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MODULE 1 Math 08 - f2f
MODULE 1 Math 08 - f2f
Mathematics of
Investment
Major Course Mathematics 08
EMMA O. CAJURAO
Subject Instructor
Dr. Emilio B. Espinosa Sr. Memorial State College of Agriculture and technology
Telegram No: 0946-1432-682
MC Math 08 (Mathematics of Investment)
Rationale
Some people distinguish between savings and investment, where savings are monies
placed in relatively risk-free accounts with modest rewards, and where investments
involve more risk and the potential for greater rewards. In this Module, we do not
distinguish between these ideas. We treat them both under the umbrella of investing.
There are many reasons to invest and to learn about investing. Perhaps the primary one
is to take charge of your financial future with the help of this module. Through this
module, you can strengthen your prospects for earned income and how to manage
money as an investment.
As Albert Einstein said, “Do not worry about your difficulties in mathematics. I can assure
you mine are still greater”. Feel free to message me in your finding difficulty in
accomplishing the task, I am ready to assist you as we go along our blended class for
this semester.
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MC Math 08 (Mathematics of Investment)
Objectives
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MC Math 08 (Mathematics of Investment)
MODULE 1
CHAPTER 1. SIMPLE INTEREST AND SIMPLE DISCOUNT
I. Overview
Would you prefer to have ₱50,000 now or ₱50,000 a year from now? Even though
the amounts are the same, most people would prefer to have a ₱50,000 now because of
the interest it can earn. Thus, whenever we talk of money we must state not only the
amount but also the time. This concept – that money today is worth more than the same
amount of money in the future—is called the TIME VALUE OF MONEY. The PRESENT
VALUE of an amount is its worth today, while the FUTURE VALUE is its worth at a later
time. This lesson, interest and simple interest will be in focus to provide knowledge on
how to compute and understand how it works weather to your benefits or not.
INTERE
ST
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MC Math 08 (Mathematics of Investment)
Interest
Interest is a fee paid for the use of one’s money. Suppose a debtor borrows
money from an investor, then he must pay back the original amount borrowed plus
an additional sum called interest. The original amount loaned is the principal. At
any time after the investment of the principal, the sum of the principal and the
interest due is called the amount. The interest rate per period is the ratio of
interest for the period to the principal.
Simple Interest
푛푢푚 표 푚표푛 ℎ�
a. t =
12
푛푢푚 표 푑푎 �
b. t =
360
8 2
Examples: 8 months = = 푎
12 3
120 1
120 days =
360
= 3
푎
Note: Unless specified, 360 days is used in all simple interest applications.
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MC Math 08 (Mathematics of Investment)
We invest ₱1,000 at 10% interest per year for 5 years. After one year we
earn 10% of ₱1,000, namely, ₱100. We withdraw that interest and put it under a
mattress leaving the original ₱1,000 to earn interest in the second year, it too
earns ₱100, which we also put under the mattress, so two years we have the
original ₱1,000 and ₱200 under the mattress. We continue doing this for 5 years,
and so after five years, we have the original ₱1,000 and ₱500 the mattress, for a
total of ₱ 1,500. Table 1.1 shows the details
Simple
Year (t) Year’s Interest Year’s end Interest
Beginning Amount (F) (I)
Principal (P) F–P
1 ₱1,000 ₱100 ₱1,100 100
2 ₱1,000 ₱100 ₱1,200 200
3 ₱1,000 ₱100 ₱1,300 300
4 ₱1,000 ₱100 ₱1,400 400
5 ₱1,000 ₱100 ₱1,500 500
We now derive the general formula for this process. First, the Total amount we have at
any time is the Future value of this ₱1,000 at that time. Thus, ₱1,500 is the Future Value
of ₱1,000 after 5 years.
t = time in year
r= interest rate
Step 1.
Based on table 1.1, in the beginning, we can find the year’s end amount by adding the
principal amount and interest after two years the year-end amount is equal to the year-
end amount in the first year + the interest and the cycle continue after 5 years.
Step 2.
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MC Math 08 (Mathematics of Investment)
using this cycle to get the year-end amount or the Future value in the table below.
Table 1.2
t F
1 P + rP = P (1 + r) Simplify
. .
. .
Seeing the series
t P (1 + tr) or P(1 + rt) above we can see
that the pattern is
multiplying the r to
the time , that is why
therefore F = P (1+rt) we change t as
unknown
Based on table 1.1 to find the simple interest we only subtract the Future value or the
year-end amount to the principal amount.
