MODULE 2:

Mathematics of
Finance

v
 2
MATHEMATICS OF FINANCE Mathematics of Finance
MIDTERM

CONTENTS
2.1. Interest ACTIVITY
2.2. Discounts
2.3 Amortization Chain Notes
Materials
• Sheet of papers
OUTCOMES • Ballpen
LO1. Apply the concepts and
methods of management science, Mechanics:
and mathematics of finance in • Select a broad open-ended
relation to business administration
question focused on a particular
through problem solving.
concept relevant to the current
OBJECTIVES content.
At the end of the module, the • Write the question at the top of a
following learning objectives will be
long sheet of paper.
attained by the students:
• Post the question somewhere in
1. Distinguished simple from
compound interest. the room so everyone can see it
as well.
2. Solves problems on simple and
• Pass the note around the class
compound interest.
from student to student, having
3. Computes for a discount problem.
each student add a one- or two-
4. Calculates a monthly amortization word sentence that relates to the
in a problem.
question and builds upon,
MOTIVATION QUESTION extends, or disagrees with

Before we start our discussion, let us others’ comments.

consider the following questions: • Make sure students know that
should read all the prior
• What comes to your mind when
you hear the word “Finance”? responses before adding their
• What is the role of finance in own “note”.
business?
• Encourage everyone to build up
the last note made so it connects
with the idea they are adding.

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• Have students turn the sheet
over when they runout of space
on the first page.
• Have students continue to pass
the Chain Notes around even if
they engage in other tasks.
Note: Make sure students know that
the notes should be brief and that it
should take no more than one to two
minutes per student to read and
respond and pass it on.
• Take up the Chain Notes when
completed and read aloud or
project so all the students can
see the responses.
• Allow students an opportunity to
give feedback on the statements
made by their peers.
• Have students discuss whether
they agree or disagree with the
statements on the paper and
defend their reasoning.
ANALYSIS
Ask the students with printed words
the following questions:
1. What is your idea about the
word/words you picked?
2. Share some real-life experience
related to those words.
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ABSTRACTION
I nterest is defined as the cost of
borrowing money, as in the
case of interest charged on a
loan balance. Conversely, interest
can also be the rate paid for money
on deposit, as in the case of a
certificate of deposit. Interest can be
calculated in two ways: simple
interest or compound interest.
Understanding the difference
between simple and compound
interest is crucial when you are
trying to pick the right loan or find
the best place to store your savings.
If you are a borrower who does not
want to get stuck with expensive
debt that takes years to eliminate,
you will probably want a loan with
interest that does not compound.
Compound interest is more
advantageous for the lender or
investor, while simple interest is
more advantageous for the borrower
or saver. However, the choice
between simple and compound
interest ultimately depends on the
specific context of the loan or
investment.
 MATHEMATICS OF FINANCE
Lesson 1.1 Interest
Interest denoted by I, the amount
earned for the use of borrowed
money, investment or, if money
deposited in a bank.
For example, a bank will pay you
interest when you deposit your
money in a high-yield savings
account. The bank pays you to hold
and use your money to invest in
other transactions. Conversely, if you
borrow money to pay for a large
expense, the lender will charge you
interest on top of the amount you
borrowed.
In practice, interests are computed
at a certain duration of time. Usually,
interests are computed annually.
Thus, the longer the time elapsed,
the higher the interest gets. There
are two kinds of interests that are
often encountered: simple interest
and compounded interest.
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Simple Interest is obtained when
the principal amount only earns
interest. To compute for the simple
interest I for a principial amount P
invested or loaned at an annual
interest rate r in t years, used the
formula:
Principal, denoted by P, the amount
lent, invested or deposited. Also
called the face value, or the present
value of a loan.
Interest Rate, denoted by r, the
amount lent of interest paid is given
as a percent of the principal.
Time, denoted as t, the unit of time
is understood to be in years, or
fraction in years.
Note:
When time is given in months,
number of months (actual time)
t=
12
When time is given in days,
number of days (actual time)
t=
360
** This is known as ordinary time or
Banker’s rule.
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Simple Interest Formula Problem 1.1

What interest is paid at the end of 3
I=Pxrxt years for ₱12,000 at an interest rate
Where: of 4%?
Find: I =?
I – Interest I Given:
P – Principal P = ₱12,000 r= 4% per year
t= 3 years
r - rate
Solution:
t – time
I=Pxrxt
Formula for Principal = (₱12,000) (.04) (3)

I I = ₱1,440
P=
rt

Problem 1.2
At what rate is interest paid, if the
Formula for Rate
interest earned by ₱80,000 for 6
I months is ₱1,200?
r=
Pt Find: r =?

