The Mathematics

of Finance
1.Simple Interest
 Introduction
When you deposit money in a bank
—for example, in a savings account
—you are permitting the bank to use
your money.
The bank may lend the deposited
money to customers to buy cars or make
renovations on their homes.
The bank pays you for the privilege of
using your money.
 Introduction

The amount paid to you is called

interest.
If you are the one borrowing money
from a bank,
the amount you pay for the privilege
of using that money is also called
interest.
Simple Interest
In the simple interest formula,
the time t is expressed in the same period
as the rate.
For example,
if the rate is given as an annual interest
rate, then the time is measured in years;
if the rate is given as a monthly interest
rate, then the time must be expressed in
months.
1. Simple Interest

Formula: I = Prt
Definitions:
 Interest (I) – is a fee paid for the use
of one’s money.
 - is it also known as the amount
earned in saving an amount in a bank.
1. Simple Interest
Principal (P) – the original amount
loaned or borrowed or deposited.
Final Amount or simply Amount (F) –
the sum of the principal and the interest
due at the end of the transaction period.
It is sometimes called as the maturity
value.
• Rate of interest (r) – expressed in
percent or decimal.
1. Simple Interest
Time (t) is always expressed in years.
If the time is given in months or days, it
can be converted in year using the
formula number of months
t
12
number of days
t
360
(unless specified, 360 days is used in all
simple interest applications)
1. Simple Interest

Note: If the interest is due at the end of

the time period, then the interest
payment is called simple interest.
EXAMPLES:
1. If ₧20,000 was borrowed at 8%
simple interest, how much will the
interest be for 2 years?
years
Solution:
Given: P = ₧20,000; r= 8% = 0.08; t = 2; I = ?
I = Prt = (20,000)(0.08)(2)
I = (20,000)(0.16)
I = ₧3,200
EXAMPLES:
2. If ₧300 is the interest at 9% after
4 months,
months how much was
borrowed?
Solution:
Given: I = ₧300; r= 9% = 0.09; t = 4mos=4/12; P= ?
I  300 
300
P  
rt 0.09 4 0.03
 12 
P = ₧10,000
EXAMPLES:
3.Find the maturity value on ₧8,000 at 10%
simple interest for 1year and 6 months.
months
Solution:
6
Given: P = ₧8,000; r= 10% = 0.1; t =1 12 =1.5 ; F = ?
I = Prt = (8,000)(0.1)(1.5)
I = ₧1,200
F = P+I = 8000 + 1200
F = ₧9,200
Derived Formula:

I = Prt
F=P+I
F = P + Prt, replaced I
F = P (1+ rt)
rt), factor out P
F
P
1  rt
EXAMPLES:
3.Find the maturity value on ₧8,000 at 10%
simple interest for 1year and 6 months.
months
Solution:
6
Given: P = ₧8,000; r= 10% = 0.1; t =1 12 =1.5 ; F = ?
F = P(1+rt)
= 8000[1+(0.1)(1.5)]
F = ₧9,200
EXAMPLES:
=

4. What principal will amount to

₧25,000 in 60 days if the interest rate
is 6 1/4%
1/4%?
Solution:
Given:
P = ? F = ₧25,000; t = 60days=60/360;
r= 6 1/4% = 6.25% =0.0625
F  25000
P
1  rt 1  .0625 60 
 360 
P = ₧24,742.26804
P = ₧24,742.27
EXAMPLES:
5. If ₧7,500 is the interest for investing
₧100,000, find the rate of interest in
one year and 8months.
Solution:
Given: I = ₧7500; P=100,000; t=1 8/12 r=?
I 7500
r r
Pt  8
100,0001 
r = 0.045 = 4.5%  12 
EXAMPLES:
6. How many months will it take for
₧15,000 to earn ₧1,050 if it is invested at
7.5% simple interest?
Solution:
Given: t = ? P = 15,000; I = 1050; r= 7.5% = 0.075
I 1050
t 
Pr 15,000(.075) 1yr = 12mos
t = 14/15 year 1mo = 30days
t = 0.93333 yr x 12 = 11.2 months
11months + .2 month .2 x 30 = 6 days = 11mos 6 days
2. The Time Between
Dates
 1.2 Time Between Dates
We have just discussed that in the
computation of simple interest, whether
it is on deposits or on loans, the time
must always be expressed in years.
But there are some cases wherein time
has to be determined.
Thus, we need a way to find time,
especially if the time to be computed is
between two given dates.
 1.2 Time Between Dates
Actual/ Exact Time is obtained by
counting each day of every month of
the term excluding the origin date.