I=F–P
Based form the table 1.2 we derived the Future value formula as F = P(1+rt), so
substitute the formula from I = F – P
I = P(1+rt) – P, expand
I = P + Prt – P
Derived Formulas:
�
a. P =
�
b. r =
푃
�
c. t =
푃
d. F = P(1+rt)
�
e. P =
1+
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MC Math 08 (Mathematics of Investment)
Illustrations:
1. Find the interest and amount of ₱ 8,700 at 3 ½ % for 2 months
2 1
Solution: P= ₱ 8,700; r =3 ½ % or 0.035 t = or year
12 6
a. I = P r t
1
= 8700 x .035 x
6
= ₱ 50.75
b. F = P + I
= 8700 + 50.75
= ₱8,750.75
Or F = P (1 + rt)
1
= 8700 (1 + 0.035 x 6)
= ₱8,750.75
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MC Math 08 (Mathematics of Investment)
120 120
= 1 =
6000 � 3 2000
= 0.6 = 6%
5. How many months will it take for ₱ 9,000 to earn ₱600 if it is invested at 7%
simple interest?
Solution: P = ₱ 9,000; r = 7% or .07; I = ₱ 600
�
t=
푃
600
=
9000 � . 07
600
‘ =
630
= .9524 year or 11.43 months (.9524 x12 = 11.43 months)
Withholding Tax
The government authorized all banks to deduct a certain amount from the interest
earned. This is known as withholding tax. The prescribed rate is 17% regardless of the
amount deposited. The net interest is left after this deduction is made.
Illustration:
Solution:
Discounting is the process of determining the present value of any amount due in
the future. The present value is the amount P invested at a given rate in order to
accumulate to F in a given time. Since I= P r t and F = P + I, then by substitution, we
have F = P + P r t. Factoring the right side of the equation, we get F = P(1 + rt)
Illustrations:
1. Discount ₱500 for 2 years at 6% simple interest?
Solution: F = ₱500; r = 6% or .06; t =2 years
F = P(1 + rt)
500 = P(1.12)
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MC Math 08 (Mathematics of Investment)
500
P=
1.12
P = ₱446.43
2. If money is worth 6 ½%, find the present value on ₱2,500 due in 2 years and 6
months
1 1
Solution: F = ₱2,500; r = 6 % or .065; t =2 years
2 2
F = P(1 + rt)
2,500 = P(1.1625)
2,500
P=
1.1625
P = ₱2,150.54
3. If ₱4,260 is the present value of ₱4,320 which is due at the end of 9 months,
find the simple interest rate?
9 3
Solution: F = ₱4,320; P= ₱4,260; t = or years
12 4
�
r=
푃
4320−4260
= 3
4260 � 4
60
= = .0188 = 1.88%
3195
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MC Math 08 (Mathematics of Investment)
I. Overview
This module will attempt to shed light on the difference of the Exact and Ordinary
interest, Exact and Approximate Time. This module also provides condensed lessons on
what is the Date of Maturity is all about.
What do you think has the bigger interest, the Longer the time or the shorter? Why?
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
______________________________________________________________
1
Illustration: Find the ordinary and exact interest at 6 % on ₱12,000 for 120 days
4
a. Ordinary Interest, Io = P r t
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MC Math 08 (Mathematics of Investment)
120
= 12,000 x .065 x
360
= ₱260
b. Exact Interest, Ie = P r t
120
= 12,000 x .065 x
365
= ₱256.44
Exact time us the actual number of days between two given dates. In approximate
time, each month is considered as having 30 days.
General Rule: Exclude the first day and include the last day in counting the exact
number of days between two dates
Illustrations:
1. Find the exact time and approximate time from June 7 to September 24, 1997
Solution:
a. Exact Time: June has 30 days, subtract 7 from 30, then add the next
succeeding months up to Sept. 24
30 = 23 June
31 July
31 Aug.
24 Sep
109 days
b. Approximate Time from June 7 to Sept. 7 these are 3 months
3 x 30 = 90
24 – 7 = 17
107 days
2. Find the exact time and appropriate time between March 19 to August 6, 1996
Solution:
a. Exact Time: Using table I
Aug. 6 --- 218 days
March 19 -- -78 days
140 days
b. Approximate Time:
March 19 to August 19 5 months
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MC Math 08 (Mathematics of Investment)
5 x 30 = 150 days
19 – 6 = -13 days
137 days
Illustrations:
Find the simple interest on ₱5,800 at 7% from April 11 to Oct. 16. 1997 using the
following: a) Exact time and ordinary interest b) Exact time and Exact interest c)
Approximate time and ordinary interest d) Approximate time and exact interest.
