MOI Chapter 1 Presentation

MOUNTAIN VIEW COLLEGE
SCHOOL OF BUSNESS AND ACCOUNTANCY
MATHEMATICS
OF INVESTMENT
PREPARED BY RONNEL ALDIN FERNANDO

About the Instructor
Ronnel Aldin D. Fernando

BSBA Graduate of MVC (2009)
Professor from the School of Business and
Accountacy (2010)
Chairperson, BSBA department
Masters in Management major in Human Resource
Management (2013)
OUTLINE OF TOPICS
The Nature of Interest

Elements of Interest Computation
CHAPTER 1 Simple Interest Computation
Maturity Value or Amount
Guidelines in Measuring Time
SIMPLE INTEREST Ordinary and Exact Interest Methods
Exact Time and Approximate Time
Methods of Computing Interest
Guidelines in Converting Time
THE NATURE OF INTEREST
WHAT IS INTEREST?
Refers to the amount paid for the use of money or the

price paid for the use of credit.
It also serves as a mechanism of imposing penalty to a
borrower for not paying a matured financial obligation at
a specified time.
TWO PARTIES IN A TRANSACTION:
1. Lender or Creditor
2. Borrower or Debtor
Lender | Creditor Borrower | Debtor
- the party lending the - the party using the

money or extending money or credit, who
credit expects future expenses
as the cost of using it.
ELEMENTS OF INTEREST
COMPUTATION
PRINCIPAL
INTEREST RATE
TIME
Principal - refers to the amount of money extended for credit

or the money deposited in the bank for safe keeping.
Interest rate - refers to the charged amount for using the

money over a certain period.
Time - refers to the period covered from the time that the
money (principal is borrowed until its due date.
SIMPLE INTEREST COMPUTATION
Simple interest - refers to an interest that is computed only once from

the time the amount is borrowed until it is paid.
I = P x R x T
Interest Principal Rate Time
FINDING THE PRINCIPAL
Principal - refers to the amount of money extended for credit or the

money deposited in the bank for safe keeping.
I
P = Interest
Principal
Rate
R T Time
FINDING THE RATE
Rate- refers to the charged amount for using the money over a
certain period
I
R = Interest
Rate
Principal
P T Time
FINDING THE TIME
Time - refers to the period covered from the time the money
(principal) is borrowed until its due date.
I
T = Interest
Time
Principal
P R Rate
MATURITY VALUE OR AMOUNT
THE SUM OF THE PRINCIPAL AND INTEREST.
M = P + I
Maturity Value Principal Interest
By expanding the basic simple interest formula, the maturity value is computed using
the following formula:
M = P + PRT
By the process of factoring, maturity value can be express as: M = P + (1 + RT)
GUIDELINES IN
MEASURING TIME
The following guidelines may be observed in measuring time:
1. If the time stated in the problem is expressed in number of days, the year should likewise be measured in
days.
2. Unless otherwise specified, it is assumed that both the loan date and the maturity date are on the same year.
3. If the loan date is given and the maturity period is expressed in months, the maturity period date shall
coincide with the loan date, regardless of the number of days in each month.
4. If the loan date and the due date are given in the problem, the number of days between the two given dates
are computed using the exact time method and approximate time method.
ORDINARY AND EXACT INTEREST METHOD
These are two methods used to

determine the interest when the
time given in the problem is
expressed in number of days but the
interest rate is expressed in percent
per year.
For Example:
How much is the interest payable by Mr. junior if
he borrows Php 20, 000 at 7%, payable after 250
days?
Question:
Shall we use 360 or 365 days
in 1 year?
Answer:
It will depend.
ORDINARY INTEREST METHOD
uses 360 days in a year.

I = PRT
= 20, 000 x 0.07 x 250/360
= Php 972.22
EXACT INTEREST METHOD
uses 365 days in a year.

