MODULE 6: MATH OF INVESTMENT

INTRODUCTIONS

Photo Source: https://due.com/blog/4-differences-group-coaching-program-private-coaching/

Why do you need to know about investments, bonds, stocks, and interests? Why is
there a need to invest your hard earned money? Whether you just want to save for that
phone or tablet that you wanted to buy; or you’re saving for a gift that you wanted to
give to your parent’s birthday: all these reasons why you plan to invest or save your
money, entails knowing some things about interest rates, and ideas in investment or
finance.

Having the knowledge in basic concepts in Business Mathematics or the

mathematics of investment may help you decide whether to use that credit card for a
5% interest compounded monthly or a simple interest for a period of 6 months. Some
topics might shed light on which banks would give a higher interest rate for your savings.
As a young professional in the future who might plan to have their dream vacation after
graduation, or is planning to buy some latest gadget, you might want to start saving as
early as now. These are some of the reasons for investing your hard earned money.

In this module, we will discuss the concepts of simple and compound interest as
well as simple and general annuities. The notions of stocks and bonds will be viewed as a
simple financial instrument.

After finishing this module, you should be able to answer the following questions:

a. How to compute for the interest, maturity value, and present value in simple
interest and compound interest environment?
b. How to find the future and present value of both simple and general annuities?
c. How to analyse the different market indices for stocks and bonds?

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LESSON OUTLINE

a. Simple and Compound Interest

b. Simple and General Annuities
c. Stocks and Bonds

LEARNING OBJECTIVES

At the end of this module, you are expected to:

a. illustrate simple and compound interests;

b. distinguish between simple and compound interests;
c. compute interest, maturity value, future value, and present value in simple interest
and compound interest environment;
d. solve problems involving simple and compound interests;
e. illustrate simple and general annuities;
f. distinguish between simple and general annuities;
g. find the future value and present value of both simple annuities and general
annuities;
h. calculate the fair market value of a cash flow stream that includes an annuity;
illustrate business and consumer loans;
i. distinguish between business and consumer loan;
j. solve problems involving business and consumer loans (amortization, mortgage)
k. calculate the present value and period of deferral of a deferred annuity;
l. illustrate stocks and bonds;
m. distinguish between stocks and bonds;
n. describe the different markets for stocks and bonds; and
o. analyse the different market indices for stocks and bonds.

LET’S TRY!
Before we dive into your sixth module, complete the following statements first by
providing the information that’ll make the statement true. Write your answer on the space
provided on each item.

1. The maturity value of 50,000php borrowed at 8% simple interest for 2 years is

______________.
2. The present value of 75,000php at 5% simple interest for three years is
______________.
3. There are exactly ________________ days from August 9,2020 to December 25, 2020.
4. You need to invest an amount of ______________________ to have 128,376.52 after
8 years if you are going to invest on a bank that pays 6% interest compounded
semi-annually.
5. An annuity in which the periodic payment is made at the beginning of each
payment interval is called _____________________.

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 LESSON 1 Simple and Compound Interest

On this lesson, Simple and Compound Interest, you will learn how to illustrate simple
and compound interests, distinguish between simple and compound interests, and
compute interest, maturity value or future value, and present value in simple interest and
compound interest environment.

LET’S DISCOVER!
Interest may be defined as the charge for using the borrowed money. It is an
expense for the person who borrows money and income for the person who lends
money. Interest is charged on principal amount at a certain rate for a certain period. For
example, 10% per year, 4% per quarter or 2% per month etc. Principal amount means
the amount of money that is originally borrowed from an individual or a financial
institution. It does not include interest. In practice, the interest is charged using one of two
methods. These are:

a. simple interest method; and

b. compound interest method.

Reading Assignment: Before we proceed to the discussion of simple and compound

interest, please turn your textbook on page 160, and familiarize yourself with the
definitions of the terms that we will encounter on this lesson.

Simple Interest

Simple Interest

Simple interest is calculated on the principal, or original, amount of a loan. You

can solve for the interest, principal, rate, or time using these formulas below.

Maturation Value on the other hand can be solved using either of the following
formulas:

𝐴 =𝑃+𝐼 𝐴 = 𝑃 + 𝑃𝑟𝑡 𝐴 = 𝑃(1 + 𝑟𝑡), where

A = maturity value P = principal r = rate t = time

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 Example 1: A bank offers 0.25% annual simple interest rate for a particular deposit. How
much interest will be earned if 1 million pesos is deposited in this savings account for
one year?

First, identify the values of 𝑃, 𝑟 and 𝑡.

Here, 𝑃 = 1,000,000𝑝ℎ𝑝, 𝑟 = 0.25% 𝑜𝑟 0.0025, and 𝑡 = 1 𝑦𝑒𝑎𝑟.

𝐼 = 𝑃𝑟𝑡

𝐼 = (1,000,000)(0.0025)(1)

𝑰 = 𝟐, 𝟓𝟎𝟎

Therefore, the interest earned is 2,500𝑝ℎ𝑝

Did you know?

Interest savings account in the Philippines is subject to 20% withholding tax. If 20%
withholding tax will be applied, the actual interest earned is (2,500)(0.8) = 2,000𝑝ℎ𝑝.

Example 2: How much interest is charged if Mr. Nangungutang borrowed 50,000php

for 9 months at an annual simple interest rate of 20%?

First, identify the values of 𝑃, 𝑟 and 𝑡.

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Here, 𝑃 = 50,000𝑝ℎ𝑝, 𝑟 = 20% 𝑜𝑟 0.2, and 𝑡 = 𝑦𝑒𝑎𝑟 𝑜𝑟 0.75 𝑦𝑒𝑎𝑟.
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Note: When the term is expressed in months (M), it should be converted to

𝑀
years by 𝑡 = .
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𝐼 = (50,000)(0.20)(0.75)

𝑰 = 𝟕, 𝟓𝟎𝟎𝒑𝒉𝒑

Therefore, the simple interest charge is 7,500𝑝ℎ𝑝.

Example 3: When invested at an annual interest rate of 5%, an amount earned

13,500php of simple interest in three years. How much money was originally invested?

On this problem, we are asked to find the value of 𝑃 or the principal amount,
𝐼
therefore, we are going to use the formula 𝑃 = .
𝑟𝑡

Then, let’s identify the values of 𝑟, 𝑡 and 𝐼.

Here, 𝑟 = 5% 𝑜𝑟 0.05, 𝑡 = 3 𝑦𝑒𝑎𝑟𝑠, and 𝐼 = 13,500.

𝑰
𝑷=
𝒓𝒕

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 13,500
𝑃=
(0.05)(3)

𝑷 = 𝟗𝟎, 𝟎𝟎𝟎𝒑𝒉𝒑

Therefore, the amount invested is 90,000𝑝ℎ𝑝.

Example 4: Jane deposited 15,000php and got back an amount of 1,800php after two
years. Find Jane’s interest rate.

On this problem, we are asked to find the value of 𝑟 or the interest rate, therefore, we
𝐼
are going to use the formula 𝑟 = .
𝑃𝑡

Then, let’s identify the values of 𝑃, 𝐼 and 𝑡.

Here, 𝑃 = 15,000𝑝ℎ𝑝,𝐼 = 1,800𝑝ℎ𝑝, and 𝑡 = 2 𝑦𝑒𝑎𝑟𝑠.

𝑰
𝒓=
𝑷𝒕
1,800
𝑟=
(15,000)(2)

𝒓 = 𝟎. 𝟎𝟔 𝒐𝒓 𝟔%

Therefore, the Jane’s interest rate is 6%.

Interest can be viewed as a lender or a borrower. Sometimes if we are the investor,

we consider the value of our investment after a given period. Example 5 will introduce
the concept of future values or accumulated values or maturity value.

Example 5: Angelica invested 100,000php in a bank that pays 8.75% compounded

annually. What is the maturity value of the money invested by Angelica if she will invest
it for 3 years?

On this problem, we are asked to find the maturity value of the amount invested. You
can use either of the three formulas, but now let us use 𝐴 = 𝑃(1 + 𝑟𝑡).

Then, let’s identify the values of 𝑃, 𝑟 and 𝑡.

Here, 𝑃 = 100,000𝑝ℎ𝑝, 𝑟 = 8.75% 𝑜𝑟 0.0875, and 𝑡 = 3 𝑦𝑒𝑎𝑟𝑠.

𝐴 = 𝑃(𝐼 + 𝑟𝑡)

𝐴 = 100,000[1 + (0.0875)(3)]

𝐴 = 100,000 (1 + 0.2625)

𝐴 = 100,000(1.2625)

𝑨 = 𝟏𝟐𝟔, 𝟐𝟓𝟎𝒑𝒉𝒑

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 Therefore, after three years, Angelica’s money will be 126,250php.

Different Ways of Expressing Time/Term of a Loan or Investment

Sometimes the term of investment is not given in years. The term or time frame
given in certain problems maybe stated in days or months. In cases where the time is
expressed in months it is easy to express it in years. But when the term/time is given in days
we use a time factor such as the following:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑎𝑦𝑠
→ Ordinary Simple Interest or Bankers Rule
360

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑎𝑦𝑠
→ Exact Simple Interest
365

Note: Whenever a problem does not specify the time factor to be used,
Bankers Rule Interest will be the used.

As we go along with the ways of expressing time of an investment, please be

reminded of the following information:

 if the loan is for less than one year, we use a fraction of a year where there are
two ways to compute simple interest: (1) ordinary interest – based on a 360 day
per year calendar, meaning it assumes 30 days in each month; and (2) exact
interest – based on a 365 day per year calendar;
 the origin date is the date when the loan or investment is made, and it is not
included in the counting; and
 maturity date is the date when the loan is paid or the investment is terminated,
and it is included in the counting.

Example 6: Assuming you have a 2,500php loan at 12% interest for 60 days.

a. What is the ordinary interest you would pay?

b. What is the exact interest you would pay?

a. Ordinary Interest
𝑑𝑎𝑦𝑠
Formula – (𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑟𝑎𝑡𝑒) ( )
360

60
(2,500)(0.12) ( ) = 𝟓𝟎𝒑𝒉𝒑
360
Therefore, you are going to pay 50php for the interest using ordinary interest.

b. Exact Interest
𝑑𝑎𝑦𝑠
Formula – (𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙)(𝑟𝑎𝑡𝑒) ( )
365
60
(2,500)(0.12) ( ) = 𝟒𝟗. 𝟑𝟐𝒑𝒉𝒑
365

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 Therefore, you are going to pay 49.32php for the interest using exact interest.

On Example 6, the number of days is already given. There are instances that you
need to solve for the number of days between two dates. We have two ways on how to
do that:

 the approximate time bases on counting 30 days in each month; and

 the actual time of a loan or investment is obtained by counting the “actual
number of days” between the origin date and the maturity date based on a Julian
calendar.

Example 7: Find the actual and approximate time from July 15, 2020 to December
21, 2020.

a. Actual Time b. Approximate Time

July 16 (𝟑𝟏 − 𝟏𝟓 = 𝟏𝟔) July 15 (𝟑𝟎 − 𝟏𝟓 = 𝟏𝟓)

Aug 31 Aug 30

September 30 September 30

October 31 October 30

November 30 November 30

December 21 December 21

Total 159 Total 156

Therefore, using actual time, there are 159 days from July 15, 2020 to
December 21, 2020, and there are 156 days between the two dates using
the approximate time.

