Fundamentals of Financial Mathematics Version 3.1 15022021

Fundamentals of Financial Mathematics
WORTH
WORTH
PRESENT
PRESENT
Lic. William A. Reyes Urroz

[This book compiles the fundamental
topics necessary in the teaching and
learning process for the development of
skills and competencies in the business
degree student .]
INTEREST
WORTH
WORTH
FUTURE
FUTURE
Lic. William A. Reyes Urroz 1

INTRODUCTION
This work aims to contribute to the teaching-learning

process in the vast world of financial mathematics.
Includes the main topics
FOREWORD
The current global context demands that new professionals be better

trained every day in the field of finance. Financial mathematics being the
main tool of finance, I intend with this book to facilitate the learning,
teaching, knowledge, systematization and dissemination of financial
mathematics. It constitutes an inevitable challenge in the university
education process; given that these are the basis of calculation for the
various financial and commercial credit operations that future
professionals who graduate from Nicaraguan universities every year will
face on a daily basis.
The purpose of this material is to present the financial mathematical

tools that allow us to make a good analysis for decision making in modern
times where all people, companies and organizations in general aspire to
achieve the maximum benefit as a buyer or user and the most attractive
returns as an investor.
The course studies the basic foundations of financial mathematics , the

logic of its different work methods and the resources to calculate and
obtain solutions to problems in commercial and financial credit
operations. There are many ways to do financial calculations. The use of
the scientific calculator is encouraged as a practical alternative for
students to solve the algebraic equations presented. These will be able to
carry out operations with simple capitalization, compound capitalization,
annuities and the most used amortization systems in Nicaragua (make
payment plans for credits) and amortization funds for personal and/or
business goals such as the replacement of the machinery and equipment.
In addition to the calculation of interests and amounts, the valuable

analysis of the present value of money is included, so important in the
financial evaluation of investment projects, the purchase of assets; In
short, there are many uses of present value and thanks to its analysis and
interpretation we can make a better decision, with good
FUNDAMENTALS OF FINANCIAL MATHEMATICS
The goal is for future professionals to acquire comprehensive training so

that they have mastery in the management of formulas and means of
calculation applied to the reality of Nicaragua and that, based on mastery
of the technique, they apply the various criteria in decision-making in
investments and commercial and financial credit operations.
This material is dedicated to these professionals, business men and

women in general, which is the result of an effort to show, in a clear,
simple and accessible way, the procedures and techniques that allow us
to know how money wins, loses or It changes its value and purchasing
power over time. The study of the mathematics of finance comes down
to this; That is, to learn how to correctly use the tools and methodology
to transfer, over time, the capital and amounts involved in any
commercial or financial operation.

I fervently hope that the person(s) who consults this material finds the
support and adequate complement to the irreplaceable work of
guidance and teaching of the teacher and that it becomes an important
part of their preparation and development. professional.
William A. Reyes Urroz
INDEX
CHAPTER I: INTRODUCTION TO FINANCIAL MATHEMATICS
1.1.- Concept of financial mathematics
1.2.- The time value of money

A) Inflation
B) Opportunity cost
C) Risk
C.1.- Country risk
D) Devaluation or slippage
E) Interest rate
1.3.- What is the application of financial mathematics?
1.4.- Basic concepts

1.4.1.1.- Capital
1.4.1.2.- Amount
1.4.1.3.- Interest
1.4.1.4.- Interest rate
1.4.1.5.- Term or time
1.4.1.6.- Payments
1.5.- Some legal aspects in Nicaragua

CHAPTER II: CAPITALIZATION AND SIMPLE UPDATE
2.1.- Introduction and basic concepts

2.1.1.- Simple capitalization basis
2.2.- Calculation of simple interest

2.2.1.- Calculation of exact simple interest
2.2.2.- Calculation of ordinary simple interest
2.2.3.- Calculation of approximate simple interest
2.3.- Calculation of time or deadline
2.4.- Capital calculation
2.5.- Calculation of the interest rate
2.6.- Calculation of the amount
2.7.- Calculation of present value
2.8.- Discount
2.8.1.- Discount types
2.8.2.- Rational Discount
2.8.3.- Bank Discount
2.9.- Amortization with simple interest (Partial payments – credits –

installments)
2.9.1.- American rule (rule of unpaid balances)
2.9.2.- Commercial rule
2.9.3.- Equivalence of values (Value equations)
CHAPTER III: CAPITALIZATION AND COMPOSITE UPDATE

3.1.1.- Capitalization or conversion period
3.1.2.- Conversion frequency
3.1.3.- Interest rate per period
3.1.4.- Number of capitalization or conversion periods
3.1.5.- Difference between simple interest and compound interest
3.2.- Composite Amount

3.3.- Present value at Compound interest.
3.4.- Term or time of an operation with compound interest
3.5.- Interest rate of an operation with compound interest
3.6.- Equivalent rates
3.6.1.- nominal rate
3.6.2.- effective rate
3.6.3.- nominal rates
3.7.- Equivalence of values or value equations with compound interest
CHAPTER IV: CAPITALIZATION AND UPDATE OF CASH FLOWS
4.1.- Introduction, basic concepts and classification of constant cash

flows
4.1.1- Elements of an annuity
4.1.2.- Classification of annuities
4.2.- Ordinary annuities due or postpaid

4.2.1. Present value of an ordinary annuity due.
4.2.2. Value of payment “A” or ordinary income “R”
4.2.3. Future value of an ordinary annuity due (VF).
4.2.4. Value of the periodic deposit “A”.
4.2.5. General annuity and adjustment of the interest rate to the
payment or income period.
4.2.6. Term or time of an ordinary annuity due.
4.2.7. Interest rate of an ordinary annuity.
4.3.- Ordinary advance or prepaid annuities

4.3.1.- Present value of an anticipated annuity.
4.3.2.- Income payment “A” or “R” of an early annuity.
4.3.3.- Amount, amount or future value of an anticipated annuity.
4.3.4.- Income deposit “A” or “R” of an advance annuity.
4.4.- Deferred annuities

4.4.1.- Present value of a deferred annuity.
4.4.2.- Income payment of a deferred annuity.
4.4.3.- Amount, amount or future value of a deferred annuity.
4.4.4.- Deposit income of a deferred annuity.
CHAPTER 5: AMORTIZATION SYSTEMS

5.2.- Active products of financial institutions
5.2.1.- Credit lines
5.1.2.- Loans
5.3.- Debt amortization systems
5.3.1.- Gradual amortization systems ( French system )
5.3.2.-Constant amortization systems ( German system )
5.3.3- Payment systems in a single future payment
5.3.4.-Flat amortization systems
5.3.5.- Amortization systems in increasing installments
CHAPTER 6: SINKING FUNDS

CHAPTER I: INTRODUCTION TO FINANCIAL

MATHEMATICS
GENERAL OBJECTIVES OF THE CHAPTER:
1. Define what financial mathematics is, its importance and the

relationship with other disciplines.
2. Explain the concepts of simple interest, time, capital, interest rate,
amount, present value, discount and value equivalence.
3. Analyze the theoretical foundations of financial mathematics and
the logic of its different calculation methods, to familiarize them
with financial analysis, which helps them to be better critics and
users of these financial tools, improving their ability to make
decisions that involve money. .
4. Expose the elements that intervene in the change in the value of
money over time.
5. Handle mathematical techniques related to finances to perform
economic-financial calculation operations.
6. Develop critical and self-critical skills
Syllabus:
1.1.- Concept of financial mathematics
1.2.- The time value of money

A) Inflation
B) Opportunity cost
C) Credit risk

C.1.- Country risk
D) Devaluation or slippage
E) Interest rate
1.3.- What is the application of financial mathematics?
1.4.- Basic concepts

1.4.1.1.- Capital
1.4.1.2.- Amount
1.4.1.3.- Interest
1.4.1.4.- Interest rate
1.4.1.5.- Term or time
1.5.- Some legal aspects in Nicaragua
1.1.- CONCEPT OF FINANCIAL MATHEMATICS
“Financial Mathematics, also called investment analysis, investment

management or economic engineering , is a derivation of applied
mathematics that studies the time value of money, combining capital,
interest rate and time to obtain a return , interest or profit; through
evaluation methods that allow investment decisions to be made based on
calculations made with the help of financial mathematics.”1
From a mathematical point of view, the basis of financial mathematics is

found in the relationship resulting from receiving a sum of money today
(VA - current value) and a different sum (VF - future value) of a larger
amount after a certain period of time. (called term). The difference
between the current value (VA) and the value (VF) responds to the
“value” (interest or profit) assigned by people to the sacrifice of their
current consumption and the risk they perceive and assume by
postponing the income thereof in time.
Financial mathematics is multidisciplinary:
1
Financial mathematics for decision making, César Aching Guzmán…. P.
With accounting , it provides, at precise or specific times, reasoned

information, based on technical records, of the operations carried out by
a private or public entity, which allow the most accurate decision to be
made when making an investment. They serve as an aid for the
calculation and due entry of the concepts of capital, interest (financial
expenses), whether current or delinquent; or to calculate the fair value of
different assets.
With the right , as the laws regulate sales in the commercial sector, the
financial instruments of financial institutions. Land, air and sea
transportation, insurance, brokerage, guarantees and shipment of
merchandise, the ownership of goods, the way in which they can be
acquired, purchase and sale contracts, mortgages, loans at interest and
even the financial mathematical method to apply for the calculation of
interest depending on the financial product to be contracted, whether it
is a passive product or whether it is an active product;
With economics , as it provides economists with the possibility of

determining the financial, commercial or service markets in which a
business or company could obtain greater economic benefits. This can be
done through the various investment evaluation methods provided by
financial mathematics such as determining the internal rate of return and
the net present value, as well as determining the time value of money.
With political science , because political science studies and solves

economic problems that have to do with society, where companies and
institutions exist in the hands of governments. Financial mathematics
helps this discipline in making decisions regarding investments, budgets,
economic adjustments and negotiations that benefit the entire
population;
With engineering , which controls production costs in the manufacturing

process, which is directly influenced by the determination of the cost and
depreciation of industrial production equipment;

With information technology , which allows optimizing manual
procedures related to economic movements, investments and
negotiations of commercial and financial credit operations;
With sociology , financial mathematics works with investments and

provides sociology with the necessary tools for companies to produce
more and better economic benefits that allow a better quality of life for
society and
With finance , discipline that works with financial assets or securities and
includes bonds, stocks and loans granted by financial institutions; as well
as demand deposits, fixed-term deposits, remittances, which are part of
the fundamental elements of financial mathematics.
With marketing, since the impact of income on companies can be

determined based on the campaigns promoted or through the
promotions carried out by the company. The calculation of discounts for
prompt payment or whether these are cascade. In another sense,
determining the interest rate at which it is attractive for the company to
finance its products or services to increase its sales.
With administration: the study of financial mathematics is closely linked

to the resolution of problems and exercises very similar to those of daily
life and in the business world.
1.2.- THE VALUE OF MONEY IN TIME

One of the most important principles in all finances.
Money is an asset that costs as time passes, allowing you to collect or pay
at periodic interest rates (daily, weekly, monthly, quarterly, etc.).
When we have an amount of money (capital) we can use it to spend it to

satisfy a need or we can decide to invest it to obtain a profit in the future.

We find the concepts of time value of money grouped into two areas:
future value and current value. Future value (FV) describes the process of
future investment growth at a given interest and periods. The present
value (PV) describes the process of future money flows that at a given
discount and periods represents current values.
The time factor plays a decisive role when determining the value of
capital. Having UM 10,000 today is not the same as having a year from
now, the value of money changes as a result of:
If the alternative was to receive the UM 10,000 at the end of a year, we

would accept the proposal on the condition of receiving an additional
sum that covers the indicated elements. That said, we conclude that
money produces more money, or more clearly generates wealth.
As long as you have the appropriate analytical techniques and can
compare the purchasing power of money at certain moments in time, you
will be able to make better economic, financial and investment decisions.
This is the help that financial mathematics or economic engineering can
provide to business managers.
A) Inflation: consists of the loss of purchasing power of money over time.

No country in the world is exempt from inflation, whether it has a low
value of 0.50% or 2% annually in developed countries, or above 20% to
the well-known hyperinflations in Latin America greater than 1,000%. The
value of money changes over time, mainly due to this phenomenon,
otherwise, that is, if there were no inflation, the purchasing power of
money would be the same over the years and economic evaluation would
be limited to simple sums. and subtractions from future earnings.
We conclude that money produces more money, or more clearly
generates wealth.
B) Opportunity cost: (The opportunity to invest them in some activity

that protects you from inflation and at the same time produces
profitability). It is the gain or utility of the best alternative discarded or
sacrificed when assigning a good or resource to a specific use, with there
being profitable alternative uses for the same good or resource.

The opportunity cost is not a real or effective cost, nor a true loss, but
rather a referential cost or loss that indicates whether or not I am being
efficient in managing my money.
C) Risk: Granting credit constitutes the probability of recovering or

not recovering the borrowed capital and the contractually agreed
benefits. The risk is generally linked to the term, amount of capital
enabled, payment method or the target market chosen for the credit
operations to be carried out. The longer the term, the greater the risk, no
one can accurately predict the future, a higher interest rate should be
charged. The shorter the term, the lower the interest rate; However, a
shorter term entails higher operating expenses for a loan for its recovery;
If both operations have the same degree of risk, the higher the risk, the
higher the interest rate.
The risk is directly and indirectly associated with the type of

debtor, the type of risk ( political, financial or economic) or the possibility
of repayment ( freedom of currency transfers, willingness to comply and
payment execution ). We will distinguish between “ country risk”,
“sovereign risk”, “commercial risk” and “credit risk”.
C.1.- Country risk: Nagy (1979) defines "country risk" as the exposure to
repayment difficulties in a debt operation with foreign creditors or with
debt issued outside the country of origin.
C.2.- Sovereign risk : it is a subset of country risk and qualifies debts
guaranteed by the government or a government agent. However,
Hefferman (1986) and Ciarrapico (1992) consider country risk and
sovereign risk as synonyms. In his opinion, country risk and sovereign risk
refer to the risk that comes from loans or debts publicly guaranteed by
the government or taken directly by the government or government
agents. In general, "country risk" tries to measure the probability that a
country will be unable to meet its financial obligations regarding external
debt; this may occur due to debt repudiation, delays, moratoriums,
forced renegotiations, or due to "technical delays." ».
C.3.- Commercial risk : corresponds to the risk that arises from any
transaction or commercial activity (exchange of goods and services, debt
issuance or investment)
C.4.- Credit risk: is the risk arising from credit activities and evaluates the
probability of non-compliance with debt commitments. For a bank, credit
risk is an important part of assessing its business risk.
C.5.- Political risk : it is the development of political and social aspects
that may affect the possibility of repatriation of foreign investment or the
repayment of external debt. Political risk is associated with political
instability and the willingness to pay on the part of the government or
the responsible agent.
D) Devaluation or slippage : it is the loss of value of the córdoba with

respect to the North American dollar. “The excess of monetary signs in
circulation, which results in their depreciation, is called inflation.”2
The monetary history in Nicaragua indicates that “in the period 1950-
1977, in which despite some cyclical oscillations, the economy was
characterized by low inflation rates and high growth rates. Between
1985-1988, the government implemented two stabilization and
adjustment programs. These programs failed in the objective of
stabilization because it was not possible to drastically reduce the growth
rate of the money supply or the fiscal deficit, nor was an adequate
volume of foreign exchange available. liquids to support the measures
implemented. The inflation rate reached 33,000 in 1988” 3
“In May 1990, the Central Bank devalued the parallel market and official
exchange rates by 100% and 50%, respectively. A new monetary unit, the
córdoba oro, was introduced in 1990, with a fixed parity of C$1.00 per
dollar. In March 1991, the government implemented various measures to
reduce inflationary pressures and achieve a competitive exchange rate.
The new monetary unit – the córdoba oro – was devalued from C$1.00 to
C$5.00 per dollar, using the exchange rate as a nominal anchoring
instrument to overcome inflationary expectations. Parallel to the
aforementioned devaluation, the old córdobas were converted to the
2
The capital, C. Marx. Chapter 14
3
Nicaragua, stabilization and adjustment policies. José Luis Medal. P.
67,68 and 69
córdobas oro, at a rate of 5 million old córdobas for one new one, and the
córdoba oro was declared the only domestic monetary unit, ending the
period during which two local currencies “were in circulation.”4 .
“As of January 1993, the anchoring was completed and a very moderate
gradual sliding system - crawling peg - of the official type began”5 This
system persists to the present day (2015).
E) Interest rate : it is the profit expressed in percentage terms. That is, if

you want to earn an amount of money from providing money to
someone else, you can determine it monetaryally by demanding an “I”
amount of money or a percentage. Financial logic indicates that this
percentage, called the interest or profitability rate, must include the
coverage of all the factors mentioned above (devaluation, inflation, risk
and opportunity cost) to produce a real profit margin.
1.3.- WHAT IS THE APPLICATION OF FINANCIAL MATHEMATICS?

