BUSINESS MATHEMATICS

Interest, Amortization, Annuities

Prepared by:
Mr. Reymund Gonowon and Ms. Shirlee Ocampo
 • Simple
• Compound
Interest
Earn
Save / Income
Invest
PHP
• Simple
• Ordinary
Spend
• Deferred
Annuities
• General

2
 Simple Interest
• Simple interest is the interest that is computed on the principal only.
• If I denotes the interest on a principal P (in whatever currency) at an interest rate
of r per year for t years, then we have
I = Prt
• The accumulated amount A, the sum of the principal and interest after t years is
given by
A = P + I = P + Prt
A = P(1 + rt)
4

Example
• Banks usually pay simple interest at
the rate of 0.25% per year for time Solution
deposit accounts.
• Using the accumulated amount
• If a customer deposits Php50000 formula with P = 50000, r = 0.0025,
and makes no withdrawals for 3 and t = 3, we see that the total
years, what is the total amount on amount on deposit at the end of 3
deposit at the end of three years? years is given by
• What is the interest earned in that
period? 𝐴 = 50000 1 + 0.0025 × 3
𝐴 = 50375.00

or Php 50375
https://www.bpiexpressonline.com/p/0/87/time-deposit-rates
4
5

Example
• Banks usually pay simple interest at
the rate of 0.25% per year for time
deposit accounts.
• If a customer deposits Php50000 Solution
and makes no withdrawals for 3 • The interest earned over the three-
years, what is the total amount on year period is given by
deposit at the end of three years?
• What is the interest earned in that 𝐼 = 50000 0.0025 3
period? 𝐼 = 375
or Php 375.00

5
 Compound Interest
Compound interest – interest is paid on both principal and interest,
compounded at regular intervals

Example:
A Php 1000 principal paying 10% simple interest after 3 years pays
0.1 × 3 × 𝑃ℎ𝑝 1000 = 𝑃ℎ𝑝 300.

If interest is compounded annually, it pays

0.1 × 𝑃ℎ𝑝 1000 = 𝑃ℎ𝑝 100 for the first year,
0.1 × 𝑃ℎ𝑝 1100 = 𝑃ℎ𝑝 110 for the second year, and
0.1 × 𝑃ℎ𝑝 1210 = 𝑃ℎ𝑝 121 for the third year
totaling Php100 + Php110 + Php121 = Php331 interest
 Compound Interest
If P (any currency) is invested over a term of t years earning interest at the rate of
r per year compounded annually, then the accumulated amount is

𝑡
𝐴 =𝑃 1+𝑟

In practice, however, interest is usually compounded more than once a year.

The interval of time between successive interest calculations is called the

conversion period.
 Compounding More Than Once a Year
• If interest at a nominal rate of r per year is compounded m times a year on a
principal of P dollars, then the simple interest rate per conversion period is

𝑟 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

𝑖= =
𝑚 𝑝𝑒𝑟𝑖𝑜𝑑𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

• For example, if the nominal interest rate is 8% per year, and interest is
compounded quarterly, then
𝑟 0.08
𝑖= = = 0.02
𝑚 4
or 2% per period.
 Compound Interest
• There are n = mt periods in t years, so the accumulated amount at the end of t
years is given by

𝑟 𝑛
𝐴 =𝑃 1+
𝑚
Where n = mt, and
A = Accumulated amount at the end of t years
P = Principal
r = Nominal interest rate per year
m = Number of conversion periods per year
t = Term (number of years)
10

Compound Interest
Times Rate per
Interest
Period Credited compounding
Credited
per year period
Annual year 1 r
𝑟
Semiannual 6 months 2
2
𝑟
Quarterly quarter 4
4
𝑟
Monthly month 12
12
 Continuous Compounding of Interest
• There are n = mt periods in t years, so the
accumulated amount at the end of t years is
given by

𝐴 = 𝑃𝑒 𝑟𝑡
Where n = mt, and
A = Accumulated amount at the end of t years
P = Principal
r = Nominal interest rate per year
t = Term (number of years)