Example 8: Compute for the (a) ordinary interest and (b) exact interest on 1,000php at
8% for 90 days.

We know that 𝑃 = 1,000, 𝑟 = 8% = 0.08, and 𝑡 = 90 𝑑𝑎𝑦𝑠

a. Ordinary Interest
90
𝐼 = (1,000)(0.08)( )
360
𝑰 = 𝟐𝟎𝒑𝒉𝒑

b. Exact interest
90
𝐼 = (1,000)(0.08) ( )
365
𝑰 = 𝟏𝟗. 𝟕𝟑𝒑𝒉𝒑

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 Therefore, at 8% interest rate, 1,000php will earn an interest of 20php for
90 days using ordinary interest, and 19.73php using exact interest.

Note: The ordinary interest is higher than the exact interest. If the
problem is silent, we always solve for ordinary interest as that is the most
commonly used interest.

Reading Assignment:

There are six more examples for simple interest on pages 162 – 169 of your
textbook.

Visit these links to learn more about simple interest:

1. https://bit.ly/3nPNcLN
2. https://bit.ly/36SZTPg
3. https://bit.ly/3lSuVND

Compound Interest
Consider an investment whose time frame is divided into equal intervals. If an
interest is computed after an interval and is being added to the principal and thereafter
earns an interest, then the difference between the original principal and the total
amount after the whole time frame is called compound interest. The compound amount
or the accumulated value of the principal is the sum of the principal and the compound
interest. In this situation, we see that the interest is being converted into a principal and
thus we use the phrase “interest is compounded” or “interest is converted”.

Compound Interest

𝑗
𝐹 = 𝑃(1 + 𝑖)𝑛 𝑖= 𝑛 = 𝑡𝑚
𝑚

where,

𝐹 = compound amount or accumulated amount

𝑃 = present value or original principal

𝑗 = interest rate per year

𝑖 = interest rate per period

𝑛 = total number of conversion periods

𝑚 = number of conversions per year

𝑡 = number of years

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 In the context of compound interest, the interest rate per annum or per year is
called the nominal rate of interest. Thus when a given nominal rate is said to be
compounded quarterly, that means in a given year there will be 4 conversions. Similarly,
when we say compounded monthly, the conversions are made every month therefore
in a given year, there will be 12 conversions.

Example 9: If 2,500php is invested at 13% compounded quarterly for 12 years, what

is its maturity value?

First, let us identify 𝑃, 𝑗, 𝑡, 𝑚, 𝑛, and 𝑖.

𝑃 = 2,500; 𝑗 = 0.13; 𝑡 = 12; 𝑚 = 4; 𝑛 = 𝑡𝑚 = (12)(4) = 48;

𝑗 0.13
𝑖= = = 0.0325
𝑚 4

𝐹 = 𝑃(1 + 𝑖)𝑛

𝐹 = 2,500(1 + 0.0325)48 = 𝟏𝟏, 𝟔𝟎𝟓. 𝟒𝟕𝒑𝒉𝒑

Therefore, 2,500php will be 11,605.47php after 12 years, given that it’s

compounded quarterly at 13% interest.

Example 10: Find the present value of 2,850 due in 5 years if the money is worth
10% compounded quarterly.

On this problem, we are looking for the value of 𝑃. Thus, we are going to use the
𝐹
formula 𝑃 = (1+𝑖)𝑛 . Now, let us identify 𝐹, 𝑗, 𝑡, 𝑚, 𝑛, and 𝑖.

𝐹 = 2,850; 𝑗 = 0.1; 𝑡 = 5; 𝑚 = 4; 𝑛 = 𝑡𝑚 = (5)(4) = 20;

𝑗 0.1
𝑖= = = 0.025
𝑚 4

𝐹
𝑃 = (1+𝑖)𝑛

2,850
𝑃 = (1+0.025)20 = 𝟏, 𝟕𝟑𝟗. 𝟐𝟕𝒑𝒉𝒑

Therefore, the present value is 1,739.27php.

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Example 11: What rate compounded annually will double any amount if it’s
invested in 6 years?

On this problem, we are solving for the value of 𝑗.

Let 𝑥 be the amount to be invested. We know that 𝑚 = 1, 𝑡 = 6, and

𝑛 = 𝑡𝑚 = (1)(6) = 6.

𝐹 = 𝑃(1 + 𝑖)𝑛

Since we are letting x be the amount to be and invested, and we want it to be

doubled in six years, our future value will be 2𝑥 instead of 𝐹.

𝑗 6
2𝑥 = 𝑥 (1 + )
1

𝑗 6
2𝑥 𝑥(1+1)
=
𝑥 𝑥

2 = (1 + 𝑗)6
6 6
√2 = √(1 + 𝑗)6

1.1225 = 1 + 𝑗

1.1225 − 1 = 𝑗

𝟎. 𝟏𝟐𝟐𝟓 = 𝒋

Therefore, any amount will be doubled in six years at 12.25% interest rate given
that it is compounded annually.

Example 12: When will 30,000php earn an interest of 15,000php if it is invested at

the rate of 7.5% converted annually?

On this problem, we are solving for the value of 𝑡.

We know that 𝐹 = 45,000𝑝ℎ𝑝, 𝑃 = 30,000, 𝑗 = 0.075, and 𝑚 = 1.

𝐹 = 𝑃(1 + 𝑖)𝑛

0.075 𝑛
45,000 = 30,000 (1 + )
1

45,000 30,000(1+0.075)𝑛
=
30,000 30,000

1.5 = (1.075)𝑛

log(1.5) = 𝑛 log(1.075)

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 log(1.5) nlog(1.075)
=
log(1.075) log(1.075)

𝒏 = 𝟓. 𝟔𝟎𝟔𝟓

Now, that we already have the value of 𝑛, we can already solve for the value
of 𝑡. We know that 𝑛 = 𝑡𝑚, and 𝑚 = 1, because the money will only be
compounded annually.

𝑛 = 𝑡𝑚

5.6065 = 𝑡(1)
5.6065 𝑡
=
1 1

𝑡 = 5.6065

Therefore, the after 5.6065 years, 30,000php will earn 15,000php, given that it will
be invested at the rate of 7.5% converted annually.

Reading Assignment:

There are five more examples for simple interest on pages 171 – 174 of your
textbook.

Visit these links to learn more about compound interest:

1. https://bit.ly/2HtTnpC
2. https://bit.ly/3fk71rR
3. https://bit.ly/35SFlqJ
4. https://bit.ly/339PXQu
5. https://bit.ly/3kWmO10

You can also visit these links to learn more about the difference between simple
and compound interest:

1. https://bit.ly/3lSfg0A
2. https://bit.ly/3lSOhC1
3. https://bit.ly/3fmoMGL
4. https://bit.ly/35UHtOZ

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 LET’S CHECK YOUR PROGRESS
Answer the following problems completely and accurately. You can check if
your answers are correct using the key to correction on page 50 of this module.

1. How many days are there from March 2, 2021 to June 5, 2021 using (a) actual time,
and (b) approximate time?
2. If Mark wants to invest his 25,000php, how many years will it take for his savings to
be 40,000php if he invested his savings to a financial institution that provides a
simple interest rate is 4% per year?
3. If the principal invested by Anika is 50,000php and the interest rate given by Peso
Financial Inc. is 2.5% compounded quarterly, how much did she earn at the end
of 5 years?
4. Monica wants to have 45,000php in 2 years to buy a new computer. How much
money should she invest today in a fund that earns 5% compounded quarterly to
get this amount after 2 years?
5. When will 80,000 grow to P95,000 if it is invested at 5% compounded annually?

LESSON 2 Simple and General Annuity

Images from https://memoxpress.net/iphone-installment-plan/ and

https://www.carousell.ph/p/rent-to-own-house-calamba-laguna-224925871/

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 Have you ever tried paying an item through installment basis? If so, you can observe
that payments by installment are done periodically, and in equal amounts. This payment
scheme is called annuity. On this lesson, Simple and General Annuity, you will learn how
to illustrate simple and general annuities, distinguish between simple and general
annuities, find the future value and present value of both simple annuities and general
annuities, calculate the fair market value of a cash flow stream that includes an annuity,
and calculate the present value and period of deferral of a deferred annuity.

LET’S DISCOVER!
Annuity is a sequence of equal payments made at equal intervals of time usually
monthly, quarterly, semi-annually, and annually. Some examples are installment
payments, rental payments, life insurance premiums, weekly wages, and periodic
pensions.

Reading Assignment: Before we proceed to the discussion simple and general annuity,
please turn your textbook on page 20, and familiarize yourself with the definitions of the
terms that we will encounter on this lesson.

Figure 1:

Figure 1 will help you understand the difference between simple annuity and general
annuity, and the different subsets of each type.

Example 13: Determine if the given situations represent simple annuity or general
annuity.

a. Payments are made at the end of each month for a loan that charges
1.05% interest compounded quarterly.

b. A deposit of 5,500php was made at the end of every three months to an

account that earns 5.6% interest compounded quarterly.

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 a. Since the payment interval at the end of the month is not equal to the
compounding interval, quarterly, the situation represents a general annuity.
b. Since the payment interval at the end of every three months (or quarterly) is
equal to the compounding interval, quarterly, the situation represents a
simple annuity.

Example 14: Determine whether the situation describes an ordinary annuity or an

annuity due.

a. Jun’s monthly mortgage payment is 35,149.05php at the end of each month.

b. The rent for the apartment is 7,000.00php and due at the beginning of each
month.

a. Because the payments are made at the end of each month, Jun’s stream of
monthly mortgage payments is an ordinary annuity.
b. Since the payments come at the beginning of each month, the stream of
rental payment is an annuity due,

Future and Present Value

 The future value of an annuity is the total accumulation of the payments and
interest earned.
 The present value of an annuity is the principal that must be invested today to
provide the regular payment of an annuity.

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 Future Value of Simple Ordinary Annuity Present Value of Simple Ordinary Annuity

(1 + 𝑗)𝑛 − 1 𝑃[1 − (1 + 𝑗)−𝑛 ]

𝐹𝑉 = 𝑃 𝑃𝑉 =
𝑗 𝑗

where where
𝐹𝑉 = Future Value 𝑃𝑉 = Present Value
𝑃 = Periodic Payment 𝑃 = Periodic Payment
𝑟 𝑟
𝑗= 𝑗=
𝐾 𝐾
where where
𝑗 = interest rate period 𝑗 = interest rate period
𝑟 = annual rate 𝑟 = annual rate
𝐾 = number of conversion periods in a 𝐾 = number of conversion periods in a
year year
𝑛 = 𝐾𝑡 𝑛 = 𝐾𝑡
𝑛 = total number of conversion periods 𝑛 = total number of conversion periods
𝑡 = number of years 𝑡 = number of years

Future Value of Simple Ordinary Annuity

Example 15: Mr. and Mrs. Mariano are planning to deposit 20,000php at the end
of each year for 5 years in an account that pays an interest at 10% compounded
annually. How much will the couple have after 5 years?

Let us first identify the values of 𝑃, 𝐾, 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 20,000𝑝ℎ𝑝, 𝐾 = 1, because it will be compounded annually, 𝑟 = 10% = 0.1,

𝑟 0.1
𝑗= = = 0.01, 𝑡 = 5, and 𝑛 = 𝐾𝑡 = (1)(5) = 5.
𝐾 1

(𝟏+𝒋)𝒏−𝟏
𝑭𝑽 = 𝑷 ( )
𝒋

(1+0.1)5 −1
𝐹𝑉 = 50 ( )
0.1

𝑭𝑽 = 𝟏𝟐𝟐, 𝟏𝟎𝟐. 𝟎𝟎𝒑𝒉𝒑

Therefore, after 5 years, Mr. and Mrs. Mariano will have a total of 122,102.00php.

