Republic of the Philippines

PALAWAN STATE UNIVERSITY

Coron Campus

Mathematics in
the Modern World
OUTCOME BASED MODULE

GE MMW
 Republic of the Philippines
PALAWAN STATE UNIVERSITY
Coron Campus

Module 6:
Mathematics of Finance

Student Signature: Date

Returned:

GE MMW
 Republic of the Philippines
PALAWAN STATE UNIVERSITY
Coron Campus

Lesson 1: Simple Interest

Learning Objectives:
At the end of this module, learners would be able to:
a. Calculate the accumulated interest.
b. Calculate the principal or the maturity value in problems involving simple interest,
compound interest; and
c. Solve problems involving simple interest, compound interest and annuities.

Read:
When a person borrows money from a lending company or a bank, he or she
usually pays a fixed rate of interest on the principal for using that money. The amount
paid by the borrower is called interest while the amount of money that is loaned is called
the principal or the present value.

Simple Interest
It is determined by multiplying the daily interest rate by the number of days that
elapsed between payments.
It is given by:
I = Prt
Where P is the Principal, r is the interest rate per year, and t is the number of
years. If the number of days in a year is 360 days in a year, the interest is called
ordinary simple interest. If it uses 365 days in a year or 366 days for a leap year then
the interest is called exact simple interest.
The future value or maturity value is the total amount paid including the interest.
This amount is obtained by the formula
F = P+I
= P+Prt
= P (1+rt)

GE MMW
 Republic of the Philippines
PALAWAN STATE UNIVERSITY
Coron Campus
Example 1:
An employee borrows P60, 000 for 7 months at an interest rate of 12% per year.
Find the interest earned and the total amount he has to pay.

Solution:
The interest earned is:
I = Prt = (60,000)(0.12)(7/12) = P4,200
The total amount to be paid is:
F = P (1+rt) = 60,000 [1+(0.12)(7/12)] = P64,200.

Lesson 2: Compound Interest

The Compound Interest is computed based on the principal amount and the total
accumulated interest earned. The total accumulated amount on the principal P for n
periods at an interest of i per periods is given by:
F = P (1 + i)n
j
where n = mt and i =
m
The interest rate j is called the nominal rate and m is the number of the
compounding periods in a year. For example, if the interest rate is 6%, compounded
quarterly for 2 years, then the total number of periods is n = mt = (4)(2) = 8 periods and
j 0.06
the interest rate per quarter is i = == =0.015 or 1.5%.
m 4

Example 2:
What is the amount that should be deposited today at 6.5% compounded
quarterly in order to withdraw P200, 000 and leave nothing in the fund at the end of 5
years?
Solutions:
j mt
F = P (1 + )
m
F

( )
mt
P= j
1+
m

GE MMW
 Republic of the Philippines
PALAWAN STATE UNIVERSITY
Coron Campus
200,000

( )
(4)(5)
P= 0.065
1+
4

P = 144,883.46

Example 3:
How long will it take to triple the sum of the money invested at 12% compounded
monthly?
Solution:
Given that F = 3P, then
j n
F = 3P = P (1 + )
m
0.12 n
3P = P (1 + )
12
3 = (1.01)n
ln (3) = n ln (1.01)
ln(3)
n= =110.41
ln(1.01)
Thus, the number of years is:
n = (m)(t)
Rearranging the equation we get:
n 110.41
t= = = 9.2 years
m 12

Effective Interest Rate, ER, is equivalent to interest rate compounded annually. It

can be used to compare two rates with different compounding periods.
j m
ER = (1 + ) -1
m

Example 4:

GE MMW
 Republic of the Philippines
PALAWAN STATE UNIVERSITY
Coron Campus
If one bank advertise its rate as 6.2 % compounded monthly and another bank
advertises its rate as 6.3% compounded annually, which rate is better for an
investment?
Solution:
For bank 1, the effective rate is

0.062 12
ER = (1 + ) -1 = 0.064% or 6.4%
12
For bank 2, the interest rate is 6.3%
Hence, bank 1 has a better interest rate. A higher interest rate is good for
financial investment.

Lesson 3: Annuity – Sinking Fund and Amortization

An annuity is a series of equal payments made at regular time intervals. It is also

known as the sinking fund which is used for future financial obligations such as
educational expenses for children, replacements of machines or equipment, and
amortization of loans or assets.
An Ordinary Annuity is one of whose payments are made at the end of each
interest period. The present value P and the future value F of an ordinary annuity A
are given by:
A
P= ¿¿
i
A
F= ¿¿
i
Where A is the payment made at the end of each successive period, i is the
interest rate per period, and n is the total number of periods.

Example 5:
An equipment costs P200,000 today and has a release value of P50,000 after 10
years. The inflation rate is 5% per year. The annual interest rate earned on investment

GE MMW
 Republic of the Philippines
PALAWAN STATE UNIVERSITY
Coron Campus
is 6%. How much money needs to be set aside each year in order to replace the said
equipment with an identical model 10 years from now?
Solution:
Due to inflation, the value of the equipment 10 years from now would be:
F1 = P (1+i)n = 200,000 (1+0.05)10 = P325, 779.00

The amount to be raised in 10 years will be:

F = F1 – resale value = 325,779 – 50,000 = 275,779
Hence, the amount that needs to be set aside yearly is computed as
follows:

F = A [ ( 1+ i )n −1¿ ¿ ¿ i]

275,779 = A [ ( 1+ 0.06 )10−1 ¿ ¿ ¿ 0.06 ]

275,779 = A (13.1808)
275,779
A=
13.1808
A = P20,923

Did you know???

Interest is an ancient practice; however, social norms from the ancient Middle
Eastern civilizations, to medieval times regarded charging interest on loans as a kind of
sin. This was due, because loans were made to people in need, and there was no
product other than money being made in the act of loaning assets with interest.
The moral dubiousness of charging interests on loans fell away during the
Renaissance period. People began borrowing money to grow businesses in an attempt
to improve their own station. Growing markets and relative economic mobility made
loans more common and made charging of interest more acceptable. It was during this
time that money began to be considered as commodity, and the opportunity cost of
lending it was seen as worth charging for.

Let’s Try:
Solve the following:

GE MMW
 Republic of the Philippines
PALAWAN STATE UNIVERSITY
Coron Campus
1. The ordinary simple interest charged after 130 days on a loan of P10,200 is
P575. Find the interest rate.
2. A mother invested P100,000 in a mutual fund on the date her first son was
born. If the money is worth 10% compound semi-annually, how much will the son
receive on his 18th birthday?
3. A house and lot amounting P3.5M is to be amortized by monthly payments
over 5 years at an annual interest of 10%. What is the monthly payment?

Additional Information:
Watch the following video clip: https://www.youtube.com/watch?
v=5J57gOVn2rA

References:
Published:
Aufman, Richard N., et al, Mathematical Excursions. 3rd ed., Brookes/Cole, Cengage
Learning.
Aufman, R., Lockwood, J.,Nation, R.,Clegg D., Epp, S., Mathematics in the Modern
World, Cengage Learning

Congratulations for Finishing Module 6.

God Bless!

GE MMW