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Module-4_Lesson-4.2 (3)

The document provides an overview of simple and compound interest, including definitions, formulas, and examples for calculating interest and maturity values. It outlines the differences between simple and compound interest, and offers practical examples to illustrate how to solve related problems. The content is aimed at helping students understand and apply these financial concepts effectively.

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9 views

Module-4_Lesson-4.2 (3)

The document provides an overview of simple and compound interest, including definitions, formulas, and examples for calculating interest and maturity values. It outlines the differences between simple and compound interest, and offers practical examples to illustrate how to solve related problems. The content is aimed at helping students understand and apply these financial concepts effectively.

Uploaded by

roniancris.caboboy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPSX, PDF, TXT or read online on Scribd
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z

Mathematics in
Finance
OBJECTIVES

At the end of this lesson, the students will


be able:
1. Explain the difference between simple
and compound interest, and
2. Solve problems involving simple and
compound interest.
Think about it!
 Did you already borrow a money from
someone or from a lending firm?
 Did you already lend a money to
someone?
 Are there interests involved?
 If there is, how did you compute it?
Simple Interest
Definition

If an amount P is borrowed or lent for a


time t at an interest rate of r per time
period, then the simple interest is given by

simple interest amount


principal amount
simple interest rate per time period
time period
Simple Interest
Formula
 If the amount of simple interest () is
missing

 If the principal amount is missing


Memoriz
e
 If the simple interest rate is missing

 If the time period is missing


Simple Interest
Formula
 Maturity Value
o The accumulated amount to be paid or
received at the maturity date.
Simple Interest
Example 1
 To buy furniture for a new apartment,
Pamela Shipley borrowed $5000 at 8%
simple interest for 11 months. How much
interest will she pay?
 Given:
 Solution:

 Therefore, the interest to be paid will be


Simple Interest
Example 2
 What is the maturity value of a loan of
$2,500 to be repaid in 8 months with
interest of 4.3 % per annum.
 Given:
 Solution:

 Therefore, the maturity value will be


$2,571.67.
Simple Interest
Example 3
 Alicia Rinke wants to borrow $8,000 from
Robyn Martin. She is willing to pay back
$8,180 in 6 months. What will be the
interest rate?
 Given:
 Solution:

 Therefore, the simple interest rate is


Simple Interest
Example 4
 Johnny invested an amount of P15,000 at
5% simple interest rate per annum. When
will his capital become P20, 000?
 Given:
 Solution:

 Therefore, his capital will become


P20,000 after 6 years and 8 months.
Simple Interest
Example 5
 Cardo earned an interest of P 2,000 for 9
months at 15% annual simple interest
rate. What was his capital?
 Given:
 Solution:

 Therefore, his capital was approximately


P17, 777.78
Compound Interest
Definition

If an amount P is borrowed or lent for a


time t at an annual interest rate of r
compounded per time period in a year, then
the compound amount is given by

compund amount
principal amount
annual interest divided by conversion
period
year times the conversion period
Compound Interest
Conversion Period
Conversion Period Conversion Coefficient
Annual 1
Semi-annual 2
Quarterly 4
Bi-monthly 6
Monthly 12
Compound Interest
Formula
 If the principal amount is missing.

 If the compound interest is missing

 If the time period is missing


Compound Interest
Example 6
 Suppose $1,000 is deposited for 6 years
in an account paying 4.25% per year
compounded annually. Find the
compound amount.
 Given:
 Solution:
𝒏
𝑨=𝑷 ( 𝟏+ 𝒊 )
 Therefore, the compound amount will be
Compound Interest
Example 6
 Suppose $1,000 is deposited for 6 years
in an account paying 4.25% per year
compounded annually. Find the
compound amount.
 Given:
 Solution:
𝒏
( () 𝟏+ 𝒊 )
𝑨=𝑷
6 (1 )
0.0425 6
¿1,000 1+ =1,000 ( 1.0425 ) =1,2836.68
1

 Therefore, the compound amount will be


Compound Interest
Example 6
 Suppose $1,000 is deposited for 6 years
in an account paying 4.25% per year
compounded annually. Find the interest.
 Given:
 Solution:

 Therefore, the compound interest will be


approximately $283.68.
Compound Interest
Example 7
 Find the amount of interest earned by a
deposit of $2,450 for 6.5 years at 5.25%
interest rate compounded quarterly.
 Given:
 Solution:

 Therefore, the compound interest will be


approximately $988.78.
Compound Interest
Example 8
 Suppose Susan invested $5,000 in a savings
account that paid quarterly interest. After 6
years the money had accumulated to $6539.96.
What was the annual interest rate?
 Given:
 Solution:

𝒓 =𝒎 (√𝒏 𝑨
𝑷
−𝟏 )
 Therefore, the annual interest rate is 4.5%.
Compound Interest
Example 9
 Stacey must pay a lump sum of $6000 in 5
years. What amount deposited today at 6.2%
compounded annually will amount to $6000 in 5
years?
 Given:
 Solution:
𝑨
𝑷= 𝒏
( 𝟏 +𝒊 )
 Therefore, the amount to be deposited today
Compound Interest
Example 10
 Gina invested an amount of P 10,000. If the
annual interest rate is 6% compounded
monthly, when will she gain a compound
interest amount of P1,966.81?
 Given:
 Solution:

𝒕=
𝟏
∙
𝒍𝒐𝒈
𝑨
𝑷 ( )
𝒎 𝒍𝒐𝒈 ( 𝟏 + 𝒊 )
 Therefore, she will gain a compound interest
Simple and Compound Interest

Q&A

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