Solution:
a. I = P r t
188
= 5800 x .07 x
360
= ₱212.02
b. I = P r t
188
= 5800 x .07 x
365
= ₱209.02
c. I = P r t
185
= 5800 x .07 x
360
= ₱208.64
d. I = P r t
185
= 5800 x .07 x
365
= ₱205.78
Among the four methods, (a) is commonly used. It is also known as the “Banker’s rule.”
When the term is given in years or months, count the number of years or months
from the date of the note and the due date falls on the same day in the month of maturity,
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MC Math 08 (Mathematics of Investment)
Example, a 2-month note dated March 30 has May 30 as the Due date is the last date.
For example, a 2-month note dated July 31 has Sept. 30 as the due date.
When the time is given in days, count from the date of the note dated March 28
has May 27 as its due date. Since March has 31 days, subtract 28 from 31 and then add
the next succeeding months until a total of 60 days is obtained.
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MC Math 08 (Mathematics of Investment)
I. Overview
Do you love shopping? are you a good buyer? Say what, if you’re having fun
buying stuff you need to know more about the discount. This lesson will provide us to
understand and calculate the discount.
In this lesson also, we can compute the financial document that is promised by the
borrower to repay a certain amount of money on a certain date.
III. Take-Off/Motivation
What comes first in your mind when you hear the word “discount”?
Write your answer on the box provided below. You can write as many as you can.
Simple Discount
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MC Math 08 (Mathematics of Investment)
balance is called the proceeds. The bank then collects the maturity value from the
marker when the note matures.
The discount rate for a given period of time is the ratio of the discount for the
period to the maturity value. As in simple interest, this rate is usually quoted on a yearly
basis. Formulas for a simple discount or bank discount:
D=Fdt Where :
F = Maturity Value
P=F–D
d = discount rate
Derived Formulas:
t = length of time
expressed in years
a) P = F (1 – dt)
� D = Simple discount
b) D =
�
�
c) F =
푑
�
d) t =
�푑
Illustrations:
1
= 3800 x .07 x
2
= ₱133
P=F–D
= 3,800 – 133
= ₱3,667
1
2. Discount ₱2,056.80 for 85 days at a discount rate 6 %.
2
1 85 17
Solution: F = ₱2,056.80; d = 6 % or .065; t = or year
2 360 72
D=Fdt
17
= 2,056.80 x .065 x
72
= ₱31.57
P=F–D
= 2,056.80 – 31.57
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MC Math 08 (Mathematics of Investment)
= ₱2,025.23
Promissory Note
Example of a noninterest-bearing note. It should satisfy Mr. Nocon just like the preceding
one.
Dec. 7, 1997
Six months after date I promise to pay to the
order of Mr. Nocon the sum of Eight thousand Two
50
Hundred Fifiy Five and pesos (₱8,255.50).
100
(Sgd.) Mr. A. Sison
Illustrations:
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MC Math 08 (Mathematics of Investment)
1. On May 12, 1996, Mrs. Garcia sold the following note to the Bank of Asia which
1
charges 6 2% discount rate.
Solution: a. I = P r t
90
= 8500 x .07 x
360
= ₱148.75
b. F = P + I
= 8500 + 148.75
= ₱8,648.75
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MC Math 08 (Mathematics of Investment)
90
1 37
e. F = ₱8,648.75; d = 6 % or .065; t =
2 360
D =Fdt
37
= 8,648.75 x .065 x
360
= ₱57.78
f. P= F–D
= 8,648.75 – 57.78
= ₱8,590.97
2. A non- interest bearing note is sold to the bank sixty days before maturity. The
discount rate is 5%. If the seller receives ₱1,342.35 from the bank, what is the face
value of the note?
60 1
Solution: P = ₱1,342.35; d = .05 t = = year
360 6
P = F(1 – dt)
1
1,342.35 = F [1 – (.05) ( )]
6
.05
1,342.35 = F (1 – )
6
6 .05
1,342.35 = F ( – )
6 6
5.95
1,342.35 = F ( )
6
1,342.35
F = 5.95
6
= ₱1,353.6
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