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Example 16: If you pay 50.00php at the end of each month for 40 years on an
account that pays interest at 10% compounded monthly, how much money will
you have after 40 years?

Let us first identify the values of 𝑃, 𝐾, 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 50𝑝ℎ𝑝, 𝐾 = 12, because it will be compounded monthly, 𝑟 = 10% = 0.1,

𝑟 0.1
𝑗= = , 𝑡 = 40, and 𝑛 = 𝐾𝑡 = (12)(40) = 480.
𝐾 12

(𝟏+𝒋)𝒏−𝟏
𝑭𝑽 = 𝑷 ( )
𝒋

0.1 480
(1+ 12 ) −1
𝐹𝑉 = 50 ( 0.1 )
12

𝑭𝑽 = 𝟑𝟏𝟔, 𝟐𝟎𝟑. 𝟗𝟖𝒑𝒉𝒑

Therefore, after 40 years, you will have 316, 203.98php.

Example 17: Alex and Tony are twins. After graduation and being finally able to
get a good job, they plan for their retirement as follows:

 Starting at age 24, Alex deposits 10,000phph at the end of each year for 36
years.
 Starting at age 42, Tony deposits 20,000php at the end of each year for 18
years.

Who will have the greater amount at retirement if both annuities earn 12% per year
compounded annually?

For Alex’s Plan For Tony’s Plan

𝑃 = 10,000 𝑃 = 20,000

𝑟 0.12 𝑟 0.12
𝑗= = = 0.12 𝑗= = = 0.12
𝐾 1 𝐾 1

𝑛 = 𝐾𝑡 = (1)(36) = 36 𝑛 = 𝐾𝑡 = (1)(18) = 18

(𝟏 + 𝒋)𝒏 − 𝟏 (𝟏 + 𝒋)𝒏 − 𝟏
𝑭𝑽 = 𝑷 ( ) 𝑭𝑽 = 𝑷 ( )
𝒋 𝒋

(1 + 0.12)36 − 1 (1 + 0.12)18 − 1
𝐹𝑉 = 10,000 ( ) 𝐹𝑉 = 20,000 ( )
0.12 0.12

𝑭𝑽 = 𝟒, 𝟖𝟒𝟒, 𝟔𝟑𝟏. 𝟏𝟔𝒑𝒉𝒑 𝑭𝑽 = 𝟏, 𝟏𝟏𝟒, 𝟗𝟗𝟒. 𝟑𝟎𝒑𝒉𝒑

16
 Therefore, following their retirement plans, Alex will have 4,844,631.16php, and Tony will
have 1,114,994.30php. This implies that Alex will have the greater amount at retirement.

Example 17 shows the value of time and the advantage of saving early on the
amount of money. As you can see, even if Tony is depositing a greater amount, Alex got
the greater amount, that is because it is very important to save early.

Example 18: Aaron’s mother saved 5,000php at the end of every six months in an
educational plan that earns 6% interest per year compounded semi-annually.
What is the amount at the end of 18 years?

Let us first identify the values of 𝑃, 𝐾, 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 5,000𝑝ℎ𝑝, 𝐾 = 2, because it will be compounded semi-annually, 𝑟 = 6% = 0.6,

𝑟 0.06
𝑗= = = 0.03, 𝑡 = 18, and 𝑛 = 𝐾𝑡 = (2)(18) = 36.
𝐾 2

(𝟏+𝒋)𝒏−𝟏
𝑭𝑽 = 𝑷 ( )
𝒋

(1+0.03)36 −1
𝐹𝑉 = 5,000 ( )
0.03

𝑭𝑽 = 𝟑𝟏𝟔, 𝟑𝟕𝟗. 𝟕𝟐𝒑𝒉𝒑

Therefore, the amount will be 316,379.72php after 18 years.

Present Value of Simple Ordinary Annuity

Example 19: Rose works very hard because she wants to have enough money in
her retirement account when she reaches the age 80. She wants to withdraw
36,000php every month for 20 years starting 3 months after she retires. How much
must Rose deposit at retirement at 12% per year compounded quarterly for the
annuity?

Let us first identify the values of 𝑃, 𝐾, 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 36,000.00𝑝ℎ𝑝, 𝐾 = 4, because it will be compounded quarterly, 𝑟 = 12% = 0.12,

𝑟 0.12
𝑗= = = 0.03, 𝑡 = 20, and 𝑛 = 𝐾𝑡 = (4)(20) = 80.
𝐾 4

17
 𝑷[𝟏−(𝟏+𝒋)−𝒏 ]
𝑷𝑽 =
𝒋

36,000[1−(1+0.03)−80]
𝑃𝑉 =
0.03

𝑷𝑽 = 𝟏, 𝟎𝟖𝟕, 𝟐𝟐𝟕. 𝟒𝟖𝒑𝒉𝒑

Therefore, Rose needs to pay 1,087,227.48php at retirement to pay for the annuity.

Example 20: Ashley borrows money to buy a motorcycle. He will repay the loan by
making monthly payments of 1,500php per month for the next 24 months at an
interest rate of 9% per year compounded monthly. How much did Ashley borrow?

Let us first identify the values of 𝑃, 𝐾, 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 1,500.00, 𝐾 = 12, because it will be compounded monthly, 𝑟 = 9% = 0.09,

𝑟 0.09
𝑗= = = 0.0075, 𝑡 = 2, and 𝑛 = 𝐾𝑡 = (12)(2) = 24.
𝐾 12

𝑷[𝟏−(𝟏+𝒋)−𝒏 ]
𝑷𝑽 =
𝒋

1,500[1−(1+0.0075)−24 ]
𝑃𝑉 =
0.0075

𝑷𝑽 = 𝟑𝟐, 𝟖𝟑𝟑. 𝟕𝟐𝒑𝒉𝒑

Therefore, Ashley borrowed 32,833.72php.

Future Value of Simple Annuity Due

Future Value of Simple Ordinary Annuity Due Present Value of Simple Ordinary Annuity Due

(1 + 𝑗)𝑛 − 1 𝑃[1 − (1 + 𝑗)−𝑛 ]

𝐹𝑉 = 𝑃 ( ) ∙ (1 + 𝑗) 𝑃𝑉 = ∙ (1 + 𝑗)
𝑗 𝑗
where where
𝐹𝑉 = Future Value 𝑃𝑉 = Present Value
𝑃 = Periodic Payment 𝑃 = Periodic Payment
𝑟 𝑟
𝑗= 𝑗=
𝐾 𝐾
where where
𝑗 = interest rate period 𝑗 = interest rate period
𝑟 = annual rate 𝑟 = annual rate
𝐾 = number of conversion periods in a 𝐾 = number of conversion periods in a year
year 𝑛 = 𝐾𝑡
𝑛 = 𝐾𝑡 𝑛 = total number of conversion periods
𝑛 = total number of conversion periods 𝑡 = number of years
𝑡 = number of years

18
Example 21: Suppose Mr. and Mrs. Mariano changed their mind and decided to
deposit 20,000php at the beginning of each year for 5 years in an investment that earns
10% per year compounded annually. What is the amount or future value of the
annuity?

Let us first identify the values of 𝑃, 𝐾, 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 20,000𝑝ℎ𝑝, 𝐾 = 1, because it will be compounded annually, 𝑟 = 10% = 0.1,

𝑟 0.1
𝑗= = = 0.1, 𝑡 = 5, and 𝑛 = 𝐾𝑡 = (1)(5) = 5.
𝐾 1

(𝟏 + 𝒋)𝒏 − 𝟏
𝑭𝑽 = 𝑷 ( ) ∙ (𝟏 + 𝒋)
𝒋

(1 + 0.1)5 − 1
𝐹𝑉 = 20,000 ( ) ∙ (1 + 0.1)
0.1

𝑭𝑽 = 𝟏𝟑𝟒, 𝟑𝟏𝟐. 𝟐𝟎𝒑𝒉𝒑

Therefore, after 5 years, Mr. and Mrs. Mariano will have 134,312.20𝑝ℎ𝑝.

If you will go back to Example 15, we have the almost the same example, the
difference is that Mr. and Mrs. Mariano decided to deposit at the beginning of each
year on Example 21. As you can see, the investment of 20,000php at the beginning
of each year for 5 years at 10% compounded annually is 12,210.20 more than the
investment done at the end of each year.

Example 22: Micah’s parents saved for his college education by investing 12,000php
at the beginning of each year in an education plan that earns 6% per year
compounded annually. What is the total amount of investment at the end of 16 years?

Let us first identify the values of 𝑃, 𝐾, 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 12,000𝑝ℎ𝑝, 𝐾 = 1, because it will be compounded annually, 𝑟 = 6% = 0.06,

𝑟 0.06
𝑗= = = 0.06, 𝑡 = 16, and 𝑛 = 𝐾𝑡 = (1)(16) = 16.
𝐾 1

(𝟏 + 𝒋)𝒏 − 𝟏
𝑭𝑽 = 𝑷 ( ) ∙ (𝟏 + 𝒋)
𝒋

(1 + 0.06)5 − 1
𝐹𝑉 = 12,000 ( ) ∙ (1 + 0.6)
0.06

𝑭𝑽 = 𝟑𝟎𝟖, 𝟎𝟕𝟎. 𝟑𝟒𝒑𝒉𝒑

Therefore, the total amount of investment at the end of 16 years is 308,970.34php.

19
Present Value of Simple Annuity Due

Example 23: Hope borrows money for her house and repays by making yearly
payments of 50,000php at the beginning of each year for a period of 10 years at an
interest rate of 8% compounded annually. How much did Hope borrow?

Let us first identify the values of 𝑃, 𝐾, 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 50,000𝑝ℎ𝑝, 𝐾 = 1, because it will be compounded annually, 𝑟 = 8% = 0.08,

𝑟 0.08
𝑗= = = 0.08, 𝑡 = 10, and 𝑛 = 𝐾𝑡 = (1)(10) = 10.
𝐾 1

𝑷[𝟏 − (𝟏 + 𝒋)−𝒏 ]
𝑷𝑽 = ∙ (𝟏 + 𝒋)
𝒋

50,000[1 − (1 + 0.08)−10 ]
𝑃𝑉 = ∙ (1 + 0.08)
0.08

𝑷𝑽 = 𝟑𝟔𝟐, 𝟑𝟒𝟒𝟒. 𝟒𝟎𝒑𝒉𝒑

Therefore, Hope borrowed 362, 344,40.

Regular Payment of Simple Ordinary Annuity and Simple Annuity Due

We have used four different formulas in solving for the present and future values
of simple ordinary annuity and simple annuity due. Manipulating these equations, we can
solve for the regular payment or periodic payment, 𝑃.

Regular Payment (𝑷) of a Simple Ordinary Annuity

(𝐹𝑉)𝑗
𝑃=
(1 + 𝑗)𝑛 − 1

(𝑃𝑉)𝑗
𝑃=
1 − (1 + 𝑗)−𝑛

Regular Payment (𝑷) of a Simple Annuity Due

(𝐹𝑉)𝑗
𝑃=
[(1 + 𝑗)𝑛 − 1](1 + 𝑗)

(𝑃𝑉)𝑗
𝑃=
[1 − (1 + 𝑗)−𝑛 ](1 + 𝑗)

20
Example 24: Mary borrow 500,000php to buy a car. She has to options to repay
her loan. The interest is compounded monthly.

