THE

MATHEMATICS
OF
FINANCE
Annuities, Credit Cards, and
Consumer Loans

Instructor: Ms. Patricia Rose B. Baguinon

 LEARNING OUTCOMES
1. Identify the different types of annuities.
2. Solve problems involving credit cards and consumer loans.
3. Use mathematical concepts and tools in finance.
4. Support the use of mathematics of finance in various aspects and
endeavors in life.
 TOPICS COVERED
1. Annuities
2. Credit cards
3. Consumer Loans
 ANNUITY
An annuity is a savings investment for which
an individual or business makes the same
payment each period (i.e., annually,
semiannually, quarterly) into a compound-
interest account where the interest does not
change during the term of the investment.
Annuities are set up by individuals to pay for
college expenses, vacations, or retirement.
These are set up by businesses to pay future
expenses such as purchasing new
equipment,
 ANNUITY
DEFINITION:

It is an annuity in which payments

1 Annuity Certain begin and end at definite times.
ANNUITY
ACCORDING It is an arrangement in which annuity
2 Contingent Annuity
TO starts until a specified event occurs.
DURATION
3 Perpetuity It is an annuity that has no end.
 ANNUITY
EXAMPLE:

Monthly savings of Php 1,000.00 for

1 Annuity Certain one year starting January 2023.
ANNUITY
ACCORDING Pension to be received by a widow
2 Contingent Annuity
TO after the death of her husband.
DURATION
3 Lease rentals (provided that the
Perpetuity property continues to exist and
assuming there is someone who
continuously rent.
 ANNUITY
DEFINITION:

It is an annuity where the payment

ANNUITY 1 Simple interval coincides with the
ACCORDING conversion period.
TO PAYMENT
INTERVAL AND It is an annuity where the payment
INTEREST 2 General interval does not coincide with the
CONVERSION conversion period.
 ANNUITY
EXAMPLE:

ANNUITY Loan payable every month with

1 Simple interest that is compounded
ACCORDING
monthly.
TO PAYMENT
INTERVAL AND
Loan payable every month with
INTEREST 2 General interest that is compounded
CONVERSION quarterly.
 ANNUITY
DEFINITION:

Ordinary It is an annuity in which payments

1 are made at the end of each
ANNUITY Annuity payment interval.
ACCORDING It is an annuity in which payments
2 Annuity Due
TO TIME OF are made at the beginning of each
payment interval.
PAYMENT
3 Deferred It is an annuity in which payments
Annuity are made at a later date.
 ANNUITY
EXAMPLE:

Ordinary Dividend payments at the end of

1
ANNUITY Annuity each quarter.

ACCORDING House rentals due every first day of

2 Annuity Due
TO TIME OF the month.
PAYMENT
3 Deferred A buy now pay later scheme in an
Annuity appliance store.
 ANNUITY
Examples:
Classify the annuities used in the following statements.

1. Ara purchased a dining set with a down payment of Php 2,000.00 and she has to
pay Php 500.00 every first day of the month for three years. What is the total
cash value of the dining set if the interest rate is 5% compounded quarterly?

Answer:
ANNUITY CERTAIN GENERAL ANNUITY ANNUITY DUE
 ANNUITY
Examples:
Classify the annuities used in the following statements.

2. Bea wanted to avail a lifetime insurance. She has to pay Php 2,000.00 monthly
starting at the end of the month. How much is the cash value of the insurance
if it is compounded monthly at 8% interest rate?

Answer:

PERPETUITY ANNUITY SIMPLE ANNUITY ORDINARY ANNUITY

 ANNUITY
Examples:
Classify the annuities used in the following statements.

3. A credit card company offers a buy now, pay later scheme. Clara plans to buy
a washing machine with monthly payments of Php 1,500.00 for 3 years. The
payment will start at the end of the 3 rd month. How much is the cash price of
the washing machine if the interest rate is 10% compounded monthly?

Answer:

ANNUITY CERTAIN SIMPLE ANNUITY DEFERRED ANNUITY

 ANNUITY
Examples:
Classify the annuities used in the following statements.

4. Mrs. Davis, a retired government personnel, just started to claim her pension
every end of the month amounting to Php 20,000.00. How much is her total
claim if the money was compounded monthly at 2% interest rate?

Answer:

CONTINGENT ANNUITY SIMPLE ANNUITY ORDINARY ANNUITY

 ANNUITY
Examples:
Classify the annuities used in the following statements.

5. In order to save for his graduation, Eric decided to save Php 200.00 at the end
of each month. If the bank pays 3.25% compounded monthly, how much will his
money be at the end of one year?