The application of financial mathematics covers all fields: accounting,
administration, marketing, economics, finance, etc. Some authors
consider them to be the mathematics of credit, which is one of the main
or most widespread applications. For this it is necessary that we know
what it is:
Financial operation: financial operation is understood as the replacement

of one or more capitals with another or other equivalents at different
moments in time, through the application of a financial law. Any financial
operation is reduced to a set of cash flows (collections and payments) of
opposite signs and different amounts that occur over time. Thus, for
example, the granting of a loan by a banking entity to a client implies for
the latter an initial charge (the amount of the loan) and periodic
payments (the installments) during the time that the operation lasts. On
the part of the bank, the operation involves a single initial payment and
4
Nicaragua, stabilization and adjustment policies. José Luis Medal. P. 94,95 and 96
5
Nicaragua, stabilization and adjustment policies. José Luis Medal. P. 14
deferred periodic charges throughout the entire term of the operation
carried out...
Carrying out a financial operation implies, therefore, that three points are
met:
1. Substitution of capitals: there must be an exchange of one capital(s)
for another(s).
2. Equivalence : the capitals must be equivalent, that is, it must result
from the application of a financial law.
3. Application of a financial law: there must be agreement on the way
to determine the amount of each and every one of the capitals that
make up the operation, resulting from the consideration of the
interest generated.
The credit operations are large; However, we could summarize them in:
 Operations at maturity: are those operations where the invested
capital remains unchanged throughout the operation and is
withdrawn in one go at the end of it.
 Installment operations: are all those operations where the invested
capital suffers decreases or increases during the duration of the
operation and is extinguished through a system of partial payments
also called amortization systems .
1.3.1.- Study of investment profitability

To understand this topic it is necessary to accept three levels of
understanding:
1. The conceptual has to do with the basic concepts of interest, interest
rate, equivalence and methods for making decisions.
2. The instrumental operation referred to the use of formulas and
financial functions of spreadsheets such as Excel.
3. The situational includes the description of reality. It can be: the
clauses of a contract or promissory note; That is, a scenario to
change and for which we have several alternative solutions.

1.3.2.- Preparation of flow charts
The free cash flow diagram, known as a flowchart or flowchart, is a

graphic model used to represent cash disbursements and receipts over
time, plotted on a time scale. It is important to understand and construct
the cash flow diagram, it is an important tool in solving problems.
Year 1 Year 6
0 1 2 3 4 5 6
Periods
Time
Typical cash flow diagram for 6 years
On the time axis each number indicates the end of the corresponding
period. The number zero indicates the present; that is, the moment we
make the decision. The number one indicates the end of period one and
so on. On the time scale, the period can be a day, a month, a year or any
other unit of time.
The direction of the arrows on the free cash flow diagram is important.
The vertical arrow pointing up will indicate positive cash flows (income)
and vice versa; That is, downward will indicate negative cash flows
(expenses).
1) Example: Expense diagram

In this diagram at the end of period zero we make disbursements of UM
500; at the end of period two, for UM 1,000 and at the end of period five,
for UM 250.
0 1 2 3 4 5
500 250
1,000
2) Example: Income Diagram

Here we receive UM 800 in period “0”; in number three, UM 1,300 and in
number four UM 750
1,300
800 1,300 750
0 1 2 3 4 5
3) Example: Deposit and Withdrawal Diagram

The diagram indicates that for a deposit of CU5,000 we receive CU6,300
after six months.
6,300
0 1 2 3 4 5 6 months
5,000
To raise and resolve situations in which a relatively large number of

amounts and dates are involved - for example when a set of obligations
that debtors and creditors previously contracted is replaced by another
that is equivalent, but with other times and other amounts -, Graphs
known as time diagrams are used. These consist of a straight line, as we
already know, in which the values, amounts, capitals, dates and deadlines
of the problem to be solved are noted.
1.4.- BASIC CONCEPTS OF FINANCIAL MATHEMATICS
1.4.1.- Capital (C) (K): The word capital, although it has several meanings,
generally refers to money or the value of assets and rights owned by a
person, organization or a country. To have a better vision of the meaning
that capital has in the study of financial mathematics, what is understood
by capital is presented in three aspects:
Economic capital: it is one of the factors of production and is represented
by the set of goods necessary to produce wealth (capital goods).
Financial capital: it is the money that is invested to produce income or
interest.
Shareholders' equity: is the arithmetic difference between the value of all
a company's assets and its total debts.
There are different ways to call capital, in the same way it can
be represented with various variables. Example (principal (P), price (Pr),
Financing, Present Value (PV), Present Value (VA), Present Value (VA), Net
Value (VN), Initial Investment (I 0 ): it is “money” that we put to work to
obtain a “profit”. Example: If you deposit money in a financial institution
authorized by the SIBOIF6 It is with the objective of obtaining some profit
(interest), the money you deposit is called capital.
“Capital is a self-increasing value, that is, a value that yields
surplus value.”7
“ Money is a commodity that plays the special role of
universal equivalent.”8
According to normal economics, money (capital) is anything
that the members of a community are willing to accept in payment for
goods and debts, whose specific function is to perform the function of
general equivalent. Money arose spontaneously in ancient times, in the
process of development of exchange and forms of value. Unlike other
commodities, money has the property of being directly and universally
exchangeable for any other commodity.
Money is nothing more than what is commonly accepted in
the labor market, goods and services, performing, among others, the
functions of means of payment, unit of account or instrument of
exchange . Goods and services are characterized by satisfying
human needs and being scarce, so they have a utility that can be
measured in monetary terms. Economic and financial activity is
characterized by the production of these goods and services and their
exchange, which can be:
Simultaneous : when the good or service that is acquired and its

payment coincide in time, it is what we know as a cash transaction.
Non-simultaneous : when the good or service that is acquired and its
payment do not coincide in time, it is what we know as a credit
operation or deferred operation.
6
SIBOIF: Superintendency of Banks and Other Financial Institutions
7
Capitalism, a. Rumiántsev, et al, Page. 152
8
The Capital. c. Marx and F. Engels. Works, t. 3, p. 28 .
Since capital is synonymous with money, when calculating capital we

will use two decimal places and apply rounding techniques .
Other concepts:
 Flow that a person possesses: work force (set of intellectual
and physical resources of a person).
 Funds available to a commercial company: working capital,
social capital, etc.
It is the monetary expression in the present time of the factors of

production:
 price of land and facilities,
 salaries and wages for labor,
 Money necessary to cover the production cycle of a company
 Cost of technology .
1.4.2.- Amount (M) or (S) or Future Value (VF): it is the single final
payment of a financial operation; or it is the sum of capital C plus interest
I calculated up to a certain period after starting the financial operation.
An example of this is the total payment that must be made at the end of
a loan when it matures to cancel it.
Depending on the information available at the time of carrying out the
financial mathematical calculation, the amount or amount can be
calculated using the following formula:
M=C+I
1.4.3 .- Interest (I) or Revenue (R), yield, profit or capital gain: it is the
“price” that is agreed upon for the “rent” of the money granted in the
form of commercial or financial credit.
Interest defines the variation that a capital will have when going from an
initial moment t 0 to a moment in the future t n or vice versa,
conventionally measured in monetary units (Córdobas in Nicaragua).
We can differentiate two types of interest:

The expired or postpayable interest (I): is that which is calculated at

the end of the operation or at the end of a certain period in it. This
interest rate is calculated by capitalization.
Advance, anticipated or prepayable interest (D): is that which is
calculated at the beginning of the credit operation or at each period
thereof. This interest rate is calculated by discount.
For money taken on credit it is necessary to pay a price. This price is

expressed by a sum that must be paid for each unit of money lent, in a
conventionally stipulated unit of time.
Other ways to conceptualize interest or income are:

It is the payment for the use of other people's money, denoted
by I.9
It is the increase in the value of money over time.10
It is the money that capital produces by lending it or investing
it so that others can use it without being their property. For example: if
you get a bank loan you will be using money that is not yours but the
bank's. Also if you invest capital in a bank, then the bank will pay you
interest for using your money.
It is the price that money has like any other good. Interest, like
any price, depends on the market and the conditions of each
negotiation, fundamentally the term and the risk. It is the payment for
the acquisition of goods and services in credit operations.11
Numerically, interest is the difference between the amount
and the capital: I=MC, expressed in monetary units.
It is a reward for giving up liquidity (that is, available money),
which is born from money itself as such.12
9
Financial Mathematics, 3rd Edition, José Luis Villalobos
10
Financial Mathematics, 3rd Edition, José Luis Villalobos, Page. 94
11
Financial Mathematics for business decision making, César Aching
Guzmán, 1st Edition.
12
J. M. Keynes
Interest is a special form of surplus value, the part
appropriated by the owners of the loan capital.13
1.4.4.- Interest rate (r): it is the ratio between interest (I) and capital (C)
per unit of time (n).
In this book we will use “i” to represent that interest rate expressed in
decimals and that is in the same unit as time.
In other words, the interest rate is the interest rate expressed in

decimals: i= r/100. Example: if the annual interest rate (called nominal
interest in many texts) is 54%, the interest rate will be: i=r/100 = 54/100=
0.54.
For a better understanding we must mention that the interest rate

changes its name but not its concept depending on the application being
studied. Example: financial institutions collect deposits, to encourage
people to open savings accounts in their respective institutions, they offer
them to pay an interest rate , which is also called passive interest rate, so
these types of operations constitute a financial obligation of the
institution towards the client.
The opposite case is when the financial institution makes a loan (or any
type of placement of money-passive product), in exchange it agrees to
charge an interest rate to the client which is called active interest rate or
current interest rate . In this same type of operations, when a client is late
in making a payment, an interest rate is additionally charged, which is
called the default interest rate.
RECOMMENDATION: In the decimal or percentage expression of the

interest rate, all decimals must be used for a correct calculation.
RECOMMENDATION : When the interest rate is expressed without being

followed by a unit of time, it should be assumed that it is an annual
13
The Capital. c. Marx and F. Engels. Works, t. 4, p. 42
interest rate. Example: 28%= 28% annual, 3%=3% annual, 0.78%=0.78%
annual.
When the interest rate is expressed as a percentage, it is called the

interest rate, rate of return or nominal rate and is denoted by “r” and the
corresponding value expressed in decimals, which is used in operations, is
denoted by “i ”, is called the interest rate; but in practice it is the first one
that is called the interest rate
Warning: the unit of time for the interest rate can be years, semesters,
quarters, quarters, bimonthly periods, months, fortnights, weeks, days or
another unit of time; However, in any case it is essential to match the
interest rate with the time units of the term. Example: if the interest rate
is weekly then the time must be expressed and worked in weeks.14
1.4.5. - Time or term (t): is the number of days, weeks or other units of
time that elapse between the initial and final dates of a commercial or
financial credit operation.
In the calculation of the different financial mathematical operations we
will use an element as a didactic complement which will be:
“n”. This variable will represent the period of time that we are going to
use to make the financial mathematical calculation of the operation
under analysis. Example: There is a loan to be paid in 18 months, but the
client decides to pay it in 10 months, in this case the time or term of the
operation is 18 months and “n” is 10 months, always expressed in the
same unit of rate time.
Recommendation: time should be expressed in years or the appropriate
fraction using all decimals. Example:
If t=10 months then n= 10/12 or 0.8333333333,
If t=6 months then n=6/12 or n= 0.5,
If t=12 weeks then n= 12/52 or 0.2307692307,
1.4.6.- Some legal aspects in Nicaragua :
14
Financial Mathematics, 3rd Edition, José Luis Villalobos, Page. 95
Article 50: interest rate, in the contracts that banks enter into with their
clients, they may freely agree on interest rates . Consequently, all legal
provisions that oppose this article are repealed.15
Article 51: Default Interests: In credit obligations in default in favor of
banks, they may charge in addition to the current interest rate, a default
interest rate that will not exceed fifty percent (50%) of the rate. agreed
current interest, this being the only additional interest that may be
charged in such concept.16 .
Article 57: Prohibitions on banks. It is strictly prohibited for any bank to:
Section 11. Increase the interest rate of a loan or decrease the interest
rate of a deposit when it has been agreed at a fixed rate during the term
of the loan. Loans or deposits with a variable rate must be subject to a
specific reference point that must be established in the contract. The
contracts must clearly establish whether the loan or deposit is agreed
upon at a fixed rate or variable rate.17
Section 13. Establish interest rates that fall at once on the total amount
of the loan, therefore the interest rate must be calculated on the debtor
balance.18
Article 2. The maximum annual interest with which loans between
individuals subject to this law can be agreed upon will be the weighted
average interest rate charged by authorized commercial banks in the
country, on the date of contracting the loan, in each item. These rates
must be published by the Central Bank of Nicaragua (BCN) in any social
media, written with national coverage, in the last five days of each month
so that they are valid throughout the immediately following month. 19 The
15
General law of banks, non-banking financial institutions and financial
groups. Law No. 561, approved on October 27, 2005; published in gazette
No. 232, of November 30, 2005.
16
Ditto 7
17
Ditto 7
18
Ditto 7
19
Law regulating loans between individuals and its reform. Law No. 176,
approved on May 12, 1997; published in Gazette No 112 of June 16, 1994
calculation of the weighted average interest excludes the interest
charged on credit card operations and interest charged on overdrafts.20
CHAPTER II: CAPITALIZATION AND SIMPLE

UPDATE
GOALS
Upon completion of the study of this chapter, a student will be able to:
 Interpret, identify and solve examples of calculating interest (ordinary,

exact and approximate), time, rate, capital, amount, current value,
discount, partial payments and equivalences of values to simple
interest.
 Distinguish and explain the difference between real time and ordinary
time, between ordinary interest, exact interest and approximate
interest; between real discount and commercial discount.
Programmatic content:
2.2.- Calculation of simple interest

2.2.1.- Calculation of exact simple interest
2.2.2.- Calculation of ordinary simple interest
2.2.3.- Calculation of approximate simple interest
2.3.- Calculation of time or deadline
2.4.- Capital calculation
2.5.- Calculation of the interest rate
20
Ditto 11
2.6.- Calculation of the amount
2.7.- Calculation of present value
2.8.- Discount
2.8.2.- Rational Discount
2.8.3.- Bank Discount
2.9.- Amortization with simple interest (Partial payments – credits –

installments)
2.9.1.- American rule (rule of unpaid balances)
2.9.2.- Commercial rule
2.9.3.- Equivalence of values (Value equations)
2.1.- INTRODUCTION AND BASIC CONCEPTS
Simple capitalization is a financial operation whose objective is the

replacement of present capital by an equivalent amount in a future time
through a financial mathematical methodology that is calculated on the
initial capital or the unpaid balance of the same that remains in force in
the operation of credit, whether passive or active. That is, the principle of
simple interest is based on the fact that the economic remuneration
caused and paid (interest) is not reinvested, since the monetary
expression of interest is calculated on the same basis (the same capital
or the capital balance in the operation).
In other words, interest is not productive, which means that interest is

always generated by the initial capital or the capital balance of the
investment or credit operation. Furthermore, as interest is generated, it
is not added to the initial capital to produce new interest in the future.
Simple interest or simple capitalization, it can be stated, is also the profit

obtained only from the capital (principal, initial cash stock, price, initial
investment) at the simple interest rate agreed upon between both

parties (the lender and the borrower) by the entire period (time or term)
of the agreed commercial or financial transaction.
A characteristic of simple capitalization is that most of its application is in

active financial operations (credit operations in general, financial leasing,
loans, factoring, etc.), mostly short-term, which does not mean that it
does not have applications in the long-term. The above does not
invalidate or limit its application to passive financial operations (savings
accounts, fixed-term deposits, demand deposits, etc.). It is also frequently
applied in the evaluation of business investments of a commercial or
service sector nature to determine their implications and be able to make
the best decisions.
The formulas for calculating the various concepts in simple interest vary
according to countless factors, from one author to another. The general
formula for simple capitalization is
Nomenclature:
I = Interest, expressed in monetary values
VA (C) = Current value, expressed in monetary units
FV (M) = Future value, expressed in monetary units
n = Compounding period, unit of time, years, months, days,...
i =Interest rate per period, annual, monthly, daily, also called period
interest rate, expressed in decimals (r/100), where “r” is the nominal
rate, generally annual.
2.2.- CALCULATION OF SIMPLE INTEREST

Starting with a capital (C 0, I 0 ) we propose to determine the final amount
(C n ) that we will recover in the future (VF, M or S), knowing the
conditions under which it is contracted, both its term and its rate of
return. interest. The basic formula for calculating interest is
Example 1. Calculate the simple interest on a capital of C$1,800 for 10
months at 4 ½% simple per year.
Data Solution
C=C$1,800 I=Cin
t= 10 months I= (1,800) (0.045) (10/12)
r= 4 ½% annually I= C$67.50
i= r/100=4 ½/100=0.045
n=10/12
Example 2.- Determine the simple interest of a loan for C$20,000 with a
4-month term with a rate of 36%.
Data Solution
C=C$20,000 I=Cin
t= 4 months I= (20,000) (0.36)
(4/12)
r= 36% I= C$2,400
n= 4/12
i= r/100= 36/100=0.36
Example 3.- What amount of monthly simple interest does a capital of