Option 1: 24 monthly payments every beginning of the month at 12% per year.

Option 2: 60 monthly payments every end of the month at 15% per year.

Find:

a. Mary’s monthly payments under each option.

b. The interest Mary pays under each option.

a.

Option 1: Since option 1 states that the payment will be done at the beginning of
each month, we are going to use the equation for the regular payment of a
simple annuity due,

(𝑃𝑉)𝑗
𝑃=
[1 − (1 + 𝑗)−𝑛 ](1 + 𝑗)

𝑃𝑉 = 500,000𝑝ℎ𝑝, 𝐾 = 12, because it will be compounded monthly,

𝑟 0.12
𝑟 = 12% = 0.12, 𝑗 = = = 0.01, 𝑛 = 24
𝐾 12

(500,000)(0.01)
𝑃=
[1 − (1 + 0.01)−24 ](1 + 0.01)

5,000
𝑃=
0.214558211

𝑷 = 𝟐𝟑, 𝟑𝟎𝟑. 𝟕𝟎𝒑𝒉𝒑

Option 2: Since option 2 states that the payment will be done at the end of each
month, we are going to use the equation of the regular payment of a simple
ordinary annuity,

(𝑃𝑉)𝑗
𝑃=
1 − (1 + 𝑗)−𝑛

𝑃𝑉 = 500,000𝑝ℎ𝑝, 𝐾 = 12, because it will be compounded monthly,

𝑟 0.15
𝑟 = 15% = 0.15, 𝑗 = = = 0.0125, 𝑛 = 60
𝐾 12

(500,000)(0.0125)
𝑃=
1 − (1 + 0.0125)−60

𝑷 = 𝟏𝟏, 𝟖𝟗𝟒. 𝟗𝟕𝒑𝒉𝒑

21
b. The interest paid is the difference between the total amount paid and the
principal borrowed.

Option 1:

24 payments of 23,303.70: (24)(24,303.70) = 559,288.80𝑝ℎ𝑝

Total interest paid is 559,288.80 − 500,000 = 59,288.80𝑝ℎ𝑝

Thus, the total interest paid is 59,288.80php.

Option 2:

60 payments of 11,894.97: (60)(11,894.97) = 713,698.20𝑝ℎ𝑝

Total interest paid is 713,698.20 − 500,000 = 213,698.20

Thus, the total interest paid is 213,698.20php.

Example 25: Eva obtained a loan of 50,000php for the tuition fee of her son. She
has to repay the loan by equal payments at the end of every six months for
three years at 10% interest compounded semi-annually. Find the periodic
payment.

Since the problem stated that the payment will be done at the end of each
period, therefore, we are going to use the formula,

(𝑃𝑉)𝑗
𝑃=
1 − (1 + 𝑗)−𝑛

Now, us first identify the values of 𝑃𝑉, 𝐾 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃𝑉 = 50,000𝑝ℎ𝑝, 𝐾 = 2, because it will be compounded semi - annually,

𝑟 0.1
𝑟 = 10% = 0.1, 𝑗 = = = 0.05, 𝑡 = 3, and 𝑛 = 𝐾𝑡 = (2)(3) = 6.
𝐾 2

(50,000)(0.05)
𝑃=
1 − (1 + 0.05)−6

𝑷𝑽 = 𝟗, 𝟖𝟓𝟎. 𝟖𝟕𝒑𝒉𝒑

Therefore, Eva will pay 9,850.87php at the end of every six months for three
years.

22
 The gradual extinction of a loan over a period of time by means of regular or equal
payments as to principal and interest and interest due at the end of every intervals of
time is known at amortization. In Example 25, we can say that the loan of 50,000php that
is amortized by equal periodic or installment payments of 9,850.87php at equal interval
at the end of every six months becomes the present value of a simple annuity.

When a loan is gradually repaid, the construction of an amortization schedule is

very important for both the lender and the lendee. They will both see how much of each
payment goes to the interest and how much is applied to the reducing principal.

Periodic Interest at 10% Amount Repaid to Outstanding

Period Payment at the Due at the End the Principal at the Principal at the
(A) End of Every Six of Every Six End of Every Six End of Every Six
Months Months Months Months
(B) (C) (D) (E)
0 50,000.00php
1 9,850.87php 2,250.00php 7,350.87php 42,649.13php
2 9,850.87php 2,132.46php 7,718.41php 34,930.72php
3 9,850.87php 1,746.54php 8,104.33php 26,826.39php
4 9,850.87php 1,341.31php 8,509.56php 18,316.84php
5 9,850.87php 915.84php 8,935.03php 9,381.81php
6 9,850.87php 469.09php 9,381.81php 0.00php
Total 59,105.22php 9,105.24php 50,000.00php

The amortization schedule can be prepared as follows:

Procedure

1. Calculate the periodic payment and complete Column B with this periodic
payment.

2. To fill up Column C, calculate the interest using the formula: 𝐼 = 𝑃𝑟𝑡.

1
Row 1: 𝐼 = 50,000(0.1) ( ) = 2,500
2
1
Row 2: 𝐼 = 46,649.13(0.1) ( ) = 2,132.46
2
1
Row 3: 𝐼 = 34,930.71(0.1) ( ) = 1,746.54
2
1
Row 4: 𝐼 = 28,826.39(0.1) ( ) = 1,341.31
2
1
Row 5: 𝐼 = 18,316.84(0.1) ( ) = 915.84
2
1
Row 6: 𝐼 = 9,381(0.1) ( ) = 469.09
2

3. To fill up Column D, subtract Column C from Column B.

Row 1: 9,850.87 − 2500 = 7350.87𝑝ℎ𝑝
Row 2: 9,850.87 − 2,132.46 = 7,718.41𝑝ℎ𝑝
Row 3: 9,850.87 − 1,746.54 = 8,104.33𝑝ℎ𝑝
Row 4: 9,850.87 − 1,341.31 = 8,509.56
Row 5: 9,850.87 − 915.84 = 8,935.03𝑝ℎ𝑝
Row 6: 9,850.87 − 469.09 = 9,381.81

23
 4. To fill up Column E, subtract Column D from Column E as follows:
Column E: 𝑅𝑜𝑤 0 − 𝑅𝑜𝑤 2 = 50,000 − 7,350.87 = 42,649.13𝑝ℎ𝑝
Column E: 𝑅𝑜𝑤 1 − 𝑅𝑜𝑤 2 = 42,649.13 − 7,718.41 = 34,930.72𝑝ℎ𝑝
Column E: 𝑅𝑜𝑤 2 − 𝑅𝑜𝑤 3 = 34,930.72 − 8,104.33 = 26,826.39𝑝ℎ𝑝
Column E: 𝑅𝑜𝑤 3 − 𝑅𝑜𝑤 4 = 26,826.39 − 8,509.56 = 18,316.84𝑝ℎ𝑝
Column E: 𝑅𝑜𝑤 4 − 𝑅𝑜𝑤 5 = 18,316.84 − 8,935.03 = 9,381.81𝑝ℎ𝑝
Column E: 𝑅𝑜𝑤 5 − 𝑅𝑜𝑤 6 = 9,381.81 − 9,381.81 = 0𝑝ℎ𝑝

Note:

1. The amount of the original loan is equal to the total repayments on the principal.
2. The outstanding principal is equal to 0 at the end of the term.

Example 26: Exponent Corporation is required to pay 8 annual installments of

2,500,000.00php each for a loan to pay for expansion at 12% compounded
annually.

a. How much is the loan?

b. Construct the amortization schedule.

On this problem, we are asked to find the amount of the loan or the present
value, therefore, we are going to use the formula,

𝑃[1 − (1 + 𝑗)−𝑛 ]
𝑃𝑉 =
𝑗

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑡, and 𝑛.

𝑃 = 2,500,000.00𝑝ℎ𝑝, 𝐾 = 1, because it will be compounded annually, 𝑟 = 0.12,

𝑟 0.12
𝑗= = = 0.12, 𝑡 = 8, and 𝑛 = 𝐾𝑡 = (1)(8) = 8.
𝐾 1

2,500,000.00[1 − (1 + 0.12)−8 ]
𝑃𝑉 =
0.12

𝑷𝑽 = 𝟏𝟐, 𝟒𝟏𝟗, 𝟎𝟗𝟗. 𝟒𝟐𝒑𝒉𝒑

Therefore, the amount of the loan made by Exponent Corporation is

12,419,099.42php.

24
 Periodic Interest at 12% Amount Repaid to Outstanding
Period Payment at the Due at the End of the Principal at the Principal at the
(A) End of Each Each Year End Each Year End of Each Year
Year (C) (D) (E)
(B)
0 12,419,099.41php
1 2,500,000php 1,490,291.93php 1,009,708.07php 11,409,391.34php
2 2,500,000php 1,369,126.96php 1,130,873.04php 10,278,518.30php
3 2,500,000php 1,233,422.20php 1,266,577.80php 9,011,940.50php
4 2,500,000php 1,081,432.86php 1,418,567.14php 7,593,373.36php
5 2,500,000php 911,204.80php 1,588,795.20php 6,004,578.16php
6 2,500,000php 720,549.38php 1,779,450.62php 4,225,127.54php
7 2,500,000php 507,015.30php 1,992,984.70php 2,232,142.84php
8 2,500,000php 267,857.14php 2,232,142.84php 0php
Total 20,000,000php 7,580,900.57php 12,419,099.41php

Consumer and Business Loan

A loan given to a costumer like Eva in Example 25 for the tuition fee of her son is
an example of consumer loan; while the loan given to Exponent Corporation to pay for
the business expansion is an example of business loan.

Consumer and Business Loan

A consumer loan is a loan given to costumers for personal, family, or

consumable items such as car and home.

A business loan is a debt that the company is required to repay

according to the loan’s terms and conditions.

Although the computation for consumer loans and business loans are similar, they
are different in some aspects like collateral, guarantor, documentation, terms, and
follow-up. The table below summarizes these differences.

Consumer Loan Business Loan

1. Collateral real estate real estate, equipment,
furniture, fixtures, inventory, or
personal assets of business work
2. Guarantor does not require a guarantor business owners have to sign
the loan as guarantors
3. Documentation requires a credit report, and tax requires credit report, tax
returns returns and the last three years
of financial statements
4. Terms longer than the business loan shorter and includes higher
interest rate

25
 5. Follow – up no further follow – up once the annual reviews of the
loan is released relationship are often
conducted

Deferred Annuity
A deferred annuity is an annuity in which the first payment is not made at the
beginning nor at the end of the payment interval but at a later date. The length of time
when these payments are made is called period of deferment. The first payment is made
one period after the period of deferment. Thus, annuity that is deferred for 6 periods will
have the first payment at the end of 7 periods. Likewise, an annuity whose first payment
is made at the end of 7 periods, the annuity is deferred for six months.

𝑃𝑉 = Present value
𝑃 = regular payment
𝑟
𝑗=
𝐾
𝑗 = rate per conversion period
𝑟 = annual rate
𝐾 = number of conversion periods
𝑛 = 𝐾𝑡
𝑛 = number of paying periods
𝑡 = number of years
𝑑 = number of deferred periods

Present Value of a Deferred Annuity

1 − (1 + 𝑗)−(𝑛+𝑑) 1 − (1 + 𝑗)−𝑑
𝑃𝑉 = 𝑃 [ − ]
𝑗 𝑗

Future Value of a Deferred Annuity

(1 + 𝑗)𝑛 − 1
𝐹𝑉 = 𝑃 [ ]
𝑗

Note: The future value of a deferred annuity is the same as the future value of simple
ordinary annuity.