Answer:

ANNUITY CERTAIN SIMPLE ANNUITY ORDINARY ANNUITY

 CREDIT CARDS
When a customer uses a credit card to make a purchase, the customer is actually
receiving a loan. Therefore, there is frequently an added cost to the consumer who
purchase on credit. This added cost may be in the form of an annual fee or interest
charges on purchases.
Suppose a credit card billing date is the 10th day of each month. If a credit
purchase is made on April 15, then May 10 is the billing date (10th day of the month
following April). The due date is June 10 (one month after the billing date). If the bill
is paid in full before June 10, no finance charge is added. However, if the bill is not
paid in full, interest charges on the outstanding balance will start to accrue (be
added) on June 10, and any purchase made after June 10 will immediately start
accruing interest.
 CREDIT CARDS
DEFINITION OF TERMS:
A finance charge is an amount paid in excess of the cash price; it is the cost to the
customer for the use of credit.
The due date on the bill is usually 21 to 25 days after the billing date.
The billing date is the month, date and year when a periodic or monthly statement
is generated.
Annual fee is charged by the card provider every year as cost for their service.
A late payment fee is charged to the cardholder when the minimum payment is not
settled within the due date.
 CREDIT CARDS
How to compute for a finance charge?
Example 1:
Suppose an unpaid bill of Php 5,000.00 has a due date on September 15. After the due
date, the following transactions were made:
September 17 – Purchased groceries worth Php 4,500.00
September 21 – Paid Php 2,000.00
September 26 – Purchased 2 electric fans worth Php 3,000.00
The next billing date is October 15. The interest on the average daily balance is 1.5% per
month. Find the finance charge on the October 15 bill.
 CREDIT CARDS
UNPAID
NO. OF DAYS BALANCE
PAYMENT/
DATE DAILY BALANCE UNTIL BALANCE ×
PURCHASE
CHARGES NUMBER OF
DAYS
Sept. 16-17 5,000 2 10,000

Sept. 18-21 4,500 9,500 4 38,000

Sept. 22-26 -2,000 7,500 5 37,500

Sept. 27-Oct. 14 3,000 10,500 18 189,000

Total 29 274,500
 CREDIT CARDS
How to compute for a finance charge?
Solution:
𝐼 = 𝑃𝑟𝑡
𝐹𝐶 = 𝐴𝐷𝐵 𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 (𝑡)
To get the Average Daily Balance:
274,500
𝐴𝐷𝐵 =
29
𝐴𝐷𝐵 = 9,465.52
To get the Finance Charge:
29 𝑇𝑜𝑡𝑎𝑙 𝐵𝑖𝑙𝑙 = 𝑃ℎ𝑝 10,500.00 + 𝑃ℎ𝑝 137.25
𝐹𝐶 = (9,465.52)(1.5% × 12)( )
360 𝑻𝒐𝒕𝒂𝒍 𝑩𝒊𝒍𝒍 = 𝑷𝒉𝒑 𝟏𝟎, 𝟔𝟑𝟕. 𝟐𝟓
𝑭𝑪 = 𝑷𝒉𝒑 𝟏𝟑𝟕. 𝟐𝟓
 CREDIT CARDS
How to compute for a finance charge?
Example 2:

Suppose an unpaid bill of Php 3,500.00 has a due date of April 10. A purchase of
Php 2,800.00 was made on April 12 and Php 1,200 was charged on April 24. A
payment of Php 1,000.00 was made on April 15. The next billing date is May 10. The
interest rate on average daily balance is 1.5% per month. Find the finance charge
on the May 10 bill.
 CREDIT CARDS
UNPAID
NO. OF DAYS BALANCE
PAYMENT/
DATE DAILY BALANCE UNTIL BALANCE ×
PURCHASE
CHARGES NUMBER OF
DAYS
April 11-12 3,500 2 7,000

April 13-15 2,800 6,300 3 18,900

April 16-24 -1,000 5,300 9 47,700

April 25-May 9 1,200 6,500 15 104,000

Total 29 177,600
 CREDIT CARDS
How to compute for a finance charge?
Solution:
𝐼 = 𝑃𝑟𝑡
𝐹𝐶 = 𝐴𝐷𝐵 𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 (𝑡)
To get the Average Daily Balance:
177,600
𝐴𝐷𝐵 =
29
𝐴𝐷𝐵 = 6,124.14
To get the Finance Charge:
29 𝑇𝑜𝑡𝑎𝑙 𝐵𝑖𝑙𝑙 = 𝑃ℎ𝑝𝑃ℎ𝑝 6,500.00 + 𝑃ℎ𝑝 88.80
𝐹𝐶 = (6,124.14)(1.5% × 12)( )
360 𝑻𝒐𝒕𝒂𝒍 𝑩𝒊𝒍𝒍 = 𝑷𝒉𝒑 𝟔, 𝟓𝟖𝟖. 𝟖𝟎
𝑭𝑪 = 𝑷𝒉𝒑 𝟖𝟖. 𝟖𝟎
 CREDIT CARDS
How to compute for a finance charge?
Practice 1:

An unpaid bill for Php 620.00 had a due date of March 10. A purchase of Php
214.00 was made on March 15, and Php 150.00 was charged on March 30. The
interest on the average daily balance is 2.00% per month. Find the finance
charge on April 10 bill.
 CREDIT CARDS
UNPAID
NO. OF DAYS BALANCE
PAYMENT/
DATE DAILY BALANCE UNTIL BALANCE ×
PURCHASE
CHARGES NUMBER OF
DAYS
March 11-15 620 5 3,100

March 16-30 214 834 15 12,510

March 31-Apr 9 150 984 10 9,840

Total 30 25,450
 CREDIT CARDS
Average Daily Balance (ADB)= 25,450 = 𝑷𝒉𝒑 𝟖𝟒𝟖. 𝟑𝟑
30

Finance Charge = (ADB)(annual rate)(time)

30
= (848.33)(2.00% × 12)( )
360

= 𝑷𝒉𝒑 𝟏𝟔. 𝟗𝟕

Total Bill = 984 + 16.97 = 𝑷𝒉𝒑 𝟏, 𝟎𝟎𝟎. 𝟗𝟕

 CREDIT CARDS
How to compute for a finance charge?
Practice 2:

A bill for Php 1,024.00 was due on July 1. Purchases Php 315.00 were made on
July 7, and Php 410.00 was charged on July 22. A payment of Php 400.00 was
made on July 15. The interest on the average daily balance is 1.2% per month.
Find the finance charge on the August bill.
 CREDIT CARDS
UNPAID
NO. OF DAYS BALANCE
PAYMENT/
DATE DAILY BALANCE UNTIL BALANCE ×
PURCHASE
CHARGES NUMBER OF
DAYS
July 2-7 1,024 6 6,144

July 8-15 315 1,339 8 10,712

July 16-22 -400 939 7 6,573

July 23-31 410 1,349 9 12,141

Total 30 35,570
 CREDIT CARDS
Average Daily Balance (ADB)= 35,570 = 𝑷𝒉𝒑 𝟏, 𝟏𝟖𝟓. 𝟔𝟕
30

Finance Charge = (ADB)(annual rate)(time)

30
= (1,185.67)(1.20% × 12)( )
360

= 𝑷𝒉𝒑 𝟏𝟒. 𝟐𝟑

Total Bill = 1,349 + 14.22 = 𝑷𝒉𝒑 𝟏, 𝟑𝟔𝟑. 𝟐𝟐

 CREDIT CARDS
Practice 3: A credit card account had Php 244.00 balance on March 5. A purchase of
Php 152.00 was made on March 12, and a payment of Php 100.00 was made on March
28. Find the average daily balance if the billing date is April 5.
Practice 4: A charge account had a balance of Php 944.00 on May 5. A purchase of Php
255.00 was made on May 17, and a payment of Php 150.00 was made on May 20. The
interest on the average daily balance is 1.5% per month. Find the finance charge on the
June 5 bill.
Practice 5: On August 10, a credit card account had a balance of Php 3,450.00. A
purchase of Php 560.00 was made on August 15, and Php 157.00 was charged on
August 27. A payment of Php 1,500.00 was made on August 15. The interest on the
average daily balance is 1.25% per month. Find the finance charge on the September 10
bill.
 CREDIT CARDS
You may watch this video for more information on credit cards:

Link: https://youtu.be/sfqMhZ-Nw9o
 CONSUMER LOANS

• Calculating Monthly Payments

• Calculating Loan Payoffs
 CONSUMER LOANS – MONTHLY PAYMENT
The payment for a loan based on annual percentage rate is given by:
𝑟
𝑃𝑀𝑇 = 𝐴( 𝑛
𝑟 −𝑛𝑡 )
1 − (1 + )
𝑛
Where 𝑃𝑀𝑇 is the payment, 𝐴 is the loan amount, 𝑟 is the annual
interest rate, 𝑛 is the number of payments per year, and 𝑡 is the
number of years .
 CONSUMER LOANS – MONTHLY PAYMENT
Examples:
1. Integrated Technologies is offering anyone who purchases a refrigerator an annual
interest rate of 9.5% for 4 years. If Dina purchases a luxury model refrigerator for
Php 72,599.00 from Integrated Technologies, find her monthly payment.
Solution: 𝑟
𝑃𝑀𝑇 = 𝐴( 𝑛
𝐴 = 72,599 𝑟 −𝑛𝑡 )
1 − (1 + )
𝑟 = 9.5% 𝑛
𝑛 = 12 0.095
𝑡=4 = 72,599( 12 )
0.095 −(12)(4)
1 − (1 + )
12 Answer:
Dina’s monthly payment is
𝑃𝑀𝑇 = 1,823.91
Php 1,823.91.
 CONSUMER LOANS – MONTHLY PAYMENT
Examples:
2. Alexa purchases a new PC set worth Php 56,659.50. How much is the monthly
payment if the annual interest rate is 5% payable for 2 years?
Solution:
𝐴 = 56,659.50 𝑟
𝑃𝑀𝑇 = 𝐴( 𝑛
𝑟 = 5% 𝑟 −𝑛𝑡 )
1 − (1 + )
𝑛 = 12 𝑛
0.05
𝑡=2
= 56,659.50( 12 )
0.05 −(12)(2)
1 − (1 + )
12
Answer:
𝑃𝑀𝑇 = 2,485.73
Alexa’s monthly payment is
Php 2,485.73.
 CONSUMER LOANS – MONTHLY PAYMENT
Practice:
A businessman purchases a new car for Php 1,520,000.00. He already made a Php
50,000.00 down payment and the remaining amount must be paid in 5 years at 10%
annual interest rate. How much is his monthly payment?
Solution: 𝐴𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑 𝑓𝑜𝑟 5 𝑦𝑒𝑎𝑟𝑠 = 1,520,000 − 50,000
𝐴 = 1,520,000
𝑟 = 10% 𝐴𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑝𝑎𝑖𝑑 𝑓𝑜𝑟 5 𝑦𝑒𝑎𝑟𝑠 = 1,470,000
𝑛 = 12 0.1
𝑡=5 𝑃𝑀𝑇 = 1,470,000( 12 )
0.1 −(12)(5) Answer:
1 − (1 + 12 )
Businessman’s monthly
= 31,233.16 payment is
Php 31,233.16.
 CONSUMER LOANS – LOAN PAYOFFS
Sometimes, a consumer wants to pay off a
loan before the end of the loan term. For
instance, suppose you have a five -year car
loan but would like to purchase a new car
after owning your car for 4 years. Because
there is still 1 year remaining on the loan, you
must pay off the remaining loan amount
before purchasing another car.
This is not as simple as just multiplying car
payment by 12 to arrive the payoff amount.
The reason is that each payment includes
both interest and principal.
 CONSUMER LOANS – LOAN PAYOFFS
The payoff amount for a loan based on the annual percentage rate is given by:
𝑟
1 − (1 + 𝑛 ) −𝑈
𝐴 = 𝑃𝑀𝑇( 𝑟 )
𝑛
Where 𝐴 is the loan payoff, 𝑃𝑀𝑇 is the payment, 𝑟 is the annual interest rate, 𝑛
is the number of payments per year, and 𝑈 is the number of remaining (or
unpaid) payments.
 CONSUMER LOANS – LOAN PAYOFFS
Examples:
1. Gwyn wants to pay off the loan on her jetski that she has owned for 18 months.
Her monthly payment is Php 10,500.00 on a 2-year loan at an annual percentage
rate of 8.7%. Find the payoff amount.
Solution: 𝑟
1 − (1 + 𝑛)−𝑈
𝑃𝑀𝑇 = 10,500 𝐴 = 𝑃𝑀𝑇( 𝑟 )
𝑟 = 8.7% 𝑛
𝑛 = 12 0.087
1 − (1 + 12 )−6
𝑈=6 𝐴 = 10,500( )
0.087
12 Answer:
𝐴 = 61,431.78 Gwyn’s loan payoff is
Php 61,431.78.
 CONSUMER LOANS – LOAN PAYOFFS
Examples:
2. Aaron has a 5-year car loan based on an annual percentage rate of 8.4%. The
monthly payment is Php 15,450.00. After 3 years, he decides to purchase a new car
and must pay off his car loan. Find the payoff amount.
Solution: 𝑟
1 − (1 + 𝑛)−𝑈
𝑃𝑀𝑇 = 15,450 𝐴 = 𝑃𝑀𝑇( 𝑟 )
𝑟 = 8.4% 𝑛
𝑛 = 12 0.084
1 − (1 + 12 )−24
𝑈 = 24 𝐴 = 15,450( )
0.084
12 Answer:
Aaron’s loan payoff is
𝐴 = 340,233.85
Php 340,233.85.
 CONSUMER LOANS – LOAN PAYOFFS
Practice
Vic has a 4-year car loan at an annual interest rate of 8.9% and a monthly payment of
Php 21,690.00. After 3 years, he decided to purchase a new car. What is the payoff of
his loan?
Solution: 𝑟
1 − (1 + 𝑛)−𝑈
𝑃𝑀𝑇 = 21,690 𝐴 = 𝑃𝑀𝑇( 𝑟 )
𝑟 = 8.9% 𝑛
𝑛 = 12 0.089
1 − (1 + 12 )−12
𝑈 = 12 𝐴 = 21,690( )
0.089
12 Answer:
Vic’s loan payoff is
𝐴 = 248,154.83 Php 248,154.83.