This Photo by Unknown Author is licensed under CC BY-SA

 Present and Future Value
•Consider the compound interest
formula:
𝑟 𝑛
𝐴=𝑃 1+
𝑚
rt
A = Pe
•The principal P is referred to as
the present value, and the
accumulated value A is called the
future value, since it is realized at a
future date.
This Photo by Unknown Author is licensed under CC BY
13
• Mr. Dela Cruz is investing
Php 200,000.00 in a time
deposit. If the interest rate
of 3.5% is computed only
on the principal, how much
will the money of Mr. Dela
Cruz be after 10 years?
How much did the
investment earn?
Example
Solution
• This asks for the future value of the
investment.
𝐴 = 𝑃 1 + 𝑟𝑡
𝐴 = 200000 1 + 0.035 10
𝐴 = 270000
• Therefore, Mr. Dela Cruz will have Php
270,000.00 after 10 years. His money earned
P70,000.00 in that time.
14
Example
A car loan uses simple interest for its loaners.
Usually banks that offer a car loan requires
downpayment so that the remaining amount of
the car will be paid through a loan.
If PSBank offers a program that requires 20%
of the car value as downpayment, and the rest
will be paid thru a loan. The loan will be paid
for 5 years at 6.5% interest rate.
For a car that costs Php 1.1M, how much does
the loan mature into?
How much does the car loan cost in all?
Solution
For a car that costs Php 1.1M, how much does
the loan mature into?
• This asks for the future value of the
investment. But keep in mind that there was
a downpayment (20% of cost of car). This
means that the amount to be paid in loan is
Php 800000.
𝐴 = 𝑃 1 + 𝑟𝑡
𝐴 = 880000 1 + 0.065 5
𝐴 = 1166000
• The loan will grow into Php 1,166,000.
15

Example
A car loan uses simple interest for its loaners.
Usually banks that offer a car loan requires
downpayment so that the remaining amount of
the car will be paid through a loan. Solution
If PSBank offers a program that requires 20% How much does the car loan cost in all?
of the car value as downpayment, and the rest
will be paid thru a loan. The loan will be paid • This refers to all the money spent for the car
for 5 years at 6.5% interest rate. loan. There was a downpayment and the
cost of the loan.
For a car that costs Php 1.1M, how much does
the loan mature into?
220000 + 1166000 = 1386000
How much does the car loan cost in all?

• The loan costs a total of Php 1,386,000.

16

Example
Solution
If purchases thru credit card are not paid 𝑟 𝑛
We need to solve for r from 𝐴 =𝑃 1+
𝑚
in full, credit card companies charge
𝑟 12
interest which is compounded. If a We have 20740.27 = 20000 1+
12
purchase of Php 20000 is made, this can 20740.27 𝑟 12
amount to Php 20740.27 in one year ➔ = 1+
20000 12
when compounded monthly. What is 12 20740.27 𝑟
the interest rate? ➔ =1+
20000 12

12 20740.27 𝑟
➔ −1=
20000 12

12 20740.27
➔ 12 − 1 = 𝑟➔ 𝑟 ≈ 0.0364
20000

➔ The interest rate is approx. 3.64%.

17

Example
Investments grow better if interest is Solution
compounded. One example is a money We need to solve for t from
market account. The Bangko Sentral ng 𝑟 𝑛
𝐴 =𝑃 1+ , where n = mt.
𝑚
Pilipinas issues a summary of interest
0.016747 6𝑡
rates, and for July 2016, the rate for We have 3𝑃 = 𝑃 1 +
6
money market is 1.6747%. How long 0.016747 6𝑡
does it take for an investment to triple if ➔3 = 1 +
6
interest is compounded every two ➔ log 3 = 6𝑡 log 1 +
0.016747
6
months?
log 3
➔𝑡 = 0.016747
6log 1+ 6

➔ 𝑡 ≈ 65.69
 Time Value of Money

• What would you choose?

Php15000 today or Php18000 4 years from now?

• Is it better to have money now rather than later?

Year
1 2 3 4
Option A: Option A:
Php15000 Php17547.88
PV FV
If interest rate is 4% annually?
Option B: Option B:
Php15386.48 Php18000
PV FV
 Time Value of Money
Time, literally is money - the value of the money you have now is not the same as it
will be in the future and vice versa. So, it is important to know how to calculate the
time value of money so that you can distinguish between the worth of investments
that offer you returns at different times.

Read more: Understanding The Time Value Of Money |

Investopedia http://www.investopedia.com/articles/03/082703.asp#ixzz4GEcTty22
 APR vs APY
Annual Percentage Rate
• APR defines the percentage of the principal
you’ll pay per period (usually in a year), taking
every charge from monthly payments over the
course of the loan, upfront fees, etc. into account
• APR is the annual rate of interest that is paid on a
loan, without the compounding of interest within
that year

Annual Percentage Yield

• APY is the effective annual rate of return that
accounts for the effect of compounding interest
without the account fees

Read more:
https://betterexplained.com/articles/a-visual-guide-to-simple-
compound-and-continuous-interest-rates/
This Photo by Unknown Author is licensed under CC BY-ND
 APR vs APY
𝑟 𝑛
APR ➔ 𝑟 ≤ APY ➔ 1 + −1
𝑛

Example
BPI Personal Loan states that the maximum interest rate they charge in a year is 25.6%. Interest
is computed on a 360-day period.
APR = 25.6%
APY = 29.16%

Read more:
https://www.investopedia.com/terms/a/apr.asp
https://www.investopedia.com/terms/a/apy.asp
https://www.bpiexpressonline.com/p/1/125/personal-loan-features
 APR vs APY

𝐴𝑃𝑅 ≤ 𝐴𝑃𝑌

REPUBLIC ACT No. 3765: Truth in Lending Act

• Requires banks to disclose all charges applied in extending credit

Read more:
https://www.lawphil.net/statutes/repacts/ra1963/ra_3765_1963.html
https://www.bpipersonalloans.com/loancalculator
Banks and financial institutions
offer loans and investment
products that customers can avail.
If they do, the customers agree to a
contract, where they pay on a
regular basis until the intended
amount is paid off.
The series of equal payments
customers make or receive is called
an annuity.