Example 27: Find the present value of 10 semi-annual payments of 2,000php

each if the first payment is due at the end of 3 years and money I worth 8%
compounded semi-annually.

On this problem, we are asked to find the present value of the deferred annuity,
therefore, we are going to use the formula,

26
 1 − (1 + 𝑗)−(𝑛+𝑑) 1 − (1 + 𝑗)−𝑑
𝑃𝑉 = 𝑃 [ − ]
𝑗 𝑗

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑡, 𝑛, and 𝑑.

𝑃 = 2,000𝑝ℎ𝑝, 𝐾 = 2, because it will be compounded semi-annually, 𝑟 = 0.08,

𝑟 0.08
𝑗= = = 0.04, 𝑡 = 5, 𝑛 = 𝐾𝑡 = (5)(2) = 10, and 𝑑 = 5.
𝐾 2

To visualize 𝑑, we have:

1 − (1 + 0.04)−(10+5) 1 − (1 + 0.04)−5
𝑃𝑉 = 2,000 [ − ]
0.04 0.04

𝑷𝑽 = 𝟏𝟑, 𝟑𝟑𝟑. 𝟏𝟑𝒑𝒉𝒑

Therefore, the present value of the deferred annuity is 13,333.13php.

Example 28: Find the present value of a deferred annuity of 1,500php every
three months for 8 years that is deferred 3 years if money is 6% converted
quarterly.

On this problem, we are asked to find the present value of the deferred annuity,
therefore, we are going to use the formula,

1 − (1 + 𝑗)−(𝑛+𝑑) 1 − (1 + 𝑗)−𝑑
𝑃𝑉 = 𝑃 [ − ]
𝑗 𝑗

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑡, 𝑛, and 𝑑.

𝑃 = 1,500𝑝ℎ𝑝, 𝐾 = 4, because it will be compounded quarterly, 𝑟 = 0.06,

𝑟 0.06
𝑗= = = 0.015, 𝑡 = 8, 𝑛 = 𝐾𝑡 = (4)(8) = 32, and 𝑑 = (3)(4) = 12.
𝐾 4

To visualize 𝑑, we have:

27
 1 − (1 + 0.015)−(32+12) 1 − (1 + 0.015)−12
𝑃𝑉 = 1,500 [ − ]
0.015 0.015

𝑷𝑽 = 𝟑𝟏, 𝟔𝟗𝟗. 𝟔𝟖𝒑𝒉𝒑

Therefore, the present value of the deferred annuity is 31,699.68php.

General Annuity

Can you still remember the difference between simple annuity and general
annuity? In simple annuity, the interest conversion period is equal or the same as the
payment interval. On the other hand, in general annuity, the interest conversion period
is unequal or not the same as the payment interval.

Present Value of General Ordinary Future Value of General Ordinary

Annuity Annuity
1 − (1 + 𝑗)−𝑛 (1 + 𝑗)−𝑛 − 1
𝑃𝑉 = 𝑃 [ ] 𝐹𝑉 = 𝑃 [ ]
(1 + 𝑗)𝑏 − 1 (1 + 𝑗)𝑏 − 1

𝑃 = regular payment
𝑟
𝑗=
𝐾
𝑗 = rate per conversion period
𝑟 = annual rate
𝐾 = number of conversion periods
𝑛 = 𝐾𝑡
𝑛 = number of paying periods
𝑡 = number of years
𝑝
𝑏=
𝑐
𝑝 = number of months in a payment interval
𝑐 = number of months in a compounding period

28
Present Value of General Ordinary Annuity

Example 29: Find the present value of an ordinary annuity payable annually for
9 years if the money is 5% compounded quarterly.

Since the problem stated that the payment will be done annually, but will be
compounded quarterly, therefore, it is a general annuity, and to find its present
value, we are going to use the formula,

1 − (1 + 𝑗)−𝑛
𝑃𝑉 = 𝑃 [ ]
(1 + 𝑗 )𝑏 − 1

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑐, 𝑝, and 𝑏.

𝑃 = 2,000𝑝ℎ𝑝, 𝐾 = 4, because it will be compounded quarterly, 𝑟 = 0.05,

𝑟 0.05 𝑝 12
𝑗= = = 0.0125, 𝑛 = 𝐾𝑡 = (4)(9) = 36, 𝑐 = 3, 𝑝 = 12, and 𝑏 = = =4
𝐾 4 𝑐 3

1 − (1 + 0.0125)−36
𝑃𝑉 = 2,000 [ ]
(1 + 0.0125)4 − 1

𝑷𝑽 = 𝟏𝟒, 𝟏𝟓𝟓. 𝟗𝟗𝒑𝒉𝒑

Therefore, the present value is 14,155.99php.

Example 30: A cellphone sells for 5,000php down payment and 900php every end of
each quarter for 3 years at the rate of 8% compounded annually. Find the cash
equivalent of the cellphone.
To find the CE or cash equivalent, add the down payment (D) and the present value
PV.

For the present value,

1 − (1 + 𝑗)−𝑛
𝑃𝑉 = 𝑃 [ ]
(1 + 𝑗)𝑏 − 1

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑐, 𝑝, and 𝑏.

𝑃 = 900𝑝ℎ𝑝, 𝐾 = 2, because it will be compounded semi-annually, 𝑟 = 0.08,

𝑟 0.08 𝑝 3
𝑗= = = 0.04, 𝑛 = 𝐾𝑡 = (2)(3) = 6, 𝑐 = 6, 𝑝 = 3, and 𝑏 = = = 0.5
𝐾 2 𝑐 6

1 − (1 + 0.04)−6
𝑃𝑉 = 2,000 [ ]
(1 + 0.04)0.5 − 1

𝑃𝑉 = 9,529.28𝑝ℎ𝑝

29
 𝐶𝐸 = 𝐷𝑃 + 𝑃𝑉
𝐶𝐸 = 5,000 + 9,529.28

𝑪𝑬 = 𝟏𝟒, 𝟓𝟐𝟗. 𝟐𝟖𝒑𝒉𝒑

Therefore, the cellphone’s cash equivalent is 14,529.28php.

Future Value of General Ordinary Annuity

Example 31: An amount of 25,000php will be invested in an account at the end

of each year at 4% compounded semi-annually. Find the size of the fund at the
beginning of the 16th year.

For the future value, let’s use this formula,

(1 + 𝑗)−𝑛 − 1
𝐹𝑉 = 𝑃 [ ]
(1 + 𝑗 )𝑏 − 1

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑐, 𝑝, and 𝑏.

𝑃 = 25,000𝑝ℎ𝑝, 𝐾 = 2, because it will be compounded semi-annually, 𝑟 = 0.04,

𝑟 0.04 𝑝 12
𝑗= = = 0.02, 𝑛 = 𝐾𝑡 = (2)(15) = 30, 𝑐 = 6, 𝑝 = 12, and 𝑏 = = =2
𝐾 2 𝑐 6

(1 + 0.02)−30 − 1
𝐹𝑉 = 25,000 [ ]
(1 + 0.02)2 − 1

𝑭𝑽 = 𝟓𝟎𝟐, 𝟎𝟖𝟎. 𝟏𝟗𝒑𝒉𝒑

Therefore, at the beginning of the 16th year, the investment will be a total of
502,080.19php.

Present Value of General Annuity Due Future Value of General Annuity Due
1 − (1 + 𝑗)−𝑛 𝑗 (1 + 𝑗)−𝑛 − 1 𝑗
𝑃𝑉 = 𝑃 [ ][ + 𝑗] 𝐹𝑉 = 𝑃 [ ][ + 𝑗]
𝑗 (1 + 𝑗)𝑏 − 1 𝑗 (1 + 𝑗)𝑏 − 1

𝑃 = annuity payment
𝑟
𝑗=
𝐾
𝑗 = rate per conversion period
𝑟 = annual rate
𝐾 = number of conversion periods

30
 𝑛 = 𝐾𝑡
𝑛 = number of paying periods

𝑡 = number of years
𝑝
𝑏=
𝑐
𝑝 = number of months in a payment interval
𝑐 = number of months in a compounding period

Present Value of General Annuity Due

Example 32: Find the present value of an annuity due of 10,000.00 payable
quarterly for 10 years if the money is worth 6% compounded semi-annually.

For the present value of a general annuity due, let’s use this formula,

1 − (1 + 𝑗)−𝑛 𝑗
𝑃𝑉 = 𝑃 [ ][ + 𝑗]
𝑗 (1 + 𝑗 ) 𝑏 − 1

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑐, 𝑝, and 𝑏.

𝑃 = 10,000𝑝ℎ𝑝, 𝐾 = 2, because it will be compounded semi-annually, 𝑟 = 0.06,

𝑟 0.06 𝑝 3
𝑗= = = 0.03, 𝑛 = 𝐾𝑡 = (2)(10) = 20, 𝑐 = 6, 𝑝 = 3, and 𝑏 = = 6 = 0.5
𝐾 2 𝑐

1 − (1 + 0.03)−20 0.03
𝑃𝑉 = 10,000 [ ][ + 0.03]
0.03 (1 + 0.03)0.5 − 1

𝑷𝑽 = 𝟑𝟎𝟒, 𝟐𝟐𝟕. 𝟖𝟕𝒑𝒉𝒑

Therefore, the present value of the general annuity due is 304,227.87php.

Example 33: Mr. Samson bought a brand new car for 500,000.00 down payment
and 20,000php every first day of each month for 3 years. If payments are based
on 8% compounded semi-annually, what is the total cash equivalent of the car?

We know that to find the CE or cash equivalent, we add the down payment (D)
and the present value PV.

For the present value of a general annuity due, let’s use this formula,

1 − (1 + 𝑗)−𝑛 𝑗
𝑃𝑉 = 𝑃 [ ][ + 𝑗]
𝑗 (1 + 𝑗)𝑏 − 1

31
 Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑐, 𝑝, and 𝑏.

𝑃 = 20,000𝑝ℎ𝑝, 𝐾 = 2, because it will be compounded semi-annually, 𝑟 = 0.08,

𝑟 0.08 𝑝 1
𝑗= = = 0.04, 𝑛 = 𝐾𝑡 = (2)(3) = 6, 𝑐 = 6, 𝑝 = 1, and 𝑏 = =
𝐾 2 𝑐 6

1 − (1 + 0.04)−6 0.04
𝑃𝑉 = 20,000 [ ][ 1 + 0.04]
0.04
(1 + 0.03)6 − 1

𝑃𝑉 = 643,654.45𝑝ℎ𝑝

𝐶𝐸 = 𝐷𝑃 + 𝑃𝑉
𝐶𝐸 = 500,000.00 + 643,654.45

𝑪𝑬 = 𝟏, 𝟏𝟒𝟑, 𝟔𝟓𝟒. 𝟒𝟓𝒑𝒉𝒑

Therefore, the car’s cash equivalent is 1,143,654.45php.

Future Value of a General Annuity Due

Example 34: Kurt wants to save 100,000php for his first year of college. He
deposits 3,500php at the beginning of each month in an account that earns 4%
per year compounded semi-annually. Will Kurt have enough money at the end
of 2 years?

