Personal Finance

Lecture 8
GNED 1101
 In this lecture, we will cover:
• 8.1: Percent, Sales Tax and Discounts
• 8.3: Simple Interest
• 8.4: Compound Interest
 Section 1

Personal Finance
• Personal finance includes every area of your
life that involves money
• It will help you understand how financial
management will affect your future
• Percent plays an important role in personal
finance, so we will start learning about that
 Basic of Percent
• Percents are the result of expressing numbers
as part of 100.
• The word percent means per hundred.
• Example: Figure 1 shows that 55 out of every
100 students prefer printed textbooks
55 = 55%
100
Expressing a fraction as a percent
1. Divide the numerator by the denominator.
2. Multiply the quotient by 100. This is done by moving the decimal
point in the quotient two places to the right.
3. Add a percent sign.

Expressing a decimal as a percent

1. Move the decimal point two places to the right.
2. Add a percent sign.

Expressing a percent as a decimal number

1. Move the decimal point two places to the left.
2. Remove the percent sign.
 Example 1
• Express 5/8 as a percent.
• Solution:
1. Divide numerator by denominator.
5 ÷ 8 = 0.625

2. Multiply quotient by 100.

0.625 × 100 = 62.5

3. Add percent sign.

62.5 %
 Example 2
• Express 0.47 as a percent.
• Solution:
1. Move decimal point two places to the right.
0.47 becomes 47

2. Add percent sign.

47 %
 Example 3
• Express 19% as a decimal.
• Solution:
1. Move decimal point two places to the left.
19% becomes 0.19%

2. Remove percent sign.

0.19
 General formula
for calculating percent
A=PB
• Read: A is P percent of B
• We can use this formula to determine the
sales tax on items
Sales tax amount = tax rate × item’s cost
 Example 4
• Suppose that the local sales tax rate is 7.5% and
you purchase a bicycle for $894.
a) How much tax is paid?
b) What is the bicycle’s total cost?
• Solution:
a) Sales tax amount = tax rate × item’s cost
= 7.5% x $894
= 0.075 x $894 = $67.05

b) Total cost = $894 + $67.05 = $961.05

 Discounts
• In contrast to paying tax (which no one likes
doing), percentages are frequently used for
discounts or sales

Discount amount = discount rate × original price

 Example 5
• A computer with an original price of $1460 is on
sale at 15% off.
a) What is the discount amount?
b) What is the computer’s sale price?
• Solution:
a) Discount amount = discount rate × original price
= 15% x $1460
= 0.15 x $1460 = $219

b) Total cost = $1460 - $219 = $1241

 Discounts
• You can also calculate the final price directly
without calculating the discount amount (if
the question is phrased in such a way):
• Example: A computer with an original price of
$1460 is on sale at 15% off.
a) Calculate the sale price
• The sale price must be 100%-15%, or 85%, of the
original price
Sale price = 85% x $1460 = 0.85 x $1460 = $1241
Finding percent increase or percent decrease
1. Find the fraction for the percent increase or the percent decrease:
amount of increase or amount of decrease
original amount original amount
2. Find the percent increase or the percent decrease by expressing
the fraction in step 1 as a percent.
 Example 6
• Figure 2 shows world population projections
through the year 2150.
a)Find the percent increase in world population
from 2000 to 2150 using the high projection
data.
b)Find the percent increase in world population
from 2000 to 2150 using the low projection
data.
 Example 6
• Solution:
a) Percent increase = amount of increase
original amount
= 30 – 6 = 24 = 4 = 400%
6 6

b) Percent decrease= amount of increase

original amount
= 6 – 4 = 2 = 0.333 = 33.3%
6 6
 Example 7
• A jacket regularly sells for $135.00. The sale
price is $60.75. Find the percent decrease of
the sale price from the regular price.
• Solution:
Percent decrease= amount of increase
original amount
= 135.00 – 60.75= 74.25 = 0.55 = 55%
135 135
 Section 3

Simple Interest
• Interest is the amount of money that we get paid
for lending or investing money, or that we pay for
borrowing money.
• The amount of money that we deposit or borrow is
called the principal.
• The amount of interest depends on the principal,
the interest rate and the length of time the money
is deposited.
– In this section the rate is assumed to be annual (per
year).
 Calculating simple interest
Interest = principal × rate × time
I = Prt
The rate, r, is expressed as a decimal when
calculating simple interest.
 Example 1
• You deposit $2000 in a savings account at
Hometown Bank, which has a rate of 6%. Find
the interest at the end of the first year.
• Solution:

P = 2000
r = 6% = 0.06 in decimal form
t = 1 year

I = Prt = (2000)(0.06)(1) = $120

 Example 2
• A student took out a simple interest loan for
$1800 for two years at a rate of 8% to
purchase a used car. What is the interest on
the loan?
• Solution:
P = 1800
r = 8% = 0.08 in decimal form
t = 2 years

I = Prt = (1800)(0.08)(2) = $288

 Future Value: Principal Plus Interest
• When a loan is repaid, the interest is added to
the original principal to find the total amount
due.
• Principal + interest = total amount due
Calculating future value
A = P + I = P + Prt = P(1 + rt)
Where:
A = future value of loan
P = present value or principal
r = rate, in decimal form
t = time
 Example 3
• A loan of $1060 has been made at 6.5% for
three months. Find the loan’s future value.
• Solution:

P = 1060
r = 6.5% = 0.065 in decimal form
t = 3 months = 3/12 = 0.25 years

A = P(1 + rt) = (1060)[1+(0.065)(0.25)] = $1077.23

 Example 5
• You borrow $2500 from a friend and promise
to pay back $2655 in six months. What simple
interest rate will you pay?

