MATHEMATICS IN THE MODERN WORLD

The Mathematics of Finance

One of the measures of success is on how one
manages his finances. It is not on how each one earns
but on how he makes the most out of what he earns.
Thus, it is important to know the basic concepts of the
application of mathematics to finances. This chapter
aims at in one way or another the students would
learn to manage their finances as well.
SIMPLE INTEREST
Simple interest is a quick and easy method of calculating
the interest charge on a loan. Simple interest is determined
by multiplying the daily interest rate by the principal by the
number of days that elapse between payments.
Computed using the formula:
I = Prt
I is Interest
P is Principal
r is rate
t is time
The following terms will be used in the discussion:

1. Principal - is a term that has several financial

meanings. The most commonly used refers to the
original sum of money borrowed in a loan or put
into an investment. ... Principal can also refer to
an individual party or parties, the owner of a
private company, or the chief participant in a
transaction.
2. Time/term - A term is a period of
duration, time or occurrence, in relation to an
event. ... In finance or financial operations of
borrowing and investing, what is considered long-
term is usually above 3 years, with medium-
term usually between 1 and 3 years and short-
term usually under 1 year.
3. Rate of Interest - The interest rate is the
amount a lender charges for the use of
assets expressed as a percentage of the
principal. The interest rate is typically noted
on an annual basis known as the
annual percentage rate (APR). The assets
borrowed could include cash, consumer
goods, or large assets such as a vehicle or
building.
4. Final Amount or maturity value - Maturity value is
the amount payable to an investor at the end of a debt
instrument's holding period (maturity date). For most
bonds, the maturity value is the face amount of the
bond. For some certificates of deposit (CD) and other
investments, all of the interest is paid at maturity.
5. Lender – the person who loans the money.

6. Debtor – the person who borrows money for any

purpose.
Example1. Find the interest of a P23,300.00
investment at 6% interest rate for 1 year. (P1,518.00)
Solution:
Given: t = 1 year
P = P25,300.00
r = 6%
I = Prt
= (25,300.00)(.06)(1)
= P1,518.00
Example 2. Find the interest of a P65,850.00
investment at 6.72% interest rate for 2 ¾
years. (P12,169.10)
Solution:
Given: t = 2 ¾ years
P = P65,850.00
r = 6.72%
I = Prt
= (65,850.00)(.0672)(2.75)
= P12,169.10
3. Find the interest of a P21,320.00
investment at 7.50% interest rate for 1 ½
years. (P2, 398.50)

Solution:
Given: t = 1 1/2years
P = 21,320.00
r = 7.5 %
I = Prt
= (21,320.00)(.075)(1.50)
= P2,398.50
ORDINARY and EXACT INTEREST
When time is expressed in days, it can be
computed using the exact number of days in a
year or the approximate number of days in a year
which assumes 30 days in every month. Time is
always expressed as a fractional part of the year
which follows that the number of days given must
be expressed as a fractional part of the year which
can have 365 for exact and or 360 days for
ordinary.
Ordinary Interest, IO is a type of interest wherein
the interest is computed based on the assumption
that the year contains 360 days and each month
has 30 days. Computed using the formula:
IO
Exact Interest, Ie is a type of interest wherein the
interest is computed based on the assumption that
the year contains 365 days and it considers the 28,
29, 30 and 31 days in each month. Computed using
the formula:
IE
Example 1. Find the exact interest of a P29,300.00
investment at 6% interest rate for 125 days.
(602.05)
Given: t = 125 days
P = P29,300.00
r = 6%
Ie = (29,300.00)(0.06)()
Ie = (29,300.00)(0.06)()
Ie = P602.05
Example 2. Find the exact interest of a P45,045.00 loan
at 4.5% interest rate for 320 days.

Given: t = 320 days

P = P45.045.00
r = 4.5%
Ie = (P45,045.00)(0.045)()
Ie = 1,777.12
`=1,777.117808
Example 3. Find the ordinary interest of a P18,300.00
loan at 7% interest rate for 225 days.

Given:
t = 225 days
P = P18,300.00
r = 7%
Io = (P18,300.00)(0.07)()
Io = 800.63
Example 4. Find the ordinary interest of a
P53,500.00 investment at 6.50% interest
for 200 days.
Given:
t = 200 days
P = P53,500.00
r = 6.5%
Io = (P53,500.00)(0.065)()
Io = 1,931.94
Example 5. Find the exact and ordinary
interest of P10,500.00 investment at
9.50% interest made on March 4, 2015
and is due on April 1, 2016.
Note: Since it gives dates, we need to
count the number of days between the
given dates of both the exact and
approximate days.
No. of days Exact Approx.