For the future value of a general annuity due, let’s use this formula,

(1 + 𝑗)−𝑛 − 1 𝑗
𝐹𝑉 = 𝑃 [ ][ + 𝑗]
𝑗 (1 + 𝑗 )𝑏 − 1

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑐, 𝑝, and 𝑏.

𝑃 = 3,500𝑝ℎ𝑝, 𝐾 = 2, because it will be compounded semi-annually, 𝑟 = 0.04,

𝑟 0.04 𝑝 1
𝑗= = = 0.02, 𝑛 = 𝐾𝑡 = (2)(2) = 6, 𝑐 = 6, 𝑝 = 1, and 𝑏 = =
𝐾 2 𝑐 6

(1 + 0.02)−6 − 1 0.02
𝐹𝑉 = 3,500 [ ][ 1 + 𝑗]
0.02 ( 1+ 0.02)6 −1

𝑭𝑽 = 𝟖𝟕, 𝟓𝟐𝟗. 𝟒𝟎𝒑𝒉𝒑

Because 87,527.40php is less than 100,000.00php, Kurt will not have enough
money at the end of two years.

32
Regular Payment of a General Annuity Due

(1 + 𝑗)𝑏 − 1 (1 + 𝑗)𝑏 − 1
𝑃 = 𝑃𝑉 [ ] 𝑃 = 𝐹𝑉 [ ]
1 − (1 + 𝑗)−𝑛 (1 + 𝑗)𝑛 − 1

Example 35: Mr. and Mrs. Cruz will need 300,000php in 2 years to start their own
business. They plan to save money by making monthly deposits at the end of
each bank in an account that pays 8% per year compounded quarterly. How
much must they deposit monthly?

For the periodic payment of a general annuity due that has a given future value,
let’s use this formula,

(1 + 𝑗 )𝑏 − 1
𝑃 = 𝐹𝑉 [ ]
(1 + 𝑗 )𝑛 − 1

Now, let us identify the values of 𝑃, 𝐾 𝑟, 𝑗, 𝑐, 𝑝, and 𝑏.

𝐹𝑉 = 300,000𝑝ℎ𝑝, 𝐾 = 4, because it will be compounded quarterly, 𝑟 = 0.08,

𝑟 0.08 𝑝 1
𝑗= = = 0.02, 𝑛 = 𝐾𝑡 = (4)(2) = 8, 𝑐 = 3, 𝑝 = 1, and 𝑏 = =
𝐾 4 𝑐 3

1
(1 + 0.02)3 − 1
𝑃 = 300,000 [ ]
(1 + 0.02)8 − 1

𝑷 = 𝟏𝟏, 𝟓𝟕𝟒. 𝟏𝟔𝒑𝒉𝒑

Therefore, Mr. and Mrs. Cruz must deposit 11,574.16php monthly to have
300,000php in two years.

Reading Assignment:

Simple and general annuities are also discussed on your textbook on pages 199 –
233. There are different problems that discuss simple and general annuity.

Visit these links to learn more about simple and general annuity:

1. https://bit.ly/39pdmBl 6. https://bit.ly/3qdwBUg
2. https://bit.ly/3qeCnoD 7. https://bit.ly/33sei4d
3. https://bit.ly/33utayP
4. https://bit.ly/3locOOm
5. https://bit.ly/3fUR5ww
6. https://bit.ly/3q9nMLf
7. https://bit.ly/2KIcjlw

33
 LET’S CHECK YOUR PROGRESS
Answer the following problems completely and accurately. You can check if
your answers are correct using the key to correction on page 50 of this module.

1. What is the future value of an amount of 2,000.00php that is deposited at the end
of every year for 5 years at 9% per year compounded annually?
2. Rick borrows 20,000.00php from a cooperative to buy a cellphone. He will repay
the loan in equal payments over 1 ½ years at the end of each month and he is
charged 10% interest compounded monthly.
(a) How much is Rick’s monthly payment?
(b) Create an amortization schedule for Rick’s debt.
3. A television set was purchased at 5,000.00php down payment and 1,000.00php at
the end of each month for 3 years. If the money is worth 10% compounded
quarterly, what is the cash value of the set?
4. In order to save 50,000.00php at the end of two years, what equal investments at
the end of each month must be made if the money is worth 4% compounded
quarterly?

LESSON 3 Stocks and Bonds

Image from:
https://edge.pse.com.ph/companyPage/stockData.do?cmpy_id=260&security_id=468

Much of the world's business activity would be impossible without stocks and bonds.
Stocks and bonds are certificates that are sold to raise money for starting a new
company or for expanding an existing company. Stocks and bonds are also called
securities, and people who buy them are called investors. On this lesson, Stocks and
Bonds, you will learn illustrate stocks and bonds, distinguish between stocks and bonds,
describe the different markets for stocks and bonds, and analyse the different market
indices for stocks and bonds.

34
 LET’S DISCOVER!
Sometimes, companies need more money for them to grow. To expand their
business, they use their own savings and the company’s profits, or to borrow from any
lending institution, or they sell more shares of its capital stock.

Image from: https://www.pse.com.ph/stockMarket/marketInfo-

marketActivity.html?tab=1&indexName=All%20Shares

Stocks

Stocks are certificates of ownership. A person who buys stock in a company

becomes one of the company's owners. Investors who buy the shares of the corporation
from the bank are called shareholders or stockholders. This is when the company gets its
money to grow. A stockholder gets a stock certificate showing the number of shares it
represents. As an owner, the stockholder is eligible to receive a dividend, or share of the
company's profits.

The amount of this dividend may change from year to year depending on the
company's performance. Well-established companies try to pay stockholders as high a
dividend as possible.

There are two types of stock: common stock and preferred stock. Owners of
common stock may vote for company directors and attend annual stockholders'
meetings. At these meetings they have the chance to review the company's yearly
performance and its future plans, and to present their own ideas. Owners of preferred
stock do not usually have voting rights or the right to attend stockholders' meetings. They
do, however, have priority when dividends are paid. The dividends on preferred stocks
are paid according to a set rate, while the dividends on common stocks fluctuate
according to the company's performance. If the company does well, however, preferred
stocks do not usually gain in value as much as common stocks. If a company goes out of
business, preferred stockholders are paid off first.

When companies decide to raise money by selling stocks, they generally go to a

big investment bank. The bank handles the Initial Public Offering or IPO before it becomes
available on a stock exchange.

35
 Figure 2

Each certificate is registered in the owner’s name of the corporation. On Figure 2,

Mr. Agbuya bought a share of stock, he owns 100 shares of the Capital Stock of Exponent
Corporation. He is therefore eligible to receive a dividend. Dividends are usually paid
quarterly. Dividend may also be paid semi-annually or annually. There are times when no
dividends are paid. However, stockholders took the risk with the company since they
know that they only get dividends when the company makes profit.

The par value of a share of stock is the value printed in the certificate. The par
value on Figure 2 is 50php. The par value of a share may be 1php, 10php, 25php, 50php,
or 100php, or any other value that the corporation may want to set. All the shares of an
issue of stock have the same value. Since Mr. Agbuya owns 100 shares of stock with par
value of 50php each, his total investment is (100)(50𝑝ℎ𝑝) = 5,000𝑝ℎ𝑝. If the par value of a
share of stock is 50php each, it means that the bank got it at a lower price. This is where
the bank earns.

Some corporations issue stock without giving shares any value. This stock is called
no-par stock.

After an issue of stock has been

sold the first time, the investors buy and
sell shares at any price they agree on.
Ownership is just changing hand and
nothing goes to the company. Buying or
selling stocks is called trading and takes
place on a stock exchange. The
Philippine Stock Exchange Plaza is in
Ayala Triangle, Ayala Avenue, Makati
City, and another one is in Pasig, Metro
Figure 3 Manila. The price that a stock is sold is
called the market price or market value.

36
 Example 36: Give the terms associated with the circled letters.

A. Certificate Number
B. Number of Shares
C. Name of the Corporation Issuing the Certificate
D. Par Value of Each Share
E. Name of the Shareholder

The market price or market value of a share of stock is usually quoted in pesos per
share. A quotation of “35 ½” means that the price of one share is 35.50php.

Investors make money with stock by selling a stock for more money than they paid
for it. When one buys a stock through a broker, the total cost of the stock is the market
price and the broker’s commission.

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑡𝑜𝑐𝑘 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 + 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛

Example 37: Mark bought 100 shares of Paper Mill stock at 150.00php per share. The
broker charged 750.00php commission. Find the total cost of the stock.

Market Price: (100𝑝ℎ𝑝)(1500) = 15,000.00𝑝ℎ𝑝

Broker’s Commission: 750.00𝑝ℎ𝑝
Total Cost: 15,750.00𝑝ℎ𝑝

37
 Example 38: Find the total cost of each stock purchase below.

No. of Shares Name of Stock Market Price Per Share Commission

1,000 ANI 1.75php 75.00php
2,000 COAL 0.94php 94.00php
500 FGEN 30.55php 763.50php

Name Total Market Price + Broker’s Total Cost

of (No. of Shares x Market Price) Commission
Stock
ANI (1,000)(1.75) = 1,750.00𝑝ℎ𝑝 75.00php 1,825.00𝑝ℎ𝑝
COAL (2,000)(0.94) = 1,880.00𝑝ℎ𝑝 94.00php 1,974.00𝑝ℎ𝑝
FGEN (500)(30.55) = 15,275.00𝑝ℎ𝑝 30.55php 16,038.50𝑝ℎ𝑝

Reading the Stock Table

A day’s sales on the stock exchange are shown in leading newspapers the next
day. Some quotations from Philippine Daily Inquirer for one day are shown below.

Figure 4
38
 The column headings indicate the meaning of the numbers across the row. We
will use these headings and the first row of the table to explain each column.

 STOCK – this heading gives the company name with its symbol
 52-WK-HIGH – this heading gives the highest price at which the company’s stock
was traded during the past 52 weeks. The price given on that column is the price
per share and the amount paid by the investor for a share of stock
 52-WK-LOW – this gives the lowest price at which the company’s stock was traded
for the past 52 weeks
 OPEN – it stands for the opening price at which the stock was traded yesterday
 HIGH – it refers to the highest price at which the stock was traded yesterday
 LOW – it refers to the lowest price the stock was traded yesterday
 CLOSE – it stands for the price at which the stock was traded when the stock
exchange closed yesterday
 VOLUME – this heading refers to the sales volume or the number of shares traded
yesterday

Other headings which are also part of a stock table are Yld%, Net Chg, and PE.

 The heading Yld% refers to percent yield. A percent yield of 2% means that the
dividends alone give the investors an annual return of 2%.
 The heading Net Chg refers to the net change. This is the change in price from
the market close two days ago to yesterday’s market close.

Example 39:

52-WK- 52-WK- STOCK OPEN HIGH LOW CLOSE VOLUME

HIGH LOW
31.6 23.55 East West Banking 25.6 25.6 25.35 25.4 82,400
Corp (EWB)

Use the stock for East West Banking Corp (EWB) to answer the following questions:
a. What are the highest and lowest prices of EWB for the past 52 weeks?
b. What are the highest and lowest prices of EWWB yesterday?
c. What was the price at which EWB shares traded when the stock exchange
closed on March 9,2015?

a. To find the highest price for the past 52 weeks, look under the heading 52-WK-
HIGH. The price is given as 31.6. Thus, the highest price for a share of stock of EWB
for the past 52 weeks was 31.60php. To find the lowest price for the past 52 weeks,
look under the heading 52-WK-LOW. The price is given as 23.55. Thus, the lowest
price for a share of stock of EWB for the past 52 weeks was 23.55php.
b. Looking at the heading HIGH and LOW, we have 25.6 and 25.35, respectively.
Therefore, the highest and the lowest prices for EWB shares last March 9, 2015
were 25.60php and 25.35php, respectively.