P = 2500
A = 2655
t = 6 months = 6/12 = 0.5 years

A = P(1 + rt)
2655 = 2500[1+r(0.5)]
2655 = 2500 + 1250r
155 = 1250r
r = 155/1250 = 0.124 = 12.4%
Reminder: BEDMAS
Order of Operations
Brackets
Exponents
Division
Multiplication
Addition
Subtraction
 Section 4

Compound Interest
• Compound interest is interest computed on
the original principal as well as on any
accumulated interest.
• Many savings accounts pay compound interest
 Compound Interest paid more than once a
year
• The period of time between two interest payments is called
the compounding period. When compound interest is paid
once per year, the compounding period is one year.
– It is compounded annually.
• We denote the letter n to represent the number of times
compounding occurs in one year.
Name Number of Compounding periods per Length of each
year (n) compounding period
semiannual n=2 6 months
quarterly n=4 3 months
Monthly n = 12 1 month
 Calculating for compound interest paid n times a
year

Where:
A = the amount after time t
P = the original principal
r = the rate, in decimal form
t = the time in years
n = the number of compounding periods per year
 Example 1
• You deposit $2000 in a savings account at
Hometown Bank, which has a rate of 6%.
a) Find the amount, A, of money in the account after
three years subject to interest compounded once a
year.
b) Find the interest.
• Solution to a):
P = 2000
r = 6% = 0.06 in decimal form
t = 3 years

A = P(1+r)t = 2000(1+0.06)3 = 2000(1.06) 3 = $2382.03

 Example 1
• You deposit $2000 in a savings account at
Hometown Bank, which has a rate of 6%.
a) Find the amount, A, of money in the account after
three years subject to interest compounded once a
year.
b) Find the interest.
• Solution to b):
$2382.03 - $2000 = $382.03
 Example 2
• You deposit $7500 in a savings account that
has a rate of 6%. The interest is compound
quarterly.
a) How much money will you have after 5 years?
b) Find the interest after 5 years.
• Solution to a):
P = 7500
r = 6% = 0.06 in decimal form
t = 5 years
n=4

A = P(1+r/n)nt = 7500[1+(0.06/4)](4x5) = 7500(1.015)20 = $10,101.41

 Example 2
• You deposit $7500 in a savings account that
has a rate of 6%. The interest is compound
quarterly.
a) How much money will you have after 5 years?
b) Find the interest after 5 years.
• Solution to b):
$10,101.41 - $7500 = $2601.41
 Compounding continuously
• Some banks use continuous compounding,
where compounding periods increase
infinitely.
• As n increases without bound, the expression
(1 + 1/n)n approaches the irrational number e:
e ≈ 2.71828.
• We can adapt our equation to incorporate this
value.
 Calculating for continuously compounded interest
A = Pert
*note it has an ‘r’ and a ‘t’, not an ‘n’ and a ‘t’
Where:
A = the amount after time t
P = the original principal
r = the rate, in decimal form
t = the time in years
 Example 3
• You decide to invest $5000 for five years and
you have a choice between two accounts. The
first pays 8% per year, compounded quarterly.
The second pays 7.88% per year, compounded
continuously. Which is the better investment?
Account 1
P = 5000
r = 8% = 0.08 in decimal form
t = 5 years
n=4

A = P(1+r/n)nt = 5000[1+(0.08/4)](4)(5) = 5000(1.02)20 = $7429.74

 Example 3
• You decide to invest $5000 for five years and
you have a choice between two accounts. The
first pays 8% per year, compounded quarterly.
The second pays 7.88% per year, compounded
continuously. Which is the better investment?
Account 2
P = 5000
r = 7.88% = 0.0788 in decimal form
t = 5 years

A = Pert = 5000e0.0788(5) ≈ 7414.50

 Example 3
• You decide to invest $5000 for five years and you
have a choice between two accounts. The first pays
8% per year, compounded quarterly. The second
pays 7.88% per year, compounded continuously.
Which is the better investment?
• Solution:
– Account 1: $7429.74
– Account 2: $7414.50
• Since account 2 is slightly less, account 1 is the
better investment
 Calculating Present Value
A
P nt
.
 r
1  
 n
Where:
A = the amount after time t
P = the original principal
r = the rate, in decimal form
t = the time in years
n = the number of compounding periods per year
 Example 4
• How much money should be deposited today
in an account that earns 6% compounded
monthly so that it will accumulate to $20,000
in five years?
• Solution:
A = 20,000
r = 6% = 0.06 in decimal form
t = 5 years
n = 12
A 20,000
P nt
 12(5)
14,827.4439
 r  0.06 
1  1  
 n  12 
 Effective Annual Yields
• A common problem in financial planning is selecting the best
investment from several options.
• We can also answer the question to compare the effective rates
of investments.
– This is called the effective annual yield.
• The effective annual yield, or the effective rate, is the simple
interest rate that produces the same amount of money in an
account at the end of one year as the when the account is
subject to compound interest at a second rate.
• If you are selecting the best investment from a few options, the
best choice is the one with the greatest effective annual yield.
– Can be called the annual percentage rate for borrowing money.
 Calculating Effective Annual Yield