C$8,500 produce at 33% simple annual interest?
Data Solution
C= C$8,500 I=Cin
t= 1 year I= (8,500) (0.33) (1)
n= 1 I= C$ 2,805 annually
If the total obtained in a year is I= C$2,805 per year, we divide it by the 12

months of a year to know the answer to the question asked; that is:
C$2,805/12= I=C$233.75 per month
Another way to do the calculation is to divide ( prorate ) the given annual

rate, that is, assign an equal part of the rate to each unit of time; that is:
12/33=2.75% per month and we thus have a monthly rate of 2.75%. We
proceed to solve the exercise
Data Solution
C=C$8,500 I=Cin
r= 2.75% monthly I= (8,500) (.0275)(1)
t= 1 month n= 1 month
I=C$233.75 per month
i= r/100=2.75/100=0.0275

The method of calculation is indistinct; However, it is practical to always
adjust the time unit to the interest rate and not the other way around.
From here we can conclude that the time unit of the interest rate will
always be equal to the time unit of the term and the capitalization for
each period is m=1.
Simple interest exercises proposed

1.- Calculate the commercial simple interest of C$3,820 for 8 months at
3.92%. R= Interest C$99.83 , Amount: C$ 3,919.83
2.- A salesperson offers an item for C$6,600 with a simple monthly rate of
3.5%, if a client purchases it to pay in 9 months, how much will they pay
in addition to the price to be financed? R= I= C$2,079
3.- Don Mario deposits, in a savings account that pays a passive rate of
4.72% annually, 25% of his bonus (which is C$12,500 and he receives it on
December 9). How much extra money will you have next Christmas if you
plan to withdraw your money on November 9? Answer = Interest C$
135.21, Amount: C$ 3,260.21
4.- Don Narciso is a producer of basic grains (Corn, beans), he is
authorized by FUNDECAN21 with a loan of C$17,500 to plant 8 Mz. The
term is 4 ½ months at a rate of 3.8% simple monthly. If the yield per
apple is 8 qq and the predicted sales price is C$450/qq
a. How much will Don Narciso earn in this agricultural cycle? R 1 = I= C$
8,307.50
b. How much will you pay in interest? R 2 = I=C$2,992.5
5.- Mrs. Margarita buys a washing machine on credit that is worth
C$9,000 in cash, pays 30% as a premium and agrees to pay the difference
over a period of 7 months with a simple annual 42%. How much will she
pay in interest? Resp = I=C$ 1,543.5
6.- How much will Nicaragua pay each month in interest on its external
debt, which amounts to C$750,000,000 at an annual simple interest of
4.5%?
R= I=C$ 33, 750,000 annually, I= C$2, 812,500 monthly
7.- How much must the “nicocina” company provide in monthly interest if
the loan that must be amortized is C$136,500 and was agreed with a
monthly rate of 3.85%? Answer: C$5,255.25
21
Foundation for Nicaraguan Peasant Development
2.2.1.- EXACT SIMPLE INTEREST, REAL OR CIVIL

Exact simple interest is calculated based on the year of 365 days (366 in
leap years); That is, it is calculated over the calendar year. When working
with exact time it is possible to calculate it in the short term; but, with
table # III the calculation is facilitated, it assigns a number to each day of
the year. Thus, January 1st is day #1 and December 31st is day #365. This
table works for a normal calendar year.
The way to use it is as follows: you take the number indicated for each
date and subtract the highest from the lowest, thus finding the number
of days elapsed from the beginning to the end of the credit operation.
Example 4.-. Determine the exact interest for a capital of C$1,500 placed
on February 21 in a savings account that pays 5.23% annual interest and
that are withdrawn on December 13 for Christmas shopping.
Data Solution
C=C$1,500 I=Cin
r= 5.23% annually I= (1,500) (0.0523) (295/365)
n= 295/365=0.808219178 I= C$63.40
t= 295 days
i= r/100=5.23/100=0.0523
In table No. III, February 21 is day #52 and December 13 corresponds to

day #347. We then have: 347-52=295 days, the time the money will be
invested is 295 days.
Example 5.- How much will accrue in exact simple interest on a capital of
C$3,250 that is placed on March 12, 2010 and will be withdrawn on
December 19, 2010 for Christmas purchases, if the interest rate is 6%?
Data Solution
C=C$3,250 I=Cin
r= 6% annually I= (3,250) (0.06) (282/365)
i= r/100=6/100=0.06 I= C$150.66
n= 282/365=0.772602739
t= 281 days

December 19 corresponds to day number 353 and March 12 corresponds
to day number 71; we have t=353-71=282 days; This will be the time of
the operation.
Example 06 . Find the exact simple interest on C$9,400 at 5% for 150

days.
Data Solution
C=C$9,400 I=Cin
r= 5% annually I= (9,400) (0.05) (150/365)
i= r/100=5/100=0.06 I= C$193.15
n= 150/365=0.410958904
t= 150 days
GUIDANCE: CALCULATE THE ORDINARY INTEREST FOR EXAMPLES 4, 5,6

AND CALCULATE THE EXACT INTEREST FOR EXAMPLES 7, 8, 9, 10,11

Simple and ordinary interest is calculated based on a 360-day year, with
the assumption that each month has 30 days. Using the 360-day year
simplifies many calculations; However, the interest charged by the
creditor increases.22 It is for this reason that financial and commercial
institutions usually calculate interest based on this method.
As a complement, table N 0 II is attached, where each day of each month

is assigned a progressive number from January 1 as day 1 to December 30
as day number 360. The number of days to use in the operation as the
term (n) is calculated by subtracting the longest day from the shortest
day. The days for this interest rate can be calculated in the same way as
in table No. III.
22
Financial Mathematics, First Edition, Frank Ayres, Pg. No. 41
Example 7.- Calculate the ordinary interest of C$10,000 borrowed at 14%
for 65 days.
Data Solution
C=C$10,000 I=Cin
r= 14% annually I= (10,000) (0.14) (65/360)
n= 65/360=0.180555555 I= C$252.78
t= 65 days
i= r/100=14/100=0.14
According to Lincoyan23 I=Ctr/ (100) (360) I = C$252.78
Example 8.- Determine the ordinary interest on a capital of C$2,180

placed for 190 days in a savings account that pays 5.25%.
Data Solution
C=C$2,180 I=Cin
r= 5.25% annually I= (2,180) (0.0525) (190/360)
n= 190/360=0.527777777 I= C$60.40
t= 190 days i= r/100=5.25/100=0.0525
According to Lincoyan24 =
= I=C$60.40
Proposed exercises of ordinary interest

1. Calculate the ordinary interest of C$19,000 at 18% per year
that was invested for 170 days. I= C$1,615. 00
2. How much is the ordinary interest on a credit operation for C$
99,000 on March 17, 2013 at 3% monthly and that is paid on October 29,
2013? I= C$ 1,831. fifty
23
Financial Mathematics, Third Edition, Lincoyán Portus, Page. 19
24
3. On August 28, 2012, a promissory note was signed for C$
93,000 that will earn 3 ¼% monthly interest until April 6, 2013. Calculate
the ordinary interest on that operation. I= C$21,963. fifty
4. Don Toribio receives an incentive bonus for C$ 4,600 today
and deposits it in an account that pays 1.32% annual interest plus value
maintenance (5% annually). How much will he have in total on November
20 of next year?
5. Mrs. Karlota owes C$ 92,000 at 25 ¼% per year to be paid in
84 days, calculate the ordinary interest for that operation. I= C$5,420. 33
When a commercial or financial credit operation does not clearly indicate

that the calculation of said operation must be made exactly, it must be
understood that said calculation will be made with ordinary, commercial
or financial time.
Note that 360 days has the following divisors: 2, 3, 4, 5, 6, 8, 9, 10, 12, 15,
18, 20, 24, 30, 36, 40, 45, 60, 72, 90, 120, 180. These dividers allow a
large number of simplifications, very useful when working without a
calculator.
Initial and terminal days: To keep track of the days, it is customary to

exclude the first day and include the last. Thus, for a loan contracted on
January 10 and paid on the 25th of the same month, the elapsed
commercial time is 15 days.
To calculate the time elapsed between the initial date and the terminal
date of periods greater than one year, it is commercially customary to
calculate ordinary time as follows: calculating years of 360 days and
months of 30 days...
Example 9.- Calculate the accumulated interest from April 3, 2013 and
September 14, 2015 with a capital of C$12,820 at 6%.
2015 years 9 months 14 days
Less 2013 years 4 months 3 days
2 years 5 months 11 days
Equal to: 720 days (2*360) + 150 days (30*5) + 11 days = 881 days.

Data Solution
C=C$12,820 I=Cin
r= 6% annually I= (12,820)(0.06)(881/360)
n= 881/360=2.4472222222 I= C$1882.40
t= 881 days
i= r/100=6/100=0.06
*The sign indicates the operation to follow, for greater ease it is advisable
to order the dates by putting the years first, then the months and last the
days.
Example No.10 .- Calculate the accumulated interest from October 18,

2011 and November 26, 2008 for a loan of C$6,800 with a simple annual
rate of 4.78%.
Major date 2011 years 10 months18 days
(-) minus minor date 2008 years 11 months26 days
(=) equal to 3 years -1 month - 8 days
In days 1080 days (3*360) minus 30 days minus 8 days = 1042 days
Data Solution
C=C$6,800 I=Cin
r= 4.78% annually I= (6800) (0.0478) (1042/360)
n= 1042/360=2.8944444444 I= C$940.81
t= 1042 days
i= r/100=4.78/100=0.0478 according to Lincoyán25
25
= =>
I=C$940.81
It is recommended to perform the exact interest exercises with ordinary

interest and vice versa
2.2.3- APPROXIMATE SIMPLE INTEREST
In the existing bibliography, apparently unimportant mention is given to

what is called the approximate interest; However, in practice it is the one
with the greatest use. In most commercial or banking credit operations, a
combination of the two methodologies studied previously (exact interest
and ordinary interest) is used, combining the calculation of days with
exact time and dividing this number of days by the 360 days of the
ordinary time.
Mathematical logic leads us to appreciate that there are, within the

approximate interest, two combinations that are used with the sole
objective of artificially increasing the return on money. On the one hand,
charging a greater amount of interest on active operations and paying
less interest on passive operations.
Approximate interest to collect: the method used is a combination of the
two previous methodologies: Calculate the time in the numerator with
exact time and using ordinary interest to calculate the time in the
denominator.
,
Approximate interest to pay: in the same way the two methodologies are
combined but inversely; That is, time is calculated in the numerator with
ordinary interest and exact time is used in the denominator.

11.- Let's return to Example 4.-. Determine the approximate interest for a
capital of C$1,500 placed on February 21 in a savings account that pays
5.23% annual interest and that is withdrawn on December 13 for
Christmas shopping.
Data Solution
C=C$1,500 I=Cin
r= 5.23% annually I= (1,500) (0.0523) (295/360)
n= 295/360= I= C$64.29
t= 295 days
i= r/100=5.23/100=0.0523
In table No. III, February 21 is day #52 and December 13 corresponds to

day #347. We then have: 347-52=295 days, the time the money will be
invested is 295 days.
In example 4 calculated with exact time the answer was I= C$63.40, while
in this exercise calculated with approximate time the answer is greater by
C$0.89, which constitutes a considerable difference, especially if the
amounts were in several thousand of córdobas.
12.- Reversing the roles in the previous exercise : Determine the

approximate interest for a deposit of C$1,500 made on February 21 in a
savings account that pays 5.23% annual interest and that is withdrawn on
December 13 for purchases of Christmas.
Data Solution
C=C$1,500 I=Cin
r= 5.23% annually I= (1,500) (0.0523) (292/365)
n= 292/365= I= C$62.76
t= 295 days
i= r/100=5.23/100=0.0523
In table number II we can see that February 21st corresponds to number

51 and December 13th corresponds to number 343, we have 343-51=292
days
Let us observe that with the same data a difference 64.29-62.76=1.53 is

created, which is artificial since the duration, the capital invested and the
interest rate are the same. These two methods artificially make capital
produce more.
Activities:
*Solve all the previous examples with approximate interest.
*Compare the results between the different calculation methodologies
for interest.
2.3.- CALCULATION OF TIME OR PERIOD
Time or term is essential when establishing a credit operation or an

investment. As in the calculation of ordinary interest and exact interest,
there is a difference in the use of time for the operations agreed with
both time calculation methods.
A monetary unit today is worth more than the same monetary unit to be
received in the future. A monetary unit today can be invested for a
certain period of time earning a certain interest rate. Precisely depending
on the term , the interest rate will vary; If it is a short -term operation, the
rate tends to be higher than if the operation is agreed upon in the long
term .
The importance of time goes further, because depending on the time

periods for calculating the interest payment, the interest rate will also
vary. It is important to remember that the time unit for the interest rate
must match the time unit of the term.
We extract the formula to calculate the time from the basic formula:
n=I/Ci
Let's look at the following examples of calculating time at simple interest:
Example 13.- How long was a capital of C$9,370.00 invested with an

interest rate of 3.72% and that it produced a profit of C$821.75?
Data Solution
n=? n=I/Ci
C= C$9,370.00 n=821.75/(9,370.00) (0.0372)
r=3.72% n=821.75/348.56
i=3.72/100=0.0372 n=2.357529751 years
I= C$821.75 In this case the answer is in years
because the unit of the interest rate is in
years.
Example 14.- How many months was a capital of C$15,500.00 invested in

a term deposit certificate that was settled at maturity with C$18,328.00
and was agreed with an interest rate of 4.28% per year?
Data Solution
I=MC=>I= C$18,328.00 - C$15,500.00 = C$2,828.00
t=months? n=I/Ci
C=C$15,500.00 n=2,828.00/(15,500.00) (0.0428)
M= C$18,328.00 n=2,828.00/663.40
r=4.28% annual n=4.2628881519 years because the rate
is
i=4.28/100=0.0428 annual; however they ask us
How many months?
To calculate the time in months, we multiply the years by the 12 months

that each year has: 4.2628881519 years * 12 months = 51.1546578228
For greater accuracy we can calculate how many days:
00.1546578228*30=4.639734684=5; that is, 51 months and five days.
Example 12.- Don Marcelo canceled today, September 25, 2010, a loan
with C$26,585.89, which was originally agreed for C$22,500.00 and a
monthly interest rate of 2.25%. On what date was the credit contract
signed?
Data Solution
t n = 09/25/2010 n=I/Ci
t 0 =?
C= C$22,500.00 n=26585.89-22500/(22500)(0.0225)
M= C$26,585.89 n=4,085.89/506.25
r=2.25% monthly n=8.0728691358 months * 30 days
i=2.25/100=0.0225 n=242.186074074 days ,
If we calculate ordinary time on September 25th. It corresponds (in table

II) to day number 295 minus 242 days of term, the day of signing the
contract was day 53 of the table; that is, February 23, 2010
PROPOSED EXERCISES FOR CALCULATION OF TIME AT SIMPLE INTEREST:
8.- On what date was a loan for C$7,200 received, if the corresponding
promissory note has a face value of C$8,100, matures on March 5, 2010
and the interest is 11.3% simple per year? n = 1.10619469 years
R= January 27, 2009. t=One year, 1 month and 8 days
9.- Don Tito paid off on October 10 of this year, with C$13,782.50, a loan
for C$12,000 that FUNDECAN granted him with 2.04% monthly interest.
What date was the loan granted? n=7.281454248 months, March 2
10.- The FUNDENIC company26 provides financing for computer
equipment at a simple annual rate of 36%. If the invoice was C$42,876.72
for 4 pieces of equipment that originally cost C$36,872.25, how long did it
take the company to recover the financing? n=0.452347858 years, 163
days
11.- How long does it take for C$2,000 to become C$2,500 at 54% annual
simple interest? R= 5 months and 17 days, n = 0.462962963 years
12.- What is the expiration date of a promissory note signed on June 15
for a period of 180 days? R= December 15, R= December 12 (real)
13.- On February 15, a promissory note was signed for C$1,500 with 32%
annual simple interest. On what date will the interest be C$400?
n=December 15,
16.- In how many days does a capital of C$65,000.00 produce interest of
C$9,000.00, invested at 8.25% simple annual rate? 1.678321678 years,
604 days
17.- How many months was a capital of C$22,850.00 invested in a savings
account that pays 2.26% simple annual rate and that was liquidated with
a total of C$28,816.25?
*Answers are based on ordinary time
26
Nicaragua Development Foundation
2.4.- CAPITAL CALCULATION

Capital is what originates a credit operation , whether money is made
available through active and passive financial products or through
commercial credit. In the first case, it may be the capital approved in a
loan, the withdrawal made from a line of credit or the deposit made in a
savings account or other passive product of a financial institution. In
commercial credit, it is the price or balance that we are financed for a
good or service (a cell phone, a vehicle, a television, a washing machine, a
DVD, a laptop, a dental consultation and repair, surgeries, etc.). We can
find it from the original formula , solving we have C= I/in; It is
advisable when you see this formula not to read it as C=I/in but read it
this way: the capital is equal to the interest, divided by the rate
multiplying it by the unit of time.
The transformation of money into capital
Money becomes capital when we use it to buy the objective and

subjective factors to produce wealth. The objective factors are the means
of production and the subjective factors are the labor force. Therefore,
money as capital is distinguished from money as simple money by the
peculiar kind of commodities it purchases: means of production and labor
power.
Conventional economics only captures money as a medium of exchange,

and money that functions as capital is also captured as a medium of
exchange. And it is true that the money that circulates as capital
functions as a medium of exchange. The difference lies, therefore, not in
the function it plays in the market, but in the type of goods that are
purchased with it. Money as simple money is used as a means of
exchange for means of personal consumption, while money as capital is
used as a means of exchange for means of production and labor power.