Given:
P = ₱80,000 I= ₱1,200
Formula for Time
t= 6 months
I
t= Solution:
Pr I
r=
Pt
₱1,200
r= 6
(₱80,000)( )
Maturity Value, denoted by A or F, 12

it is the sum of the principal and ₱1,200

interest. Also known as amount, =
(₱80,000)(0.50)
balance, or future value.
₱1,200
Formula for Maturity Value =
₱40,000
a) A = P + I
b) A = P + Prt = 0.03 x 100
c) A = P (I + rt)
r = 3%

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Problem 1.3 Problem 1.5

If ₱10,000 is invested at 4.5% simple A loan of ₱100,000 has been issued
interest, how long will it take to grow for 5 years. Compute the amount to
to ₱11,800? be paid to the lender if simple
interest is charged at 5% per year.
Find: t =?
Find: A =?
Given: Given:
P = ₱10,000 I= ₱1,800 P = ₱100,000 r= 5% per year
r= 4.5% t= 5 years

Solution: Solution:
I
t= A = P + Prt
P𝑟
₱1,800 = ₱100,000 +(₱100,000) (.05) (5)
t = (₱10,000)(0.045)
= ₱100,000 + ₱25,000
₱1,800
= A = ₱25,000
(₱450)

t = 4 years Note:
You can also use the process for
Problem 1.4 solving first the interest, then
Mark got a demand letter asking him followed by Formula A for
to pay the interest loan amount of Maturity Value.
₱7,200. It is related to his bank loan
of 9 months term with 8% interest I=Pxrxt
rate. Calculate the present value that = (₱100,000) (.05) (5)
Mark received from the bank?
I = ₱25,000
Find: P =?
Given: A=P+I
I = ₱7,200 t= 9 months = ₱100,000 + ₱25,000
r = 8%
A = ₱125,000
Solution:
I
P=
𝑟𝑡
₱7,200
P = (0.08)(9/12)

₱7,200
= (0.08)(0.75)

₱7,200
=
(0.06)

P = ₱120,000

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Where:
A = Compound amount/ Maturity /
Future value
P = Principal / Present value
r = rate
t= time / term in years
n = frequency of conversion
(annually, semi-annually, quarterly, or monthly)

Problem 1.6
Compound Interest Margie invested ₱40,000 in her time
deposit account in a period of 3 years
In business transactions covering an with 6% interest rate compounded
extended period of time, interest annually. Banks pay compounded
may be handled in different ways. interest on her time deposit account.
Interest may earn on top of interest. How much will be the future or
At stated intervals the interest due is maturity value? How much is the
added to the principal. In this case total interest?
the interest is said to be compounded
or concerted into principal and
thereafter also earns interest. Thus,
the principal increases periodically
throughout the term of the
transaction. The interest due is
added to the principal and thereafter
earns interest. The sum due at the Find: A = ? Ic = ?
end of the transaction is called Given:
Compound amount or compound P = ₱40,000 t= 3
maturity value. r= 6% n=1

Solution:
Compound interest. The interest r nt
A =P (1 + )
paid when the interest due at the end n
.06 (1)(3)
of a certain period is added to the = ₱40,000 (1 + )
1
principal and that sum earns interest 3
= ₱40,000 (1 + . 06)
for the next period. 3
= ₱40,000 ( 1. 06)
= ₱40,000 (1.19)
Compound Amount Formula

r nt A = ₱47,640.64
A =P (1 + n
)