March 4, 2015 – March 4, 2016 366 360

March 4, 2016 - March 31, 2016 27 26
March 31, 2016 – April 1, 2016 1 1
…………………………..
Total 394days 387days
Given: Exact Interest
t = 394 days
P = P10,500.00
r = 9.5%
Ie = (P10,500.00)(0.095)()
Ie = 997.50
Ie = (P10,500.00)(0.095)()= 76.52
Total Exact Interest= 1,074.02
Ordinary Interest
t = 387 days
P = P10,500.00
r = 9.5%
Io = (P10,500.00)(0.095)()
Io= 1,072.31
Determine the exact & ordinary simple interest on P1200 for the period from Jan 16
to Nov. 26 2012 if the rate of interest is 24%.
Exact Ordinary

January 16 to January 31 15 14
January 31- February 29 29 30
February 29- March 31 31 30
March 31 – April 30 30 30
April 30- May 31 31 30
May31-June 30 30 30
June 30-July 31 31 30
July 31-August 31 31 30
August 31-September 30 30 30
September 30- October 31 31 30
October 31-November 26 26 26
315 days 310 days
I = (p1,200.00)(0.24)
= 247.87
I= (1,200.00)(.24)(310/360)
ordinary interest
=248.00
 MATHEMATICS IN THE MODERN WORLD

Computing the Maturity Value

Maturity value or final amount is the sum of the interest accumulated
over the period of time and the principal. Computed using the formula:
F=P+I
F = P(1 +r t )
Where F is the final amount
P is the principal
r is the rate
t is the time
I is the interest
Example 1. Find the maturity value of a loan
of a P28,000.00 made for two years at 8.15%
simple interest.

Solution:
Given: t = 2 years F = P(1 +rt)

r = 8.15%
=28,000.00[1+(0.0815)(2years/year)]
=P32,564.00
I=Prt
=(28,000.00)(0.0815)(2)
= P4,564.00
F = 28,000.00 + 4,564.00
F =32,564.00
Example 2. A sum of P43,720.00 is borrowed for 14
months at 7 % simple interest. Determine the
maturity value of the loan. 7 % = 7.2% ; 7 %
=7.25%
Solution:
Given: t =14 months
P = P43,720.00
r= 7 %
F = P43,720.00(1+ (.072)
= P47, 392.48
Computing the Principal Amount
Computed using the formula:
P= I= Prt
Example 1. A online seller borrows a certain amount of
money at 8% simple interest for three months. Determine
the principal that results in interest amounting to P500.00.
Given: r = 8%
t =3 months
I = P500.00
P=
= P25,000.00
Example 2. Miss Sheila was charged P1,900.00 on a
loan for 144 days at 9 % simple interest. Determine
the original amount of the loan.
Given: r=9%
t = 144 days
I =P1,900.00
P=
= P50,000.00
Computing the Simple Interest Rate
Computing using the formula: r x100%
Example1. A loan of P17,500.00 was charged P1,500.00 for
2.5 years. What simple interest rate was applied on the
loan?
Given: t = 2.5 years
P = P17,500.00
I = 1,500.00
Solve for r: r x 100%
= 3.43%
Example 2. If P60,000.00 was deposited in a bank and
became P61,625.00 at the end of 150 days, find the
interest rate.
P = 60,000.00
F = 61,625.00
t = 150 days
r
= = 0.065 x 100%
= 6.50%
Computing the Time
Computed using the formula:
Example 1. The interest earned on an P8,000.00 deposit is
P1,250.00. How long was the term if interest is 5% simple interest.
Given: P = P8,000.00
I = P1,250.00
r= 5%
t=
= 3.125 years
= 3 years, 1 month and 15 days
Example 2.
How many days will it take for an investment of
P36,000.00 to grow to P45,750.00 if it earning 7.5%
simple interest?
Solve for t.
t=
= 3.61 years x
= 1,299.6days
=1,300 days
Compound Interest
Compound interest (or compounding interest) is the
interest on a loan or deposit calculated based on both the
initial principal and the accumulated interest from previous
periods. Thought to have originated in 17th century Italy,
compound interest can be thought of as "interest on
interest," and will make a sum grow at a faster rate than
simple interest, which is calculated only on the principal
amount.
Compound interest formula
C=P
Example 1. Ms. Cathy invested
P15,000.00 in a coop share account at
9.5% interest, compounded annually, for
5 years. Compute for the compound
amount the compound interest.