Example 13.- What was the initial investment that produced a profit of
C$75,500.00 in a period of 10.5 months with a profitability of 28%
annually?
Data Solution
I 0 =? C=I/in
I= C$75,500 C=75,500/ (0.28)*(10.5/12)
t=10.5 months C=75,500/0.245
n=10/12 C= C$308,163.27
r=28% annually
i=28/100=0.28
Example 14.- Ms. Anielka wishes to cancel her loan 90 days after
obtaining it with an interest rate of 36% per year that has produced
C$3,256.75 in interest. How much was the amount you borrowed?
Data Solution
C=? C=I/in
I= C$3,256.75 C=3,256.75/(0.36)*(90/360)
t=90 days C=3,256.75/0.09
n=10/12 C= C$36,186.11
r=36% annual
i=36/100=0.36
PROPOSED CAPITAL EXERCISES

18.- If Licda. Miriam received C$2,730.22 in interest for a savings account
that she opened 15 months ago with a simple annual interest rate of
4.28%. What amount of money did she open the account with? R=
C$51,032. fifteen
19.- What capital produces C$ 3,500 in interest in 18 months at 7.5%
simple annually? R= C$31,111. eleven
20.- How much should be invested today to have C$ 9,600 in 20 weeks, if
11.6% simple annually is earned? R= C$9,189. 99
21.- On December 15, a public deed for C$16,780 that was in support of a
14 ½ month loan at 2.78% monthly interest was canceled. How much was
the loan? C$11,959. 23

22.- If the Lic. Madriz paid a total of C$16,870 to cancel a commercial
credit for a TV Plasma that was financed for 5 months with 54%, what
was the price of the T: V? R= C$13,771. 43
2.5.- CALCULATION OF THE INTEREST RATE

We also know investment analysis as financial mathematics, investment
management or economic engineering. Investment analysis uses the
interest rate as a fundamental concept, with which we obtain elements to
carry out countless economic-financial analyzes, mainly for:
1. Establish the exact cost of the financing alternative or true profitability
of the investment.
2. Organize financing plans in credit or installment sales businesses.
3. Choose the most appropriate plans for the settlement of financial and
commercial obligations, according to liquidity and profitability criteria.
4. Determine the cost of capital
5. Choose the most appropriate investment alternatives in the short and
long term.
6. Choose between cost alternatives.
In simple interest, the formula for calculating the interest rate is obtained
from the original formula, then:
If I=Cin, we have
Example 15.- What is the annual simple interest rate, if a loan of

C$14,000.00 is paid off with C$14,644.00 within a period of 6 months?
Data Solution
M= C$14,644.00
C= C$14,000.00 ; t=6 months; i=?; n=6/12 i=644/7,000;

i=0.092 or r=9.2% simple annual
Example 16.- An initial investment of C$20,000 produced a net profit of

C$3,500 for 9.5 months, find the monthly simple rate earned.
Data Solution
I 0 = C$20,000 i=I/Cn
Useful. Net = C$3,500 I=3,500/ (20,000) (9.5/12)
t=9.5 months i=3,500/15833.333333
i=? i=0.2210526315 simple annual, but the
n=9.5/12 question is what is the monthly rate? We
divide by 12 months: i=1.8421052%
PROPOSED INTEREST RATE EXERCISES

23.- With what annual simple interest rate will C$24,650 be obtained on
April 5, if now, on December 23, C$24,078 is invested? a) 8.435% b)
9.017% c) 9.52% d) 8.384% e) Other
24.- If the account that Don Mario opened is settled with C$89,960 after
opening it 11 months earlier with C$72,500, what was the monthly
interest rate paid? r= 2.189341693% monthly
25.- The Lic. Eduardo pays C$16,800 for a Laptop that he took out on
credit with a term of 8 1/3 months. If the cash price was C$11,750, what
annual interest rate did you agree on for your commercial credit?
r=5.15744%
26.- A capital of C$2,850 was invested for 21 fortnights in an account that
was settled with C$3,283.76. What was the annual interest rate paid?
And the biweekly rate?
r=17.39388471% annually, r= 0.724745196% biweekly
27.- If a C$10,000 government bond is redeemed for a total of C$10,266.5
in 6 months, what is the interest rate paid? r=5.33% annual
28.- Mr. López obtains a loan for C$2,000 and pays C$2,400 after 8
months. What monthly interest rate was he charged?
r=2.5% monthly
29.- What is the monthly interest rate with which a commercial credit
operation was agreed to be paid in 6 and a half months with C$ 17,800
equivalent to the credit sale of two drawers of imported pants, which will
produce profit of C$2,120? r= 1.8323 %
30.- A credit sales executive discusses the following with his client:
Client: You are charging me more than necessary, you told me that you
were going to charge me 12% per year... I think you have to charge me
less according to my calculations, 12% per year on C$ 16,000 is C$1,920 if
you add both you have C$ 17,920… so why am I going to pay you C$
19,950?
Executive: “Look, ma'am, the system says that we financed the furniture
for C$16,000. 00 in February 2012 and that must be paid with C$ 19,950. 00
in May 2013, I cannot give you a discount because the system says that…
Ahh and the credit rate in the system is 12% annually….
You are the client's daughter or son...calculate the true annual interest
rate you are being charged.
2.6.- CALCULATION OF THE AMOUNT, AMOUNT (M) OR FUTURE VALUE

(VF)
The future value (FV) describes the growth process of an investment in
the future with a given interest rate and period.
Accumulation
6,300
0 1 2 3 4 5 6 months
C= C$5,000
The term future value means the value of a future payment on a given
date before maturity. The less time remaining until maturity, the greater
the present value of the amount owed, and, on the maturity date, the
present value is equal to the amount payable. To verify any one of these
current values, it is enough to find whether at the indicated rate, at the
stated time, the current value is the amount owed.
The amount or future value is calculated with the following formulas:

1.- M=C+I 1.1-
The component (1+in) is called simple interest capital accumulation

factor . This allows you to determine how much an investment, a loan, a
fixed-term deposit or other financial product will grow with a given
interest rate over a given term.

The application of the simple interest amount lies in passive financial

products such as an installment savings account. The total amount to
cancel a fixed-term certificate of deposit. And it also has applications in
the calculation to settle any active financial operation or project linear
population growth, etc.
Example.17- Calculate the accumulated amount of an investment of UM

12,000 for 10 months at 22% annually.
Solution: VA = 12,000; n = (10/12) = 0.83333333; i = 0.22; VF =?
VF = 12,000(1 +0.22*0.8333) = MU 14,199.99
Answer: The accumulated amount is UM 14,199.99
Example.18.- How much does Mrs. Carrillo accumulate in a bank account

in 2 years, if she invests a capital of C$ 28,000.00 earning interest of 7.3%
simple annually?
Data Solution
t=2 years
C= C$28,000.00 M=28,000(1+0.073*2)
r=7.3% simple annual M=28,000(1,146)
n=2 M=C$32,088.00
i=7.3/100=0.073 The accumulated value of a capital of C$ 28,000.00
M=? in 2 years at 7.3% interest is C$32,088.00
PROPOSED AMOUNT EXERCISES

30.- A loan for C$180,000 is obtained with a 160-day term at 30% simple
annual rate. What amount must you pay when your debt falls due?
M=204,000
31.- How much will a client pay in total for a sofa set worth C$16,500 in a
commercial house that charges 2.8% monthly interest and provides a
225-day term? M= C$19,965.00
32.- When the baby of the López-Pérez family was born, he had health
problems to the extent that his parents went to a pawn shop to obtain
C$14,500 for his clothes and belongings for which they will be charged

3.15% monthly simple interest. With what amount of money will they
cancel the pledge 287 days after doing so? M= C$ 18,869.58
33.- The Lic. Quiñonez lent C$36,000 payable over 36 months with
monthly capital installments of C$1,000, plus interest corresponding to
each month of 2.85%. If the tenth installment is 10 days late and the
default interest is 50% of the originally agreed rate, how much will you
have to pay to catch up? R= C$1,783.75
I 27, 000 = C$769.5, I 1000 = C$9.5, I (arrears) 1,000 = C$4.75
34.- Mrs. de Marín failed to fulfill her commitment to cancel a
commercial credit for a dining room set for C$18,410, which originally
cost C$14,000, and which was agreed upon with an annual rate of 42%
for a 9-month term. How much do you pay off your debt 45 days later, if
you also have to pay 5% per month in late payment interest? R=
C$20,195
35.- A company wants to fire 10 workers within 6 months. The settlement
of these workers will amount to C$ 190,000. 00 , calculate the capital
necessary to create a settlement fund, from the workers' own funds for
vacations, seniority and bonuses, if the financial institution offers to pay
4.5% simple annual rate.
36.- The fast food company “Candelaria” owes its suppliers C$ 15,000. 00
córdobas to be paid in 2 months for a bain-marie and C$ 38,000. 00 to be
paid in 9 months for the cancellation of the construction of his palm
ranch on credit. Looking for financial flexibility, you want to replace both
commitments with a financial institution that will do a debt consolidation
on the above, if the commitments were agreed with a monthly rate of
3.25%. Calculate the value of the lump sum payment you will make in six
months using a value equation.
2.7.- CALCULATION OF PRESENT VALUE, CURRENT VALUE OR CAPITAL

Money is an asset that costs as time passes, allowing you to buy or pay at
periodic interest rates (daily, weekly, monthly, quarterly, etc.).
We find the concepts of time value of money grouped into two areas:
future value and current value. Future value (FV) describes the process of
future investment growth at a given interest and periods. The present
value (PV) describes the process of future money flows that at a given
discount and periods represents current values.
We can calculate the present value using two formulas:
, 2.-
Where:
VP, VA, C: current value, present value or capital.
M, VF: Future value or amount.
i: interest rate, expressed in decimals.
n: time, expressed in years or the corresponding fraction.
The element of formula number 1 for calculating the present value (1+in)
-1
is called the update factor or discount factor. Its function is to bring a
value calculated in the future to its current value with an interest rate
(discount rate) determined in the operation
Let's look at some examples to better understand this topic:
Example 19.- What capital produces C$55,500.00 per amount in 18

months at 7.5% simple annual rate?
Data Solution
C=?
M= C$55,500.00
t= 18 months
r=7.5% simple annual PV=55,500(0.89887640)
i=7.5/100=0.075 PV=C$49,887.64
20.- What will be the cash amount of a wardrobe that was financed with
an interest rate of 3.5% per month and was paid off with C$5,335 within a
period of 1 ¼ years?
Data Solution
C=?
M= C$5,335.00
t= 1 ¼ years, n=15 months

r=3.5% simple monthly PV=5,335(0.655737704)
i=3.5/100=0.035 PV=C$3,498.36

PROPOSED PRESENT VALUE EXERCISES:

35.- On December 15, a public deed for C$16,780 that was in support of a
14 ½ month loan at 2.78% monthly interest was canceled. How much was
the loan? PV= C$11,959.23
36.- If the Lic. Madriz paid a total of C$16,870 to cancel a commercial
credit for a TV of plasma that was financed for 5 months with 54%, what
was the price of the T: V?
R= C$ 13,771.43
37.- The Lic. Castillo purchases a car for C$212,500.00 that depreciates at
a rate of 20% annually. What will be the value of the car three years after
purchasing the vehicle?
38.- José and Carla are a couple who plan to buy their new house in two
years. The company that sells the houses offers them a 20% premium on
the value of the house (C$320,000.00) to deliver the property to them. .
How much should they invest in a term deposit that offers them to pay
7% annual simple interest to meet the premium on their house?
Premium: C$64,000; PV= C$56,140.35
A company wants to lay off 10 workers within 6 months. The settlement
of these workers will amount to C$ 190,000. 00 , calculate the capital
necessary to create a settlement fund, from the workers' own funds for
vacations, seniority and bonuses, if the financial institution offers to pay
4.5% simple annual rate.
2.8.-. DISCOUNT OPERATIONS

Discounting is the process of deducting an interest rate from a given
capital, to find the present value of that capital when it is payable in the
future. In the same way, we apply the word discount to the amount
subtracted from the face value of the bill of exchange or other promise of
payment, when we collect it before its maturity. The proportion
deducted, or interest rate applied, is the discount rate.
The discounting operation is part of the normal activities of banks. Clients

go to these to collect in advance the amount of the obligations
receivable; The banks deliver these amounts in exchange for retaining
discount rates, this is part of their income. Commercial banks, in turn,
need to discount documents, in this case, they are taken by the central
bank, such an operation is called rediscounting.
The discount rate set by central banks for rediscounting is of utmost

importance for the economy, since they affect the set of discount rates
and interest rates charged in a country during specific periods. The
discount rate is the reason for payment for the use of the money returned
when settling the operation in advance of the total time .
A modern application of discount operations is factoring , which is a

specialized service offered by some financial institutions. Factoring
companies were created with the objective of helping to solve the
liquidity problems faced by legal and natural persons, purchasing their
receivable documents.
This service carries with it an implicit risk for the person who acquires the
receivable portfolio, who is called a factor , and a cost of commissions
that the transferor, the one who sells the portfolio, pays the factor for the
privilege of having a part of his money, before the expiration date.
It is evident that the capital that the transferor receives from the factor in
the purchase and sale is less than the value stated in the document, its
nominal value M. The calculations are made based on the invoiced value,
nominal value or future value (M) and supported by an invoice-
promissory note. On this basis, a discount rate is applied and depending
on the negotiation, the required amount is delivered to the assignor. A
series of other elements come into play here such as commissions,
contractual conditions, charges, etc.
2.8.1.- Simple Discount

Since the discount is interest, it can be simple or compound. The person
(borrower) can pay a lender the cost (price) of the loan at the beginning
of the period or at the end of the period. In the first case this price is
called a discount; in the second interest.
Simple discount is the financial operation that aims to represent future
capital by another equivalent with present maturity, through the
application of the simple discount formula. It is an inverse procedure to
capitalization.
2.8.1.1.- Particularities of the operation

Interest does not capitalize, that is to say:
• The interest produced is not subtracted from the initial capital
to generate (and subtract) new interest in the future and, therefore, at
the interest rate in force in each period, the interest is generated by the
same capital at the rate in force in each period.
The discount procedures have a starting point that is the known future
value (VF or M) whose maturity we would like to advance. It is necessary
to know the conditions of this anticipation: duration of the operation
(time and future capital) and the interest rate applied.
The capital resulting from the discount operation (current or present

value VA) is of a smaller amount, the difference between both capitals
being the interest that the future capital ceases to have due to
anticipating its maturity. In conclusion we will say, if transferring present
capital to the future involves increasing interest, doing the reverse
operation, anticipating its maturity, will mean a decrease in that same
percentage amount.
Nomenclature:
D: Discount or reduction.
DR: Rational discounting
DC: Commercial discount
VN (VF): Final or nominal value, it is the known future value
VA: Current, initial or effective value.
i or d: Interest or discount rate
From this point on, the interest will be “d” if they are collected in advance
and “i” if they are collected at maturity. Consider this observation when
using the formulas to calculate Equivalent Rates, both in simple interest
and compound interest operations. .
The current value (VA) is lower than the future value (FV) and the
difference between the two is the discount (D). Fulfilling the following
expression:
DR =VF -VA

As we saw, the discount is a decrease in interest that a future capital
experiences as a consequence of advancing its maturity. It is calculated as
the total interest of a time interval. Being fulfilled:
DR = VF* n* i
Depending on the capital considered for the calculation of interest, there
are two types of discount:
• Rational or mathematical discounting
• Commercial or banking discount.
Whatever the discount modality used, the starting point is always a
known future value VF, which we must represent by a current value VA
that has to be calculated, for which the interest savings (discount) that
the operation entails is important. .

