SELF PACED LEARNING MODULE

IN

GE 4 (Mathematics in the Modern World)

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 Module 5 Mathematics of Finance
a. Simple and Compound Interests
b. Credit Cards and Consumer Loans
c. Stocks, Bonds and Mutual Funds
d. Home Ownership
Competencies1. 1. Use mathematical concepts and tools in other areas such as in finance,
voting, logic, business, networks and systems.
2. 2. Support the use of mathematics in various aspects and endeavors in
life.
3. 3. Compute simple and compound interest.
4. 4. Compute credit card finance charges.
5. 5. Make an amortization schedule for a home loan.
6. 6. Compute the profit or loss from a stock sale.
Discussion 1. Simple and Compound Interest

Simple interest is a one - time percent of an amount of money. Compound

interest is a percentage of an original amount, as well as a percentage of
the new amount including previously calculated interest.

In order to compute simple interest, we will need three pieces of

information: the principal, the rate, and the time.
Interest (I) is the fee charged for the use of money.
Principal (P) is the amount of money borrowed or placed into a savings
account.
Rate (r) is the percent of the principal paid for having money loaned, or
earned for investing money. Unless indicated otherwise, rates are given as
a percent for a term of 1 year.
Time (t) or term is the length of time the money is being borrowed or
invested. When the rate is given as a percent per year, time has to be
written in years.
Future Value (A) is the amount of the loan or investment plus the interest
paid or earned.

Formulas for computing simple interest and future value

1. Interest = principal x rate x time
𝑰 = 𝑷𝒓𝒕
2. Future value = principal + interest
𝑨 = 𝑷 + 𝑰 𝒐𝒓 𝑨 = 𝑷(𝟏 + 𝒓𝒕)

Example 1.
Find the simple interest on a loan of Php 3,600.00 for 3 years at a rate of
8% per year.

Solution
Change the rate to a decimal and substitute into the formula.
8% = 0.08
𝐼 = 𝑃𝑟𝑡
𝐼 = (3,600)(0.08(3) = 864
The interest on the loan is Php 864.00

Example 2.
Find the future value for the loan in example 1.

Solution
Substitute into the formula
𝐴 =𝑃+𝐼
𝐴 = 𝑃ℎ𝑝 3,600.00 + 𝑃ℎ𝑝 864.00 = 𝑃ℎ𝑝 4,464.00
The total amount of money to be paid is Php 4,464.00

Example 3.
To meet payroll during a down period, United Ceramics Inc. needed to

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 borrow Php 2,000.00 at 4% simple interest for 3 months. Find the interest.

Solution
Change 3 months to years by dividing by 12, and change the rate to a
decimal. Substitute in the formula.
𝐼 = 𝑃𝑟𝑡
3
𝐼 = (2,000)(0.04) ( ) = 20
12
The interest is Php 20.00

Example 4.
Admiral Chauffuer Services borrowed Php 600.00 at 9% simple interest for
1 ½ years to repair a limousine. Find the interest, future value and the
monthly payment.

Solution
Step 1. Find the interest.
𝐼 = 𝑃𝑟𝑡
1
𝐼 = (600)(0.09) (1 ) = 81
2
The interest is Php 81.00

Step 2. Find the future value of the loan.

𝐴 =𝑃+𝐼
𝐴 = 600 + 81 = 𝑃ℎ𝑝 681.00
Step 3. Divide the future value of the loan by the number of months. Since
1 ½ years = 18 months, divide Php 681.00 to get Php 37.83. The monthly
payment is Php 37.83

Example 5.
Phillips Health and Beauty Spa is replacing one of its workstations. The
interest on a loan secured by the spa was Php 93.50. The money was
borrowed at 5.5% simple interest for 2 years. Find the principal.

Solution
𝐼 = 𝑃ℎ𝑝 93.50, 𝑟 = 5.5% = 0.055, 𝑡 = 2 𝑦𝑒𝑎𝑟𝑠
𝐼 = 𝑃𝑟𝑡
93.50 = 𝑃(0.055)(2)
93.50 𝑃(0.055)(2)
=
(0.055)(2) (0.055)(2)
𝑃 = 𝑃ℎ𝑝 850.00

Example 6.
R & S Furnace Company invested Php 15,250. 00 for 10 years and received
Php 9,150.00 in simple interest. What was the rate that the investment
paid?

Solution
𝑃 = 𝑃ℎ𝑝 15,250.00, 𝑡 = 10, 𝐼 = 𝑃ℎ𝑝 9,150
𝐼 = 𝑃𝑟𝑡
9,150 = (15,250)(𝑟)(10)
9,150 (15,250)(𝑟)(10)
=
(15,250)(10) (15,250)(10)
𝑟 = 0.06 𝑜𝑟 6%

Example 7.
Judi and Laura borrowed Php 4,500.00 at 8.75% to put in a hot tub. They
had to pay Php 2,756.25 interest. Find the term of the loan.