C=P
C = 15,000.00
= P23,613.58
Compound Amount at Varying Rate
Example: Mr. Alvin invested P25,000.00 for 15 years . The
terms as follows: in the first 5 years , the interest rate is
10% compounded quarterly; then it will be 12%
compounded semi-annually for the next seven years; and
14% compounded annually for the remaining years.
Determine the compound amount at the end of 15 years.
First 5 years
i= ; n = (5)(4)=20
C = 25,000.00 10%=0.10/4= .025
= P40,965.41
7 years
i = = 6% = 0.06 ; n = (7)(2)=14
C=
= P92,618.86
3 years
i = = 0.14 ; n = (3)(1)=3
C =P92,618.86
= 137,218.92
Present Value of a Compound Amount
Computed using the formula: P =
Where: P-principal or present value
C- compound amount or future value
i- periodic interest rate
Compounded: quarterly i/4
monthly i/12
semi-annually i/2
annually i/1
n- total number of compounding periods
Example1.
Romeo plans to raise 350,000.00 in 3 years. Discount the
amount at 12% compounded quarterly. Find the present
value.
Given:
C= 350,000.00
t=3 years
r =12% 12%/4=3%
Solve for P.
P=
= 245,482.96
Example 2.
Find the present worth value of 95,000.00 at 8%
compounded quarterly for 6 years and 5 months. 6 years
and 5 months.
Given: r=8%/4=2% : 2% = .02
C= 95,000.00
t = 6 years and 5 months = 6 = 77/12
n= X4=25= no. of period
Solve for P.
P=
= 57,146.00
Finding the Interest Rate
In finding compound amount, there are two interest rates to be
considered:
1. Nominal interest rate (j)
2. Periodic interest rate (i)
Periodic rate(i) =
nominal rate = periodic rate x term period
From the formula in finding the compound amount.
C=
The formula in finding the periodic interest rate is expressed as
Example. At what periodic rate, compounded quarterly,
will 17,500 become 32,250 at the end of 12 years?
Given:
P = 17,500.00
C = 32,250.00
n = 12(4)=48
Solve for i.
i = x (100%)
= 1.28%
 AMORTIZATION
Amortization Method - method of paying a loan (principal and
interest) on installment basis, usually of equal amounts at
regular intervals.
Mortgage - a loan, secured by a collateral, that the borrower is
obliged to pay at specified terms.
Chattel Mortgage - a mortgage on a movable property
Collateral - assets used to secure the loan. It may be a real-
estate or other investments
Outstanding Balance - any remaining debt at a specified time.
(b) Discuss the basics of a mortgage loan to the students.
A mortgage is a business loan or a consumer loan that is
secured with a collateral.
Outstanding Balance
R= Regular Payment
1. Mr. Abaya got a P700,000 loan for the expansion of his
business payable monthly in 4 years. How much is the
monthly amortization if the interest rate is 12%
compounded monthly?
j=12%/12
n=4x12=48
in calculator

R=
=
=18, 433.68
2. A consumer loan of P300,000 is to be repaid quarterly
for 5 years. If the interest rate is 10% converted
quarterly, How much is the quarterly payment?
j=0.10/4 =0.025
n= 5x4 =20
R=
=
=19,244.14
3. A business loan of P650,000 is to be settled by paying
P29,994.20 monthly in 2 years. If the interest rate is 10%
converted monthly, how much is the outstanding balance
after 6 payments?
n=2 x 12 =24-6=18
j=0.10/12=8.333333x

=29,994.20
=499,428.21
4. Ms. Sena got a P500,000 loan to be repaid quarterly in 5
years. The interest rate applied is 10% convertible
quarterly. The quarterly payment is solved as P32,073.56.
How much is the outstanding balance after 2 years ?
n4x5=20 – 8=12
j = .10/4=0.025

=329,003.03
5. A business loan of P45,000 is given to Ms. Alfonso. The
monthly payment for the loan amounts to P11,485.35 for 4
months. The interest rate used is 10% convertible monthly.
How much is the outstanding balance after the first
payment? ‘

=
=33,889.65
6. Mrs. Lachica applied for a P100,000 loan. She plans to
pay for this loan annually at 8% per annum for 5 years.
The annual payment is computed as P25,045.65.
a. How much is the outstanding balance after the fourth
payment?

= 23,190.42
b How much of the 5th payment goes to pay the interest
and principal?
b. = j=(0.08)(23,190,42)
=1,855.23
P = R=25,045.651,855.23
= 23,190.42
Example. A debt of 5,000.00 with interest at 12% compounded semi-annually is to
be amortized by equal semiannual payments over the next 3 years, the first due in 6
months. Find the semiannual payment and construct an amortization schedule.
Solution:
A= P
A- periodic payment amount
P- amount principal, net of initial payments
I periodic interest rate
n – total number of payments
 Amortization Schedule
Period Outstanding Principal at Interest due at payment Principal repaid at end of
beginning of period end of period period
1 5,000.00 300.00 1,016.82 716.82
2 4,283.18 256.99 1,016.82 759.83
3 3,523.35 211.40 1,016.82 805.42
4 2,717.93 163.08 1,016.82 853.74
5 1,864.19 111.85 1,016.82 904.97
6 959.22 57.55 1,016.82 959.27
TOTALS 1,100.87 6,100.92 5,000.05