Unit V : Mathematics of Finance

Content:
I. Simple Interest and Compound Interest
II. Simple Annuity and their Applications
III. Amortization and Sinking Fund
IV. Depreciation and Perpetuities
 Simple Interest
Simple Interest is interest on the amount
invested or borrowed at a given rate and for a
given time. It is usually associated with loans or
investments which are short-term in nature.it is
computed entirely on the original principal by
simply multiplying together the principal , rate
and time.
The Formula for Simple Interest
I = Prt
Where: I - simple interest
P - principal ( in pesos )
r – interest rate per period of time ,
expressed as percent or a fraction
t – time (in years ) between the date of
loan is made and the date it matures or becomes
repayable to the lender
The maturity value , F , the total amount the borrower
would need to pay back, is given by the formula

F=P + I

Also F = P + Prt ; leading to

F = P ( 1 + rt )
 Interest is charged as a percent of
the principal for a definite period of
time.
Rates are stated in terms of one
year unless otherwise specified. A stated
rate of 12% means 12% of the principal
for one year
Example:
1. Find the interest on a loan of ₽1,000 for
one year if the interest rate is 12%
Given : P = ₽1,000 ; r = 12% = 0.12 ; t = 1 yr
Solution :
I = Prt
= ( 1,000) ( 0.12 ) ( 1)
= ₽ 120
 If the term is 2 years , then the interest is
Given:
P = 1,000 ; r= 12% = .12 ;t = 2
Solution :
I = Prt
= ( 1,000 ) ( 0.12 0 )( 2)
= ₽ 240
2. A credit union has issued a 3-year loan of ₽50,000
at a rate of 10%. What amount will be repaid at
the end of the third year ?
Given :P = ₽ 50,000 ; r = 10%=0.10 ; t = 3 years
Solution :
I = (₽ 50,000)(0.10 ) ( 3 )
= ₽ 15,000
The amount to be paid plus the interest
F=P +I =
2. A credit union has issued a 3-year loan of ₽50,000
at a rate of 10%. What amount will be repaid at
the end of the third year ?
Given :P = ₽ 50,000 ; r = 10%=0.10 ; t = 3 years
Solution :
I = (₽ 50,000)(0.10 ) ( 3 )
= ₽ 15,000
The amount to be paid plus the interest
F = P + I = ₽50,000 + ₽ 15,000
F = ₽ 65,000
 Or since the problem is asking for the amount ,
we can go immediately to solving for F and not solving
for I. Using F = P ( 1 + rt )

F = P ( 1 + rt )
= 50,000 [ 1 + (0.10 ) (3 )]
= 50,000 ( 1.30 )
= ₽ 65,000
 3. A 5,000 savings account earned 700
interest in 2 years. What was the rate of
interest given ?
Given
P = ₽ 5,000 ; I = ₽ 700 ; t = 2 years
Solution :
From I = Prt
r = = = 0.70
r = 7%
 4. At the end of 2 years , ₽ 36,000 in
interest was paid on an 18% simple interest
loan. How much was borrowed?
Given:
I = ₽ 36,000 r = 18% = 0.18 t = 2 years
Solution :
from I = Prt
P = = = ₽ 100,000
 Exercises:
1. A student loan of ₽ 1,500 at 3% was repaid at
the end of 3 years. How much interest did he pay?
2. An interest of ₽ 720 was paid on a ₽ 3,000
simple- interest loan at the end of 2 years. What
was the rate of interest charged? bac
3. A company has issued a 5-year loan 750,000 to a
new vice president to finance a home improvement
project. The terms of the loan are to be paid back
in full at the end of 5 years , with simple interest at
6%. Determine the interest which must be paid.
Ordinary and exact Interest
There are times when money is borrowed for a
certain number of days only . If the number of
months is placed over 12( 12 months in one year ) ,
the number of days is placed over 360 or 365 ,
( 360 days in one year for ordinary interest ,
based on 12 months in one year , and 365 days in
one year for exact interest ).
Unless otherwise specified , ordinary interest is
computed when term of the loan is given in
days,that is why, it is not most commonly-used
method.
To compute ordinary interest , we use the
formula

while to compute exact interest

where
D is the number of days of a given term.
 Example :
1.Find the ordinary and exact interest on ₽ 15,000 if
it is invested at 12% for 60 days.
a. Ordinary Interest
Given : P = ₽ 15,000 r = 12% = 0.12 D= 60 days
Solution;
= (15,000)(0.12)
= ₽ 300
b. Exact Interest
₽ 15,000 ( 0.12 )(