I = PRT
= 20, 000 x 0.07 x 250/365
= Php 958.90
RELATIONSHIP BETWEEN ORDINARY AND
EXACT INTEREST METHODS
The denominator used in the time

element of the interest formula.
The amount of simple interest using
the ordinary interest method is higher
compared to exact interest method.
Ratio = 360/365
= 0.986301:1
Using the data in the same illustration, the relationshio is as follows:
Exact interest = Ordinary interest x 0.986301

= 972.22 x 0.985301
= Php 958.90
Conversely, the ratio of 365 days against 360 days is as follows:

Ratio = 365/360
= 1.013889:1
Hence, using the same data, the relationship is expressed as follows:

Ordinary Interest = Exact interest x 1.013889
= 958.90 x 1.013889
= Php 972.22
EXACT TIME AND APPROXIMATE TIME
They are used to count the number

of days in a given period where the
loan date and the due dates are
mentioned.
Exact time - adding all number of days of all

months between the loan date and the
maturity date.
Approximate time - it is assumed that

there are 30 days in each month.
For Example:
Bryan borrowed Php 20,000 at 8% on March 15,
2012, which is payable on August 20, 2012.
Question:
In computing the interest, how many days
are there from March 15, 2012 to August 20,
2012?
Answer:
The number of days between the two periods
will depend if the exact time or approximate
time is used.
EXACT OR ACTUAL TIME METHOD
Time is determined by adding the number of days of all the

months between the loan and the maturity date.
Months Days
March (31-15) 16 days
April 30 days
May 31 days
June 30 days
July 31 days
August 20 days
Exact Time 158 days
APPROXIMATE TIME METHOD
Time is determined by adding the number of days of all the

months between the loan and the maturity date.
Months Days
March (30-15) 15 days
April 30 days
May 30 days
June 30 days
July 30 days
August 20 days
Exact Time 155 days
METHODS OF COMPUTING INTEREST
Ordinary interest method using exact or actual time.

Exact time
I=PxRx
360
Ordinary interest method using approximate time.

Approximate time
I=PxRx
360
Exact interest method using exact time. Exact time

I=PxRx
365
Exact interest method using approximate time.

Approximate time
I=PxRx
365
BANKER'S RULE
ANSWER: Method 1
QUERY: In case shall be used to
the problem fails compute simple
interest in case the
to specify the
problem does not
method, which specify the method to
formula shall be be used. This method is
used? known as the Banker's
Rule.
GUIDELINES IN CONVERTING TIME
The time element in simple interest

is computed by dividing the interest
with the product of the principal and
the rate.
Sometimes, the result of the

computation is a decimal or a whole
number and a decimal. The decimal
should be converted to days or
months.
CONVERTING TIME
ANSWER: The following
guidelines may be
observed:
QUERY: How is 1. If whole number:
time expressed in automatically equal to
whole number year/years.
2. If whole number and a
and decimal
decimal:
converted into whole number (Year);
years and days? decimal (fraction of a
year)
THANK YOU!
MVC SCHOOL OF BUSINESS AND ACCOUNTANCY

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MOUNTAIN VIEW COLLEGE

SCHOOL OF BUSNESS AND ACCOUNTANCY

PREPARED BY RONNEL ALDIN FERNANDO

Ronnel Aldin D. Fernando

The Nature of Interest

Refers to the amount paid for the use of money or the

Lender | Creditor Borrower | Debtor

- the party lending the - the party using the

Principal - refers to the amount of money extended for credit

Interest rate - refers to the charged amount for using the

Simple interest - refers to an interest that is computed only once from

Principal - refers to the amount of money extended for credit or the

THE SUM OF THE PRINCIPAL AND INTEREST.

The following guidelines may be observed in measuring time:

These are two methods used to

uses 360 days in a year.

EXACT INTEREST METHOD

uses 365 days in a year.

EXACT INTEREST METHODS

The denominator used in the time

Exact interest = Ordinary interest x 0.986301

Conversely, the ratio of 365 days against 360 days is as follows:

Hence, using the same data, the relationship is expressed as follows:

They are used to count the number

Exact time - adding all number of days of all

Approximate time - it is assumed that

Time is determined by adding the number of days of all the

Time is determined by adding the number of days of all the

Ordinary interest method using exact or actual time.

Ordinary interest method using approximate time.

Exact interest method using exact time. Exact time

Exact interest method using approximate time.

The time element in simple interest

Sometimes, the result of the

MVC SCHOOL OF BUSINESS AND ACCOUNTANCY

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