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 Solution
𝑃 = 𝑃ℎ𝑝 4,500.00, 𝑟 = 8.75% = 0.0875, 𝐼 = 2,756.25
𝐼 = 𝑃𝑟𝑡
2,756.25 = (4,500)(0.0875)(𝑡)
2,756.25 (4,500)(0.0875)(𝑡)
=
(4,500)(0.0875) (4,500)(0.0875)
𝑡=7
The term of the loan was 7 years.

The Banker’s Rule

The Banker’s rule treats every month like it has 30 days, so it uses 360
days in a year. They claim that the computations are easier to do. When a
lending institution uses 360 days instead of 365, how does that affect the
amount of interest?
For example, on a Php 5,000 loan at 8% for 90 days, the interest would be
𝐼 = 𝑃𝑟𝑡
90
𝐼 = (5,000)(0.08) ( ) = 𝑃ℎ𝑝 98.63
365
Using the Banker’s rule, the interest is
𝐼 = 𝑃𝑟𝑡
90
𝐼 = (5,000)(0.08) ( ) = 𝑃ℎ𝑝 100.00
360
Example 8.
Find the interest of a Php 1,800.00 loan at 6% for 120 days. Use the
Banker’s rule.

Solution
120
𝑃 = 𝑃ℎ𝑝 1,800.00, 𝑟 = 6% = 0.06, 𝑡 =
360
𝐼 = 𝑃𝑟𝑡
120
𝐼 = (1,800)(0.06) ( ) = 𝑃ℎ𝑝 36.00
360

Example 9.
A student obtained a 2-year Php 4,000.00 loan for college tuition. The rate
was 9% simple interest and the loan was discounted loan.
a. Find the discount.
b. Find the amount of money the student received.
c. Find the true interest rate.

Example.
a. The discount is the total interest for the loan.
𝑃 = 4,000, 𝑟 = 9%, 𝑡 = 2 𝑦𝑒𝑎𝑟𝑠
𝐼 = 𝑃𝑟𝑡
𝐼 = (4,000)(0.09)(2) = 720
The discount is Php 720.00

b. The student received Php 4,000.00 – Php 720.00 = Php 3,280.00

c. The true interest rate is calculated by finding the rate on a Php 3,280.00
loan with Php 720.00 interest.
𝐼 = 𝑃𝑟𝑡
720 = (3,280)(𝑟)(2)
720 = 6,5560𝑟
720
𝑟= = 0.1098
6,560
The true interest rate is approximately 10.98%.

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 Compound Interest
When interest is computed on the principal and any previously earned
interest, it is called compound interest.
When interest is calculated once each year, we ay that it is compounded
yearly. In many cases, interest is computed at more frequent intervals than
that. It can be compounded semiannually (twice a year), quarterly (4 times
a year), monthly (12 times a year), or even daily.

Formula for Computing Compound Interest

𝒓 𝒏𝒕
𝑨 = 𝑷 (𝟏 + )
𝒏
where
A is the future value
r is the yearly interest rate in decimal form
n is the number of times per year the interest is compounded
t is term of the investment in years

Example 1.
Find the interest on Php 7,000.00 compounded quarterly at 3% for 5 years.

Solution
Quarterly means 4 times a year, so n = 4.
𝑃 = 𝑃ℎ𝑝 7,000.00, 𝑟 = 3% = 0.03, 𝑡 = 5
𝑟 𝑛𝑡
𝐴 = 𝑃 (1 + )
𝑛
0.03 4(5)
𝐴 = 7,000 (1 + )
4

𝐴 = 7,000(1.0075)20

𝐴 = 𝑃ℎ𝑝 8,128.29
To find the interest, subtract the principal from the future value.
𝐼 = 𝑃ℎ𝑝 8,128.29 − 𝑃ℎ𝑝 7,000.00
= 𝑃ℎ𝑝 1,128.29
The interest is Php 1,128.29.

Effective Rate
The effective rate (also known as the annual yield) is the simple interest
rate which would yield the same future value over 1 year as the compound
interest rate.

Formula for Effective Interest Rate

𝒓 𝒏
𝑬 = (𝟏 + ) − 𝟏
𝒏
where
E = effective rate
n = number of periods per year the interest is calculated
r = interest rate per year (i.e., stated rate)

Example 2.
Find the effective interest rate when the state rate is 4% and the interest is
compounded semiannually.