Approximate Time is obtained by

assuming that every month has 30
days.
 1.2 Time Between Dates
Illustrations:
Find the actual time and approximate
time between between
1. April 18, 2018 and October 5, 2018.
2. October 28, 2017 and February 12,
2018.
 Find the actual time and approximate time
1. Between April 18, 2018 and October 5, 2018.
Solution:

a) Actual/ Exact Time(te) b) Approximate Time (ta)

April (30-18) – 12 Year Month Day
May – 31 Last date 2018 10 9 05 35
June – 30 First date 2018 04 18
July – 31 0 5 17
5mo x 30 = 150
August – 31 150 + 17 = 167 days
September – 30 ta = 167 days
October – 5 Start the subtraction from the left (day) to the year (right).
5 cannot subtract 18
te = 170 days Borrow 1month from 10, covert it to days.
1month is approximately 30days, 30 + 5 = 35.
Alternative solution to find approximate time ta
1. Between April 18, 2018 and October 5, 2018.
Solution:

a) Actual/ Exact Time b) Approximate Time ta

April (30-18) – 12 Year Month Day
May – 31 -1 2018 10 05
June – 30 2018 04 18
July – 31 -1 0 5 17
5 x 30 = 150 + 17
August – 31 -1
ta = 167 days
September – 30
October – 5 Alternative solution to find approximate
time is that we subtract 1 day to each month
te = 170 days with 31 days.

ta = 170–3= 167days
 NUMBER OF EACH DAY OF THE YEAR
Day Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sept. Oct. Nov. Dec.
1 1 32 60 91 121 152 182 213 244 274 305 335
2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8 8 39 67 98 128 159 189 220 251 281 312 342
9 9 40 68 99 129 160 190 221 252 282 313 343
10 10 41 69 100 130 161 191 222 253 283 314 344
11 11 42 70 101 131 162 192 223 254 284 315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14 14 45 73 104 134 165 195 226 257 287 318 348
15 15 46 74 105 135 166 196 227 258 288 319 349
16 16 47 75 106 136 167 197 228 259 289 320 350
17 17 48 76 107 137 168 198 229 260 290 321 351
18 18 49 77 108 138 169 199 230 261 291 322 352
19 19 50 78 109 139 170 200 231 262 292 323 353
20 20 51 79 110 140 171 201 232 263 293 324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 238 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
 Alternative solution to find exact time te
1. Between April 18, 2018 and October 5, 2018. 2018
Solution: 108 278
a) Actual/ Exact Time(te) Alternative solution to find exact time is using
the table of the number of days. (Given the
slide above)
April (30-18) – 12
May – 31 278
June – 30 - 108
July – 31 te=170 days
August – 31
September – 30
October – 5
te = 170 days
 Alternative solution to find exact time te
2. Between October 28, 2017 and February 12, 2018 2018.
Solution: 301 43
Alternative solution to find exact time is using
a) Actual/ Exact Time(te) the table of the number of days. (Given the
slide above)
Oct. (31-28) – 3
Nov – 30
Dec. – 31
Jan – 31
365
Feb. – 12 - 301
te = 107 days 2017: = 64
2018: + 43
te = 107days
 1.2.1 Exact and Ordinary Interest

Exact Interest means using 365 as denominator

Ie = P r (number of days )
365

Ordinary Interest means using 360 as denominator

Io = P r (number of days )
360
 1.2.1 Exact and Ordinary Interest

• Four different times are possible in

counting the number of days
between two dates. If we express
the number of days as a fraction of a
year, we either use the 360 or 365
(366 if leap year) as our
denominator.
 1.2.1 Exact and Ordinary Interest
• Let’s look at the following:
Exact Interest exact / actual time
1.
365
approximate time
2.
365
exact / actual time
Ordinary Interest 3.
360
approximate time
4.
360
 Exact and Ordinary Interest
1. Exact Interest and Actual Time
actual number of days
Ie = Pr( )
365

2. Exact Interest and Approximate Time

approximate number of days
Ie = Pr( 365 )

3. Ordinary Interest and Actual Time

Io = Pr(actual number of days )
360
4. Ordinary Interest and Approximate Time
Io = Pr(approximate number of days )
360
 Exact and Ordinary Interest

Illustration: when
P= ₧1000, r = 10%, te =170days ta=167days,
find Ie and Io.
 Solution:
when P = ₧1000, r = 10%, te = 170days ta=167days, find Ie and Io.

1. Exact Interest and Actual Time

170
Ie =Pr(actual number of days) =1000(.1)( 365 ) = ₧46.58
365
2. Exact Interest and Approximate Time
approximate number of days 167
Ie = Pr( 365
) = 1000(.1)(365 ) =₧45.75
3. Ordinary Interest and Actual Time
actual number of days 170
Io = Pr( 360 ) = 1000(.1)( 360 ) =₧47.22
4. Ordinary Interest and Approximate Time
approximate number of days 167
Io = Pr( 360 ) = 1000(.1)( 360 ) =₧46.38
 Conclusion:
1. Exact Interest and Actual Time
Among the 4 computations, the ordinary
170
Ie = 1000(.1)( 365 ) = ₧46.58 interest using actual time gives the highest
interest.

2. Exact Interest and Approximate Time

167 This is called the BANKER’S RULE.
Ie = 1000(.1)( 365 ) =₧45.75
3. Ordinary Interest and Actual Time
170
Io = 1000(.1)( 360 ) ₧47.22
=₧47.22 Banker’s Rule
4. Ordinary Interest and Approximate Time
Io = 1000(.1)(167 ) =₧46.38
360