GMATH Module 6

MODULE 6: Mathematics of Finance
Our target learning outcomes for this module are a) use mathematical concepts
and tools in other areas such as finance and business; b) differentiate compound interest
from simple interest; and c) apply the interest and annuity formulas to cases of loans,
credits, stocks bonds, property purchases, and investment problems.
A. Important Terms
Principal. It refers to the original sum of money borrowed in a loan or put into an
investment.
Interest is the charge for the privilege of borrowing money. From the investor’s
viewpoint, interest is the income from an invested amount at a given rate for a given time.
From the debtor’s viewpoint, interest is the money paid for the use of borrowed
money.
Interest Rate. The interest rate is the amount a lender charges for the use of money
expressed as a percentage of the principal. The interest rate is typically noted on an
annual basis known as the annual interest rate.
Time. This is the period from the beginning when the money was borrowed (or
invested) to the period when the money should be returned with the additional amount
(interest). This is also called the term of loan or term of investment.
Property of and for the exclusive use of SLU. Reproduction, storing in a retrieval system, distributing, uploading or posting online, or transmitting in any form or by any
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 97
B. SIMPLE INTEREST
Simple interest refers to the interest paid on the original principal. It is also
characterized by a fixed amount earned over time. Usually, simple interest is associated
with loans and investments which are short term in nature.
The formula in computing for the simple interest is given by

𝐼 = 𝑃𝑟𝑡
where: 𝐼 = the Interest
𝑃 = the Principal
𝑟 = the rate of interest (written as a decimal)
𝑡 = the time period
We have to note that the time 𝑡 should be expressed in years. Unless otherwise
stated, it will be assumed that the interest rate is an annual interest.
Example 1: Find the simple interest earned in an account where ₱4,500 is on deposit for 4
years at 3 1/4% annual interest.
1
Given: 𝑃 = ₱4,500, 𝑡 = 4, 𝑟 = 3 % = 0.0325
4
Unknown: 𝐼
Solution:
𝐼 = 𝑃𝑟𝑡 = ₱4,500 0.0325 4 = ₱585
Answer: 𝐼 = ₱585
Example 2: Find the simple interest for a loan of ₱12,400 due at the end of 8 1/4 years at 4
1/2% annual interest.
1 1
Given: 𝑃 = ₱12,400, 𝑡 = 8 = 8.25 , 𝑟 = 4 % = 0.045
4 2
Unknown: 𝐼
Solution: 𝐼 = 𝑃𝑟𝑡 = 12400 0.045 8.25 = ₱4,603.5
Answer: 𝐼 = ₱4,603.5
Example 3: Find the principal necessary to earn ₱814 in simple interest if the money is to be
left on deposit for 5 years and 3 months and earns 5 1/2% annual interest.
3 1
Given: 𝐼 = ₱814, 𝑡 = 5 = 5.25, 𝑟 = 5 % = 0.055
12 2
Unknown: 𝑃
𝐼
Solution: Using 𝐼 = 𝑃𝑟𝑡, we obtain 𝑃 =
𝑟𝑡
814
𝑃= = ₱2,819.05
0.055 5.25
Answer: 𝑃 = ₱2,819.05
Example 4: Find the time necessary for a deposit of ₱11,500 to earn ₱3,450 in simple interest
if the money is to earn 3 3/4% annual interest.
3
Given: 𝑃 = ₱11,500, 𝐼 = ₱3,450, 𝑟 = 3 % = 0.0375
4
Unknown: 𝑡
𝐼
Solution: Using 𝐼 = 𝑃𝑟𝑡, we obtain 𝑡 =
𝑃𝑟
𝐼 3,450
𝑡= = = 8 Answer: 8 𝑦𝑒𝑎𝑟𝑠
𝑃𝑟 11,500 0.0375
If the period of a loan (or investment) with an annual interest rate is given in days,
there are two ways to convert the time to years:
1. Exact method: 𝑡 = number of days /365