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 Solution
Let r = 0.04 (rate is 4%) and n = 2 (compounded semiannually)
𝑟 𝑛
𝐸 = (1 + ) − 1
𝑛
0.04 2
𝐸 = (1 + ) −1
2
𝐸 = 0.0404 = 4.04%
The effective rate is 4.04%

Annuities
An annuity is a savings investment for which an individual or business
makes the same payment each period (i.e., annually, semiannually, or
quarterly) into a compound-interest account where the interest does not
change during the term of the investment.

Formula for Finding the Future Value of an Annuity

𝒓 𝒏𝒕
𝑹 [(𝟏 + 𝒏) − 𝟏]
𝑨= 𝒓
𝒏
where
A is the future value of the annuity
R is the regular periodic payment
r is the annual interest rate
n is the number of payments made per year
t is the term of the annuity in years

Example 3
Find the future value of an annuity when the payment is Php 800.00
semiannually, the interest rate is 5% compounded semiannually, and the
term is 4 years.

Solution
R = Php 800.00, r = 5% = 0.05, n = 2 (semiannual), t = 4

𝑟 𝑛𝑡
𝑅 [(1 + 𝑛) − 1]
𝐴= 𝑟
𝑛

0.05 (2)(4)
800 [(1 + 2 ) − 1]
800[(1.025)8 − 1]
𝐴= = = 𝑃ℎ𝑝 6,988.89
0.05 0.025
2
The future value of the annuity at the end of 4 years is Php 6,988.89.

Formula for Finding Regular Annuity Payments Needed to Reach a Goal

𝒓
𝑨 (𝒏)
𝑹=
𝒓 𝒏𝒕
[(𝟏 + 𝒏) − 𝟏]

Example 4
Suppose you’ve always dreamed of opening your own tattoo parlor, and
decide it’s time to do something about it. A financial planner estimates that
you would need a Php 35,000.00 initial investment to start the business

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 Solution
We know the following values:
A = 35,000, r = 7.5% = 0.075, t = 5 and n = 52
𝒓
𝑨 (𝒏)
𝑹=
𝒓 𝒏𝒕
[(𝟏 + 𝒏) − 𝟏]
0.075
35,000 ( )
𝑅= 52
0.075 (52)(5)
[(1 + ) − 1]
52
2,625
( )
𝑅= 52 = 111.04
(52)(5)
0.075
[(1 + ) − 1]
52

2. Credit Cards and Consumer Loans

Installment buying is when an item is purchased and the buyer pays for
it by making periodic partial payments, or installments.

A fixed installment loan is a loan that is repaid in equal payments.

Sometimes the buyer will pay part of the cost at the time of purchase. This
is known as a down payment.

The amount financed is the amount a borrower will pay interest on.
Amount financed = Price of item – Down payment

The total installment price is the total amount of money the buyer will
ultimately pay.
Total installment price = Sum of all payments + Down payment

The finance charge is the interest charged for borrowing the amount
financed.
Finance charge = Total installment price – Price of item

Example
Cat bought a 2-year old Santa Fe for $12,260. Her down payment was
$3,000, and she will have to pay $231.50 for 48 months. Find the amount
financed, the total installment price, and the finance charge.

Solution
Using the formulas previously shown:
Amount financed = Cash price – Down payment
= $12,260 – $3,000
= $9,260
Since she paid $231.50 for 48 months and her down payment was $3,000,
Total installment price = Total of monthly payments + Down payment
= (48 x $231.50) + $3,000
= $14,112.00
Now we can find the finance charge:
Finance charge = Total installment price – Cash price
= $14,112.00 – $12,260.00
= $1,852.00
The amount financed was $9,260.00; the total installment price was
$14,112.00, and the finance charge was $1,852.00.

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 Example 2.
After a big promotion, a young couple bought $9,000 worth of furniture.
The down payment was $1,000. The balance was financed for 3 years at
8% simple interest per year.
(a) Find the amount financed.
(b) Find the finance charge (interest).
(c) Find the total installment price.
(d) Find the monthly payment.

Solution
(a) Amount financed = Price of item – Down payment
= $9,000 – $1,000 = $8,000
(b) To find the finance charge, we use the simple interest formula:
I = Prt
= $8,000 x 0.08 x 3
= $1,920
(c) In this case, the total installment price is simply the cost of the
furniture plus the finance charge:
Total installment price = $9,000 + $1,920 = $10,920
(d) To calculate the monthly payment, divide the amount financed plus the
finance charge by the number of payments:
Monthly payment = ($8,000 + $1,920) ÷ 36 = $9,920 ÷ 36 = $275.56
In summary, the amount financed is $8,000, the finance charge is
$1,920, the total installment price is $10,920, and the monthly payment is
$275.56.

Annual Percentage Rate (APR)

Lenders are required by law to disclose an annual percentage rate, or
APR, that reflects the true interest charged. This allows consumers to
compare loans with different terms.