Where:
Y = the effective annual yield
r = a nominal interest rate, in decimal form
n = the number of compounding periods per year
 Example 6
• A passbook savings account has a nominal rate
of 5%. The interest is compounded daily. Find
the account’s effective annual yield. (Assume
360 days in a year).
• Solution:
r = 5% = 0.05 in decimal form
n = 360

Y = (1+r/n)n-1 = [1+(0.05/360)]360-1 ≈ 0.0513 ≈ 5.13%

Extra questions from Course Outline (a)
• Question a) How long for money to double if
invested with simple interest at 12%?
Extra questions from Course Outline (a)
• Question a) How long for money to double if
invested with simple interest at 12%?
• Solution:
A=2 A = P(1+rt)
P=1 2 = 1(1+(0.12)t)
r = 12% = 0.12 2 = 1 + 0.12t
1 = 0.12t
Need to solve for t T = 1/0.12 = 8.33 years
 Logarithms & exponents
• Logarithms (logs) are the inverse of exponents

x = by is equivalent to logb(x) = y

• Write the following in log form:

– 16 = 42
 Logarithm Rules
logaxy = logax + logay

loga(x/y) = logax – logay

logaxn = nlogax
 Logarithm Rules - Examples

logaxy = logax + logay

1. Expand log(2x)

logaxn = nlogax
2. Simplify log(x) + log(y)

5. Expand log(x3)

loga(x/y) = logax – logay 6. Simplify 2log(x)

3. Expand log(16/x)

4. Simplify log(4) – log(5)

 Logarithm Rules - Examples

logaxy = logax + logay

1. Expand log(2x)
log(2x) = log(2) + log(x)
logaxn = nlogax
2. Simplify log(x) + log(y)
log(x) + log(y) = log(xy)
5. Expand log(x3)
log(x3) = 3log(x)
log(x/y) = logx – logy 6. Simplify 2log(x)
2log(x) = log(x2)
3. Expand log(16/x)
log(16/x) = log(16) - log(x)

4. Simplify log(4) – log(5)

log(4) – log(5) = log(4/5)
Extra questions from Course Outline (b)
• Question b) How long for money to double if
invested with compound interest
compounded monthly at 12%?
Extra questions from Course Outline (b)
• Question b) How long for money to double if
invested with compound interest
compounded monthly at 12%?
• Solution:
A=2
P=1
r = 12% = 0.12
n = 12 (compounded monthly)

Need to solve for t using log rules

Isolating for t from exponential
equation
Use this rule: logaxn = nlogax

A = P(1+r/n)nt

A/P = (1+r/n)nt

Take log of both sides

log(A/P) = log[(1+r/n)nt]

log(A/P) = (nt)log(1+r/n)

log(A/P) = t
nlog(1+r/n)
Extra questions from Course Outline (b)
• Question b) How long for money to double if
invested with compound interest
compounded monthly at 12%?
• Solution: Again, define A as twice the amount
of P A=2
P=1
r = 12% = 0.12
n = 12
t = log(A/P) = log(2/1) = log(2) = 5.81 years
nlog(1+r/n) 12log(1+(0.12)/12) 12log(1.01)
Extra questions from Course Outline (c)
• Question c) How long for money to double if
invested at 12% with continuous
compounding?
Extra questions from Course Outline (c)
• Question c) How long for money to double if
invested at 12% with continuous
compounding?
• Solution:
A=2
P=1
r = 12% = 0.12

Need to solve for t using log rules with

continuously compounded equation
Isolating for t from exponential
equation
Use this rule: logaxn = nlogax

A = Pert

A/P = ert

Take log of both sides

log(A/P) = log[(e)rt]

log(A/P) = (rt)log(e)

log(A/P) = t
r log(e)
Extra questions from Course Outline (b)
• Question b) How long for money to double if
invested with compound interest
compounded monthly at 12%?
• Solution: Again, define A as twice the amount
of P A=2
P=1
r = 12% = 0.12

t = log(A/P) = log(2/1) = 5.78 years

rlog(e) 0.12log(e)
 References
• GNED 1101 MRU Science and Mathematical
Literacy
– Pearson Custom Book ISBN 1323728384
 Summary of Equations
Simple Interest
Simple Interest I = Prt
Future Value A = P(1+rt)

Compound Interest
Compound Interest
(compounded n times per year)

Continuously Compounded Interest A = Pert

Effective Annual Yield