2. Ordinary method: 𝑡 = number of days /360
Note that the ordinary method is used by most businesses. Unless otherwise specified, we
use the ordinary method.
Example 5. Calculate the simple interest due on a 45-day loan of ₱3500 if the annual
interest rate is 8%.
45
Given: 𝑡 = 𝑑𝑎𝑦𝑠, 𝑃 = ₱3,500, 𝑟 = 0.08
360
Unknown: 𝐼
45
Solution: 𝐼 = 𝑃𝑟𝑡 = 3,500 0.08 = ₱35
360
Answer: 𝐼 = ₱35
*We have used the ordinary method to convert the time in days into years as there is
no method specified in the problem.
Example 6. Calculate the simple interest due on a 120-day loan of ₱7,000 using the exact
method if the annual interest rate is 5.25%.
120
Given: 𝑡 = 𝑑𝑎𝑦𝑠, 𝑃 = ₱7,000, 𝑟 = 0.0525
365
Unknown: 𝐼
120
Solution: 𝐼 = 𝑃𝑟𝑡 = 7,000 0.0525 = ₱120.82
365
Answer: 𝐼 = ₱120.82
Time between two dates
When time is given between two dates, the time in days is determined using actual
or approximate time:
 Actual time uses the exact number of days in each month

 Approximate time assumes 30 days per month for all months
Methods of computing for the simple interest when time is given between two dates
Given the ways to count the number of days between two dates and the ways to
convert days to years, there are then 4 ways to compute for simple interest when time is
given between dates:
1. Ordinary Interest for actual number of days

𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒
𝐼𝑜 = 𝑃𝑟
360
This is referred to as the Banker’s Rule.
2. Ordinary Interest for approximate number of days
𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
𝐼𝑜 = 𝑃𝑟
360
3. Exact Interest for actual number of days

𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒
𝐼𝑒 = 𝑃𝑟
365
4. Exact interest for approximate number of days

𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 𝑡𝑖𝑚𝑒
𝐼𝑒 = 𝑃𝑟
365
Note: Use the Banker’s rule unless otherwise specified. When we count the number of days
in between two dates we do not include the first day but we include the last day. Take
note that February may either have 29 or 28 days depending on if it is a leap year or not.
Example 7. Calculate the simple interest due on a loan of ₱2000, at 6.5% simple interest,
which was availed on July 12, 2019, and to be repaid on December 12, 2019. Use the four
methods of computing for simple interest.
Given: 𝑃 = ₱2,000, 𝑟 = 0.065
𝑡: July 12, 2019 → December 12, 2019
Unknown: 𝐼 using the four different methods
Solution: First we count the number of days between July 12, 2019 and September
12, 2019 using actual time and approximate time.
Actual Time Approximate Time

July 31-12=19 July 30-12=18
August 31 August 30
September 30 September 30
October 31 October 30
November 30 November 30
December 12 December 12
Total 153 Total 150
a) Ordinary Interest for actual number of days (Banker’s Rule)

𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒 153
𝐼𝑂 = 𝑃𝑟 = 2,000 0.065 = ₱55.25
360 360
b) Ordinary Interest for approximate number of days

𝑎𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑒 150
𝐼𝑂 = 𝑃𝑟 = 2,000 0.065 = ₱54.17
360 360
c) Exact Interest for actual number of days

𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒 153
𝐼𝑒 = 𝑃𝑟 = 2,000 0.065 = ₱54.49
365 365
d) Exact Interest for approximate number of days
approximate 𝑡𝑖𝑚𝑒 150
𝐼𝑒 = 𝑃𝑟 = 2,000 0.065 = ₱53.42
365 365
Note: Among the four methods of computing simple interest, the Banker’s rule will usually
give the highest interest.
Final Amount
The final amount is the sum of the principal and the interest which is accumulated at
a certain time. Final amount could be the Future Value or the Maturity Value:
 Future Value (of an investment)