This is a sample of APR table.

Using the APR Table

Step 1. Find the finance charge per $100 borrowed using the formula
𝑭𝒊𝒏𝒂𝒏𝒄𝒆 𝑪𝒉𝒂𝒓𝒈𝒆
𝒙$𝟏𝟎𝟎
𝑨𝒎𝒐𝒖𝒏𝒕 𝑭𝒊𝒏𝒂𝒏𝒄𝒆𝒅
Step 2 Find the row in the table marked with the number of payments and
move to the right until you find the amount closest to the number from
Step 1.
Step 3 The APR (to the nearest half percent) is at the top of the
corresponding column.

Example 3
Burk Carter purchased a color laser printer for $600.00. He made a down

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 payment of $50.00 and financed the rest for 2 years with a monthly
payment of $24.75. Find the APR.

Solution
Step 1. Find the finance charge per $100.00. The total amount he will pay
is $24.75 per month x 24 payments, or $594.00. Since he financed
$550.00, the finance charge is $594.00 – $550.00 = $44.
𝑭𝒊𝒏𝒂𝒏𝒄𝒆 𝑪𝒉𝒂𝒓𝒈𝒆
𝑭𝒊𝒏𝒂𝒏𝒄𝒆 𝒄𝒉𝒂𝒓𝒈𝒆 𝒑𝒆𝒓 $𝟏𝟎𝟎 = 𝒙$𝟏𝟎𝟎
𝑨𝒎𝒐𝒖𝒏𝒕 𝑭𝒊𝒏𝒂𝒏𝒄𝒆𝒅
$𝟒𝟒
= 𝒙$𝟏𝟎𝟎 = $𝟖. 𝟎𝟎
$𝟓𝟓𝟎

Step 2. Find the row for 24 payments and move across the row until you
find the number closest to $8.00. In this case, it is exactly $8.00.

Step 3. Move to the top of the column to get the APR.

It is 7.5%.

Unearned Interest
One way to save money on a fixed installment loan is to pay it off early.
This will allow a buyer to avoid paying the entire finance charge.

The amount of the finance charge that is saved when a loan is paid off
early is called unearned interest.

There are two methods for calculating unearned interest, the actuarial
method and the rule of 78.

Actuarial Method
kRh
u=
10+h
0
where
u = unearned interest
k = number of payments remaining, excluding the current one
R = monthly payment
h = finance charge per $100 for a loan with the same APR and k monthly
payments

Example 4
Our friend Burk from the previous example decides to use part of his tax
refund to pay off the full amount of his laser printer with his 12th
payment. Find the unearned interest and the payoff amount.

Solution
To use the formula for the actuarial method, we’ll need values for k, R, and
h.
Half of the original 24 payments will remain, so k = 12.
From Example 3, the monthly payment is $24.75 and the APR is 7.5%.
Using the APR Table, we find the row for 12 payments and the column for
7.5%; the intersection shows $4.11, so h = $4.11.
Substituting k = 12, R = 24.75 and h = 4.11:

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and prime catalyst for a progressive and sustainable Quirino appropriate knowledge and technologies to meet the needs of Quirino
Province and Southern Cagayan Valley. Province and Southern Cagayan Valley.

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 The unearned interest is $11.72.
The payoff amount is the amount remaining on the loan minus unearned
interest.
At this point, Burk has made 11 payments, so there would be 13
remaining if he were not paying the loan off early.
Payoff amount = (13 x $24.75) – $11.72 = $310.03
With a payment of $310.03, Burk is the proud owner of a laser printer.

The Rule of 78

( +1
fkk )
u=
(n+1
n )
where
u = unearned interest
f = finance charge
k = number of remaining monthly payments
n = original number of payments

Example 5
A $5,000 car loan is to be paid off in 36 monthly installments of $172. The
borrower decides to pay off the loan after 24 payments have been made.
Find the amount of interest saved by paying the loan off early. Use the rule
of 78.

Solution
Find the finance charge (i.e. total interest).
$172 x 36 = $6,192
$6,192 – $5,000 = $1,192
Substitute into the formula using f = $1,192, n = 36, and k = 36 – 24 = 12.

Open-Ended Credit
Open-ended credit has no fixed number of payments or payoff date. By
far the most common example of this is credit cards.
With the unpaid balance method, interest is charged only on the balance
from the previous month.

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 Example 6
For the month of April, Elliot had an unpaid balance of $356.75 at the
beginning of the month and made purchases of $436.50. A payment of
$200.00 was made during the month. The interest on the unpaid balance
is 1.8% per month. Find the finance charge and the balance on May 1.