23
 Annuity
• “Ordinary” annuity – payments happen at the end of the pay period

• “Annuity due” - payments happen at the beginning of the pay period

• “Simple” annuity – payment interval is the same as the compounding period

• “General” annuity – payment interval and the compounding period are not the
same
 Annuity: Simple and Ordinary

Future
Value

Year

1 2 3 … n-2 n-1 n

Periodic Periodic Periodic ... Periodic Periodic Periodic

Payment Payment Payment Payment Payment Payment
 Future Value of an Annuity

⊸ Amount of an annuity - F (future value) of n payments of R dollars for n

periods at a compounded rate of i:

 (1 + i )mt − 1 
F = R 
 i 

F = Rs
ni
 Present Value of an Annuity

⊸ Present Value (P) of n payments of R dollars for n periods at a

compounded rate of i:

1 − (1 + i )− mt 
P = R 
 i 

P = R p
ni
28

Example
Solution
Manulife™ offers an investment   0.10 125 
product where an investor can pay  1 +  − 1
according to his budget. Let’s say an  12  
S = 2000   = 154874.14
investor deposits P2000 at the end of 
0.10

each month in an account earning  12 
10% compounded monthly.
Determine how much money will be
in the investment after 5 years. How I = 154874.14 − (2000  12  5) = 34874.14
much interest did the depositor earn?

The investment grows to

P154,874.14 and earns P34,874.14.

S = Sinking Fund
Accumulated funds meant to be used in the future
29

Example
Solution
Financial advisers prepares investment ➔ We need to see if the interest rate, term, and
products for their clients. They can future value determine a periodic payment that
come up with an investment product fits the client’s budget.
specifically for their client’s objective
and budget. 7% 2×8
1+ 2 −1
500,000 = 𝑅
For example, a client’s goal is to have 7%
P500,000 in 8 years. The client can 2

pay P20000 every 6 months. If you 500,000

=𝑅
were the financial adviser, can we 7%
1+ 2
2×8
−1
offer an investment that earns 7% 7%
compounded semi-annually with 2
payments made at the end of each
𝑅 ≈ 23842.42
semi-annual period?
The client will be required to pay
P23,842.42 semi-annually.
30

Example
Solution
Financial advisers prepares investment ➔ If the client sticks to his budget, how
products for their clients. They can much will his payment amount to in
come up with an investment product
specifically for their client’s objective the same time and interest rate?
and budget. 7% 2×8
1+ 2 −1
For example, a client’s goal is to have 𝑆 = 20000
P500,000 in 8 years. The client can 7%
pay P20000 every 6 months. If you 2
were the financial adviser, can we ≈ 419420.59
offer an investment that earns 7%
compounded semi-annually with The client can only accumulate Php
payments made at the end of each 419,420.59 with his budget.
semi-annual period?
31

Example
Solution
When a person reaches the legal ➔ We need to determine the present value of an
retirement age, it is ideal that he sets up a annuity that will pay the retiree P300000 per
pension plan before he/she retires. A year.
pension fund will be handy for expenses 0.05 −7
1− 1+. 1
that a retired person will have. 𝑃 = 300000
0.05
One way to set up a pension fund is to
deposit an amount that grows. Come 𝑃 ≈ 1735912.02
retirement time, the amount will be able
to cover annual budget for the retiree. Php 1,735,912.02 is needed to set up a pension
What lump sum deposited today would fund that will pay a person Php 300,000 per
year once he/she retires.
allow payments of P300,000/year for 7
years at 5% compounded annually?
 Amortization
⊸ A financial product is “amortized” if both principal and interest are paid off by a
sequence of periodic payments.

⊸ Financial institutions are required to report finance charge (interest) and their
annual percentage rate (APR).

⊸ APR is the true effective annual interest rate (compounding not included) for a
loan.