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IC = A - P Problem 1.8
= ₱47,640.64 - ₱40,000 Margie invested ₱40,000 in her time
deposit account in a period of 3 years
IC = ₱7,640.64 with 6% interest rate compounded
quarterly. Banks pay compounded
interest on her time deposit account.
How much will be the future or
Problem 1.7 maturity value? How much is the
Margie invested ₱40,000 in her time total interest?
deposit account in a period of 3 years
with 6% interest rate compounded Solution:
semi-annually. Banks pay
compounded interest on her time Find: A = ? Ic = ?
deposit account. How much will be Given:
the future or maturity value? How P = ₱40,000 t= 3
much is the total interest? r= 6% n=4

r nt
Find: A = ? Ic = ? A =P (1 + )
n
Given: .06 (4)(3)
= ₱40,000 (1 + )
P = ₱40,000 t= 3 4
12
r= 6% n=2 = ₱40,000 (1 + .015)
12
= ₱40,000 (1 .015)
Solution:
= ₱40,000 (1.195618171)
r nt
A =P (1 + )
n A = ₱47,824.73
.06 (2)(3)
= ₱40,000 (1 + 2
)
= ₱40,000 (1 + .03)
6 IC = A - P
6 = ₱47,824.73 - ₱40,000
= ₱40,000 (1 .03)

Ic = ₱7,824.73
= ₱40,000 (1.19)

A = ₱47,762.09
Problem 1.9
Margie invested ₱40,000 in her time
IC = A - P deposit account in a period of 3 years
= ₱47,762.09 - ₱40,000 with 6% interest rate compounded
monthly. Banks pay compounded
Ic = ₱7,762.09 interest on her time deposit account.
How much will be the future or
maturity value? How much is the
total interest?

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Find: P = ?
Find: A = ? Ic = ? Solution:
Given:
P = ₱40,000 t= 3 A
P= r
r= 6% n = 12 (1+ n)nt
Solution:
₱47,867.22
r nt
= .06
A =P (1 + ) (1+ 12 )(12)(3)
n
.06 (12)(3)
= ₱40,000 (1 + 12
) ₱47,867.22
36 =
= ₱40,000 (1 + .005) (1+ .005)36
36
= ₱40,000 (1 .005)
= ₱40,000 (1.196680525) ₱47,867.22
=
(1.005)36
A = ₱47,867.22
₱47,867.22
=
IC = A - P 1.196680525
= ₱47,867.22 - ₱40,000
= ₱39,999.99916

Ic = ₱7,867.22 P = ₱40,000.00

Present Value at Compound

Interest Finding Rate at Compound
Formula for Principal or Present value Interest
of a Compound Interest:
A Formula:
P= r
(1+ n)nt 𝑛 𝐴
r= ( √ − 1)
𝑃

Problem 1.10
Problem 1.11
Margie invests in an annuity with an
What annual interest rate
annual fixed interest rate of 6%. The
compounded monthly would be
annuity compounds monthly. If after
needed for ₱40,000 to accumulate
3 years, the account balance is
₱47,867.22 in 3 years?
₱47,867.22 how much was the
beginning investment? Given:
P = ₱40,000 n = 12
Given: A = ₱47,867.22 t=3
r = 6% n = 12
A = ₱47,867.22 t=3 Find: r = ?

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Solution: Solution:
A
𝐴 1 log10 ( )
r = n[( )𝑛𝑡 − 1] P
𝑃 t= r
(n)log10 (1+ )
n
1
₱47,867.22
= 12[( ) (12)(3) − 1] log10 (
₱47,867.22
)
₱40,000 ₱40,000
= .06
1 (12)log10 (1+ )
12
= 12[(1.1966805) − 1] 36
log10 (1.1966805)
= 12[(1.1966805).0278 – 1] =
(12)log10 (1+ 0.005)
= 12[(1.005004009 – 1]
0.077978214
=
= 12 (.005004009) (12)log10 (1.005)

=0.060048108 0.077978214
=
=0.060048108 x 100
(12)(0.002166062)

= 6.0048108 0.077978214
=
0.025992741
r = 6%
t = 2.999999654

Finding Term at Compound t=3

Interest

Formula:
A
log10 ( )
P
t= r
(n)log10 (1+ )
n

Problem 1.12
How long will it take for ₱40,000 to
accumulate ₱47,867.22 if 6% is
compounded monthly?