2.8.2.1.- Rational, real or mathematical Discount
The difference between the amount to be paid and its current value is
called a rational or mathematical discount, it is not the same as a bank
discount. We designate the bank discount simply with the word discount.
We calculate the rational discount, determining the current value of the
sum at the indicated rate and subtracting this VA from said amount. The
result is rational discounting.
Rational discounting is simple interest. The unknown sought is the
current value (initial capital). That is, the rational discount is equal to the
amount to pay (VN) minus the current value [VA] of the capital. Then:
I = D, formulas
Example20.-: What is the real discount of a document with a face value of
C$25,300, 72 days before its maturity, with a discount rate of 11.4%
annual imple?
Data Solution
FV: C$25,300
t: 72 days
d: 11.4%
n: 72/360 PV = C$24,736.02

i: 11.4/100=0.114 The real discount is, then, D=MC. I mean:
D=25,300-24736.02 or D=C$563.98
2.8.2.2.- Bank or commercial discount

In this type of discount, interest is calculated on the nominal value VN
using a discount rate d . For this reason, we must first determine the
discount Dc and then the current value VA or initial capital.
The initial capital is obtained by the difference between the final capital
(VN) and the discount (Dc): D=Mnd
Example 21.-: The commercial discount of a document with a face value
of C$6,500 three months before its maturity, that is, n=3/12, given that
the term is given in years, with a discount rate of 11.2% simple annual, is:
Data Solution
FV= C$6,500 D=Mnd
t=3 months D=6,500*3/12*0.112
d=11.2% D= C$182
n=3/12 Subtracting this discount from the
nominal value i=11.2/100= 0.112 we obtain its commercial
value, which will be:
Dc=6500-182 = Dc= C$6,318
Example 22.- (Rational and commercial discount)

We wish to advance today a capital of UM 5,000 with maturity within 2
years at an annual rate of 15%. Determine the current value and discount
of the financial operation
Solution:
VN = 5,000; n = 2; i = 0.15; VA =?; DR=?
First topic:
Assuming that the capital on which we calculate interest is the initial
capital (rational discount):
5,000 VA = = MU 3,846.15 (1+2*0.15)
DR = 5,000 - 3,846 = MU 1,153.85
Second topic:
Assuming that the capital on which we calculate interest is nominal
(commercial discount):
DC = 5,000*2*0.15 = MU 1,500
VA = 5,000 - 1,500 = CU 3,500
Or also:
VA = 5,000(1 - 2*0.15) = MU 3,500
Proposed problems
39.- Find the simple discount on a debt of C$1,500 maturing in 9 months.
What is the rational discount?
40.- A mortgage has a value of C$1,200 at maturity. Determine its value 5
months before maturity, assuming a yield of 4 ½% simple interest. What
is the rational discount? Answer: C$1,177.91; C$22.09.
41.-Determine the simple discount on:
a. C$3,500 for 60 days at a 4% simple discount.
b. C$ 5,000 for 90 days at 3 ½% simple discount.
c. C$ 1,200 for 4 months at a 5% simple discount.
d. C$ 2,500 from March 5 to April 10, at a 6% simple discount.
e. C$ 4,000 from October 10 to November 13 at a 5 ½% simple
discount.
f. C$3,000 from September 15 to October 30 at 4 ½% simple
discount.
Answers: a) C$23.33, b) C$43.75, c) C$20, d) C$15, e) C$20.78, f)
C$16.88
2.9.- Amortization with simple interest (partial payments)
Amortizing is the process of canceling a debt and its interest through a

series of payments that may or may not be equal in amount and paid in
equal or not equal periods of time . All following a market logic that
allows the target market to access the purchase of goods and services on
credit in payable installments, according to their payment capacity.
Amortize means “to put to death” the debt (due to its Latin roots, ad and
mortus ). Up to this point, we have studied and learned certain
applications of simple interest, mainly those short-term financial
operations that can be canceled at maturity, where generally only an
initial capital is involved and the cancellation is taken into account until
the end of the term. In this section we study the basis of both financial
and commercial credit operations.
In the commercial, economic, investment and, above all, financial

environment, there is a diversity of products (assets and liabilities) which
contain a dynamic and a logic that implies a series of facilities to reach
the less wealthy market segments and thus be able to sell their products
and services through credit operations with payments (installments or
credits) that are composed of a portion of capital ( amortization ) plus
another portion of interest. This methodology is known as partial
payments, popularly called “subscriptions” or installments.
The financial logic of carrying out credit operations with partial payments
lies in the fact that the credit risk is deferred because paying a certain
amount of money (amount) at once at the maturity of the operation is
not the same as dividing it into a certain number of installments payable
within the period set for the total cancellation of the credit operation.
In box No. 127 Some active and passive products from different financial
institutions are presented.
ACTIVE PRODUCTS (PLACEMENT) PASSIVE PRODUCTS (CAPTURE)

Ac/p and L/p loans Savings account
Credit cards Debit cards
Financing of items (televisions,
Current accounts
laptops, DVDs, etc.)
Leasing Operations Fixed term deposits
*Read the Single Accounts Manual (MUC) for the accounting definition of
each product
Active operations : the purpose of these products is to satisfy the

borrower's need to have cash in various ways and repay it through a
series of partial payments according to the client's payment capacity or
according to the signed contractual conditions. This type of operation
27
Own elaboration
constitutes an asset for the institution that provides the service, for which
it generally charges interest and constitutes a financial obligation for
which the borrower must pay interest.
Financial institutions, in their purpose of attracting financial resources

from the public, offer a number of financial products ( passive products)
to individuals (savers) so that, through them, they can channel their
investments and make them profitable.
Passive operations therefore constitute a financial obligation for the

financial institution that captures the resource and an investment for the
saver who obtains his profit from the payment of interest .
Financial activity is mainly dominated by primary banking, which consists

of financial intermediation, which involves capturing resources from the
public that has money available (paying relatively low interest rates) and
then placing them among natural and legal persons (with a rate of
relatively greater interest). The difference between both interest rates
constitutes the profit of each financial institution.
Financial obligations are generally fulfilled through a series of partial

payments , within the obligation period, instead of a single payment until
the maturity date, this methodology allows the capital to be recovered
more quickly and reduce credit risk.
2.9.1.- Rule of unpaid balances (American rule)

The unpaid balance of a debt is the capital that has not been paid on the
date the analysis is made. It is necessary to make the difference between
unpaid balance and total balance, the latter includes the capital, interest
and any other charges that have been agreed upon in the credit
operation .
Unpaid balance rule: “ With this rule, interest is calculated on the unpaid
(or unpaid) balance of the debt each time a partial payment is made. If
the payment is greater than the interest due, the difference is applied to
reduce the debt. If the payment is less than the interest due, the
payment is carried without interest until other partial payments are made
whose amount exceeds the interest due on the date of the last of said
partial payments.28 .
This rule can be represented by an algorithm:
Algorithm:
= Initial debt balance (financial obligation)
+ Interest accrued to the payment date
= Amount of debt on the payment date
- Value of partial payment (subscription)
=Unpaid balance on the date of last payment
The process is repeated until the balance is reached on the cancellation or
expiration date.
Example of an active transaction (example23): In a debt of C$40,000 with

interest of 36% that matures in one year, the debtor pays C$20,000 after
5 months and C$10,000 after 9 months. Find the balance of the debt on
the due date.
Before solving the problem, it is useful to recommend that it be done
with the following procedure:
1.- Extract the data
2.- Make the flowchart
3.- Solve the exercise by extracting the data from the flowchart.
Data:
C=C$40,000
p 1 = C$20,000
p 2 =C$10,000
r= 36%
t 1 = 5 months t 2 =9 months
tn = 1 year p3=? t 3 = 1 year
=Initial debt balance (financial obligation)= C$40,000

28
Financial Mathematics, Frank Ayres, Jr. 3rd edition , 1991
+ Interest accrued to date I= 40,000*0.36*5/12=C$ 6,000
=Amount of debt on the payment date (5 months) C$46,000
(Less) Value of partial payment (credit) C$20,000
C$26,000
+Interest accrued to date I= 26,000*.36*4/12= C$3,120
=Amount of debt on the payment date (9 months) C$29,120
(Less) Value of partial payment (subscription)
C$10,000
C$19,120
+Interest accrued to date I= 19,120*.36*3/12=C$ 1,720.8
=Unpaid balance on due date C$20,840.8
Example of a passive operation (Example 24): Doña Julieta deposited

C$3,500 on 01/20/2010 in a savings account that pays 2 ¼% annual
simple interest; 45 days later, withdraw C$700 and 90 days later,
withdraw another C$1,200. With what amount will the savings account
be liquidated on 08/14/2010?
Data
C=C$3,500 p 2 =C$1,200
r= 2.25% annually t 2 =90 days later
tn = 08/14/2010 p3=?
p 1 = C$700 t 3 = 08/14/2010
t 1 = 45 days
=Initial debt balance (financial obligation) C$3,500.00

+Int. accrued to date (03/05/2010) I= 3,500*0.0225*45/360 = 9.85
=Amount of debt on the payment date C$3,509.85
• Value of partial payment (subscription)
C$700.00
C$2,809.85
+Accrued interest. to date I=2,809.85*.0225*90/360 C$ 15.81
=Amount of debt on the payment date C$2,825.66
• Value of partial payment (subscription)
C$1,200.00
=Unpaid balance on the date of the last payment (06/05/2010)
C$1,625.66
+Interest accrued to date I=1,625.66*.0225*69/360 C$ 7.01
=Amount of debt on the payment date (08/14/2010) C$1,625.66
=Unpaid balance on the date of the last payment (08/14/2010)
C$1,632.67
To cancel the operation on the indicated date, Doña Julieta must pay
C$1,632.67
PROPOSED PARTIAL PAYMENT ISSUES

1. A debt of C$3,000 with interest at 6% matures in 9 months. If
C$1,000 is paid after 4 months and C$1,200 three months later, find the
unpaid balance on the due date using a) the commercial rule and b) the
United States rule. Answer: a) C$898.00,
b) C$899.81
2. The microenterprise “El fogón” requests a loan from a bank for
C$8,000 for 8 months at 5%. At the end of two months you pay C$4,000
and at the end of 6 months you want to pay the balance. How much will
you have to pay according to the US rule? Answer: C$4,134.45
3. The “Dry Cotton” company receives financing for C$35,600 to
be paid in 9 months with an interest rate of 4.5% monthly, on which it
pays C$11,200 45 days after receiving it and another C$14,750 four
months later. Calculate the final payment amount using the unpaid
balance rule
4. Applying (a) the commercial rule, and (b) the United States
rule, find the balance on the maturity date of a C$7,500 10-month note at
6% if it is reduced by two equal payments of C$2,500 each one, carried
out 4 months and 7 months before the expiration date. Answer a)
C$2,742.50, b) C$2,742.97
5. Doña Gema pays C$3,600 as an initial payment (premium) for
the purchase of a house whose price is C$10,000. You then pay C$1,000

at the end of each quarter for three quarters. Find the unpaid balance at
the end of the year by applying the United States rule with an interest
rate of 8%. Answer: C$3,805.96 The signer of a 180-day document for
C$5,000, with interest at 5%, dated March 10, 2010, pays C$1,500 on
May 6, 2010; C$750 on June 20, 2010 and C$1,000 on August 19, 2010.
Find the unpaid balance on the due date by applying a) the commercial
rule and b) the United States rule. Answer: a) C$1,838.76, b) C$1,839.72
6. Mrs. Priscila has a credit account in a warehouse, on which she
pays 18% interest and which has had the following movements in recent
months:
7. Movements 8. Amount
9. Balance as of June 10 10. C$4,000
11. Subscription on June 16 12. C$2,000
13. Charge on July 11 14. C$2,500
15. Charge on July 31 16. C$150
17. Subscription on August 18. C$2,000
15
Calculate the balance as of September 15. Answer: C$2,828.35
19. Calculate the total available, as of November 2013, using the
American rule, in a savings account that was opened in a credit union in
October 2012. The opening capital was C$12,000. 00 at a simple annual
interest rate of 4.98% and on which two withdrawals were made, the first
for C$ 5,000. 00 in February 2013 and the second in June 2013.
2.9.2.- Merchant's Rule

“With this rule, interest is calculated on the original debt and on each
partial payment as of the due date. The amount to be settled on the due
date is the difference between the amount of the debt and the sum of
the partial payments.29 .
29
Financial Mathematics, first edition, p. 55
“For notes that earn interest, the future values of the obligation and the
different credits must be calculated, independently, on the maturity date.
The amount to be settled on that date is the difference between the
future value of the obligation and the sum of the future values of the
different payments.30 .
Example 1: The store “El BB” signs a promissory note for C$70,000. 00 with
a 6-month term, with interest of 24%. Before expiration, make the
following partial payments (credits or installments): C$14,000. 00 per
month and C$28,000. 00 four months after signing the document. Find the
balance that must be paid at maturity using the business rule.
1.- Calculate the amount of debt 2.- Calculate the amount of

each payment up to
until expiration: Due date:
30
Financial Mathematics, fourth edition, p. 73
The amount to be settled is the difference between the future value of
the obligation and the sum of the different payments:
M=78,400. 00
- Σpayments= (15,400 + 29,120) 44,520.00
FINAL PAYMENT = 33,880.00
2.9.3.- Financial equivalence of capital (equations of equivalent values)
When we have various capitals of different amounts, located at different

times, it may be convenient to know which of them is most attractive
from a financial point of view. To define this, it is necessary to compare
them, but it is not enough to look only at the amounts, fundamentally we
must consider the moment where the capitals are located. As we saw, to
compare two capitals at different times, we will find their equivalent at
the same time and there we make the comparison.
Focal date: it is the date on which the comparison of all the amounts of
money involved in the operation is planned. Generally, borrowers
request an extension of the term to make payments and therefore, if the
financial operation in question does not specify a determined focal date,
the maturity date of the new obligations or the new debt should be
taken.
Financial equivalence is the process of comparing two or more capitals

located at different times at a given rate, observing whether they have
the same value at the time they are measured . To do this we use the
formulas of financial mathematics of capitalization or discounting.
We must remember that two or more amounts of money located at
different times should not be added because their value is not equivalent;
Therefore, only money located on the same date should be added or
subtracted.
The value equivalence methodology is applied to replace:

 An old debt for a series of payments. Debts=Payments
 Several old debts for one new debt or several payments. Old
debts=New debts

The situations described above are applied with the consent of both
parties; that is, both the lender and the borrower, which can culminate
with a debt restructuring, a debt consolidation or simply what we will call
a debt renegotiation; who must agree to the following fundamental
conditions:
 Moment of time from which maturities are computed.

 Moment at which the equivalence is made, taking into account that
changing this data varies the result of the problem. Call focal date
 Interest rate of the operation (called renegotiation rate).
When this type of operation is carried out, it is advisable to follow the

following series of steps to simplify the renegotiation calculation:
1. Extract all data from the operation.
2. Calculate the amounts of all loans.
3. Prepare the flowchart for the renegotiation of debt(s).
4. Pose the value equation and find the answer to the unknowns.
5. Issue the necessary conclusions, check the answers.
In most cases the borrower does not impose the maximum date for the
comparison of the obligations, the lender is in charge of this and
generally the date that should be taken as the focal date if it does not
appear in the exercise is the maturity date of the new financial
obligation(s).
Example 25: Determine the value of the following obligations, today, with
a simple interest rate of 4%: C$1,000 due today, C$2,000 due in 6 months
with 5% interest and C $3,000 due in one year with interest at 6%. Use
today as the focal date.
Step 1: Extract the data
Step 2: Find the amounts
Renegotiation rate: 4%
C 1 : C$1,000, t 1 : today
C 2 : C$2,000, t 2 : 6 months, r 2 : 5%
M= 2000(1+0.05*6/12); M= C$2,050 in 6 months
C 3 : C$3,000, t 3 : one year, r 3 : 6%

M=3000(1+0.06*1); M= C$3,180
Focal date: today
Step 3: Prepare the flow chart 6 months
One
year
Today 6 12 months
1000 2050 3180
FF; X?
Step 4: Pose the value equation and find the answer
X=1000+ 2050(1+.04*6/12) -1 +3180(1+.04*1) -1
X=1000+2050(0.980392156)+3180(0.961538461)
X=1000+2009.80+3057.69
X= C$6067.49 is the value of all future commitments
25.a.-In the previous exercise the focal date is one year. A: C$6,068.27
PROPOSED EXERCISES OF VALUE EQUATIONS

49.- Mrs. María José owes C$2,000 to pay in one year, with interest of
6%. Agree to pay C$500 at the end of 6 months. What amount will you
have to pay at maturity to settle the balance? A: C$1,605
50.- The “El Ceibón” farm must pay a total of C$2,500 in three months
and C$8,500 in 6 months. What amount will you have to pay today to
settle your accounts with a rate of 12%? Answer: C$10,446.05
51.- Mr. Jiménez acquires land for C$5,000 through a cash payment of
C$500. He agrees to pay 6% interest on the balance. If you pay C$2,000
three months after the purchase and C$1,500 6 months later. What is the
amount of payment you will have to make one year after acquiring the
land to pay off the debt? Answer: C$ 1,157.50
52.- The fritanga “El bojazo” owes C$20,000 due in 3 months and
C$16,000 due in 8 months. You propose to pay your debt through 2 equal
payments due in 6 months and one year respectively. Determine the
value of the payments with an interest rate of 8%. Focal date: one year.
Answer: C$18,444.44
53.- The fast food company “Candelaria” owes its suppliers C$ 15,000. 00
córdobas to be paid in 2 months for a bain-marie and C$ 38,000. 00 to be
paid in 9 months for the cancellation of the construction on credit of his
palm ranch. Looking for financial flexibility, you want to replace both
commitments with a financial institution that will do a debt consolidation
on the above, if the commitments were agreed with a monthly rate of
3.25%. Calculate the value of the lump sum payment you will make after
six months using a value equation
Other activities:
Investigate passive interest rates on savings accounts
Investigate active interest rates for loans
What are the interest rates charged by commercial houses?
Why do bank interest rates differ from the interest rates of microfinance
institutions and commercial houses?
If a person deposits money in a bank account, what does it represent for
the bank?
Can any institution capture savings from the public?
2.10.- Proposed complementary exercises:

Calculate the following time relations:
 How many weeks are there in three months?
 How many fortnights are there in six months?
 How many fortnights are there in three and a half years?
 How many months are there in two terms?
 How many months are there in 3 semesters?
 How many quarters are there in 3 years?
 How many quarters are there in a month?
 How many quarters are there in 5 semesters?
 How many semesters are there in 4 years?
 How many semesters are there in two months?
 How many semesters are there in three months?
 How many semesters are there in 9 months?
I.- Given a rate of 36% per year, calculate the equivalent nominal rates:
1.-The monthly.
2.-The quarterly.
3.-The weekly.
4.-The bimonthly.
5.-The quarterly.
8.-The biweekly.
II.- Calculate the following interest rates:

 The monthly 4% bimonthly.
 The annual 5% semiannual.
 The monthly 8% annual.
 The annual 3% quarterly.
 The quarterly of 12% annually.
 The biweekly of 6.24% annually.
 The annual 1.25% weekly.
 The weekly 22% semi-annual.
 The bimonthly of 48.78% annually.
III.- Calculate the calendar and ordinary days

1.-From August 3 to November 2
2.-From March 5 to June 6.
3.-From February 6 to March 4.
4.-From May 5 to August 6.
5.-From July 12 to November 5.
6.-From January 5 to October 28.
7.-From February 28 to June 5.
8.-From January 21 to March 23.
9.-From May 1 to May 30.
10.-From March 4 to November 21.
11.-From August 13 to December 28.
12.-From November 8 to December 28
13.-From May 14 to November 15.
14.-From November 15 to December 10.
15.-From September 10 to December 23.
16.-From April 19, 2010 to July 21, 2012.
17.-From February 12 to March 19 in leap year.
18.-From December 30, 2009 to September 26, 2010
19.-From November 20, 2010 to March 23, 2011.
20.-From February 14, 2011 to April 16, 2014
Consolidation exercises of chapter I

(Taken from Lincoyan Portus, Cap. 1 page 44, 45)
19.- A man paid C$ 2,500.20 for a promissory note of C$ 2,400, signed on
April 10, 1996 with 4 ½% interest. What date did you pay it? Response
March 10, 1997
21.- An investor received a promissory note worth C$120,000 at an
interest rate of 8% on July 15 with a maturity of 150 days. On October 20
of the same year, he offered it to another investor who wanted to earn
10%. How much does the first investor receive for the note? Resp C$
122,200.93
23.- A person must pay C$ 14,000 over 3 months, with 8% interest. If the
promissory note has a penal clause that, in the event of default, 10% is
charged for the time that exceeds the established term, what amount
does the debtor pay, 70 days after maturity? Resp Calculating default
interest on the real value at maturity C$14,557.67
25.- A person discounts a C$ 20,000 promissory note due August 13 on
May 15 and receives only C$ 19,559.90. At what rational or mathematical
discount rate was the note discounted? Ans: 9%
27.- A person owes C$20,000 due in 3 months and C$16,000 due in 8
months. It proposes to pay its debt through two equal payments due in 6
months and one year, respectively. Determine the value of the new notes
at the 8% yield. (Take the date one year from now as the focal date).
Response C$ 18,444.45
(Taken from Lincoyan Portus Cap. 2, p. 65, 66, 67)

13.- someone sells a property for which they receive the following values
on July 9 of a certain year:
a. C$20,000 cash.
b. A promissory note for C$ 20,000, due on October 9 of the same
year.
c. A promissory note for C$ 30,000, due on December 9 of the same
year
15.- The livestock bank discounts a promissory note for C$ 80,000 at 10%,
90 days before its maturity. 15 days later he rediscounted it in another
bank at a rate of 9%. Calculate the profit of the livestock bank. Resp
C$500
17.- A commercial company owes its bank three promissory notes with
the following characteristics: C$30,000 due on April 30; C$ 25,000 due
May 30 and C$ 50,000 due June 30. On April 20, he proposed to his bank
to replace the three promissory notes with a single one, maturing on June
15 of the same year. If the discount rate is 9%, calculate the value of the
new note.
19.- A businessman owes his bank two promissory notes, one for C$
40,000 due on August 20 and another for C$ 60,000 due on October 20.
On August 25, when the first promissory note expires, it is agreed with
your bank to collect the two promissory notes and replace them with
another, due on November 30. If the discount rate is 9% and the default
interest is 12%, what is the value of the new note? Resp C$ 101,692.72
(Taken from Lincoyan Portus, Cap. 3 p. 90, 91)

11.-A debt of C$7,000 with interest of 9% matures in 8 months. C$2,000
is paid after 3 months and 2 months later, C$3,000. Calculate the unpaid
balance on the due date:
a. By business rule . Response C$ 2,277.5
b. Applying the rule of unpaid balances. Response C$ 2,285.15
13.- An obligation of C$ 20,000, whose maturity is 6 months at 12%, is
reduced through two equal payments of C$ 6,000 made 3 months and 2
months before maturity. Calculate the unpaid balance:
a. Applying the business rule. Answer C$8,900
b. Applying the American rule. Response C$ 8,920.92
15.- A piece of equipment whose cash price is C$50,000 is sold in
installments, with an initial payment of C$5,000 and 20 weekly payments
of C$2,500 each. Calculate a.- the interest rate applying the commercial
rule b.- the bank discount rate. Answers: a) 61.18%, b) 49.52%
17.- A person receives two offers for the same item, whose cash value is
C$3,800. A merchant offers you installment sales with the following plan:
12% surcharge for installment sales; initial fee C$500; the balance in 8
monthly installments. Another merchant offers another plan like this:
10% surcharge for installment sales; initial payment of C$ 750 and the
balance in 8 monthly installments. Do the corresponding calculations to
determine which is the most convenient offer. Answer The second offer
is 4.5% lower
Facilitated
1. If the amount of a loan is $15,000 it matures within 8 months,
at an interest rate of 25%. Calculate its value:
a. The present day. Answer. $12,857.14
b. In one year and 22 days. Answer. $16,479.17
c. In 3 months. Answer. $13,584.91
d. Within 1 months and 25 days. Answer. $13,292.31
e. Within 260 days. Answer. $15,208.33
2. Banco Ganadero discounts a promissory note for $80,000 at
10%, 90 days before its maturity, 5 days later it rediscounts it in another
bank at the rate of 9%. Calculate the profit of Banco Ganadero.
a. Response 78,000
b. Response 78,500
c. Utility 78,500-78,000= Response 500
3. Someone sells a property for which they receive the following
values on July 9 of a certain year:
a. $20.00 cash
b. A promissory note for $20,000, due on October 9 of the same
year.
c. A promissory note for $30,000, due on December 9 of the
same year.
4. If the local bank discount rate is 9%, calculate the real value of
the sale.
a. 20,000 counted
b. 19,540 Response
c. $68,392.50 Response
5. What is the final value of a document with a face value of
$50,000 with a term of 3 years and 6 months if the simple interest is
32%? Answer: $106,000.0
6. Determine the net value of the notes, discounted at a bank at
the rates and dates indicated below:
a. $20,000 discounted at 10%, 45 days from expiration.
Response 19,750
b. $18,000 discounted at 9%, 2 months before expiration.
Response 17,730
c. $14,000 discounted at 8% on June 15, if its maturity date is
September 18 of the same year.
Response 13,704.44
d. $10,000 discounted at 10% on November 20, if its maturity
date is February 14 of the following year. 9,761.11 Response
7. Find the amount and maturity date of a deposit of $3,000 that begins
on September 12 with a term of 180 days and interest of 2.8% simple
annually. Answer. $3,042, due the following March 11.
8. A loan shark made a loan of $100 payable with $120 in one month.
What is the annual interest rate? Answer: 240%
CHAPTER III: CAPITALIZATION AND

COMPOSITE UPDATE
Specific objectives:
Distinguish and explain the difference between simple interest and
compound interest, nominal interest rate and effective interest rate.
Explain the concepts of compounding period, conversion frequency,
compound interest rate, number of compounding periods.

Pose and solve examples of calculating amount, current value, rate,
time, equations of values equivalent to compound interest.
Programmatic content:
3.1.1.- Capitalization or conversion period
3.1.2.- Conversion frequency
3.1.3.- Interest rate per period
3.1.4.- Number of capitalization or conversion periods
3.2.- Compound interest
3.3.- Composite Amount
3.4.- Present value at Compound interest.
3.5.- Term or time of an operation with compound interest
3.6.- Interest rate of an operation with compound interest
3.7.- Equivalent rates
3.7.1.- nominal rate
3.7.2.- effective rate
3.7.3.- nominal rates
3.8.- Equivalence of values or value equations with compound interest
Introduction
In the previous chapter we learned that interest, with a simple interest
rate, is calculated on the capital and its greatest application is in short-
term operations. Likewise, most operations culminate with the payment
of interest and capital.

There are countless operations that are carried out on a basis of
reinvesting the interest generated at certain time intervals, this
methodology is known as operations with compound interest.
Suppose you save C$150,000.00 at a rate of 10% per year (0.83% per
month, or 0.0833), for a period of one month. In theory, we take the
formula for the amount of simple interest, remaining as follows:
M=C (1+ i n); i.e.: M=150,000(1+0.08333333*1); M=C$151,250
Suppose you want to invest the same amount again in another month
and with the same rate. Of course, without withdrawing the interest ,
otherwise we fall into simple interest and what this topic is about is
compound interest.
So we have to:
M=C (1+ i n); i.e.: M=151,250(1+0.08333333*1); M=C$163,854.16
The investor again wants to invest another month and with the same
rate, the amount of his capital. (Continue with the same previous
procedure.) Can you imagine that a person wants to be calculating 12, 25
or 180 months? ……… This is why compound interest provides a simple
(abbreviated) way to capitalize each of the months in which you want to
be investing.
In short: compound interest is used in long-term operations, and unlike

simple interest (simple interest is not capitalized), the interest generated
in each period is added to the capital and is more used in operations at
maturity or for a few periods. (2, 3,4,).
The formula deduced from the compound amount is M=C (1+i) n ; where
the following intervene:
Basic concepts:
Capital (C): is the single monetary amount, calculated at any time before
maturity.
Amount (M): is the single monetary amount, calculated in any period
after the beginning.

3.1.1.- Capitalization or conversion period: it is the time elapsed from the
beginning of a period to the end of the period generally agreed to
capitalize interest or convert it into capital. The most frequent
capitalization or conversion periods are:
 If the interest rate is compounded annually, the period in which the
interest is capitalized is twelve months.
 If the interest rate is capitalized semiannually, the period in which the
interest is capitalized is every six months.
 If the interest rate is capitalized quarterly, the period in which the
interest is capitalized is every four months.
 If the interest rate is compounded quarterly, the period in which the
interest is capitalized is every three months.
 If the interest rate is compounded bimonthly, the period in which the
interest is capitalized is every two months.
 If the interest rate is compounded monthly, the period in which the
interest is capitalized is each month.
 If the interest rate is compounded biweekly, the period in which the
interest is capitalized is every fifteen days.
 If the interest rate is compounded weekly, the period in which the
interest is capitalized is every 7 days.
3.1.2.- Frequency of conversion or capitalization (m) : it is the number of

times that interest is converted or capitalized in a year. This concept is
directly related to the capitalization or conversion period, therefore:
If the interest rate is compounded annually (ca or c 1 ), the conversion
frequency is m=1 .
If the interest rate is compounded semiannually (cs or c 2 ) , the
conversion frequency is m=2.
If the interest rate is compounded quarterly (cc or c 3 ) , the conversion
frequency is m=3 .
If the interest rate is compounded quarterly (ct or c 4 ) , the conversion
frequency is m=4 .
If the interest rate is compounded bimonthly (cb or c 6 ) , the conversion
frequency is m=6 .
If the interest rate is compounded monthly (cm or c 12 ) , the conversion
frequency is m=12 .

If the interest rate is compounded biweekly (cq or c 24 ) , the conversion
frequency is m=24 .
If the interest rate is compounded weekly (c sem or c 52 ) , the conversion
frequency m=52 .
If the interest rate is compounded daily , depending on ordinary or exact
time.
Example: What is the compounding frequency of a bank deposit that pays

2.10% interest compounded quarterly?
One year ₌ 12 months₌ 4 times or 4 periods
3 months one quarter
Compound rate (r): is the nominal interest rate that indicates the
capitalizations or conversions that must be made for each year of the
operation. Example: 8% compounded semiannually, 12% compounded
monthly, 2,015% compounded biweekly, etc...
3.1.3.- Interest rate per period ( i) : is the rate that results from dividing
the nominal rate by 100 and the conversion frequency; that is:
i=r/100/m . Indicates the proration of the nominal rate.
An example of this is: If the annual rate is 12% and the capitalizations are:
Ordinary exact
Diary 12%/360 either 12%/365
Weekly 12%/52 weeks = 0.23076923 12%/52.1428571
weeks=0.23013699
Biweekly 12%/24 fortnights = 0.50 12%/24.3 q = 0.49
Monthly 12/12 months = 1% or .01 12/12= 1% or 0.01
Bimonthly 12/6 bimesters = 2% or 0.02 12/6 = 2% or 0.02
Quarterly 12/4 quarters = 3% or 0.03 12/4 = 3% or 0.03
Quarterly 12/3 quarters = 4% or 0.04 12/3= 4% or 0.04
Biannual 12/2 semesters = 6% or 0.06 12/2= 6% or 0.06
We must remember that if it is not indicated in the operation, the

calculation methodology that we will use will be that of ordinary time.
Time (t): is the period of time from the beginning to the end of the
operation.
3.1.4.- Total number of capitalization or conversion periods (n): it is the

result of multiplying the time (expressed in years) by the conversion
frequency; that is: n=t*m. Example: Josefa Pérez deposits C$1,500 in a
savings account that pays 3% compounded quarterly and keeps it there
for two years, calculate the interest rate per period and the number of
total capitalization periods.
r=3%; m=3; t=2
i=r/100/m; 3/100/3; then i =0.01
n=t*m; n=2*3=6 periods

To understand better, let's solve an exercise with both methods (simple
interest and compound interest)
Exercise: C$100,000.00 is invested in a savings account that pays 15%
nominal for two months, calculate the liquidation value of the account.
Data: C =C$100,000.00; r =15% annually; t= two months;
i=15/100/12=0.0125; n=(2/12)(12)=2 periods
With simple interest
First month amount=100,000(1+ 0.15*1/12)= C$101,250
Second month amount, reinvesting interest
M=101,250(1+0.15*1)= C$ 102,515.63
You can check by calculating the interest for one month, and then
calculating the second, and it coincides with the result obtained in the
compound interest (101,250 and 102,515.63)
With compound interest

First month amount =10000(1+0.125) 1 = C$101,250
Second month amount=101250(21+0.0125) 1 = C$102,515.63
IMPORTANT NOTE: THE CAPITAL DOES NOT REMAIN FIXED OVER TIME,
IT INCREASES, AS WELL AS THE INTEREST GENERATED BY THE
INVESTMENT, IN THE SAME WAY INCREASES WITH EACH
CAPITALIZATION.