A term used to refer to the total amount on deposit after the interest earned has
been added to the principal.
 Maturity Value (of the loan)
A term used to refer to the total amount to be repaid to the lender where the
amount is the interest due on the loan plus the principal.
The formula in computing for the Final Amount is given as:
𝐹 =𝑃+𝐼
𝐹 = 𝑃 + 𝑃𝑟𝑡
𝐹 = 𝑃(1 + 𝑟𝑡)
where: 𝐹 = the Final Amount.
𝑃 = the Principal.
𝐼 = the Interest.
Example 8. Calculate the maturity value of a simple interest, eight-month loan of ₱8,000 if
the interest rate is 9.75%.
8 2
Given: 𝑡 = = , 𝑃 = ₱8,000, 𝑟 = 0.0975
12 3
Unknown: 𝐹
2
Solution: 𝐹 = 𝑃 1 + 𝑟𝑡 = 8,000 1 + 0.0975 = ₱8,520
3
Answer: 𝐹 = ₱8,520
Example 9. What principal will accumulate to ₱135,000 in 2 years at 15% simple interest?
Given: 𝐹 = ₱135,000, 𝑡 = 2, 𝑟 = 0.15
Unknown: 𝑃
𝐹
Solution: Using 𝐹 = 𝑃 1 + 𝑟𝑡 we obtain 𝑃 = .
1+𝑟𝑡
𝐹 135,000
𝑃= = = ₱103,846.15
1+𝑟𝑡 1+(2)(0.15)
Answer: 𝑃 = ₱103,846.15
Example 10. How many years are needed for ₱5,700 to accumulate to P6,555 at 3.5%
simple interest?
Given: 𝑃 = ₱5,700, 𝐹 = ₱6,555 𝑟 = 0.035
Unknown: 𝑡
𝐹
−1
Solution: Using 𝐹 = 𝑃 1 + 𝑟𝑡 we obtain 𝑡 = 𝑃
.
𝑟
𝐹 6,555
−1 −1
𝑃 5,700
𝑡= = = 4.29
𝑟 0.035
Answer: 𝑡 = 4.29 years
Practice Exercise 6-1: My Score:
Simple Interest. Read and analyze the following problems. Solve for the unknown/s in each
problem and provide a complete solution of your calculations.
Write your solutions and answers on a clean sheet of paper. Submit the image of your
HANDWRITTEN SOLUTIONS as a single pdf file in the submission bin for this activity in the
Classroom. You may use image scanning apps on your phone (CamScanner or Tap
Scanner) to save several images into 1 pdf file, or place your images in a document and
save as a pdf file.
1. On February 19, 2020, Trisha borrowed ₱50,000 from a community cooperative at 9%

simple interest. The loan is payable on September 12, 2020. Compute the simple
interest using the four methods. How much will be the maturity value if the Banker’s
Rule is used?
2. Mike deposited on March 12, 2020 at 10.5% simple interest. On September 8, 2020,
the fund accumulated to ₱12,630. How much was the amount originally invested?
3. Mr. Tan borrowed ₱15,000 from the faculty fund at 13.25% simple interest for 210
days. How much would he repay at the end of the term if he is charged exact
interest?
C. COMPOUND INTEREST
Compound interest is the interest resulting from the periodic addition of simple
interest to the principal to create a new principal every now and then. Interest is charged
(or paid) on interest as well as on principal. The compound interest is the sum by which the
original principal has been increased by the end of the term.
The total accumulated amount at the end of the period which is the original
principal plus the compound interest is called the compound amount or final amount.
The formula in computing for the compound amount is given by
𝑟
𝐹 = 𝑃(1 + 𝑖)𝑛 where 𝑖 = and 𝑛 = 𝑚𝑡, or
𝑚
𝑟 𝑚𝑡
𝐹 =𝑃 1+
𝑚
and the formulas for the compound interest and the principal are
𝐼 =𝐹−𝑃 𝑃 = 𝐹(1 + 𝑖)−𝑛
where: 𝐹 = the Final amount or Compound amount

𝑃 = the Principal
𝐼 = the Compound Interest
𝑖 = the interest rate per period or periodic rate
𝑡 = time or term of investment, expressed in years
𝑛 = number of conversion periods (or compounding periods) for the
whole term.
𝑚 = the number of times interest is computed per year or
the number of conversion periods per year;
𝑟 = the nominal rate of interest per annum or year.
*Conversion or Compounding periods
Conversion/Compounding Period Value of m

Annually 1
Semi-annually 2
Quarterly 4
Monthly 12
Simple Interest and Compound Interest Compared
To better understand the difference between simple and compound interest, let us
use the following information.
Given: P=₱1,000,
𝑟 = 0.1,
𝑚 = 1,
𝑡=3
Simple Interest
Year Principal (amount Interest for the Total interest for
earning an period covered the period
interest) covered
1 ₱1,000 ₱100 ₱100
2 1,000 100 100
3 1,000 100 100
Final Amount at the end of 3 years where F = P (1 +rt) ₱1,000 + ₱300

F = 1000 [1 +(0.1)(3)] = ₱1,300 = ₱1,300
*The same ₱1,000 earns an interest per period.
Compound Interest
Year Principal (amount earning Interest for the period Total interest for the
an interest) covered period covered
1 ₱1000 ₱100 (a) ₱100
1000 100 (b)