⊸ The table that shows how the product is repaid through an annuity is called an
amortization schedule.
33
Amortization

Period Periodic Interest Principal Outstanding

Payment Payment Payment Balance

0
An amortization schedule
1 R
details how each periodic
2 R payment is distributed to pay
the principal and the interest
3 R for a loan.
. .
. .
. .
n-1 R
n R
34
Amortization of a Loan
Solution
Period Periodic Interest Principal Outstanding 1. Determine the number of periods.
Payment Payment Payment Balance 2. Compute the periodic payment.
3. Assign the periodic payment to
0 each period.
4. Interest will be computed and
1 R deducted from the periodic
payment.
2 R
5. Periodic Payment less the Interest
3 R Payment is the Principal Payment
for the period.
. . 6. The Outstanding Balance (OB) is
updated by subtracting the
. . Principal Payment for the period
. . from the OB before the payment.
7. Repeating the process for the
n-1 R Interest Payment, Principal
Payment, and Outstanding
n R Balance will complete the
schedule.
35

Example
Solution
The Social Security System can 1. the number of periods
provide a P 65,000.00 loan at 12% ➔ There will be semi-annual payments in three
compounded every 6 months. This years.
loan can be repaid in semi-annual ➔ This means that there will be 6 periods.
payments in 3 years.
Period Periodic Interest Principal Outstandng
Payment Payment Payment Balance

The amortization schedule for the 0 65000.00

loan is determined by… 1 R

2 R

3 R

4 R

5 R

6 R
36

Example
Solution
The Social Security System can 2. the periodic payments
provide a P 65,000.00 loan at 12% ➔amount borrowed in a loan is present value
compounded every 6 months. This
loan can be repaid in semi-annual 1 − (1 + i )− mt 
payments in 3 years. P = R 
 i 
  −23 
The amortization schedule for the 0.12 
 1 − 1 + .  
loan is determined by…   2  
65000 = R  
0.12
 
 2 
R  13218.57
37

Example
Solution
The Social Security System can 3. Assign the periodic payments
provide a P 65,000.00 loan at 12% ➔ Periodic payment is the same for all periods
compounded every 6 months. This
loan can be repaid in semi-annual R  13218.57
payments in 3 years.
Period Periodic Interest Principal Outstanding
Payment Payment Payment Balance

The amortization schedule for the 0 65000.00

loan is determined by… 1 13,218.57

2 13,218.57

3 13,218.57

4 13,218.57

5 13,218.57

6 13,218.57
38

Example
Solution
The Social Security System can 4. Interest will be computed and deducted from
provide a P 65,000.00 loan at 12% the periodic payment.
compounded every 6 months. This 0.12
loan can be repaid in semi-annual 65000
2
= 3900
payments in 3 years.
Period Periodic Interest Principal Outstanding
Payment Payment Payment Balance
The amortization schedule for the
0 65000.00
loan is determined by…
1 13,218.57 3900.00

2 13,218.57

3 13,218.57

4 13,218.57

5 13,218.57

6 13,218.57
39

Example
Solution
The Social Security System can 5. Periodic Payment less the Interest Payment is
the Principal Payment for the period
provide a P 65,000.00 loan at 12%
compounded every 6 months. This 13218.57 − 3900 = 9318.57
loan can be repaid in semi-annual
payments in 3 years.
Period Periodic Interest Principal Outstanding
Payment Payment Payment Balance
The amortization schedule for the
0 65000.00
loan is determined by…
1 13,218.57 3900.00 9318.57

2 13,218.57

3 13,218.57

4 13,218.57

5 13,218.57

6 13,218.57
40

Example
Solution
The Social Security System can 6. The Outstanding Balance (OB) is updated by
provide a P 65,000.00 loan at 12% subtracting the Principal Payment for the period.
compounded every 6 months. This From the OB before the payment
loan can be repaid in semi-annual 65000 − 9318.57 = 55681.43
payments in 3 years.
Period Periodic Interest Principal Outstanding
Payment Payment Payment Balance
The amortization schedule for the 0 65000.00
loan is determined by… 1 13,218.57 3900.00 9318.57 55681.43

2 13,218.57

3 13,218.57

4 13,218.57

5 13,218.57

6 13,218.57
41

Example
Solution
The Social Security System can 7. Repeating the process for the Interest Payment,
Principal Payment, and Outstanding Balance will
provide a P 65,000.00 loan at 12% complete the schedule
compounded every 6 months. This
loan can be repaid in semi-annual
payments in 3 years.
Period Periodic Interest Principal Outstandng
Payment Payment Payment Balance
The amortization schedule for the
0 65,000
loan is determined by…
1 13,218.57 3,900.00 9,318.57 55,681.43

