November 3, 2020

o Accounting

o Inventory management

o Marketing

o Sales projection

o Market analysis
o Interest

o Stocks

o Bonds

o Loans
o Interest rates set the pace for the market investments

Interest rates and investment are inverse proportion.

The higher the interest rates, the lower the value of investment.

To know how interest rates, together with other economic forces affect

investments, and consequently, the economy, start with the basics- interest and

annuity.
o I can illustrate simple and compound interest.

o I can distinguish between simple and compound interests.

o I can compute for the interest, maturity value, future value, and present value in

simple interest and compound interest environment.

o I can solve problems involving simple and compound interests.

o Interest is the amount paid for the use of another amount of money, called the

principal amount or simply principal.

o Financial institution like banks and pawnshops pay interest to their clients for using

the money they deposited in their savings account for other investment
opportunities.
o On the other hand, borrowers are charged by this institutions with higher interest for

the use of money loaned to them.

o Interest is the primary source of income of banks.
o Interest is expressed in terms of percent and is stated as rate of the principal

involved per annum.

o The description of interest suggest that three elements play important role in the

computation of interest:
𝑖. Principal is the base in which interest is computed. If an amount is loaned or
borrowed, this amount is referred to as principal.
𝑖𝑖. Term is the unit of time for which the principal is loaned or the length of time
the principal is borrowed.
𝑖𝑖𝑖. Interest rate is the multiplier expressed as percent of the principal to be paid
each term.
o The maturity value, or simply the amount, is the sum of the principal and the interest

that accumulates over the agreed term. This agreed term is usually expressed in

years or a fraction of a year (quarterly, semiannually, or monthly).

o Conventionally, an agreed term in a business transaction expressed in days, weeks,

or months is converted to the equivalent fraction of a year. If the term is not stated in

a given situation, 𝑡 is understood as percent per annum.

o Interest may be calculated as simple or compound interest.

o If the simple interest for a principal in 4 months is ₱100, the simple interest from the

same principal in 8 months is ₱200.

o If the simple interest for a principal at 3% is ₱500, the simple interest for the same

principal at 6% is ₱1,000.

o If the simple interest on the principal amounting ₱100,000 is ₱500 over a contract

term, the simple interest on the principal amounting to ₱500,000 is ₱2,500 over the

same contract term.

 An amount of ₱150,000 is invested for 9 months at 4%. Find the:
a. interest b. maturity value
Solution
a. Given: principal 𝑃 = ₱150,000 b. The maturity value or the amount 𝐴 is the

Rate 𝑟 = 4% or 0.04 sum of the principal and the interest.

Hence,
Term 𝑡 = 9 months or
9
= 0.75
12 𝐴=𝑃+𝐼
The interest is 𝐴 = ₱150,000+₱4,500
𝐴 = ₱154,500
𝐼 = 𝑃𝑟𝑡

𝐼 = (₱150,000)(0.04)(0.75)

𝐼 = ₱4,500
 A dollar investment of $1,200 is transacted for 5 months at 6%. Find the:
a. interest b. maturity value
Solution
a. Given: principal 𝑃 = $1,200 b. The maturity value or the amount 𝐴 is the

Rate 𝑟 = 6% or 0.06 sum of the principal and the interest.

Hence,
Term 𝑡 = 5 months or
5
12
𝐴=𝑃+𝐼
The interest is 𝐴 = $1,200+$30
𝐴 = $1,230
𝐼 = 𝑃𝑟𝑡
5
= ($1,200)(0.06)
12
𝐼 = $30
 An amount of ₱1,000,000 is invested in a financial
institution.
a. How long will it take for the amount to reach ₱1,001,000 at 2% simple interest?

b. At what interest rate will it earn ₱1,000 in 10 months?

Solution
a. Given: The value of the term 𝑡 can be derived from 𝐼 = 𝑃𝑟𝑡.
principal 𝑃 = ₱1,000,000 𝐼
𝐼 = 𝑃𝑟𝑡 𝑡=
rate 𝑟 = 2% = 0.02 𝑃𝑟
𝑃𝑟
term 𝑡 = 18 days 1,000
𝑡= = 0.05
maturity value 𝐴 = ₱1,001,000 (1,000,000)(0.02)
interest 𝐼 =𝐴−𝑃
Since there are 12 months in a year, it will take
𝐼 = ₱1,001,000 − ₱1,000,000 = ₱1,000 12 0.05 = 0.6 months, or approximately
(0.6)(30 𝑑𝑎𝑦𝑠) = 𝟏𝟖 days for ₱1,000,000 to amount to
₱1,001,000 at 2% simple interest.
 An amount of ₱1,000,000 is invested in a financial
institution.
a. How long will it take for the amount to reach ₱1,001,000 at 2% simple interest?
b. At what interest rate will it earn ₱1,000 in 10 months?

Solution
b. Given: The value of the term 𝑡 can be derived from 𝐼 = 𝑃𝑟𝑡.

principal 𝑃 = ₱1,000,000 𝐼
𝐼 = 𝑃𝑟𝑡 𝑟=
𝑃𝑡
rate 𝑟 = 0.12% = 0.0012 𝑃𝑡
10 5 1,000
term 𝑡 = 10= = 𝑟=
5
12 6 (1,000,000) 6
maturity value 𝐴 = ₱1,001,000
𝑟 = 0.0012
interest 𝐼 = 1,000
𝑟 = 0.12%
o The time or term for which a certain amount is lent or borrowed is important in any

financial transaction. The process of computing the term, if only inclusive dates of

transaction are indicated, depends on the agreement between parties involved.