= ₽ 295.89
2. To renovate a portion of his house Mr. Aggu
Utang made a loan of ₽ 48,000 from a bank that
charges 16% interest. How much did he pay the
bank after 120 days using the ordinary- interest
method?
Given : P = ₽48,000 r= 16% = 0.16 D= 120
days
Solution:
=
= ₽ 2,560
 The amount Mr. Aggu Utang needed to
pay the bank consisted of the original amount
of the loan plus the interest. Therefore, he
needed to pay the final amount F.

F = P +
= ₽ 48,000 + ₽ 2,560
= ₽ 50, 560
3. Find the maturity value of ₽ 4,250 at 9%
for 90 days using exact interest method.
Given : P = 4,250 r = 9% = 0.9 D = 90
days
Solution:
the maturity value is the value of F.
F =P[1+ r
= ₽ 4,250 (1.02219178 )
F = 4,344.32
Approximate and exact time

There are two ways of finding time

between the two dates given time . One
method is to find the approximate time
and the other is to find actual time
Problem
On May 4, 2002 , Mikee borrowed 22,000 at
10% interest. Interest and principal were due
on September 6 , 2002 . What was the total
amount paid by her on that date ?
P = 22,000 r = 10% = 0.10
r = May 4 to September 6 , 2002
Solution:
To find the interest due on September 6 , 2002 we
will first find the time between May 4 and September
6, 2002
a. Approximate Time
Year Month Day
2002 9 6
2002 5 4
______________________________
4 2
 This means 4 months and 2 days . To
find the number of days ; ( 4 x 30 days )
+ 2 days = 122 days
we consider (1) month = 30 days
using approximate time , the total
amount paid by Julie on September 6 ,
2002 can be obtained by the following
solution.
F=P[1+r
= ₽22,000[ 1 + (0.10) (
= 22,000 ( 1.033888889 )
= ₽ 22,745.56
 b. Actual Time
The actual number of day between May 4 and
September 6, 2002 can be obtained by the following
solution:
May ( 31 – 4 ) 27
June 30
July 31
August 31
September 6
_____
125 days
 To find the total amount paid by Julie on
September 6 , 2002 using actual time .

F=P[1+r
= 22,000 [ 1 + (0.10)(]
= ₽ 22,000 ( 1.034722222 )
F = ₽ 22, 763.89
Exercises:
1. Find the ordinary and exact interest if ₽ 6,500 is
borrowed at 24% for 120 days.
2. Allan borrowed ₽ 3,785 from a friend and promised
to repay him in 90 days plus 12% interest. How much will
he pay when the loan matures using exact interest.
3. Pee Guess is buying a van from the interest of his
time deposit in a bank. His April monthly interest at 12%
was ₽ 125, 000. what was Pee Guess principal balance of
April ? Use 365 days
 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.
D =Fdt
where: D = discount
F = 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

t = F =
Example :
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 =¼ d = 0.05
D = Fdt = (2,000) ( 0.05 ) (1/4)
= ₽ 25
P = F - D
₽ 2,000 - ₽ 25 = ₽ 1,975
Alternate solution:

D = F ( 1 - dt )
= ₽ 2,000 [ 1 - ( 0.05) (1/4) ]
= ₽ 1,975
 2. Find the amount due at the end of 9 months
whose present value is ₽ 3,000 at 6% simple
discount.
Given:
P = 3,000 d = .06 t = 9/12 =
¾
Solution :
F = = = 3,141.36
 3. How long will ₽ 3,000 accumulate to ₽ 3,050 if
the discount rate is % ?
Given :
P = ₽ 3,000
F = ₽ 3,050
d = 4.5% = 0.045
Solution :
t= = =
= 0.36 years
Exercises:
1. Discount ₽6,500 for 120 days at 4.5 %
simple discount.
2. Discount ₽4,250 for 1 year and 2 months at
7.5 % simple discount.
3. Accumulate ₽ 3,200 for 2 years and 6
months at 6.25 % simple discount.
 Compound Interest
In the previous chapter , simple interest has
been discussed as a type of interest. The present
topic will discuss compound interest as another
type.
Compound interest is the sum by which the
original principal has been increased by the end of
the contract. The total accumulated amount at the
end of the period , the original principal plus the
compound interest is called the Compound Amount.
Interest is said to be compounded monthly , quarterly ,
semi-annually , or annually. When the conversion periods
are :
annually m=1
semi-annually m=2
quarterly m=4
annually m=
12
The time between successive interest
computations is called Conversion Period while the total
number of conversion periods for the whole term is
designated by n ( n = m x t ).
If interest is compounded either annually , semi-
annually , quarterly or monthly , basic compound
interest formula can be used , that is

F = P : n = mt
or
F =P ; i=
I = F -P
Where:
P = original principal
F = compound amount
I = compound interest
i= periodic rate
n = number of conversion periods for the whole
term
m= number of conversion periods
t = time or term of investment which is expressed
in
years
j = nominal rate of interest per year
Example.
1. Accumulate ₽15,000 for 5 years at 6%
compounded quarterly.
Solution.
Let P = ₽15,000 ; m=4; j= 0.06
n = mt = 4(5) = 20 ;i= = 0.015
F =P = ₽15,000
= ₽15,000 ( 1.346855 )
F = ₽ 20,202.83
2. Accumulate ₽6,500 for 4 years and 5 months at
5.5% compounded semi-annually.
Solution.
Let P = ₽6,500 ; m = 2 ; t = 4 ; j= 0.055
n= mt = 2(= 8.833 ; i= = =0.0275
F =P = ₽6,500
F = ₽6,500 ( 1.270776 )
F = ₽6,500 8,260.04
Finding the Present Value
The Present Value is defined as the
principal which you would have to invest now
at a given intertest rate , so that it will
amount to some predetermined future sum of
money.
The Compound Discount is the
difference between the future value and the
present value.
The formula for present value and discount value of
an amount is given by

P= or P=F(

P= or P=F(

D = F - P
Example:
1. If money can be invested at 3 compounded quarterly ,
find the present value of ₽6,500 at the end of 2 years
and 3 months.
Given:
let P = ₽6,500 ; t= 2; m = 2; i= = 0.0875
n = mt = 4 ( = 9
P = F ( = ₽6,500 (
P= ₽6,500 ( 0.924588 )
P = ₽ 6,009.82
or

P= =

P = = 6,009.82
2. Find the present value of ₽7,600 due at the end
of 4 years and 4 months, if money is worth 6%
compounded quarterly.
Given:
Let P = ₽7,600 ; t= 4 years and 4 months ; m=4
n = mt = 4 ( = 17.3333;i= = 0.015
P = F ( = ₽7,600 (
P = ₽7,600 ( 0.772580)
P = ₽ 5,871.61
3. Discount ₽9,500 for 7 years and 4 months at 5%
compounded monthly.
Given:
Let F = ₽9,500 ; m= 12 ; t = 7yrs and 4 mos; j = 5%
n = mt = 12 ( 88; i= = 0.0041667

P = F ( = ₽9,500 (
P = ₽9,500 ( 0.6935687 )
P = ₽6,588.90
Exercises:
1. Find the present value of 10,500 for 7 years at 15%
compounded
a. Annually b. semi-annually c. quarterly
d. Monthly
2. If money is worth 8% compounded annually
a. Accumulate ₽8,500 for 10 years
b. Discount the result in (a) for 5 years
c. Accumulate ₽8,000 for 15 years