2 13,218.57 3,340.89 9,877.68 45,803.75

3 13,218.57 2,748.22 10,470.35 35,333.40

4 13,218.57 2,120.00 11,098.57 24,234.83

5 13,218.57 1,454.09 11,764.48 12,470.35

6 13,218.57 7,48.22 12,470.35 0.00

42

Period Periodic Interest Principal

Example
Outstandng
Payment Payment Payment Balance
0
Solution
₱1,200,000.0000
1 ₱7,983.6299 ₱7,000.0000 ₱983.6299 ₱1,199,016.3701
2 ₱7,983.6299 ₱6,994.2622 ₱989.3678 ₱1,198,027.0023
… … … … …
360 periods and12 payments in a year mean that
358 ₱7,983.6299 ₱138.0992 ₱7,845.5307 ₱15,828.6252
the loan takes 30 years
359 ₱7,983.6299 ₱92.3336 ₱7,891.2963 ₱7,937.3289
360 ₱7,983.6299 ₱46.3011 ₱7,937.3289 ₱0.0000

This schedule is for a loan that requires 12

monthly payments in a year. The interest
rate is 7% and is compounded monthly.
How many years will it take to completely
pay the loan?
43

Period Periodic Interest Principal

Example
Outstandng
Payment Payment Payment Balance
0
Solution
₱1,200,000.0000
1 ₱7,983.6299 ₱7,000.0000 ₱983.6299 ₱1,199,016.3701
➔360 payments of ₱7,983.63 means
2 ₱7,983.6299 ₱6,994.2622 ₱989.3678 ₱1,198,027.0023
₱2,874,106.78 was paid, which
… … … … …
includes the interest.
358 ₱7,983.6299 ₱138.0992 ₱7,845.5307 ₱15,828.6252
359 ₱7,983.6299 ₱92.3336 ₱7,891.2963 ₱7,937.3289
➔The loan amount is ₱1,200,000.00.
360 ₱7,983.6299 ₱46.3011 ₱7,937.3289 ₱0.0000

➔Then the total interest paid is

This schedule is for a loan that requires 12 ₱1,674,106.78.
monthly payments in a year. The interest
rate is 7% and is compounded monthly.
How much interest was paid?
44
Amortization of an Investment
Solution
Period Periodic Interest Principal Outstanding
Payment Payment Payment Balance
1. R is assigned at period 0
for it to earn interest.
0 2. The first balance earns
1 R interest.
2 R 3. The current R adds to
3 R
the OB.
4. Continue with the
. .
algorithm to fill the
. . schedule.
. .
n-1 R
n R
45

Example
A Manulife client wants to invest in a Solution
product where he can put Php 2800 1. R = 2800 and is given at period 0 for it to earn
interest.
monthly. The financial adviser
indicates that the average rate of
earnings is 11%. What will be the
investment schedule of the client?
Period Periodic Interest Principal Outstandng
Payment Payment Payment Balance
0 2800.00 2800.00

1 2800.00

2 2800.00

3 2800.00

4 2800.00

5 2800.00

… … …. …. ….
46

Example
Solution
A Manulife client wants to invest in a 2. The first balance earns interest.
product where he can put Php 2800 3. The current R adds to the OB.
0.11
monthly. The financial adviser 2800 ≈ 25.667
indicates that the average rate of 12
2800 + 25.667 ≈ 2825.667
earnings is 11%. What will be the
investment schedule of the client?
Period Periodic Interest Principal Outstandng
Payment Payment Payment Balance
0 2800.00 2800.00

1 2800.00 25.667 2825.667 5625.667

2 2800.00

3 2800.00

4 2800.00

5 2800.00

… … …. …. ….
47

Example
Solution
A Manulife client wants to invest in a 4. Continue with the algorithm to fill the
product where he can put Php 2800 schedule.
monthly. The financial adviser Period Periodic
Payment
Interest
Payment
Principal
Payment
Outstandng
Balance
indicates that the average rate of
0 ₱2,800.0000 ₱2,800.0000
earnings is 11%. What will be the
1 ₱2,800.0000 ₱25.6667 ₱2,825.6667 ₱5,625.6667
investment schedule of the client?
2 ₱2,800.0000 ₱51.5686 ₱2,851.5686 ₱8,477.2353
3 ₱2,800.0000 ₱77.7080 ₱2,877.7080 ₱11,354.9433
4 ₱2,800.0000 ₱104.0870 ₱2,904.0870 ₱14,259.0302
5 ₱2,800.0000 ₱130.7078 ₱2,930.7078 ₱17,189.7380
6 ₱2,800.0000 ₱157.5726 ₱2,957.5726 ₱20,147.3106
7 ₱2,800.0000 ₱184.6837 ₱2,984.6837 ₱23,131.9943
8 ₱2,800.0000 ₱212.0433 ₱3,012.0433 ₱26,144.0376
9 ₱2,800.0000 ₱239.6537 ₱3,039.6537 ₱29,183.6913
… … …. …. ….
 Amortization

⊸ Persons with amortized loans, or those who invest and pays a periodic
amount needs to know the amount that their payments contributed to
the principal.
⊸ The outstanding balance at the end of any period k is computed by two
formulas for loans.
1 − (1 + i )−(n − k )  1 − (1 + i )− mt 
OB k = R   based from P = R 
 i   i 


OB k = P(1 + i ) − R 
k (1 + i ) k
− 1 based from  (1 + i )mt − 1 
 F = R 
 i   i 
 Amortization

⊸ Persons with amortized loans, or those who invest and pays a periodic
amount needs to know the amount that their payments contributed to
the principal.
⊸ The outstanding balance at the end of any period k is computed by two
formulas investments/savings.