2
100 (a) 10 (c) ₱110
₱1000 ₱100 (d)
100 (a) 10 (e)

3
100 (b) 10 (f)
10 (c) 1(g) ₱121
Final Amount at the end of 3 years where 𝐹 = 𝑃(1 + 𝑖)𝑛

𝟑
𝑭 = 𝟏𝟎𝟎𝟎 𝟏 + 𝟎. 𝟎𝟏 = ₱𝟏, 𝟑𝟑𝟏 ₱1000+₱331=₱1,331
*The same ₱1,000 earns an interest per period but the interests also earn interest.
Comparing simple and compound interest there is a ₱31 discrepancy. Said amount
is the accumulated interest of the interests.
Example 11: Find the compound amount and interest if ₱1,000 is invested at 2%
compounded quarterly for 1 year and 6 months.
Given: 𝑃 = ₱1,000, 𝑟 = 0.02, 𝑚 = 4, 𝑡 = 1.5
Unknown: 𝐹, 𝐼
𝑟 𝑚𝑡 0.02 4(1.5)
Solution: 𝐹 = 𝑃 1 + = 1,000 1 + = ₱1,030.38
𝑚 4
𝐼 = 𝐹 − 𝑃 = 1,030.38 − 1,000 = ₱30.38
Answer: 𝐹 = ₱1,030.38 and 𝐼 = ₱30.38
In some business transactions involving money, especially during the onset of the
purchase of an expensive good or service, a down payment is required and in most cases,
the purchaser makes financing arrangements to cover the remaining amount owed to the
seller (Investopedia). In the case that we want to compute for the cash value then we use
CASH VALUE = Down payment (DP) + Present value of all future payments
If no down payment is required, then
CASH VALUE = Present value of all future payments
Example 12. Equipment is purchased on installment by your company. Your company paid
an amount of ₱205,000 and owes a balance of ₱500,000 to be paid at the end of seven
years. Find the cash value of the equipment if money is worth 5% compounded quarterly.
Given: 𝐷𝑃 = ₱205,000, 𝐹 = ₱500,000, 𝑟 = 0.05, 𝑚 = 4, 𝑡 = 7
Unknown: 𝐶𝑎𝑠ℎ 𝑉𝑎𝑙𝑢𝑒
Solution:
To solve for the cash value, we have to determine the present value 𝑃 of the future
payment of ₱500,000.
𝑟 −𝑚𝑡 0.05 −4 7
𝑃 =𝐹 1+ = 500,000 1 + = ₱353,109.26
𝑚 4
Then 𝐶𝑎𝑠ℎ 𝑣𝑎𝑙𝑢𝑒 = ₱205,000 + ₱353,109.26 = ₱558,109.26
Answer: 𝐶𝑎𝑠ℎ 𝑣𝑎𝑙𝑢𝑒 = ₱558,109.26
My Score:
Practice Exercise 6-2:
Compound Interest. Read and analyze the following problems. Solve for the unknown/s in
each problem and provide a complete solution of your calculations.
save as a pdf file.
1. Determine the final amount and interest if ₱24,500 is invested in an account that
earns 8% compounded quarterly for 5 3/4 years.
2. How much money should be invested in an account that earns 9.5% interest,
compounded monthly, in order to have ₱30,000 in 5 years?
3. How much interest is due at the end of 2 1/2 years on a loan of ₱40,000 today if
interest is computed at 7.2% compounded semiannually?
4. Find the compound amount after 5 years and 9 months if the principal is ₱150,000
and the interest rate is 7% compounded annually.
5. What present value, compounded quarterly at 8%, will amount to ₱65, 893.71 in 4
years?
6. Accumulate ₱180,000 for 5 years at 13% compounded semi-annually. (Note:

accumulating an amount means finding its maturity value.)
7. How much must Ella deposit in a bank that pays 11% interest compounded quarterly
so that she will have ₱400,000 after 4 years?
8. At what interest rate will a principal of ₱9,500 accumulate to ₱15,000 in 2 years

compounded semi-annually?
D. ANNUITY (or SIMPLE ANNUITY)
An annuity refers to a sequence of equal payments made at equal intervals of time.