Solution
Step 1 Find the finance charge on the unpaid balance using the simple
interest formula with rate 1.8%. (r = 0.018)
I = Prt
= $356.75 x 0.018 x 1
= $6.42 (rounded)
The finance charge is $6.42.
Step 2 To the unpaid balance, add the finance charge and the purchases
for the month; then subtract the payment to get the new balance.
New balance = $356.75 + $6.42 + $436.50 – $200
= $599.67
The new balance as of May 1 is $599.67.

Average Daily Balance Method

When using the average daily balance method, the balance for each day
of the month is used to compute an average daily balance, and interest is
computed on that average.

Procedure for the ADB Method

Step 1 Find the balance as of each transaction.
Step 2 Find the number of days for each balance.
Step 3 Multiply the balances by the number of days and find the sum.
Step 4 Divide the sum by the number of days in the month.
Step 5 Find the finance charge (multiply the average daily balance by the
monthly rate).
Step 6 Find the new balance (add the finance charge to the balance as of
the last transaction).

Example 7
Betty’s credit card statement showed the following transactions during the
month of August.
August 1 Previous balance $165.50
August 7 Purchases 59.95
August 12 Purchases 23.75
August 18 Payment 75.00
August 24 Purchases 107.43
Find the average daily balance, the finance charge for the month, and the
new balance on September 1. The interest rate is 1.5% per month on the
average daily balance.

Solution
Step 1 Find the balance as of each transaction.
August 1 $165.50
August 7 $165.50 + $59.95 = $225.45
August 12 $225.45 + $23.75 = $249.20
August 18 $249.20 + $75.00 = $174.20
August 24 $174.20 + $107.43 = $281.63

Step 2 Find the number of days for each balance.

Date Balance Days Calculations
August 1 $165.50 6 (7 – 1 = 6)
August 7 $225.45 5 (12 – 7 = 5)

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 August 12 $249.20 6 (18 – 12 = 6)
August 18 $174.20 6 (24 – 18 = 6)
August 24 $281.63 8 (31 – 24 + 1 = 8)

Step 3 Multiply each balance by the number of days, and add these
products.
Date Balance Days Calculations
August 1 $165.50 6 $165.50(6) = $993.00
August 7 $225.45 5 $225.45(5) = $1,127.25
August 12 $249.20 6 $249.20(6) = $1,495.20
August 18 $174.20 6 $174.20(6) = $1,045.20
August 24 $281.63 8 $281.63(8) = $2,253.04
31 $6,913.69

Step 4 Divide the total by the number of days in the month to get the
average daily balance.
Average daily balance = $6,913.69/31 ≈ $223.02

Step 5 Find the finance charge. Multiply the average daily balance by the
rate, which is 1.5%, or 0.015.
Finance charge = $223.02 x 0.015 ≈ $3.35.

Step 6 Find the new balance. Add the finance charge to the balance as of
the last transaction.
New balance: $281.63 + $3.35 = $284.98
The average daily balance is $223.02. The finance charge is $3.35, and the
new balance is $284.98.

3. Stocks, Bonds and Mutual Funds

In order to get information about a certain stock, you can refer to a stock
table. In this case, a stock listing for a company called Computer
Programming and Systems, Inc. will be used as an example.

The first two columns give the highest and lowest selling prices for one
share of stock in this company during the past 52 weeks.
The column labeled STOCK contains the letters CPSI. This is the symbol
the company uses for trading.
The column labeled DIV is the dividend per share that was paid to
shareholders last year.
The column labeled YLD% is the annual percentage yield: It is the dividend
per share divided by the current price. This percent can be compared to
other stocks as a measure of performance.
The P/E column is the price-to-earnings ratio. It is the ratio of yesterday’s
closing price of the stock (found in the CLOSE column) to its annual
earnings per share.
The column labeled VOL (1,000s) means the number of shares in
thousands that were traded yesterday.
The column labeled NET CHG is the change in the price of the stock
between the day before yesterday and yesterday at closing time.

Example 1
The following is a stock listing for the Terex Corporation. Use the listing to

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 answer the questions.

(a) What was the highest price that the stock sold for during the past 52
weeks?
(b) What was the lowest price that the stock sold for during the past 52
weeks?
(c) What was the amount of the dividend per share that TEX paid last
year?
(d) If you owned 250 shares of stock, how much did you make in dividends
last year?
(e) How many shares were traded yesterday?
(f) What was the closing price per share the day before yesterday?

Solution
(a) $35.00 (Found in the “HI” column.)
(b) $20.97 (Found in the “LO” column.)
(c) $0.24 (Found in the DIV column.)
(d) (250) ($0.24) = $60 ($0.24 dividend per share x 250 shares)
(e) (7,143) (1,000) = 7,143,000 (Number in VOL column x 1,000)
(f) ($24.51) (0.06) = $24.57 (Closing price of $24.51 is 0.06 below previous
day.)