1+𝑖 𝑘 −1  (1 + i )mt − 1 
𝑂𝐵𝑘 = 𝑅 based from F = R 
𝑖  i 
50

ExampleSolution
Refer to the same schedule: From a F perspective…

Period Periodic Interest Principal Outstandng 𝑂𝐵𝑘

Payment Payment Payment Balance 2
0.07
0 ₱1,200,000.0000 = 1200000 1 +
12
1 ₱7,983.6299 ₱7,000.0000 ₱983.6299 ₱1,199,016.3701
0.07 2
2 1+ −1
₱7,983.6299 ₱6,994.2622 ₱989.3678 ₱1,198,027.0023 12
− 7983.6299
… … … … … 0.07
12
358 ₱7,983.6299 ₱138.0992 ₱7,845.5307 ₱15,828.6252
≈ 1198027.002
359 ₱7,983.6299 ₱92.3336 ₱7,891.2963 ₱7,937.3289
360 ₱7,983.6299 ₱46.3011 ₱7,937.3289 ₱0.0000

How much is the unpaid principal after 2

payments?
51

ExampleSolution
From a P perspective

Period Periodic Interest Principal Outstandng

Payment Payment Payment Balance
𝑂𝐵2
0 ₱1,200,000.0000 − 360−2
0.07
1 ₱7,983.6299 ₱7,000.0000 ₱983.6299 ₱1,199,016.3701 1− 1+
12
= 7983.6299
2 ₱7,983.6299 ₱6,994.2622 ₱989.3678 ₱1,198,027.0023 0.07
… … … … …
12
≈ 1198026.996
358 ₱7,983.6299 ₱138.0992 ₱7,845.5307 ₱15,828.6252
359 ₱7,983.6299 ₱92.3336 ₱7,891.2963 ₱7,937.3289 **Slight difference will
360
happen due to rounding.
₱7,983.6299 ₱46.3011 ₱7,937.3289 ₱0.0000

How much is the unpaid principal after 2

payments?
52

Example Solution
From an F perspective

Period Periodic Interest Principal Outstandng

Payment Payment Payment Balance ➔180 payments of ₱7,983.63
0 ₱1,200,000.0000
means ₱1,437,053.38 was paid,
1 ₱7,983.6299 ₱7,000.0000 ₱983.6299 ₱1,199,016.3701
which includes the interest.
2 ₱7,983.6299 ₱6,994.2622 ₱989.3678 ₱1,198,027.0023
… … … … … ➔ The outstanding balance after
358
180 payments is ₱888226.40
₱7,983.6299 ₱138.0992 ₱7,845.5307 ₱15,828.6252
359 ₱7,983.6299 ₱92.3336 ₱7,891.2963 ₱7,937.3289
360
➔ Then the total interest paid is
₱7,983.6299 ₱46.3011 ₱7,937.3289 ₱0.0000
₱548,827.02
How much interest was paid after 15 years?
 Deferred Annuity

⊸ Programs offered by banks where the first payment is delayed

for some time

⊸ Since the first payment is deferred for k periods, the present

value of the annuity is adjusted. The formula is given by

1 − (1 + i )− mt 
Pdef = R   (1 + i ) −k
 i 
54

ExampleSolution
A bank offers a loan program that ➔ The period of deferment is k =
promotes a deferred payment. The loan 4 periods * 5 years = 20
will require a payment of P10,000.00 every
3 months for 10 years, but the first 𝑃𝑑𝑒𝑓
payment will only be given after 5 years. 0.06 −40
1− 1+ −20
The interest rate is 6% and is compounded = 10000 4
1+
0.06
quarterly. How much is the loan valued if a 0.06 4
4
customer applies for it today?
𝑃𝑑𝑒𝑓 ≈ 222116.30

The loan is valued at P222,116.30

today.
55

ExampleSolution
A credit card company offers a “Buy Now, ➔This is a deferred annuity
Pay Later” scheme. They say that for a concerned with present value.
certain purchase, the customer will be ➔But first, we have to find the
paying 30 monthly installments of P1000. matching interest rate.
The start of which is 6 months after the 4 12
purchase and interest is charged at 16% 0.16 𝑟
1+ = 1+
compounded quarterly. How much is the 4 12
minimum purchase for this payment 1
0.16 3
scheme to take effect? 𝑟 = 12 1+ − 1 ≈ 0.1579
4