This identifies the elements of an annuity as follows:
a. Sequences or series of payments
b. Payments are of equal amounts
c. Payments are made at equal intervals of time.
The concept of annuity applies to premiums of life insurance, periodic payments of

rentals, purchase of car or house, interest payment on bonds, or payment of household
appliances purchased on installment.
The term of an annuity refers to the period of time from the beginning of the first
payment interval up to the last payment interval. The size or value of each payment is
called the periodic payment. The time between successive periodic payments is called the
payment interval.
Classification of (Simple) Annuity Certain

1. Ordinary Annuity – annuity where the periodic payments are made at the end of
each payment interval.
2. Annuity Due – annuity where the periodic payments are made at the beginning of
each payment interval.
3. Deferred Annuity – annuity where the first periodic payment is not made at the
beginning nor at the end of the first payment interval but at some later date.
PRESENT VALUE AND AMOUNT OF AN ANNUITY
The Present Value of an Annuity, denoted by 𝐴, is the value of the annuity at the
beginning of its term.
The Final Amount of an annuity or Sum of an Annuity, denoted by 𝑆, is the value of
the annuity at the end of its term.
Ordinary Annuity
Ordinary Annuity is an annuity where the periodic payments are made at the end of
payment intervals.
Formulas for Ordinary Annuity

1. Final Amount of Ordinary Annuity
𝑟 𝑚𝑡
1+𝑖 𝑛 −1 1+ −1
𝑚
𝑆𝑜𝑟𝑑 =𝑅 =𝑅 𝑟
𝑖
𝑚
2. Present Value of Ordinary Annuity
𝑟 −𝑚𝑡
1− 1+𝑖 −𝑛 1− 1+
𝑚
𝐴𝑜𝑟𝑑 =𝑅 =𝑅 𝑟
𝑖
𝑚
where: 𝑆𝑜𝑟𝑑 = the Sum or final amount of an ordinary annuity
𝐴𝑜𝑟𝑑 = the Present value of an ordinary annuity
𝑅 = Periodic payment
𝑡 = the term of the annuity
𝑖 = the periodic rate
𝑟 = the rate of interest of an annuity
𝑚 = number of conversion periods per year
𝑛 = total number of conversion periods for the whole term
Example 13. A man deposits ₱12,200 every end of 6 months in an account paying 2%
compounded semi-annually. What amount is in the account at the end of 9 years and 6
months?
Given: 𝑅 = ₱12,200, 𝑚 = 2, 𝑟 = 0.02, 𝑡 = 9.5𝑦𝑟𝑠
Unknown: 𝑆𝑜𝑟𝑑
Solution:
𝑟 𝑚𝑡 0.02 2(9.5)
1+ −1 1+ −1
𝑚 2
𝑆𝑜𝑟𝑑 = 𝑅 𝑟 = 12,200 0.02 = ₱253,892.92
𝑚 2
Answer: 𝑆𝑜𝑟𝑑 = ₱253,892.92
Example 14. A home video entertainment set is offered for sale for ₱18,000 down payment
and ₱1,800 every three months for the balance, for 18 months. If interest is to be computed
at 10% converted quarterly, what is the cash price equivalent of the set?
18
Given: 𝐷 = ₱18,000, 𝑅 = ₱1,800, 𝑡 = = 1.5, 𝑟 = 0.10, 𝑚 = 4
12
Unknown: 𝐶𝑎𝑠ℎ 𝑉𝑎𝑙𝑢𝑒
Solution: To find the cash value, we need to solve first for the present value of future
payments. As the future payments are in the form of an ordinary annuity, we simply
solve for 𝐴𝑜𝑟𝑑 .
𝑟 −𝑚𝑡 0.10 −4 1.5
1− 1+ 1− 1+
𝑚 4
𝐴𝑜𝑟𝑑 = 𝑅 𝑟 = 1,800 0.10 = ₱9,914.63
𝑚 4
Now for the cash value,