P/E Ratio
The P/E ratio of a stock is a comparison of the current selling price to the
company’s earnings per share.
Yesterda
s
Closin
Pric
=
P/E
Ratio
Annual
Earnin
per
share
Example 2
If the annual earnings per share for Terex is $0.98, find the P/E ratio.

Solution
Yesterd
s
Closin
Pric
=
P/E
Ratio
Annual
Earnin
per
share
$24.51
= =
25
(rounded)
$0.98
This means that the price of a share of stock is 25 times the company’s
annual earnings per share. In general, the lower the P/E ratio is, the better
the investment.

Annual Earnings Per Share

Knowing the price per share of stock and the P/E ratio, you can find the
annual earnings per share for the last 12 months by using the following
formula:

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 Yeste
s
Clo
Pr
=
Annual
Earnin
per
share
P/E
Ra
Example 3
If the closing price for Kellogg’s stock was $44.23 and the P/E ratio is 15,
find the annual earnings per share for last year.

Solution
Yest sClo
Pr
Annual=
Earnin
per
share
P/E
Ra
$
44.23
= 
$2.95
15
Current Yield for Stock
The current yield for a stock can be calculated by using the following
formula:
Annual
Divid
per
Shar
=
Current
Stock
d Yi
Closin
Price
of
Stoc

Example 4
For the CPSI stock, the annual percent yield is 6.5%. Verify the current
yield by using the preceding formula.

Solution
The dividend per share is $1.44 and the closing price is $22.25:

Annual
Divid
per
Shar
=
Current
Stock
d Yi
Closin
Price
of
Stoc
$1.44
= 0
. =
065
6.
5%
$22.25

Example 5. Finding the total cost of buying stock

Shares of Apple Computer (AAPL) closed at $12.89 on April 1, 2004.
Suppose that an investor bought 600 shares at that price using a broker
that charged a 2% commission. Find the amount of commission and the
total cost to the investor.

Solution
Step 1 Find the purchase price.
600 shares x $12.89 = $7,734.00

Step 2 Find the broker’s commission.

2% of purchase price = 0.02 x $7,734.00
= $154.68

Step 3 Add the commission to the purchase price.

$7,734.00 + $154.68 = $7,888.68
The investor paid a total of $7,888.68 for the transaction.

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 Example 6. Finding amount made from selling stock
On May 1, 2008, shares of Apple stock reached $192.24. If the investor in
Example 5 sold all of his Apple stock at that point, and the broker also
charges a 2% commission on sales, find the commission, proceeds, and the
amount of profit made by the investor.

Solution
Step 1 Find the total amount of the sale.
600 shares x $192.24 = $115,344.00

Step 2 Find the broker’s commission.

2% of purchase price = 0.02 x $115,344.00
= $2,306.88

Step 3 Subtract the commission amount from the total amount of the sale
to get the proceeds.
$115,344.00 – $2,306.88 = $113,037.12

Step 4 The profit is the proceeds minus the total cost from Example 5.
$113,037.12 – $7,888.68 = $105,148.44

Bonds
When an investor purchases bonds, the investor is lending money to the
company that issues the bonds. Bonds can also be issued by local, state,
and federal governments. Bonds have a face value, which is usually
$1,000, and a fixed interest rate. Bonds can be sold just like stocks and
the prices vary with the market conditions. Bonds also have a maturity
date, which is the date that they come due. Bonds are listed in tables that
are similar to stock tables. Brokers also earn commissions for buying and
selling bonds. Investment procedures for bonds are similar to those for
stocks.

Mutual Funds
Many times, investors purchase a group of stocks and bonds called a
mutual fund. Mutual funds are managed by professional managers and
include money from other investors. The manager follows the markets and
makes the decisions of when to buy or sell the stocks and bonds. Mutual
funds usually consist of a large number of small investments in companies.
This way, if a single stock does not perform well, only a small amount of
money is lost. Sometimes mutual funds can be high return but also high
risk.
Ratings for mutual funds can be found on most financial websites, and in
business publications like the Wall Street Journal. They are rated either
from A to F, or from 5 to 1, with 5 being the best. Often, two separate
ratings are given. An overall rating compares the fund to all other stock
funds. A category rating compares a fund to other funds that have similar
holdings. For example, there are funds that invest strictly in smaller
businesses, and it makes sense to compare those funds to others like
them, as well as to the market as a whole.

4. Home Ownership
Mortgage
A mortgage is a long-term loan where the lender has the right to seize the
property purchased if the payments are not made.

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 There are several types of mortgages.
A fixed-rate mortgage means that the rate of interest remains the same
for the entire term of the loan. The payments (usually monthly) stay the
same.
An adjustable-rate mortgage means that the rate of interest may fluctuate
(i.e., increase and decrease) during the period of the loan.

