercise 1.
Find the present value of ₱2,000 which is due at the end of 90 days at 5%
simple discount.
Given: F=2,000 t=1/4 d=0.05
Required: D and P
Solution: Alternative Solution:
D=Fdt P=F(1-dt)
D=(2,000)(0.05)(1/4) P=2,000[1-(0.05)(1/4)]
D=25 P=₱1,975
P=F-D
P=2,000-25
P=₱1,975

Example 2.
GE 104- Math in the Modern World 6
 Find the amount due at the end of 9 months which present value is ₱3,000 at
6% simple discount.
Solution:
Given: P=3,000 t=3/4 d=0.06 F=?

( )( )

Example 3.
How long will ₱3,000 accumulate to 3,050 if the discount rate is 4½%.
Solution:
Given: P=3,000 F= 3,050 d=0.045
Required: t

( )( )

Example 4.
If a loan of ₱3,500 will be paid with ₱3,750 at the end of one year and 3
months, what is the simple discount rate?
Solution:
Given: P=3,500 F=3,750 t=1¼ years

( )( )

Example 5.
Accumulate ₱4,200 for 2 years and 3 months at 6 ½ % simple discount.
Solution:
Given: P=4,200 d=0.065 t=2 ¼ years

( )

Exercises:
Answer the following.
1. If you deposit ₱500.00 at a rate of 7% for 2 years, how much interest will you
earn?
a. ₱40.00 b. ₱50.00 c. ₱60.00 d. ₱70.00
2. Dan has ₱25,320 in savings that earns 12% per year. How much interest will
earn in 4 years and 6 months?
a. ₱3,038.00 b. ₱3,038.40 c. ₱13,060.00 d. ₱13,672.80
3. How long should Cathy invest the amount of ₱90,000.00 to earn an interest
of ₱4,500.00 at 7 ½ % simple interest?
a. 7 months b. 8 months c. 9 months d. 10 months
4. Find the principal in an account that a rate of 7.5% for 1 year earns ₱900.00
in interest.
GE 104- Math in the Modern World 7
 a. ₱10,000.00 b. ₱11,000.00 c. ₱12,000.00 d. ₱13,000.00
5. Marie borrows ₱3,000.00 for 1 year. At the end of the year, she has paid
₱210.00 in interest. Find the rate of interest.
a. 6% b. 7% c. 8% d. 9%
6. Mrs. Yap loaned ₱4,500.00 with a yearly interest of 8%. How much interest
did she pay after 6 months?
a. ₱450.00 b. ₱360.00 c. ₱250.00 d. ₱180.00
7. How much final amount would Miss Trixie receive if she invests ₱75,000.00 for
3 years at 7 3/4% simple interest?
a. ₱17,437.50 b. ₱92,437.50 c. ₱102,436.50 d. ₱171,437.50
8. Mark paid an interest of ₱2,800.00 on a loan for 2 years at 9.5%. How much
was the original loan?
a. ₱13,746.84 b. ₱14,376.84 c. ₱14,736.84 d. ₱14,637.84
9. Determine the approximate time from June 9, 2019 to January 4, 2020.
a. 203 days b. 204 days c. 205 days d. 206 days
10. Find the actual time between March 16, 2019 to November 29, 2019?
a. 228 b. 238 c. 251 d. 258

EVALUATION

Part I:
Answer the following problems by identifying the given.
1. Mr. Santos borrowed ₱25, 300 for 3 years at 8% simple interest. How much was
the amount charged for the use of money
2. Mrs. Lannie Dy borrowed ₱15, 820 at 6% simple interest. She was charged an
interest of ₱1, 260. Compute the duration of the loan on years.
3. If money is worth 8.5%, then how much shall be the principal if it will earn an
interest of ₱5,500 in 3 years and 6 months?
4. At what interest rate will an investment of ₱50,000 earn an interest of
₱10,062.50 in 1 year and 9 months?
5. What final amount would Mariel get if she deposited P50,000 for 3 years and 10
months at 5 ¾% simple interest?
Part II.
1. An amount of ₱18,000 was invested at 8% simple interest on May 25, 2017. How
much shall be the amount of interest earned on October 12, 2017 using the:
a) actual time, ordinary interest
b) actual time, exact interest
c) approximate time, ordinary interest
d) approximate time, exact interest
2. On August 25, 2017, Miss Santos deposited an amount of ₱15,800 in a bank that
pays 6.5% simple interest. Compute the accumulated value on December 8,
2017, using the:
a) Banker’s rule
b) approximate time, exact interest.
3. Miss Helen Sandoval invested an amount of ₱20,600 on June 28, 2007 at 6% per
annum. Compute the amount of interest earned on December 12, 2007, using
a) actual time, ordinary interest
b) actual time, exact interest
c) approximate time, ordinary interest
d) approximate time, exact interest

REFERENCES
GE 104- Math in the Modern World 8
Cervillon, C.C., et. al. 2004. “Mathematics of Investment”. 2004. Mandaluyong
City, Philippines
Paguio, D.P., et al. 2004. Mathematics of Investment. Jimczybville Publications,
Malabon City, Philippines
Zorilla, R. et al., 2013. “Business and Investment Mathematics”. Grandbooks
Publishing Inc., Metro Manila

Well done! You have just finished this

lesson. Keep working and enjoy!

GE 104- Math in the Modern World 9