➔ The equivalent rate in one year is

0.1579. This will undergo monthly
compounding.
56

ExampleSolution
A credit card company offers a “Buy Now, ➔Then, we compute the present
Pay Later” scheme. They say that for a value of this deferred annuity.
certain purchase, the customer will be
paying 30 monthly installments of P1000. 0.1579 −30
1 − 1 + 12 0.1579
−6

The start of which is 6 months after the 𝑃𝑑𝑒𝑓 = 1000 0.1579

1+
12
purchase and interest is charged at 16% 12

compounded quarterly. How much is the

minimum purchase for this payment ≈ 22794.78
scheme to take effect?

➔ The purchase should amount to

P22794.78 for the payment scheme to
take place.
 Business and Consumer Loans

Banks and lending institutions

offer loans for their customer’s
needs. These loans are used to
fund children’s education,
investments, purchases,
businesses, etc.
 Business and Consumer Loans

Business Loans
➔ money lent specifically for a
business/entrepreneurial purposes

Consumer Loans
➔ money lent to individuals for
personal or family purposes
59
Business and Consumer Loans
Example
Mr. Bercenio plans to have a barbershop. He wants to borrow some money
from the bank in order for him to buy the equipment for the barbershop. Business Loan!!!

Mr. and Ms. Awayan wants to borrow money from the bank to finance the
Consumer Loan!!!
college education of their daughter.

Mr. Alonzo wants to have some improvements on their 10-year old house.
He wants to build a new room for their 16-year old daughter. He will Consumer Loan!!!
borrow some money the bank to finance this plan.

Mr. and Mrs. San Juan owns a siomai food cart empire that they want to
Business Loan!!! expand internationally. They decided to have a loan to fund this
objective.

Ms. Dela Vega owns a computer shop. She decides to upgrade her own
desktop computer by applying for a loan. Consumer Loan!!!
 Fair Market Value of an Annuity

⊸ You have received two offers

➔It is concerned with a single
amount that is a substitute for
inflows (income) or outflows
(expenses) on a focal date.
for an antique turntable that
you want to sell. Ms. Blanco’s
offer is P25,000 down plus a
P100,000 lump sum payment
five years from now. Mr.
Nemecio has offered P20,000
down plus P5000 every quarter
for five years.
 Fair Market Value of an Annuity

Ms. Blanco’s
Php 25k Php 100k

Year

0 1 2 3 4 5
Php 5k Php 5k Php 5k Php 5k Php 5k
Mr. Nemecio Php 20k quarterly ...
quarterly quarterly quarterly quarterly
62

ExampleSolution
• You have received two offers on an ➔If the focal date is the present time.
antique turntable that you want to sell. Hence, the present value will be the
Ms. Blanco’s offer is P25,000 down plus fair market value of these offers.
a P100,000 lump sum payment five ➔Ms. Blanco’s…
years from now. Mr. Nemecio has
5
offered P20,000 down plus P5000 every 100000 = 𝑃 1 + 0.05
100000
quarter for five years. 𝑃= 5
≈ 78352.62
1 + 0.05

• Compare the economic values of the two 25000 + 78352.62 = 103352.62

offers if money can earn 5%
compounded annually. The fair market value of Ms. Blanco’s
offer at present is Php 103352.62
63

ExampleSolution
• You have received two offers on an ➔If the focal date is the present time.
antique turntable that you want to sell. Hence, the present value will be the
Ms. Blanco’s offer is P25,000 down plus fair market value of these offers.
a P100,000 lump sum payment five ➔Mr. Nemecio’s… 𝑟 4
1
years from now. Mr. Nemecio has 1 + 0.05 = 1 +
4
𝑟 ≈ 0.04908893
offered P20,000 down plus P5000 every
0.04908893 −4×5
quarter for five years. 1− 1+ 4
𝑃 = 5000
0.04908893
4
𝑃 ≈ 88196.59
• Compare the economic values of the two
offers if money can earn 5% 20000 + 88196.59 = 108196.59

compounded annually.
The fair market value of Mr. Nemecio’s
offer at present is Php 108196.59
64

ExampleSolution
• You have received two offers on an ➔Which offer would you choose?
antique turntable that you want to sell.
Ms. Blanco’s offer is P25,000 down plus Mr. Nemecio’s: Php 108196.59
a P100,000 lump sum payment five Ms. Blanco’s: Php 103352.62
years from now. Mr. Nemecio has
offered P20,000 down plus P5000 every
quarter for five years. If the present is the focal date, Mr.
Nemecio’s offer has a higher
economic value.
• Compare the economic values of the two
offers if money can earn 5%
compounded annually.
65