Given:
P = ₱40,000 A = ₱47,867.22
r = 6% n = 12

Find:
t=?

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Summary

In this module, we learned about management science and its application to various
organization, as well as the approaches of management science in solving a problem.
Management science is a field that applies mathematical and statistical methods to
decision-making. In the context of accounting, management science plays a significant
role in helping managers make informed decisions based on data and analysis.
Management science techniques can be used to analyze financial data, such as budgets
and sales projections, to help organizations make decisions about investment,
budgeting, and resource allocation. This can help organizations to optimize their use
of resources, reduce waste, and make more informed decisions about their future
operations.

Additionally, management science can also be used to evaluate the performance of

organizations and their accounting systems. By analyzing financial data and
performance metrics, organizations can gain a better understanding of their strengths
and weaknesses, as well as identify areas where they can improve. This can help
organizations to make more informed decisions about how to allocate resources, adjust
their accounting processes, and improve their overall performance.

In summary, the significance of management science in accounting lies in its ability to

provide data-driven insights that can help organizations make informed decisions
about their financial operations, resource allocation, and performance improvement.

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MATHEMATICS OF FINANCE MIDTERM

Check For Understanding/Case Discussion

You have now an idea about interest and how it is imposed in our financial
transactions. Write a 3-paragraph essay that distinguish simple from compound
interest. Given the same amount of investment, annual interest rate, length of
time, which one will eventually earn bigger interest: simple or compound
interest? (30 points)

Criteria:
Content Clarity and Substance (including citation) - 10 pts.
Organization and Presentation - 10 pts.
Technicality (e.g., grammar) and Creativity - 10 pts.

TOTAL 30 pts.

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ASSESSMENT 1 Problem Solving

Instruction: Solve the following in a 1 whole sheet yellow paper. Round off
your answer in an appropriate corresponding unit if it is in currency, rate, or
term. Show the given and formula before writing your solution. (5 points each)

1. RB General Merchandise borrowed ₱120,000 from Union Bank. If the

company agreed to pay an 8% annual interest rate. How much is the
interest they must pay if the loan period is 9 months?

2. Suppose that Mr. Richards save ₱4,200 of your salary and deposit it into
an account that earns simple interest. After 9 months, the balance is
₱4,263. What is the annual interest rate?

3. Mrs. Reyes deposited her ₱15,000 to her bank and with a simple interest
rate of 2.3%. How many month(s) it will take before she earns ₱517.50
interest?

4. The Rural Construction Supply withdrawn their investment’s interest

from their time deposit account amounting ₱156,000. They had their
investment for 2 years with an annual interest rate of 6%. How much is
their investment in the bank.

5. Mr. Dantes went to home credit to avail the latest Samsung Galaxy Z
Flip 5 (Flip Phone). The sale price is ₱71,990. He got an approved loan
term of 36 months with a 5% annual interest rate. Calculate the total
amount he has to pay at Home Credit.

Management Science ‖ Caya 13

 MATHEMATICS OF FINANCE MIDTERM

ASSESSMENT 2 Problem Solving

Instruction: Solve the following in a 1 whole sheet yellow paper. Round off
your answer in an appropriate corresponding unit if it is in currency, rate, or
term. Show the given and formula before writing your solution. (5 points each)

1. J & J Holdings puts ₱20,000 in a savings account paying 8% annual

interest compounded monthly. At this rate how much money will be in
the account after 10 years.

2. Melan Lending Investor Corp deposited ₱40,000 at a bank 8 ½ years

ago. If the money’s worth 17% compounded quarterly. How much
interest has accumulated on her deposit now?

3. In order to accumulate ₱900,000 for 3 years 9% compounded monthly,

how much should MTQ Company deposit in a bank now?

4. How long would it take for ₱50,000 to mature into ₱120,000 invested at
14% compounded annually?

5. Six years ago, EG Flower Shop deposited ₱40,000 in savings account

that compound interest quarterly. If EG Flower Shops has ₱100,000 on
its account now, what rate of interest did she earn?

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