Interest Rate

CENTRAL BANKING
CASH BASIS OR
P AY I N G A D O W N
P AY M E N T F I R S T ?
DOWNPAYMENT
is the first payment that one makes
when buying something with an
agreement to pay the rest later.
NAME SOME
THINGS YOU BUY
THAT CAN BE
PAID INITIALLY
THROUGH DOWN
PAYMENT?
MORTGAGE
a loan in which real property is used to
secure the debt.

*EQUITY: the difference between the

expected selling price and the balance
owed on property.
PAYMENT OF MORTGAGE
(FINANCING METHODS)

IN-HOUSE BANK HDMF /

FINANCING FINANCING PAG-IBIG
AMORTIZATION
the process for repaying a loan
through equal payments at a
specified rate for a specific
length of time.
INTEREST

SIMPLE
INTEREST

COMPOUND
INTEREST
SIMPLE INTEREST

applies when a loan

or investment is
repaid in a lump sum.
1. On certificates of deposit for
periods of one year or less
2. On car loans
3. Other loans (consumer loans)
4. Discounts on early payments
COMPOUND INTEREST

Compounding typically refers

to the increasing value of an
asset due to the interest
earned on both a principal
and accumulated interest.
1. Bank accounts earn compound
interest
2. Some bonds earn compound interest
3. Credit cards
4. Compound interest on pension
In reality, taking advantage of compound interest could mean
retiring earlier or with a better retirement income.
Definition of Terms
1. Conversion or compounding period
• the time interval between the points when interest is
added to the principal
2. Frequency of conversion (m)
• number of conversion periods in one year
3. Nominal rate (r)
• annual interest rate
4. Periodic rate (i)
• rate of interest for each conversion period;
 Maturity Value and Compound Interest
𝒏 𝒓 𝒎𝒕
𝑭 = 𝑷 𝟏+𝒊 𝑜𝑟 𝑭 = 𝑷 𝟏+
𝒎
where
n – total no. of conversion periods;
F – maturity value
n = mt
P – principal or present value
m – frequency of conversion in one
i – periodic rate; i = r/m
year
r – annual interest rate Conversion Period m
(nominal rate) Annually 1
Semi-annually 2
t – term (years)
Quarterly 4
Monthly 12
 Examples
1. Find the compound amount on deposit at the end of
2 years if P20,000 is deposited at 4% compounded
a) annually
b) semi-annually.
Given: P = 20,000 𝑟 𝑚𝑡
Solution: 𝐹 = 𝑃 1+
r = 0.04 𝑚
0.04 1(2)
t=2 a) 𝐹 = 20,000 1+
1
= 𝑷𝟐𝟏, 𝟔𝟑𝟐
m = 1, 2 0.04 2(2)
Required: b) 𝐹 = 20,000 1+
2
= 𝑷𝟐𝟏, 𝟔𝟒𝟖. 𝟔𝟒
F
2. Find the maturity value
and interest if P10,000 is
deposited in a bank at 2%
compounded quarterly for
5 years?
2. Find the maturity value and interest if P10,000 is deposited
in a bank at 2% compounded quarterly for 5 years?
𝑟 𝑚𝑡
Given: P = 10,000 Solution: 𝐹 = 𝑃 1 +
𝑚
r = 0.02 0.02
4(5)
t=5 F = 10,000 1 +
4
m=4 F = 𝑷𝟏𝟏, 𝟎𝟒𝟖. 𝟗𝟔

Required: Ic = F – P = 11,048.96 – 10,000

F, Ic Ic = 1,048.96
3. Cris borrows P50,000 and
promises to pay the principal
and interest at 12%
compounded monthly. How
much must he repay after
6 years?
3. Cris borrows P50,000 and promises to pay the principal and
interest at 12% compounded monthly. How much must he repay
after 6 years?

𝑟 𝑚𝑡
Given: P = 50,000 Solution: 𝐹 = 𝑃 1 +
𝑚
r = 0.12 0. 12
12(6)

t=6 F = 50,000 1 +
12
m = 12
F = 𝑷𝟏𝟎𝟐, 𝟑𝟓𝟒. 𝟗𝟕
Required:
F
How much is Cris’
MONTHLY
AMORTIZATION?
Total amount to be PAID = 𝑷𝟏𝟎𝟐, 𝟑𝟓𝟒. 𝟗𝟕
TOTAL MONTHS TO PAY = 6 YEARS (12 MONTHS) = 72 MONTHS

𝑷𝟏𝟎𝟐, 𝟑𝟓𝟒. 𝟗𝟕 / 72

= 𝑷𝟏, 𝟒𝟐𝟏. 𝟔𝟎 / month

INDIVIDUAL
EXERCISES
1.
a) A P2,300,000 property is sold to Mr.
Andrion. He made a down payment of
P500,000 and he plans to amortize the
remaining balance. How much will be the
mortgage?

b) In item (a), if Mr. Andrion will pay for

the amortization of his mortgage on a
monthly basis for 7 years, what is the
total number of payments that he has to
make?
c) Consider item (a) and (b) again. If
the bank offers him 3% interest rate,
compounded annually, what will be
the periodic interest rate?

d)Considering the given information in

items (a),(b) and (c), how much will be
Mr. Andrions’s monthly amortization?
2. Engr. Wood sold his P3,000,000
property to Atty. Carolino. Atty.
Carolino gave Engr. Wood a
downpayment of P1,000,000 and
loaned the remaining balance from
a bank. If Atty. Carolino will pay the
bank monthly for 10 years at an
interest rate of 11%, compounded
annually, how much will be the
monthly amortization?
3.Suppose you are planning to avail of a housing
loan. You are considering the options given
below:

Option A: The mortgage will be paid on a

monthly basis for 15 years at an interest rate of
6%, compounded monthly.

Option B. The mortgage will be paid on a

monthly basis for 20 years at an interest rate of
4%, compounded monthly.
If you plan to borrow P2,000,000, how much will
be the monthly amortization and the total
interest in each option?
4. JDN Bank loaned Josh
P100,000 for four years
compounded quarterly at
8%. How much interest
was Josh required to pay
on his semi-annually
amortization?
Write TRUE if the statement is correct;
otherwise, write FALSE.

1.If the payment for a loan is due monthly

for 10 years, then the total number of
payments is 120.
2. If the payment for a loan is due
monthly and the interest rate is 6%,
compounded monthly, then the interest
rate per period is 6%.
3. The mortgage is equal to the value of a
property minus the down payment.