Example
• Company A offers ₱𝟏𝟓𝟎,𝟎𝟎𝟎 at the end Company A
of 𝟑 years plus ₱𝟑𝟎𝟎,𝟎𝟎𝟎 at the end 𝟓 Php Php
years. Company B offers ₱𝟐𝟓,𝟎𝟎𝟎 at Year
150k 300k

the end of each quarter for the next 5

years. Assume that money is worth 8% 0 1 2 3 4 5
compounded semi-annually. What’s the Company B
Php 25k Php 25k Php 25k Php 25k Php 25k
difference of the two offers? Use focal quarterly quarterly quarterly quarterly quarterly
date at the start of the term.
66

ExampleSolution
• Company A offers ₱𝟏𝟓𝟎,𝟎𝟎𝟎 at the end ➔Company A’s
of 𝟑 years plus ₱𝟑𝟎𝟎,𝟎𝟎𝟎 at the end 𝟓 0.08
6
150000 = 𝑃 1 +
years. Company B offers ₱𝟐𝟓,𝟎𝟎𝟎 at 2
150000
the end of each quarter for the next 5 𝑃=
1 + 0.04 6
≈ 118547.18
years. Assume that money is worth 8% 10
0.08
compounded semi-annually. What’s the 300000 = 𝑃 1 +
2
difference of the two offers? Use focal 300000
𝑃= ≈ 202669.25
date at the start of the term. 1 + 0.04 10

118547.18 + 202669.25 = 321216.43

The fair market value of Company A’s

offer at present is Php 321,216.43
67

ExampleSolution
• Company A offers ₱𝟏𝟓𝟎,𝟎𝟎𝟎 at the end ➔Company B’s
of 𝟑 years plus ₱𝟑𝟎𝟎,𝟎𝟎𝟎 at the end 𝟓 2
0.08 𝑟 4
years. Company B offers ₱𝟐𝟓,𝟎𝟎𝟎 at 1+
2
= 1+
4
the end of each quarter for the next 5 𝑟 ≈ 0.0792156

years. Assume that money is worth 8%

compounded semi-annually. What’s the 1− 1+
0.0792156 −4×5

4
difference of the two offers? Use focal 𝑃 = 25000
0.0792156
date at the start of the term. 4
𝑃 ≈ 409560.08

The fair market value of Company B’s

offer at present is Php 409,560.08
68

ExampleSolution
• Company A offers ₱𝟏𝟓𝟎,𝟎𝟎𝟎 at the end ➔Which offer would you choose?
of 𝟑 years plus ₱𝟑𝟎𝟎,𝟎𝟎𝟎 at the end 𝟓
years. Company B offers ₱𝟐𝟓,𝟎𝟎𝟎 at Company A: Php 321,216.43
the end of each quarter for the next 5 Company B: Php 409,560.08
years. Assume that money is worth 8%
compounded semi-annually. What’s the
difference of the two offers? Use focal The difference between their Fair
date at the start of the term. Market Values at the start of the
term is ₱𝟖𝟖,𝟑𝟒𝟑.𝟔𝟓.
 REFERENCES
• Ocampo Shirlee R. , Tresvalles, Regina M. , et. al. (2016) Teaching Guide for Senior High School ,
General Mathematics.
• Lim, Y., Nocon, E., Ruivivar, L., et. Al. (2016) Math for Engaged Learning: General Mathematics
• http://davisclasses.weebly.com/uploads/2/2/5/4/22542542/day_1_notes_-
_graphing_rational_functions_-_keyed.pdf
• https://mcckc.edu/tutoring/docs/br/math/graphing/Graphing_a_Rational_Function.pdf
• https://www.sctcc.edu/sites/default/files/users/cas/Asymptotes%20and%20Graphing%20Rational%20F
unctions.pdf
• http://msenux2.redwoods.edu/IntAlgText/chapter7/chapter7.pdf
• http://msenux2.redwoods.edu/IntAlgText/chapter4/section1.pdf
• http://www.kkuniyuk.com/PrecalcBook/Precalc0105to0107.pdf
• https://www.cusd80.com/cms/lib/AZ01001175/Centricity/Domain/2385/4.7%20Alg.pdf
• https://wl.apsva.us/wp-content/uploads/sites/38/2017/08/Wright-2.7-Piecewise-SY18.pdf
• https://www.jacksonsd.org/cms/lib/NJ01912744/Centricity/Domain/504/Alg%203.7%20BI%20TB.pdf
• https://www.classzone.com/eservices/home/pdf/student/LA202HAD.pdf

69
BUSINESS MATHEMATICS
Interest, Amortization, Annuities

Prepared by:
Mr. Reymund Gonowon and Ms. Shirlee Ocampo