𝐶𝑎𝑠ℎ 𝑉𝑎𝑙𝑢𝑒 = 𝐷 + 𝐴𝑜𝑟𝑑 = ₱18,000 + ₱9,914.63 = ₱27,914.63
Answer: 𝐶𝑎𝑠ℎ 𝑉𝑎𝑙𝑢𝑒 = ₱27,914.63
Example 15. How much monthly deposit must be made for 5 years and 5 months in order
to accumulate ₱120,000 at 3% compounded monthly?
5
Given: 𝑡 = 5 , 𝑆𝑜𝑟𝑑 = ₱120,000, 𝑟 = 0.03, 𝑚 = 12
12
Unknown: 𝑅
𝑟 𝑚𝑡
1+𝑚 −1
Solution: From 𝑆𝑜𝑟𝑑 = 𝑅 𝑟 we can obtain
𝑚
−1
𝑟 𝑚𝑡 𝑟
1+ −1
𝑚 𝑚
𝑅 = 𝑆𝑜𝑟𝑑 𝑟 = 𝑆𝑜𝑟𝑑 .
𝑟 𝑚𝑡
𝑚 1+ −1
𝑚
𝑟 0.03
Then 𝑅 = 𝑆𝑜𝑟𝑑 𝑚
𝑟 𝑚𝑡
= 120,000 12
5 = ₱1,702.52
1+𝑚 −1 0.03 12 5+12
1+ 12 −1
Answer: 𝑅 = ₱1,702.52
Example 16. Bebong wants to buy a car worth ₱740,000. He can pay 40% of the price as
down payment and the balance payable every end of the month for 60 months, how
much must he pay monthly at 9% compounded monthly?
Given: 𝐶𝑎𝑠ℎ 𝑝𝑟𝑖𝑐𝑒 = ₱740,000, 𝐷𝑃 = ₱740,000 0.4 = ₱296,000
60
𝑡 = = 5, 𝑟 = 0.09, 𝑚 = 12
12
Unknown: 𝑅
𝑟 −𝑚𝑡 𝑟
1− 1+𝑚
Solution: From 𝐴𝑜𝑟𝑑 = 𝑅 𝑟 we can obtain 𝑅 = 𝐴𝑜𝑟𝑑 𝑚
𝑟 −𝑚𝑡
.
𝑚 1− 1+𝑚
Since 𝐶𝑎𝑠ℎ 𝑝𝑟𝑖𝑐𝑒 = 𝐷 + 𝐴𝑜𝑟𝑑 , this implies that

𝐴𝑜𝑟𝑑 = 𝐶𝑎𝑠ℎ 𝑝𝑟𝑖𝑐𝑒 − 𝐷 = ₱740,000 − ₱296,000 = ₱444,000
𝑟 0.09
Finally , 𝑅 = 𝐴𝑜𝑟𝑑 𝑚
𝑟 −𝑚𝑡
= 444,000 12
0.09 −12 5
= ₱9,216.71
1− 1+ 1− 1+ 12
𝑚
Answer: 𝑅 = ₱9,216.71
Annuity Due
An annuity where the periodic payments are made at the beginning of each
payment interval.
Formulas for Annuity Due

1. Final Amount of Annuity Due
𝑟 𝑚𝑡 +1
1+𝑖 𝑛 +1 −1 1+ −1
𝑚
𝑆𝑑𝑢𝑒 = 𝑅 −1 =𝑅 𝑟 −1
𝑖
𝑚
2. Present Value of Annuity Due
𝑟 −𝑚𝑡 +1
1− 1+𝑖 −𝑛 +1 1− 1+
𝑚
𝐴𝑑𝑢𝑒 =𝑅 +1 =𝑅 𝑟 +1
𝑖
𝑚
where: 𝑆𝑑𝑢𝑒 = the Sum or final amount of an annuity due
𝐴𝑑𝑢𝑒 = the Present value of an annuity due
𝑅 = Periodic payment
𝑡 = the term of the annuity
𝑖 = the periodic rate
𝑟 = the rate of interest of an annuity
𝑚 = number of conversion periods per year
𝑛 = total number of conversion periods for the whole term
Example 17. Mimay wants to have ₱95,000 for his traveling expenses four years from now.
How much must he save at the beginning of each quarter starting today, if he gets 0.06%
compounded quarterly interest on his savings?
Given: 𝑆𝑑𝑢𝑒 = ₱95,000, 𝑡 = 4, 𝑟 = 0.0006, 𝑚 = 4
Unknown: 𝑅
1+𝑖 𝑛 +1 −1 1+𝑖 𝑛 −1
Solution: Consider 𝑆𝑑𝑢𝑒 = 𝑅 −1 =𝑅 1+𝑖 .
𝑖 𝑖
0.0006
𝑆𝑑𝑢𝑒 𝑖 95,000,
Then we obtain 𝑅 = = 0.0006
4
0.0006 4 4
= ₱5929.93
1+𝑖 1+𝑖 𝑛 −1 1+ 4 1+ −1
4
Answer: 𝑅 = ₱5929.93
Practice Exercise 6-3: My Score:
Annuities. Read and analyze the following problems. Solve for the unknown/s in each
problem and provide a complete solution of your calculations.
save as a pdf file.
1. Find the amount and the present value of an annuity of ₱1,500 every 3 months for 5
years if money is worth 8% compounded quarterly.
2. Polly purchased a car. She paid ₱150,000 as down payment and pays ₱5,500 at the
end of each month for 48 months. If the interest is 7.8% compounded monthly, how
much was the car worth?
3. A house and lot are worth ₱4.3 million in cash. A buyer pays a 40% downpayment
and agrees to pay the balance by equal payments at the end of each month for
10 years at the rate of 9% compounded monthly. How much will be the monthly
payment?
4. In order to have ₱1 million in a fund at the end of 15 years, how much must be
deposited in the fund every quarter if money can be invested at 10.5%
compounded quarterly?
5. Find the present value and final amount of an annuity of ₱12,000 at the beginning of
every 6 months for a term of 8 years if the interest is 9.8% compounded
semiannually.
6. An investment of ₱2,850 is made at the beginning of each month for 6 years and 7
months. How much will the investment be at the end of the term if interest is 11%
compounded monthly?
7. A loan of ₱40,000 is to be amortized by equal payments at the beginning of each