Complementary compound interest exercises
I.- What is the interest rate per period (i) and the capitalization
frequency (m) of the following passive rates:
1) 0.5% monthly?
2) 15th annual?
3) 2% quarterly?
4) 4.48% compounded weekly?
5) 5.52% compounded biweekly? .
6) 1.50% annually compounded monthly?
7) 18% annually compounded monthly?
8) 3% annually compounded monthly?
9) 16:% compounded semiannually?
10) 18% annually compounded semiannually?
II.- What is the interest rate (i) and the conversion frequency (m) of the
following active rates:
1) 5.5% monthly?
2) 4 1/8% quarterly?
3) 50 annually?
4) 19.22: semiannual % of convertible semiannually?
5) 38 ¼% annually convertible semi-annually?
6) 42% annual convertible monthly?
7) 13% annual convertible monthly?
8) 56 ½% annually convertible monthly?
9) 15.52% convertible biweekly?
10) 14.48% convertible weekly?
III.- Find the interest rate per conversion period and the number “n” of
conversion periods:
1. For 15 years at 36%
2. For 9 years and four months at 3 ½% convertible monthly
3. For 2 ½ years at 3 ¼%: compounded bimonthly
4. For 2 years and two quarters at 24% compounded biweekly
5. For 2 years and 6 months at 1.78% annually compounded
semiannually
6. For 9 ½ years at 2.24% compounded weekly
7. From January 1, 2005 to July 1, 2015 at 5.56% compounded
semiannually
8. From August 18, 2008 to February 18, 2014, at 8% convertible
quarterly
9. From March 15, 2007 to September 15, 2015, at 3½% convertible
semiannually
10. From November 25, 2006 to October 10, 2016 with an interest rate
of 2.08% convertible per month.
11. For 6 years with an annual interest rate of 18.18% convertible
quarterly.
12. For 12 and 1/3 years at 13% convertible quarterly.
13. For 12 fortnights with a rate of 8% convertible weekly
14. For fifteen bimonthly periods with a rate of 36% convertible
semiannually
15. For 58 months with a rate of 18% convertible bimonthly
3.2.- COMPOUND INTEREST
Compound interest is the result of investing discrete or continuous cash

flows in a financial instrument that is agreed upon with a compound
interest rate or a rate whose interest is capitalized or convertible for
periods during a certain period.
To determine the amount or value of simple interest we will start from

the fact that the interest is equal to the amount minus the principal; In
terms of compound capitalization we express this like this:

Where:
I c : Compound interest
M c : Composite amount
C: Capital
The formula to calculate the compound amount is:
Where:
N: number of capitalization periods
By substituting and clearing in the first formula mentioned we would

have (in mathematical terms):
Clearing
Example 1.- Calculate the compound interest for a capital of C$ 150,000

invested in a financial instrument that pays 1.2% annually compounded
semiannually for a period of 3 years.
Data
Capital: C $150,000 Substituting we have:
Rate : 1.2% annual convertible.
semi-annually
m=2
i = 1.2/100/2= 0.006
Term ( t )= 3 years
n = txm= 3x2=6
Conclusion:

The compound interest accrued on a capital of C$ 150,000 invested in a
financial instrument for a period of three years is C$ 5,481.65.
PROPOSED COMPOUND INTEREST EXERCISES

1. Calculate the compound interest earned on a principal of
C$120,000 placed in a fixed-term certificate of deposit that pays 7%
compounded semiannually for 5 years.
2. A private charitable institution receives a donation of
C$650,000 and places it in an investment account that offers to pay 2.8%
annually compounded quarterly, calculate the value of the interest that
will accrue in one year.
3. The municipal mayor of Chinandega receives C$ 4,250,000 in
advance municipal transfers for the execution of road improvement
projects. These projects will begin to be executed in six months and it is
decided to invest the money in a national bank that pays 4.2% annually.
compounded monthly. Calculate the value of the interest that said mayor
will receive.
3.3. AMOUNT OR COMPOSITE FUTURE VALUE
The compound amount is the final value of an operation calculated with

an interest rate that establishes a capitalization for periods in a certain
period. The formula to calculate the Composite Amount is M=C(1+i) n ;
where (1+i) n is called the accumulation factor or capitalization factor.
Example 1 : The company “El reptil” invests C$100,000.00 in a bank that

offers an interest rate of 14% compounded quarterly for a one-year term.
Data
C=C$100,000 M=C(1+i) n
r= 14% ct M=100,000(1+0.035) 4
m= 4 times M=100,000(1.147523001)
i=r/100/m=14/100/4=0.035 M= C$114,752. 30
t= 1 year
n=tm=(1)(4)=4
Example 2: How much is accumulated in a savings account that pays

18.6% annually, compounded every two months over a period of 2 years,
if C$35,000 is invested.
Data
C= C$35,000 M=C(1+i) n
r= 18.6% cb M=35,000(1+0.031) 12
m= 6 M=35,000(1.442460679)
t= 2 years M= C$50,486. 12
n= (2)(6)=12 periods
i= r/100/m = 18.6/100/6 = 0.031
Example 3: A bank loan is contracted for C$160,000, the payment term is

3 years, the interest rate is 20% compounded semiannually. What is the
amount of money that must be paid to pay off said loan with a single
advance payment after 15 months?
Data
C= C$160,000 M=C(1+i) n
t= 3 years M=160.00(1+0.10) 2.5
r= 20 cs M=160,000(1.269058706)
m= 2 M=203,049.39
i= r/100/m = 20/100/2 = 0.10
n = tm = (15/12) (2) = 2.5 periods
3.1.- Proposed compound amount exercises:

A.- Calculate the Amount composed of:
1) C$50,000.00 that are deposited for 2 ¼ years in a securities account
that pays 15% annually, compounded monthly. Ans.: C$ 69,925.55
2) C$12,500.00 deposited for a year and a half in an investment account
that pays 3.12% annually compounded biweekly. Ans.: C$ 13,098.51
3) C$8,375.00 placed in a fixed-term account for 9 months that pays
3.62% annually compounded quarterly. Ans.: C$ 8,604.45
4) C$15,000 at 24% compounded quarterly in 6 years, 3 months.
Answer: C$64,378.06.
B.-Resolve the following banking operations:

1) When her son was born, 8 years ago, a mother deposited C$2,870 in
a savings account that pays 3.86% annually, compounded monthly.
What is the balance in the account? Ans.: C$ 3,906.40
2) How much will a savings account open with C$9,850.00 on December
12, 2008 and be liquidated on June 12, 2010 be liquidated, if the
fixed interest rate throughout the period was 2.58% compounded
annually?
a. Fortnightly?
b. Monthly?
c. Quarterly basis?
d. Semi-annually?
3) The funeral company “Divine Dream” deposits C$100,00.00 today in
a savings account that pays 2.4% annually compounded biweekly, if it
deposits C$80,000.00 plus five months later, what will be available if
the account will be settled in five quarters?
4) A marketing student decided to quit smoking in January 2013…. He
consumed ½ pack a day and each pack cost C$22.50. In February he
began to deposit monthly the equivalent of what he smoked during
all these months (considered 30 days) in a savings account that pays
him 2.16% per year, compounded monthly. How much money will
you have in your account as of May 2013?
5) The owner of a coffee farm knows that her sales in 2012 were
850 qq at a price of $117.25 per quintal. If the market
indicates that her sales can grow at a rate of 3.25% annually
based on the previous year, predict the sales for the years
2,015 - 2,016 - 2,017.
3.3.- PRESENT VALUE WITH COMPOUND INTEREST .
Depending on the contractual conditions (term, interest rate, payment

method, frequency) in financial operations we can know a certain value
before the maturity date; Likewise, we can know the amount to be paid
at a future date and we want to know the capital necessary, at the
present moment, to achieve said amount within the indicated period. In
these situations we are looking for the current value, present value or net
present value of an investment with a future return.
The current value shows, as its name indicates, what is the value at a
given time of an amount that will be received or paid at a later time.
To calculate it, the formula M=C (1+i) n is used.
In it we clear the capital C C= M ₌
C= M (1+i) -n (1+i) n
The element (1+i) -n is called the update factor or discount factor with
compound interest.
Example 1: What capital should Mrs. Hilda invest to have C$12,000 in a
savings account that produces 14.4% annual interest compounded
monthly, one year later?
Data
M= C$12,000 C= 12,000(1+0.012) -12
r= 14.4% cm C= 12,000(0866630261)
m = 12 C= C$10,399.56
t = 1 year
i = r/100/12 = 14.4/100/12 = 0.012
n = tm = 1 x 12 = 12
3.2.- CALCULATE THE PRESENT VALUE COMPOSED OF:

1) What is the present value of C$1,000.00 that will be collected at the
end of a year if the interest rate compounded quarterly is:
a) 10%? b) 20%? c) 30% d) 40%?
2) How much was deposited in a savings account that was settled with
an amount of C$8,960.50, 1 ½ years after it was opened with a rate
of 0 . 75% that is capitalized per month?
3) A company dedicated to the export of cattle wants to increase its
operations and has 2 alternative projects. The capital budgets are:
REQUIRED NET CASH FLOW AT THE END OF THE
PROJECT INVESTME
NT YEAR 1 YEAR 2 YEAR 3
TO 150,000 50,000 85,000 80,000
b 150,000 80,000 85,000 50,000

What alternative should be chosen if the company can obtain net returns
of:
a) 22 ¼%?
b) 35 ½%?
4) A selective transportation company must select between two

mutually exclusive projects whose projected cash flows are
presented in the following table:
Project Investm Year 1 Year 2 Year Year 4 Year 5

ent 3
New 42,00 41,00 40,00 50,00
-180,000 42,000
Cars 0 0 0 0
Repair 35,00 32,00 26,00 38,00
-110,000 35,000
of cars 0 0 0 0
Which project generates more profits for the company if the project's
minimum acceptable rate of return (MARR) is 28 ½% per year? Justify
your answer
5) A pharmacy owner receives an offer of C$325,000.00 for his

business, if the pharmacy will generate cash flows of C$80,000,
C$90,000.00, C$70,000.00, C$100,000.00, 82,000.00 in the next five
years and the MARR to analyze this decision is 26 ¼%; What decision
should you make?
6) A sales manager is analyzing the economic feasibility of introducing a

new product or another to the market. About which the company
has the following data:
Product Investment Projected cash flows by product

Year 1 Year 2 Year 3
TO - C$60,000 20,000 22,000 40,000
b - C$60,000 30,000 26,000 26,000

The comparison rate between both products is 18%
convertible annually. If you are the sales manager, what product would
you recommend the company introduce to the market first? Justify your
answer.
3.4. - PERIOD OF AN OPERATION WITH COMPOUND INTEREST

The formula M=C (1+i) n can be used to solve any of its unknowns, the
capital, or the present value, the term, the interest rate, as long as we
know at least three of its variables. Solving for “n” in the original formula
we obtain the formula to calculate the term:
M
Log
n= c
log(1+i)
Example 1: How many years must a deposit of C$6,000 be left in a savings

account that accumulates 8% convertible semiannually for it to become
C$10,000?
Data: t =?, C$6,000, r = 8% cs, M = C$10,000, i = 8/100/2 = 0.04, n = ?
10000
log
n= 6000
log(1+0.04)
n = log 1.666666667 ₌ n = 13.02 semesters; if n = t*m then
t= n; so we have it
m log 1.04 t = 130.02/2 = t = 6.51 years
3.3.- Proposed time problems with compound interest:

A. How many years will it take for:
a) Will C$6,500 double, at 1.68% convertible semi-annually?
Answer: n= 82.86361191 semesters, 41.43180595 years

b) Will you get three times as much on an investment of C$28,500
at 1.72% convertible quarterly? R=256.040143 quarters,
64.0100358 years
c) Is the amount available in a savings account C$55,000 if
C$44,000 is invested at 3.8% convertible bimonthly? Answer: n=
20.2802871 fortnights, .84501196 years
d) Is C$77,750 available at 4 ¼% convertible semi-annually, if we
invest C$60,000? Answer: n=12.3246047 semesters, 6.16230236
years.
B. In how many months does an investment of C$78,250 at 23%
annually compounded quarterly obtain the figure of C$95,000?
C. In how many quarters does an investment of C$900,000.00 on which
a return of 35% per year, compounded monthly, reaches
C$1,350,000?
D. What is the period of time necessary to recover an investment of
C$120,000 that produced C$145,000 at a rate of 22 ½% per year
compounded biweekly?
3.5.- INTEREST RATE OF AN OPERATION WITH COMPOUND INTEREST

The interest rate refers to: The valuation of the cost involved in
possessing money resulting from a loan. Revenue generated by an
operation, over a certain period, and which is expressed as a percentage
with respect to the capital that produces it. It is the percentage price paid
for the use of financed funds.
THE RATE OF RETURN REFERS TO THE RATE THAT THE INVESTOR EXPECTS
TO OBTAIN FROM THEIR INVESTMENTS, OF COURSE, BEFORE THE TAX
BURDEN.
If we look for the components that are the basis for determining the rate
of return offered by investment instruments, we could say: that the rate
of return should exceed the market rate in risky projects.
IT SHOULD BE CONSIDERED AMONG OTHER THINGS: the real rate, the

inflation accumulated over the period of time of the investment and the
degree of risk. However, in the active and passive operations carried out

by financial institutions, they only take the reference rate that the Central
Bank of Nicaragua authorizes for this purpose.
In this case we must clearly understand that we will find the interest rate
with which the financial operation was agreed.
-1=i
Example: At what interest rate should C$15,000 be deposited to have
C$50,000 available within a period of 54 years? Consider that interest is
capitalized: a) semi-annually, b) quarterly, c) monthly.
Data: C = C$15,000, M = C$50,000, t =5 years, n = 5 x2 = 10, i = ?
-1=i
- 1 = i then = i = 12.79% x 2 =
r = 25.58% annually
3.4.- Proposed interest rate exercises with compound interest:

a) Find the semiannually convertible nominal interest rate at which the
amount of C$2,500 is C$3,250 in 5 years. R = 5.312%
b) Find the quarterly convertible nominal interest rate at which the
amount of C$3,500 is C$5,000 in 5 ¼ % years. R = 6.849%
c) Find the nominal monthly convertible interest rate at which the
amount of C$3,250 is C$4,000 in 8 years. R = 2.604%
3.6.- EQUIVALENT RATES
Generally interest rates are expressed in annual terms; In reality they do

not always appear like this, in most cases, the accumulation of interest to
the initial capital is in smaller periods (months, quarters, semesters,
weeks, days, etc.).
Does modifying the interest calculation frequency mean benefit or harm?

In this regard, regardless of the number of times the interest is
calculated, in the end the total amount is the same, that is, the final
results of the negotiation do not vary.

If we change the frequency (m) of calculating interest, the amount of the
interest rate applied in each case must also be changed. This is how the
concept of equivalent rates arises, which means: two interest rates, with
different conversion frequencies, are equivalent when applied to an initial
capital for a year they produce the same amount or final capital.
In theory, interest rates with different compounding periods are

equivalent if they generate the same return in the long term. The interest
rate is equivalent to its associated effective rate, because both generate
similar profits. In financial and commercial practice, it is frequently
necessary to calculate the equivalent rate, based on different
capitalization periods (Pastor, 1999).
Nominal rate: it is the annual rate without capitalization.
The effective rate (i e ) is the interest rate actually paid or earned once per
year, which depends on the compounding periods (daily, weekly,
monthly, semiannual or annual). Effective rates are indicators that help
investors and financial advisors make the best decision to invest capital.
For a better understanding of equivalent rates we will identify three
cases:
From an effective rate, find the equivalent nominal rate

From a nominal rate find an equivalent effective rate
From a nominal rate find another equivalent nominal rate
3.6.1.- NOMINAL RATE

Case 1: Finding a nominal rate equivalent to an effective rate
In this case we want to know the nominal convertible interest rate for
periods that is equivalent to a certain effective interest rate.
Applying the previous equation, we solve for “r”:
i e = (1+i) m – 1; our unknown is “r”
i e +1= (1+i) m

; but, also i=r/100/m, then finally
O well
Example: Determine the nominal rate “r” convertible quarterly, which

produces an annual effective rate of 36%.
Data: r=?, m=4,i e =36%, m=1
r = 31.961117954%
Applying a practical example: Which option is less risky for a financial
investment: C$15,000 at 31.961117954% compounded per quarter or
C$15,000 with a rate of 36% annually, both for one year? If we calculate
the liquidation of both investments:
M= 15,000(1+31.961117954/100/4) 4 = C$20,399.99
M= 15,000(1+36/100/1) 1 = C$20,400, let's observe a minimum difference
of 0.01 cent that we can attribute to rounding, if we place our calculator
rounding without digits this slight difference will have been erased.
Case 1: Calculate the equivalent nominal rate from an effective rate

1) Find the semiannual convertible rate equivalent to 4.2% effective. R =
4.16%
2) Find the nominal rate “r” convertible quarterly equivalent to an
effective rate of 5%. R = 4.91%
3) If a financial institution pays 3 ¼% effective annually, what is the
annual equivalent rate compounded by months?
4) A company wants to make investments that yield 25% effective, what
is the annual equivalent rate convertible quarterly?
5) A company needs to decide between the purchase of securities that
yield 8% annually and other instruments such as bills that pay twice a

year. What is the minimum rate that it must accept from a bill so that
its investments yield the same?
3.6.2.- EFFECTIVE RATE

Case 2: Finding an effective rate equivalent to a nominal rate
The formula to calculate this operation is: i e = (1+i) m - 1
Example 1: What will be the effective rate equivalent to 11.8% annually
compounded quarterly?
r = 11.8% ct; m = 4; i = 11.8/100/4 = 0.0295: i e ?
So: i e = (1+0.0295) 4 - 1
i e = 1.123324947 – 1 i e = .123324947 ;
That is to say, if we invest capital C at an annual rate of 12.3324947%, it is
equivalent to investing it with a quarterly convertible annual nominal rate
of 11.8%.
Case 2: Finding an equivalent effective rate from a nominal rate

1) What is the annual effective rate paid for a bank loan of C$250,000
that was agreed upon at 16% annual interest convertible quarterly? R
= 16.98%
2) A deposit of C$1,000 accumulated C$1,195.62 in one year, calculate:
a. The annual effective rate R =
19.56%
b. The nominal rate compounded monthly R = 18%
3) If a security pays 3 ½% per year compounded semiannually, calculate
the effective annual rate paid.
4) A standardized BCN bill offers to pay 4 ¼% annually convertible
quarterly. What is the effective rate paid for our taxes?
5) A Nicaraguan public debt instrument pays 5 1/8% annually
compounded per semester. What is the effective annual rate paid?
3.6.3.- EQUIVALENT NOMINAL RATES

Case 3: Finding a nominal rate equivalent to another nominal rate with
different convertibility
This case allows us to compare two nominal rates with different
convertibilities to determine which is more productive or simply find a
rate (r 1 ) with a convertibility equivalent to another different rate (r 2 )
with another convertibility. Comparing both rates we have:
Equalizing and clearing have:
; But, also if i 1 =r 1 /100/m 1
Example: At what rate should FUNDECAN place its credit operations so

that the profit on all its credit operations is equivalent if it currently
places with an annual interest rate of 12.48% convertible weekly and with
a rate of 12.85% compounded by semesters? . Being 12.48% r 1 , m 1 =52,
i 1 = 12.48/100/52 = 0.0024 and r 2 = 12.85%, m 2 =2, i 2 =12.85/100/2 =
0.06425
r 1 = 12.46899087%; That is to say, a rate of 12.46899087% compounded

weekly is equivalent to a rate of 12.85% compounded semiannually. Let's
check this: Let's place C$10,000 for one year with both rates; we would
have:
M 1 = 10,000(1+ 12.85/100/2) 2 = 11,326.28
52
M2 = 10000(1+12.46899087/100/52) = 11,326.28
The previous result indicates that those credit operations with a

semiannual payment frequency should be placed with a nominal interest
rate of 12.85% convertible semiannually and credit operations with a
weekly payment frequency should be placed with an interest rate of

12.46899087% convertible weekly, this will allow us for both operations
to provide FUNDECAN with the same profit or interest.
Case 3: Finding a nominal rate equivalent to another nominal rate with

different convertibility
1) What annually convertible rate is equivalent to 6% quarterly
convertible? R = 6.136%
2) Find the nominal rate convertible quarterly equivalent to 5%
convertible semiannually. R =4,969
3) Find the monthly convertible nominal rate equivalent to 5%
convertible semiannually R = 4.949%
4) What annual rate compounded biweekly is equivalent to a rate of 3
½% annually compounded bimonthly?
5) A marketer wants to design a credit product that has an equivalent
annual profitability, but that is presented with a rate of 7% per year,
compounded monthly or another rate, compounded quarterly. What
rate should she offer?
3.7.- EQUIVALENT VALUE EQUATIONS WITH COMPOUND INTEREST

(Equivalence of values)
Time and value diagrams are a very useful tool in solving financial
situations that involve more than one operation; That is, a loan and
several payments, two debts renegotiated with a new debt, several debts
that are replaced by several deferred payments over a longer period, etc.
As we already mentioned in the previous unit, value equations are used
in debt consolidation operations, loan restructuring, etc.
The flowcharts are represented as a horizontal timeline, where the dates

on which the different financial movements (payments, placements)
were or will be carried out are represented. This line represents the
periods for the operation (months, fortnights, years, etc.), at the top the
capital placements or old debts to be negotiated, each on the
disbursement date; and, at the bottom, the payments made or to be
made or new debts are represented.