Monthly Payments & Interest

One way to find the monthly payments for a fixed-rate mortgage is to use a
table. The table displays the monthly payment required for each $1,000 of
a mortgage, which includes principal and interest.

Finding the Monthly Payment

Step 1 Find the down payment.
Step 2 Subtract the down payment from the cost of the home to find the
principal of the mortgage.
Step 3 Divide the principal by 1,000.
Step 4 Find the number in the table that corresponds to the interest rate
and the term of the mortgage.
Step 5 Multiply that number by the number obtained in step 3 to get the
monthly payment.

Example 1.
The Petteys family plans to buy a home for $174,900, and have been
offered a 30-year mortgage with a rate of 5.5% if they make a 20% down
payment. What will their monthly payment be with this loan?

Solution
Step 1 Find the down payment.
20% of $174,900 = 0.20 x $174,900 = $34,980

Step 2 Subtract the down payment from the cost of the home to get the
principal.
$174,900 – $34,980 = $139,920

Step 3 Divide by 1,000.

Step 4 Find the value in the table for a 30-year mortgage at 5.5%. It is
$5.68.

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 Step 5 Multiply the value from step 3 by $5.68.
139.92 x $5.68 ≈ $794.75 (Monthly payment with 30-year term.)

Example 2.
Find the total amount of interest the Petteys family would pay if they take
the loan in Example 1.

Solution
On a 30-year mortgage, there are 30 x 12 = 360 payments. We found that
the monthly payment would be $794.75.
$794.75 x 360 = $286,110
This is the total of payments. We subtract the amount financed from
Example 1:
$286,110 – $139,920 = $146,190 (Interest on the loan.)
The interest paid exceeds the principal of the loan by over $6,000!

Example 3.
Suppose that the Petteys family from Examples 1 and 2 is also offered a
15-year mortgage with the same rate and down payment. Find the
difference in monthly payment and interest paid between the 15- and 30-
year mortgages.

Solution
We essentially need to rework Examples 1 and 2 with a 15-year mortgage,
then compare the results. Fortunately, some of the work we did carries
over.

We know that the principal is $139,920, and the principal divided by 1,000
is 139.92.

This time we use the 15-year column and 5.5% row in the table to get
$8.17.

Now we multiply that by 139.92:

139.92 x $8.17 ≈ $1,143.15 (Monthly payment with 15-year term.)

The difference in monthly payments is

$1,143.15 – $794.75 = $348.40
(Recall that $794.75 was payment for 30 years.)

With a monthly payment of $1,143.14 for 15 years (which is 180 months)

the total payments are
$1,143.15 x 180 = $205,767.00
and the interest paid is
$205,767 – $139,920 = $65,847

The interest paid on the 30-year mortgage was $146,190:

$146,190 – $65,847 = $80,343
If the Petteys family can manage an extra $348.40 a month, they will save
over $80,000 in interest!

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 Computing Monthly Payments

r 
P 
R=  n
−nt
 r
1−1+ 
 n
R = regular monthly payment
P = amount financed, or principal
r = rate written as a decimal
n = number of payments per year
t = number of years

Example 4.
After one hit single, a young singer unwisely decides that she needs a $2.2
million dollar mansion. With some of the proceeds from her CD, she puts
down $500,000, leaving $1,700,000 to finance at 6% for 30 years.
Find her monthly payment.

Solution
In the formula, use P = 1,700,000, r = 0.06, n = 12, and t = 30.

r  0.06
P  1,700,000
R=  n = 12
−nt -1230
 r  0.06 
1−1+  1− 1+ 
 n  12 
8
,500
=
(1 )
−
360
1− .00
5

$1
0
,1
92
.
36

Amortization Schedule
After securing a mortgage, the lending institution will prepare an
amortization schedule. This schedule shows what part of the monthly
payment is paid on the principal and what part of the monthly payment is
paid in interest.

Procedure for Computing an Amortization Schedule

Step 1 Find the interest for the first month. Use I = Prt, where t = 1/12.
Enter this value in a column labeled Interest.

Step 2 Subtract the interest from the monthly payment to get the amount
paid on the principal. Enter this amount in a column labeled Payment on
Principal.

Step 3 Subtract the amount of the payment on principal found in step 2

from the principal to get the balance of the loan. Enter this in a column
labeled Balance of Loan.

Step 4 Repeat the steps using the amount of the balance found in step 3
for the new principal.

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 Example 5.
Compute the first two months of an amortization schedule for the loan in
Example 1.

Solution
The value of the mortgage is $139,920, the interest rate is 5.5%, and the
monthly payment is $794.75.

Step 1 Find the interest for month 1.

Enter this in a column labeled Interest.