39
 c. Looking under the heading CLOSE, the number given is 25.4. It means that when
the stock exchange closed last March 9, 2015, the price for a share of EWB stock
was 25.40php.

Stock Income

a. Dividends
The income the stockholder receives from his investment is the amount of dividend
he gets. The amount of dividend paid by the company depends on the profit the
company makes. The dividend maybe shown either as a percent of the par value
of the stock, or as an amount of money per share.

Example 40: Ramon owns 75 shares of D&E common stock, par value 400.00php. if the
corporation declares a 7 ¼ % dividend, what is the total dividend that Ramon will get?

Dividend per Share: (0.0725)(400) = 29𝑝ℎ𝑝

Total dividend: (75 𝑠ℎ𝑎𝑟𝑒𝑠)(29𝑝ℎ𝑝) = 2,175.00𝑝ℎ𝑝

Therefore, Ramon will get a total dividend of 2,175.00php.

b. Selling Stocks
Another way a stockholder earns an income is to sell his stock. A broker may be
used to buy or sell stocks. The broker’s representatives take charge of the investor’s
order. However, selling stock will either make a profit, break-even, or take a loss.
These situations depend on the total cost of the stock, selling price of the stock,
and the expenses in selling the stock. Some expenses to be considered are
commission of the broker, small SEC (Securities and Exchange Commission) fees,
and sometimes transfer stock. After deducting all the expenses from the market
price of the stock, the money that you will receive is called net proceeds.

𝑁𝑒𝑡 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠

Example 41: If you bought 500 shares of East West Banking Corp. stock at the
52-WK-LOW, 23.55php per share, and sold at the 52-WK-HIGH, 31.60php,
a. how much money did you make on this transaction (not including the
dividends)?
b. find the broker’s commission if the broker charges 2% of the total sale price.

40
 a. Calculate the difference between the low price per share and the high price er
share.
31.60 − 23.555 = 8.05𝑝ℎ𝑝
Thus, you made 8.05php per share. For 500 shares you made,
(8.05)(500) = 4,025𝑝ℎ𝑝

b. Because you are selling the stock at (31.60)(500) = 15,800 and the broker
charges 2% of the total sales; thus,
(15,800)(0.02) = 316𝑝ℎ𝑝
Therefore, the broker received 316.00php as a commission.

Things to remember when you want to invest on stock:

1. Be a smart investor. Only buy shares of the companies that are earning big only
consistently. The efficient market theory and the stock index will guide you on this
aspect.
 The efficient market theory states that the stock market reacts very fast to
any information and at any given period, the market contains the total view
of all the investors in the market. Thus, the proponents of the theory believe
that the current price of the stock is the accurate reflection of the investor’s
knowledge about the stock.
 A stock index is the measure of the value of a section of the stock market
and is computed from the price of the stocks. Investors and financial
managers use this to describe the market and compare the return on
specific investment. The daily result of stock indexes are the most popular
numbers cited in the investing world.
2. Decide whether you will need a full-service broker, a discount broker, or online
brokerage. In online brokerage, you are allowed to trade stocks directly without a
broker. Opening an online trading account is very similar to opening normal
savings account.

Bonds

A bond is a form of a long term investment issued by a corporation or government

where the purchaser becomes a creditor of the company. People who buy a bond are
lending money to the corporation from which they buy the bond. Hence, a bond is very
much like a loan. When a corporation is selling a bond, it is selling an IOU, which is a
promise to payback the buyer his money, plus the interest a particular time.

There are several reasons for selling bonds. For example, the Association of
Celebrities and Talents Society (ACTS) Corporation wants to borrow 50,000,000.00 for 5
years for the expansion of their business. So it issues 50,000 5-year bonds with a face value
of 1,000.00php each. The entire issue is often sold to an investment banking house; the
bank then sells the bonds to investors at a slight increase in price over what is paid for
them. In this particular case, the banking house may buy then for ACTS Corporation at
995.00 each and then sell them at 1,000.00php each to the investors.

41
 The bonds that are issued are the corporation’s written promise notes to return the
price an investor pays for the bond at the time it was purchased, called the face value,
together with interest payments at a given rate.

Figure 5

On Figure 6, Ms. Janelle Catalig, the bond holder, lent ACTS Corporations 1,
000.php with interest rate of 10% per annum. Hence, on March 1, 2020, ACTS Corporation
must pay Ms. Catalig whether it made profit or not. If the loan is not repaid, the bond
holders may take the corporation’s equipment, buildings, o land. This guarantee is an
agreement made between the corporation and a bank or trust company, called the
trustee. The trustee is appointed by the corporation to represent the bond holders as a
group in their transaction with the corporation.

The following should be considered when buying bonds:

1. the price of the bond;

2. interest rate;
3. whether the bonds can or cannot be resold;
4. the earnings record of the issuer;
5. the credit history of the issuer; and the business condition.

Riskier businesses offer higher rates of interest to convince investors to but their
bonds. There are ratings for bonds which are based on company’s past performance
and whether analysts predict the company will do well or poorly. Bonds are rated as:

 Aaa or AAA for the best and safest bonds;

 Bbb or BBB for the riskier bonds;
 Ccc or CCC for very risky bonds; and
 D are considered worthless bonds.

42
 Bonds have two kinds of values. These are par value and market value. The par
value of the bond is the same as its face value. This is the amount printed on the face of
the bond which the borrower promises to pay the bond holder on the due date. The
market value of the is the price at which the bond is sold. It may be greater than or less
than the amount of the par value. If the market value is greater than the par value, then
the bond is selling at a premium. On the other hand, if the market value is less than the
par value, then the bond is selling at a discount.

The market price of a bond is computed by multiplying the par value by the
percent of the par value. Note that “95” means 95% of the par value of the bond. For
example, if the banking house offers ACTS Corporation bonds at 98, the price of one of
the corporation’s 1,000.00php bonds is 98% of the 1,0000.00 or 980.00php.

Example 42: Find the market price of one 1,000.00php bond at each quoted price.

a. 98 b. 96 c. 101 ¾ d. 106 ¼

a. At 98: (0.98)(1,000) = 980.00𝑝ℎ𝑝 c. At 101 ¾ : (1.0175)(1,000) = 1,017.50𝑝ℎ𝑝

b. At 96: (0.96)(1,000) = 960.00𝑝ℎ𝑝 d. At 106 ¼ : (1.0625)(1,000) = 1,062.50𝑝ℎ𝑝

In order to find the total investment in bonds, you need to know the market price
of one bond and multiply it to the number of bonds bought.

Example 43: Ms. Everything bought fifty 1,000.00php ACTS bonds at 103. How much is
her total investment in ACTS bonds?

Market Price 1 bond: (1.03)(1,000) = 1,030.00𝑝ℎ𝑝

Total Investment: (1,030)(50) = 51,500.00𝑝ℎ𝑝

Therefore, Mr. Everything invested a total of 51,500.00php.

When bonds are bought and sold through a broker, the broker charges a broker’s
commission or brokerage fee. Hence, the amount of investment becomes the market
price of the bonds plus the broker’s commission.

Example 44: Ms. Hermar bought five 1, 000.php MAcQue Outback Corporation bonds
at 92 plus 10.00php commission per bond through a broker. What is her total amount
of investment?

Market Price 1 bond: (0.92)(1,000) = 920.00𝑝ℎ𝑝

Market Price of 5 bonds: (920)(5) = 4,600.00𝑝ℎ𝑝
Commission on 5 bonds: (10)(5) = 50𝑝ℎ𝑝
Total Investment: 4,600 + 50 = 4,650.00𝑝ℎ𝑝

43
 Therefore, Ms. Hermar has a total investment of 4,650.00php.

Bond Income
The interest given by the corporation as a government unit who issued the bond
serves as the income from the bond. The interest of the bond is based on the par value,
because the par value serves as the principal, the interest formula can be calculated as:

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = (𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒)(𝑅𝑎𝑡𝑒)(𝑇𝑖𝑚𝑒)

Example 45: Mr. Han owns 45 bonds with a par value of 1,000.00php each and pays
8 ½ interest. What annual income does Mr. Han get from these bonds?

Par Value of 45 bonds: (45)(1,000) = 45,000.00𝑝ℎ𝑝

Interest: (45,000)(0.0825)(1) = 3,835.00𝑝ℎ𝑝

Therefore, Mr. Han’s annual income is 3,825.00php.

Before buying bonds, it is important to know what rate of income you will receive
from them. Hence, this will help you compare bonds with other types of investments. The
rate of income or the yield is the ratio of the annual income to the total investment,
𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑐𝑜𝑚𝑒 =
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

Example 46: Find the yield on 1,000.00php, 9% ACTS bond priced at 94 plus 10.00php
commission.

Annual Income: (1,000)(0.09) = 90.00𝑝ℎ𝑝

Market Price of 1 bond: (0.94)(1,000) = 940.00𝑝ℎ𝑝
Amount Invested: 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 + 𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛
940 + 10 = 950.00𝑝ℎ𝑝
90
Yield/rate of income: = 0.0947
950

Therefore, the yield on the investment is 9.47% or ACTS Corporation bond yields
47%.
Reading Assignment:

Stocks and bonds are also discussed on your textbook on pages 237 – 248. There
are also discussions about Theory of Efficient Markets, and Basic Concepts of Loans from
page 248 – 262.

44
 Visit these links to learn more about stocks and bonds:

1. https://bit.ly/2HOSnwi 9. https://bit.ly/2HQhrDh
2. https://bit.ly/37kXHAo 10. https://bit.ly/3occJiJ
3. https://bit.ly/3mmj3n5 11. https://bit.ly/37eTX3g
4. https://bit.ly/39sBUtg 12. https://bit.ly/36k8Nq3
5. https://bit.ly/3mmtebg 13. https://bit.ly/3mjWlMA
6. https://bit.ly/2JjKDTQ 14. https://bit.ly/2Vf7aUj
7. https://bit.ly/36jQoJX 15. https://bit.ly/36k3qqL
8. https://bit.ly/2Jm7qxY 16. https://bit.ly/2JqnJK6

LET’S CHECK YOUR PROGRESS

Answer the following problems completely and accurately. You can check if
your answers are correct using the key to correction on page 50 of this module.

I. Find the total cost of stock by completing the table.

No. of Stock Market Price Broker’s Total Cost

Shares Commission
a. 98 Beiter Corporation 93.50php 458.15php
b. 450 Hoyt Industries Inc. 87.00php 1,957.50php

II. Use the stock table below to answer the following questions:
a. What were the high and low prices of DMPL for the past 52 weeks?
b. How many shares of the company’s stock were sold yesterday?
c. What were the high and low prices for a share yesterday?
d. What is the stock’s price when the stock exchange closed yesterday?

52-WK- 52-WK- STOCK OPEN HIGH LOW CLOSE VOLUME

HIGH LOW
21.72 11.96 Del Monte Pacific 12.8 12.8 12.54 12.8 82,106,200
Limited (DMPL)

III. A 200,000.00php bond paying interest at 8.5% was bought at 160,000.00php

plus 200.00php commission. What is the rate of income of the investment?