quarter for 18 months. If interest is 7.5% compounded quarterly, find the periodic
payment.
It’s time to answer Quiz 2 (40 points)

and prepare for the MIDTERM EXAMINATION!

GMATH Module 6

Uploaded by

Copyright:

Available Formats

GMATH Module 6

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

GMATH Module 6

Uploaded by

Copyright:

Available Formats

MODULE 6: Mathematics of Finance

The formula in computing for the simple interest is given by

1. Exact method: 𝑡 = number of days /365

Time between two dates

 Actual time uses the exact number of days in each month

1. Ordinary Interest for actual number of days

This is referred to as the Banker’s Rule.

3. Exact Interest for actual number of days

4. Exact interest for approximate number of days

Actual Time Approximate Time

a) Ordinary Interest for actual number of days (Banker’s Rule)

b) Ordinary Interest for approximate number of days

c) Exact Interest for actual number of days

 Future Value (of an investment)

The formula in computing for the Final Amount is given as:

Practice Exercise 6-1: My Score:

1. On February 19, 2020, Trisha borrowed ₱50,000 from a community cooperative at 9%

where: 𝐹 = the Final amount or Compound amount

*Conversion or Compounding periods

Conversion/Compounding Period Value of m

Simple Interest and Compound Interest Compared

1 ₱1,000 ₱100 ₱100

2 1,000 100 100

3 1,000 100 100

Final Amount at the end of 3 years where F = P (1 +rt) ₱1,000 + ₱300

*The same ₱1,000 earns an interest per period.

1 ₱1000 ₱100 (a) ₱100

1000 100 (b)

₱1000 ₱100 (d)

100 (a) 10 (e)

10 (c) 1(g) ₱121

Final Amount at the end of 3 years where 𝐹 = 𝑃(1 + 𝑖)𝑛

If no down payment is required, then

CASH VALUE = Present value of all future payments

6. Accumulate ₱180,000 for 5 years at 13% compounded semi-annually. (Note:

8. At what interest rate will a principal of ₱9,500 accumulate to ₱15,000 in 2 years

D. ANNUITY (or SIMPLE ANNUITY)

An annuity refers to a sequence of equal payments made at equal intervals of time.

The concept of annuity applies to premiums of life insurance, periodic payments of

Classification of (Simple) Annuity Certain

Formulas for Ordinary Annuity

Answer: 𝑆𝑜𝑟𝑑 = ₱253,892.92

Now for the cash value,

Since 𝐶𝑎𝑠ℎ 𝑝𝑟𝑖𝑐𝑒 = 𝐷 + 𝐴𝑜𝑟𝑑 , this implies that

Formulas for Annuity Due

Practice Exercise 6-3: My Score:

7. A loan of ₱40,000 is to be amortized by equal payments at the beginning of each

It’s time to answer Quiz 2 (40 points)

You might also like