Payment Payment of
Interest Balance of Loan
Number Principal
1 $641.30 $153.45 $139,766.55

Step 2 Subtract the interest from the monthly payment.

$794.75 – $641.30 = $153.45
This goes into the Payment on Principal column.

Step 3 Subtract principal payment from principal.

$139,920 – $153.45 = $139,766.55
This goes into the Balance of Loan column. Now we repeat steps 1–3 using
the balance of $139,766.55.

Payment Payment of
Interest Balance of Loan
Number Principal
1 $641.30 $153.45 $139,766.55
2 $640.60 $154.15 $139,612.40

Step 4

Step 5 $794.75 – $640.60 = $154.15

Step 6 $139,766.55 – $154.15 = $139,612.40

Enrichment Simple and Compound Interest

Activities 1. Suppose that you have a choice of two loans: one at 5% simple interest
for 6 years, and one at 6% simple interest for five years. Which will result
in the smaller future value? Does it depend on the principal?

2. A person deposits Php 5,000.00 into an account paying 4% compounded

semiannually. Two years later the person deposited Php 2,000.00 into the
same account. How much money was there at the end of 5 years?

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 Credit Cards and Consumer Loans
1. A couple borrowed Php 800.00 for 1 year at 12% interest. Payments
were made monthly. After eight payments were made, they decided to pay
it off. Find the interest that was saved if it was computed equally over 12
months. Then find the interest saved using the rule of 78. Explain which is
better for the borrower.

Stocks, Bonds and Mutual Funds

1. Compare the two investments below and decide which would have been
the better choice.
Investment 1. Php 10,000.00 was invested in a 24-month CD (Certificate
of Deposit) that earned 5.1% annual interest compounded daily.
Investment 2. 1,400 shares of stock in the Lybarger Aviation Company
were brought at Php 7.11 per share using a brokerage with a 0.75%
commission rate on both buying and selling stock. Over the 2 years the
stock was held, it paid a dividend of Php 0.48 per share in the first year
and Php 0.36 per share in the second year. The stock was sold through the
same brokerage for Php 7.95 per share.

Home Ownership
1. You decide to buy a Php 180,000.00 home. If you make a 25% down
payment, you can get a 20-year mortgage at 9%, but if you can make a
10% down payment, you can get a 25-year mortgage at 7%. Which is the
better option for you?

Comprehension 1. Benson Electric borrowed Php 1,800.00 at 12% for 1 year from a local
Check bank. Find the simple interest and future value of the loan, and the
monthly payment.

2. Find the simple interest on a Php 5,000.00 loan at 4% for 60 days. Use
Banker’s rule.

3. Latoya obtained a 6-year Php 12,650.00 discounted loan at 7.5%. Find

the discount and the amount of money Latoya received.

4. Find the interest and future value for a principal of Php 500.00 invested
at 6.5% compounded semiannually for 4 years.

5. Find the interest and future value on a principal of Php 9,750.00

invested at 10% compounded quarterly for 6 years.

6. Bart Johnson purchased a Mazda for Php 15,000.00 and had a down
payment of Php 2,000.00. He financed the balance at Php 305 per month
for 48 months. Find the APR.

7. In problem 6, Bart was able to pay off his loan at the end of 24 months.
Using the actuarial method, find the unearned interest and the payoff
amount.

8. Tamara’s credit card statement showed these transactions for the month
of September:
September 1 Previous balance Php 50.00
September 13 Purchases Php 260.88
September 17 Payment Php 100.00
September 19 Purchases Php 324.15

a. Find the average daily balance.

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 b. Find the finance charge for the month. The interest rate is 1.1% per
month.
c. Find the new balance on August 1.

9. A home is purchased for Php 180,000.00 with 5% down payment. The

mortgage rate is 6% and the term is 30 years.
a. Find the amount of down payment.
b. Find the amount of the mortgage.
c. Find the monthly payment.
d. Compute an amortization schedule for the first 2 months.

10. Use the following information below.

a. What was the highest price that the stock sold for during the last 52
weeks?
b. What was the lowest price that the stock sold for during the last 52
weeks?
c. What was the amount of dividend per share that the company paid last
year?
d. If you own 682 shares, how much in dividends did you make last year?
e. How many shares traded yesterday?
f. What was the closing price of the stock yesterday?
g. Find the annual earnings per share.
h. If you purchase 842 shares of the stock at Php 52.67 per share and the
broker’s commission is 2%, find the total cost of the purchase.
i. If an investor had 1,225 shares of stock and the dividend per share was
Php 0.67 last year, how much did the investor make?
j. What was the closing price of the stock the day before yesterday?

Reference Mathematical Excursions 3rd edition by Aufmann, et.al.

Math in our World 2nd edition by Sobecki, et.al.

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