IV. Ms. Seo bought two hundred 1,500.00php Samsan Tech bonds at 98 plus
15.00php commission per bond through a broker. How much is Ms. Seo’s total
investment?

45
 LET’S WRAP UP!
Did you enjoy your sixth module? I hope you did have fun studying about the math
of investment. Before we proceed to the assessment of your understanding, let us first
have a summary of the lesson. Let us answer the following questions:

a. How to compute for the interest, maturity value, and present value in simple
interest and compound interest environment?
b. How to find the future and present value of both simple and general annuities?
c. How to analyse the different market indices for stocks and bonds?

Key Concepts:

 Simple interest is calculated on the principal, or original, amount of a loan. It can

be solved using the formula 𝐼 = 𝑃𝑟𝑡.
 Maturation Value on the other hand can be solved using either of the following
formulas:
𝐴 =𝑃+𝐼 𝐴 = 𝑃 + 𝑃𝑟𝑡 𝐴 = 𝑃(1 + 𝑟𝑡), where
A = maturity value P = principal r = rate t = time.
 If the loan is for less than one year, we use a fraction of a year where there are
two ways to compute simple interest: (1) ordinary interest – based on a 360 day
per year calendar, meaning it assumes 30 days in each month; and (2) exact
interest – based on a 365 day per year calendar.
 The origin date is the date when the loan or investment is made, and it is not
included in the counting; and
 Maturity date is the date when the loan is paid or the investment is terminated,
and it is included in the counting.
 The approximate time bases on counting 30 days in each month.
 The actual time of a loan or investment is obtained by counting the “actual
number of days” between the origin date and the maturity date based on a Julian
calendar.
 Compound interest is interest calculated on the initial principal, which also
includes all of the accumulated interest from previous periods on a deposit or loan.
 The compound amount or the accumulated value of the principal is the sum of
the principal and the compound interest. It can be computed using the formula
𝑗
𝐹 = 𝑃(1 + 𝑖)𝑛 𝑖= 𝑛 = 𝑡𝑚
𝑚
where,
𝐹 = compound amount or accumulated amount
𝑃 = present value or original principal
𝑗 = interest rate per year
𝑖 = interest rate per period
𝑛 = total number of conversion periods
𝑚 = number of conversions per year
𝑡 = number of years
 Simple Annuity is an annuity where the payment interval is the same as the
interest period.
 General Annuity is an annuity where the payment interval is not the same as the
interest period.

46
 The future value of an annuity is the total accumulation of the payments and
interest earned.
(1+𝑗)𝑛 −1
𝐹𝑉 = 𝑃 , where
𝑗

𝐹𝑉 = Future Value, 𝑃 = Periodic Payment

𝑟
𝑗 = , where
𝑘

𝑗 = interest rate period, 𝑟 = annual rate, and 𝐾 = number of conversion periods in a

year

𝑛 = 𝐾𝑡, where

𝑛 = total number of conversion periods, and 𝑡 = number of years

 The present value of an annuity is the principal that must be invested today to
provide the regular payment of an annuity.
𝑃[1−(1+𝑗)−𝑛]
𝑃𝑉 = , where
𝑗

𝑃𝑉 = Present Value, 𝑃 = Periodic Payment

𝑟
𝑗 = , where
𝑘

𝑗 = interest rate period, 𝑟 = annual rate, and 𝐾 = number of conversion periods in a

year

𝑛 = 𝐾𝑡, where

𝑛 = total number of conversion periods, and 𝑡 = number of years

 Future Value of Simple Ordinary Annuity Due

(1 + 𝑗)𝑛 − 1
𝐹𝑉 = 𝑃 ( ) ∙ (1 + 𝑗)
𝑗
 Present Value of Simple Ordinary Annuity Due

𝑃[1 − (1 + 𝑗)−𝑛 ]
𝑃𝑉 = ∙ (1 + 𝑗)
𝑗
 Regular Payment (𝑷) of a Simple Ordinary Annuity
(𝐹𝑉)𝑗 (𝑃𝑉)𝑗
𝑃 = (1+𝑗)𝑛 or 𝑃 =
−1 1−(1+𝑗)−𝑛
 Regular Payment (𝑷) of a Simple Annuity Due
(𝐹𝑉)𝑗 (𝑃𝑉)𝑗
𝑃 = [(1+𝑗)𝑛 or 𝑃 = [1−(1+𝑗)−𝑛 ](1+𝑗)
−1](1+𝑗)
 Amortization is the gradual extinction of a loan over a period of time by means of
regular or equal payments as to principal and interest and interest due at the end
of every intervals of time.
 A consumer loan is a loan given to costumers for personal, family, or consumable
items such as car and home.
 A business loan is a debt that the company is required to repay according to the
loan’s terms and conditions.
 A deferred annuity is an annuity in which the first payment is not made at the
beginning nor at the end of the payment interval but at a later date. The length
of time when these payments are made is called period of deferment.

47
 Present Value of a Deferred Annuity
1 − (1 + 𝑗)−(𝑛+𝑑) 1 − (1 + 𝑗)−𝑑
𝑃𝑉 = 𝑃 [ − ]
𝑗 𝑗
 Future Value of a Deferred Annuity
(1 + 𝑗)𝑛 − 1
𝐹𝑉 = 𝑃 [ ]
𝑗
 Present Value of General Ordinary Annuity
1 − (1 + 𝑗)−𝑛
𝑃𝑉 = 𝑃 [ ]
(1 + 𝑗)𝑏 − 1
 Future Value of General Ordinary Annuity
(1+𝑗)−𝑛 −1
𝐹𝑉 = 𝑃 [ (1+𝑗)𝑏 ], where
−1

𝑃 = regular payment
𝑟
𝑗=
𝐾
𝑗 = rate per conversion period

𝑟 = annual rate

𝐾 = number of conversion periods

𝑛 = 𝐾𝑡

𝑛 = number of paying periods

𝑡 = number of years
𝑝
𝑏=
𝑐
𝑝 = number of months in a payment interval

𝑐 = number of months in a compounding period

 Present Value of General Annuity Due

1 − (1 + 𝑗)−𝑛 𝑗
𝑃𝑉 = 𝑃 [ ][ + 𝑗]
𝑗 (1 + 𝑗)𝑏 − 1
 Future Value of General Annuity Due

(1 + 𝑗)−𝑛 − 1 𝑗
𝐹𝑉 = 𝑃 [ ][ + 𝑗]
𝑗 (1 + 𝑗)𝑏 − 1

 Regular Payment of a General Annuity Due

(1+𝑗)𝑏 −1 (1+𝑗)𝑏 −1
𝑃 = 𝑃𝑉 [ ] or 𝑃 = 𝐹𝑉 [(1+𝑗)−𝑛 ]
1−(1+𝑗)−𝑛 −1
 Stocks are certificates of ownership. A person who buys stock in a company
becomes one of the company's owners. Investors who buy the shares of the
corporation from the bank are called shareholders or stockholders. This is when
the company gets its money to grow. A stockholder gets a stock certificate
showing the number of shares it represents. As an owner, the stockholder is eligible
to receive a dividend, or share of the company's profits.
 When companies decide to raise money by selling stocks, they generally go to a
big investment bank. The bank handles the Initial Public Offering or IPO before it
becomes available on a stock exchange.
 The par value of a share of stock is the value printed in the certificate.

48
 The price that a stock is sold is called the market price or market value.
 The column headings of a stock table indicate the meaning of the numbers across
the row. We will use these headings and the first row of the table to explain each
column.
a. STOCK – this heading gives the company name with its symbol.
b. 52-WK-HIGH – this heading gives the highest price at which the company’s
stock was traded during the past 52 weeks. The price given on that column
is the price per share and the amount paid by the investor for a share of
stock.
c. 52-WK-LOW – this gives the lowest price at which the company’s stock was
traded for the past 52 weeks.
d. OPEN – it stands for the opening price at which the stock was traded
yesterday.
e. HIGH – it refers to the highest price at which the stock was traded yesterday.
f. LOW – it refers to the lowest price the stock was traded yesterday.
g. CLOSE – it stands for the price at which the stock was traded when the stock
exchange closed yesterday.
h. VOLUME – this heading refers to the sales volume or the number of shares
traded yesterday
i. The heading Yld% refers to percent yield. A percent yield of 2% means that
the dividends alone give the investors an annual return of 2%.
j. The heading Net Chg refers to the net change. This is the change in price
from the market close two days ago to yesterday’s market close.
 After deducting all the expenses from the market price of the stock, the money
that you will receive is called net proceeds.
𝑁𝑒𝑡 𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 = 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
 The efficient market theory states that the stock market reacts very fast to any
information and at any given period, the market contains the total view of all the
investors in the market.
 A stock index is the measure of the value of a section of the stock market and is
computed from the price of the stocks.
 The bonds that are issued are the corporation’s written promise notes to return the
price an investor pays for the bond at the time it was purchased, called the face
value, together with interest payments at a given rate.
 If the market value is greater than the par value, then the bond is selling at a
premium. On the other hand, if the market value is less than the par value, then
the bond is selling at a discount.
 When bonds are bought and sold through a broker, the broker charges a broker’s
commission or brokerage fee.
 The interest of the bond is based on the par value, because the par value serves
as the principal, the interest formula can be calculated as:
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = (𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒)(𝑅𝑎𝑡𝑒)(𝑇𝑖𝑚𝑒)
 The rate of income or the yield is the ratio of the annual income to the total
investment,
𝐴𝑛𝑛𝑢𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑐𝑜𝑚𝑒 =
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

49
ANSWER KEY:

Let’s Try! (page 2)

1. 58,000php
2. 65,217.39php
3. 138
4. 80,000php
5. Annuity Due

Let’s Check Your Progress (page 12)

1. Exact Time – 95 days

Approximate Time – 93 days
2. 15 years
3. 6,635.39php
4. 40,742.93php
5. 3.52 years

Let’s Check Your Progress (page 34)

1. 11,969.42php
2. a. 1,201.14php
3. 31,284.77php
4. 2,004.84php

Let’s Check Your Progress (page 45)

I.
a. 9,621.15php
b. 41,107.50php

II.
a. The highest price for a share of stock of DMPL for the past 52 weeks was
21.72php. While the lowest price for a share of stock of DMPL for the past 52
weeks was 11.96php.
b. Looking at the heading VOLUME, it can be found that 82,106,200 shares were
sold yesterday.
c. Looking at the heading HIGH and LOW, we have 12.8 and 12.54, respectively.
Therefore, the highest and the lowest prices for DMPL shares yesterday were
12.80php and 12.54php, respectively.
d. Looking under the heading CLOSE, the number given is 12.8. It means that
when the stock exchange closed yesterday, the price for a share of DMPL
stock was 12.80php.

III. 10.61%
IV. 297,000.00php

50
RESOURCES

Books
CHED. General Mathematics Learner's Materials. Pasig City: Department of Education -
Bureau of Learning Resources, 2016.

Oronce, Orlando A. General Mathematics, 1st Ed. Quezon City: Rex Book Store Inc.,
2016.

Online Sources:

https://www.investopedia.com/articles/fundamental/03/022603.asp

https://www.investopedia.com/articles/investing/020614/learn-simple-and-compound-
interest.asp

https://www.investopedia.com/articles/investing/062813/why-companies-issue-
bonds.asp

https://www.investopedia.com/articles/investing/082614/how-stock-market-works.asp

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