There are two ways by which term is determined:

𝑖. Ordinary time is based on 30-day month computation. This means that a 6-month
transaction covers 6 30 𝑑𝑎𝑦𝑠 = 180 days.

𝑖𝑖. Exact time is based on the exact number of inclusive dates of transaction. For
instance, a loan entered on December 24, 2014 and matured on April 11, 2015
has

7 days- from December 25, 2014 to December 31, 2014

31 days- from January 1, 2015 to January 31, 2015

28 days- from February 1, 2015 to February 28, 2015

31 days- from March 1, 2015 to March 31, 2015

11 days- from April 1, 2015 to April 11, 2015

108 days total

o The choice of whether to adopt ordinary (or approximate) time or exact time in

financial transactions affects the computation of interest.

o The divisor to be used in computing terms in days contingent on the agreement of

parties involved. The term in days has 2 divisors: a divisor of 365 (the actual

number/days in a year), and 360 (the usual practice in business since this number

offers many factors).

o The divisor for the term, result in two ways of computing simple interest.

o The most commonly used method is the Banker’s Rule. The other method is seldom
used. If the method to be used is not specified, the Banker’s Method applies.
 Find the exact interest and the ordinary interest given the
following values: ₱5,000 for 120 days at 5%.

Solution
a. The exact interest is: The value of the term 𝑡 can be derived from 𝐼 = 𝑃𝑟𝑡.

principal 𝑃 = ₱5,000 𝐼 = 𝑃𝑟𝑡

rate 𝑟 = 0.05 𝐼 = (5,000)(0.05) 0.32876712

120
term 𝑡 = = 0.32876712 𝐼 = (250) 0.32876712
365
Interest 𝐼 = ₱82.19
𝐼 = ₱82.19
maturity value

𝐴 = ₱5,082.19
 Find the exact interest and the ordinary interest given the
following values: ₱5,000 for 120 days at 5%.

Solution
b. The ordinary interest is: The value of the term 𝑡 can be derived from 𝐼 = 𝑃𝑟𝑡.

principal 𝑃 = ₱5,000 𝐼 = 𝑃𝑟𝑡

rate 𝑟 = 0.05 𝐼 = (5,000)(0.05) 0.33333333

120
term 𝑡 = = 0.33333333
360 𝐼 = (250) 0.33333333

Interest 𝐼 = ₱83.33
𝐼 = ₱83.33
maturity value
𝐴 = ₱5,083.33
 Mr. Seniro issued a promissory note on May 8, 2015 to BPI
amounting to ₱100,000 with interest at 6%. The due date is
October 8, 2015. Determine the maturity value to be paid.
Solution
A promissory note is a legal written statement issued by a person who owes a certain amount from
another person or company. The person who borrowed is bound to pay a certain amount on a specific date.
Since no method is specified, use the Banker’s Rule.

principal 𝑃 = ₱100,000 𝐼 = 𝑃𝑟𝑡

23 days- May 9-31 𝐼 = (100,000)(0.06) 0.425

rate 𝑟 = 0.06
30 days- June
153 31 days- July
𝐼 = (100,000) 0.0255
term 𝑡 = 360 = 0.425
31 days- August
𝐼 = ₱2,550
30 days- September
Interest 𝐼 = ₱2550
8 days- October 1-8
𝐴=𝑃+𝐼
maturity value 𝐴 = ₱102,550 153 days 𝐴 = ₱100,000 + ₱2,550
𝐴 = ₱102,550
 Mr. Seniro issued a promissory note on May 8, 2015 to BPI
amounting to ₱100,000 with exact interest at 6%. The due
date is October 8, 2015. Determine the maturity value to be
Solution paid.
A promissory note is a legal written statement issued by a person who owes a certain amount from
another person or company. The person who borrowed is bound to pay a certain amount on a specific date.

principal 𝑃 = ₱100,000
𝐼 = 𝑃𝑟𝑡
rate 𝑟 = 0.06
23 days- May 9-31 𝐼 = (100,000)(0.06) 0.41917808
153 30 days- June
term 𝑡 = = 0.41917808 𝐼 = (100,000) 0.02515068
365 31 days- July
31 days- August
Interest = ₱2,515.07 𝐼 = ₱2,515.07
30 days- September
8 days- October 1-8
maturity value = ₱102,515.07 𝐴=𝑃+𝐼
153 days
𝐴 = ₱100,000 + ₱2,515.07
𝐴 = ₱102,515.07
 Find the ordinary interest where the amount of principal
is ₱543,000 at 6% for 60 days.

Solution
b. The ordinary interest is: The value of the term 𝑡 can be derived from 𝐼 = 𝑃𝑟𝑡.

principal 𝑃 = ₱543,000 𝐼 = 𝑃𝑟𝑡

rate 𝑟 = 0.06 𝐼 = (543,000)(0.06) 0.16666667

60
term 𝑡= = 0.16666667
360 𝐼 = (32,580) 0.16666667

Interest 𝐼 = ₱5430
𝐼 = ₱5430
maturity value 𝐴 = ₱548,430
“Do your best to present yourself to God as one

approved, a worker who has no need to be

ashamed, rightly handling the word of truth.”