It is necessary to remember that a comparison date is always defined
(also called focal date ), which works like a magnet attracting all debts,
both old and new, as well as all past and future payments towards it in
order to compare (add or subtract depending on applicable) discounting
or capitalizing said values as indicated by the directional lines of the flow
diagram. Let us remember that two amounts of money located in
different time periods should not be added or subtracted, since their value
is not equivalent.
The suggested methodology to solve a value equation is the same one

that we studied in simple interest:
Extract all data from the operation.
Calculate the amounts of all loans.
Prepare the flowchart for the renegotiation of debt(s).
Pose the value equation and find the answer to the unknowns.
Issue the necessary conclusions, check the answers.
Example : El Bosque SA owes FUNDECAN two amounts C$10,000 payable

in two years and C$18,000 payable in 5 years. It agrees with FUNDECAN
to pay both debts through a single payment after 3 years, with an interest
rate of 12% convertible semiannually.
Step 1: Operation data Step 2= Calculate amounts
M 1 = C$10,000; t 1 = 2 years In this case there are no
amounts to calculate
M 2= C$18,000; t 2 =5 years; X=?; t x =3 years. ; r = 12% cs; i = 12/100/2 =
0.06
Step 3: Prepare the flowchart:

10,000 VF PV 18,000
2 3 5
X=?
Focal date
Step 4: Pose the value equation, in this case debts = payments

10,000(1+0.06) 2 +18,000(1+0.06) -4 =
11,236 + 14,257.69 = X; then X = C$25,493.69
Step 5: Issue conclusions: The company “El Bosque SA” must pay at the
end of the third year the amount of C$25,493.69 to cancel the two
amounts it currently owes to FUNDECAN.
Solve this exercise using today as the focal date.
Example 2: You have a bank debt of C$500,000 payable in two

installments of C$250,000 each, in 3 and 6 months. It is desired to settle it
in three semiannual payments: the first of C$100,000, the second of
C$200,000. What will be the value of the third payment if the agreement
is signed with a rate of 36% convertible monthly?
Step 1: Extract the data
M 1 = C$500,000, Mp 1 = 250,000, t p1 = 3 months, Mp 2 = 250,000, t p2 = 6
months, X 1 = C$100,000, t x1 = 6 months; X 2 = C$200,000, t x2 = 12
months; X 3 = ?, t x3 = 18 months, r = 36% cm; i = 36/100/12 = 0.03
Step 2: Calculate amounts if any: there are no amounts to calculate.
Step 3: Prepare flowchart

250,000 250000
Step 4: State the equation: Old debts = new debts

250,000(1+0.03) 15 +250,000(1+0.03) 12 = 100,000(1+0.03) 12
+200,000(1+0.03) 6 +X
389,491.85 + 356,440.22 = 142,576.09 + 238,810.46 +
745,932.07 = 381,386.55 + X
745,932.07 – 381,386.55 = X; then the value of X = C$364,545.52
3.6.- Solve the following value equations at compound interest:

1) In the purchase of a television valued at C$5,300.00, C$1,500.00 is
paid in cash and a document is signed for the difference to be paid in
6 months considering an interest of 2% monthly. What is the amount
of the document?
2) A piece of country land is purchased. C$50,000.00 premium is paid
and two documents are signed for the same amount to be paid in 1
and 2 years. What sum must be delivered to pay off the purchase
after one year if the interest rate is 15%?

3) A person must settle a debt by paying C$30,000.00 in 6 months and
another payment of C$50,000 in a year and a half. What amount
should I pay to settle the debt in a single payment after four months
at a rate of 12% annually compounded bimonthly?
4) A debt of C$8,500 payable in 1 1/2 years and another of C$10,500
payable in 4.5 years will be settled by a single payment within 2 years
and eight months. Find the value of the payment with a yield of 8 ¼%
convertible quarterly. R = C$
5) A debt of C$5,250 due three years ago and another of C$5,750
payable in 1.75 years will be settled on the date through a single
payment. Find the amount of the payment with a rate of 8%
convertible semiannually. R = C$
6) Marcelo owes C$11,500 payable within 3 years. If you make a
payment of C$4,000 today, what will be the value of the payment
you will have to make in 2 years to settle your debt with an interest
rate of 6.5% convertible semiannually? R = C$
7) A person owes C$10,000 payable within 2 years and C$20,000
payable within 5 years. With your creditor you agree to make a single
payment at the end of 3 years with a rate of 8% compounded
semiannually. Make a flowchart and calculate the payment value
8) A company sells machinery for C$85,000. They pay you C$25,000 in
cash and sign two documents for C$30,000 each, with maturities of 9
and 18 months. What amount will pay off the debt after 13 months
considering an interest of 20% convertible monthly?
9) María owes C$15,000 to be paid in one year. Pay C$2,000 after 3
months and C$3,000 after 6 months. What amount must be
delivered after 9 months to settle the debt if an interest of 1.5%
compounded monthly is considered?
10) The company “Don Pedro” owes “ECODOWN” two amounts: C$9,660
and C$11,115; the first to be paid in 1 ½ years and the second in 54
months. How much should you pay to pay off both in 42 months with
an interest rate of 38.56% per year convertible biweekly? Make the
corresponding flowchart. (Data 1 point, flow chart 1 point, equation
and answer 3 Points)
11) The company “La Leonesa” has the commitment to pay a total of
C$105,000 in 15 months. In addition, he owes C$80,000 agreed with
36% compounded monthly to be paid in 4 ¼ years. You agree with
your financial creditor on a payment in 12 months and the second in
3.5 years with an interest rate of 42 ½% per year compounded
monthly. What will be the amount of these payments? Make the
appropriate flowchart.
12) The selective transportation cooperative must pay C$ 22,500. 00 in 4
months and C$ 32,500. 00 in 1 ¼ years. Since your cash flow does not
allow you to cancel both commitments, you agree with your creditor
to cancel both commitments by:
a. a payment today of C$ 5,000. 00 and
b. two equal annual payments with a renegotiation rate of 3.75%
monthly.
Calculate the amount of each annual payment using a value
equation.
Recommended activities:
1) Investigate: which financial institutions use compound rates
2) Describe at least three financial products to which these rates apply.
Unit consolidation exercises :

(Taken from Lincoyan Portus cap. 4, p., 120, 121)
21.- A person deposits C$ 3,000 on April 22, 1995, in a savings bank that
pays 6%, compounded semiannually on June 30 and December 31 of each
year. How much will you be able to withdraw on November 14, 2002?
23.- A father dies on March 20, 1996 and leaves his daughter C$ 100,000
to be given to them when she turns 18. The inheritance is deposited in an
account that earns 6% compounded annually. On September 22 of the
year the father died, the daughter turned 10 years old; calculate the
amount you will receive at the set age. (Int. Real)
25.- What rate, compounded semiannually, is equivalent to 8%,
compounded quarterly?
27.- Find the semiannual convertible nominal rate, at which a capital of
C$10,000 becomes C$12,500, in 5 years.
29.- How many years should a deposit of C$6,000 be left in a savings
account that accumulates 8% every six months, so that it becomes
C$10,000?

31.- What is more convenient: investing in a timber company that
guarantees doubling the capital invested every 10 years, or depositing in
a savings account that offers 6% compounded quarterly?
33.- An investor offered to buy a C$ 120,000 interest-free note that
matures within 3 years, at a price that produces 18% effective annually;
calculate the offered price.
(Taken from Lincoyan Portus cap. 5, p. 138, 139)

15.- Find the current value of C$ 96,000 payable in 20 years at 8% with
quarterly capitalization. Answer: C$ 19,485.25
17.- What offer is most convenient for the sale of a property, if the
interest rate is 10%, with semiannual capitalization?
a. C$602,000 in cash.
b. C$30,000 in cash and C$35,000 for a 3-year term
Answer: Offer a is higher by C$ 3,882.46
19.- A person has a promissory note of C$ 60,000 with a 5-year term at an
interest of 8%, with semiannual accumulation. Three years before
maturity, he offers it for sale to a lender who invests at 10%, with
quarterly compounding. What amount does the lender offer you?
66,038.66
21.- A person must pay C$ 50,000 within 2 years; The creditor accepts a
cash payment of C$20,000 and a new 3-year promissory note. Find the
value of the new note at the rate of 8%, with semiannual accumulation.
Answer: C$ 28,773.62
23.- A promissory note of C$ 8,000 payable within 2 years and another of
C$ 10,000 payable within 5 years will be settled in a single payment
within 3 ½ years. Find the value of the single payment at the rate of 9%,
convertible semiannually. Response C$ 17,892.30
25.- A person sells a piece of land and receives two promissory notes of
C$ 60,000 with a term of 2 and 4 years. Find the cash value, if the yield is
8% with semiannual compounding. Response C$ 95,129.66
Facilitated
1. At what annual rate compounded by weeks does a capital triple in 3
years? Answer: 0.3675%
2. What is the present value of a debt amount of $22,123.89 due in 7
months if the debtor is offered a compound discount of 15%?
Answer: $20,391.75
3. What is the final value of a term certificate with face value of $1,200
that runs from October 12 to April 14 of the next year and interest
of 8% CD? Answer: $1,249.38
4. What is the final value of a certificate with a face value of $15,500
with a term of 8 months and 12 days if the interest rate is 6.8% CT?
Answer: $16,249.14
5. What is the final value of a certificate with a face value of $15,500
with a term of 8 months and 12 days if the interest rate is 6.8% CT?
Answer: $16,249.14
6. What is the final value of a document with a face value of $3,000
with a term of 2 years and 7 business months if the interest is 18%
CT? Answer: $4,727.77
7. What is the final value of a document with a face value of $50,000
with a term of 3 years and 6 months if the interest is 32% CT.?
Answer: $146,859.68
8. What is the nominal annual CB rate, if a capital of $10,500
generates interest of 30% total global in 8 months? Answer:
40.674%
9. Calculate the amount of $23,000 in 2 years and 5 months at 30% CS.
Answer: $45,196.08
10. Calculate the amount of $2,000 from May 10 to December 18 of the
same year at 14.965% CD. Answer: $2,190.54
11. Determine the present value of $20,000 payable in 15 months at
12% CS. Answer: $17,288.82
12. Determine the amount of $12,500 invested at 21% continuously for
18 months. Answer: $17,128.24
13. Determine the amount of $12,500 invested at 21% continuously for
18 months. Answer: $17,128.24
14. Determine which plan is best for a person to save a certain amount
of money after 5 months, knowing that the money earns interest at
22% CT.
15. On March 18, a promissory note with a face value of $10,000 is
signed with 15% CM, the amount to be paid is $11,182.92. On what
date does it expire?
16. On June 2, Mr. González purchases merchandise for $32,500 and
signs a promissory note with a face value of $37,250 and maturity
on the following August 21. What is the CD annual interest rate?
Answer: 61.4377%
17. In what time does a capital of ($45,500) reach a value of ($68,000) if
it is invested at 18.3% CT?
18. What deposit must be made today in a fund that pays 24% CM. To
have $60,000 available after 2 years? Answer: $37,303.29
19. A television whose cash price is $4,500 is paid off with $5,200 on
credit after three months. What is the annual interest rate
compounded fortnightly? Answer: 58.48%
20. An investment of $15,000 earns interest payable at the end of every
six business months in the amount of $1,147.50 for 18 months.
Calculate the rate of return on the investment. Answer: 15.30%
21. A person invests $4,500 and 15 months later returns $7,010.85.
What effective monthly and annual interest rate does he/she earn
on the investment? Answer: 3% monthly and 42.5760% annually.
22. At what CT nominal rate will the amount of $3,000 be $9,000 in 3
years? Answer: j=38.349% CT
a)At what effective annual rate does capital double in 2 years?
b)In what time does a capital of $48,500 reach a value of
$60,000 if it is invested at 8.3% CM? b) In what time does
it double? Answer: a) 2 years, 6 months and 27 days b) 8
years, 4 months, 17 days.
c) i=41.42% b) j= 37.84% CS c) j= 35.163% CIV
d) At what CS nominal rate does capital double in 2 years?
e) At what nominal rate CM does capital double in 2 years?
UNIT IV: CAPITALIZATION AND UPDATE OF

CASH FLOWS (ANNUITIES)

SPECIFIC OBJECTIVES:
1. Define and explain the concept of a simple and general certain annuity.
2. Draw the fund flow graph of an annuity.
3. Identify the different types of annuities.
4. Pose and solve problems calculating present value, future value,
income, term and interest rate. interest.
5. Make applications for certain simple ordinary, anticipated, deferred
and perpetual annuities.
6. Transform general annuities into simple cases through the adjustment
of the rate to the period of payment or the adjustment of the
payment to the interest rate period.
7. Discount flow of funds from projects with real rates and with nominal
rates.
8.-Pose and solve problems with this type of annuities and find the
amount, present value, term or interest, as the case may be.
Summary
4.1.- Introduction, basic concepts and classification of annuities
4.1.1- Elements of an annuity
4.1.2.- Classification of annuities
4.2.- Ordinary annuities due or postpaid

4.2.1. Present value of an ordinary annuity due.
4.2.2. Value of payment “A” or ordinary income “R”
4.2.3. Future value of an ordinary annuity due (VF).
4.2.4. Value of the periodic deposit “A”.
4.2.5. General Annuity and Interest Rate Adjustment
payment or rent period.
4.2.6. Term or time of an ordinary annuity due.
4.2.7. Interest rate of an ordinary annuity.
4.3.- Ordinary advance or prepaid annuities

4.3.1.- Present value of an anticipated annuity.
4.3.2.- Income payment “A” or “R” of an early annuity.

4.3.3.- Amount, amount or future value of an annuity
anticipated.
4.3.4.- Income deposit “A” or “R” of an advance annuity.
4.4.- Deferred annuities

4.4.1.- Present value of a deferred annuity.
4.4.2.- Income payment of a deferred annuity.
4.4.3.- Amount, amount or future value of an annuity
deferred.
4.4.4.- Deposit income of a deferred annuity.
4.5 – Perpetual annuities
4.1.- INTRODUCTION
In the fundamentals of financial mathematics , the expression
ANNUITIES is used to indicate the system of flow of fixed sums of money
at equal intervals of time. Normally, people involved in financial activity
receive or pay equal amounts of money at equal intervals of time, at a
compound and occasionally continuous interest rate. Such payments or
receipts are called annuities or rents in the financial market.
Although the word annuity generally indicates annual periods,

payments or receipts are not necessarily made every year, but rather
their frequency can be any other; monthly, weekly, semi-annual, daily,
etc., as we will see in this unit.
Installment operations are a fundamental part of financial and

commercial operations, those in which all payments or deposits are equal
are called annuities. Some examples of annuities are:
 Monthly rental payments.
 The biweekly or weekly collection of salaries.
 Monthly payments equal to a credit account.
 Annual premium payments for life insurance policies.
 The equal deposits agreed for a savings account.

 Payments in equal periods and for equal amounts of money
made to repay a loan.
This unit presents the financial mathematical tools necessary

to calculate the future value of a series of deposits made with a specific
time frequency and for a specific time. The objective is to carry out these
operations quickly, safely and abbreviated instead of calculating the
future or present value one by one; as the case may be, and then add
them to make the final and definitive calculation.
Annuities are frequently used in various transactions, whether
commercial or financial, both in the public sector (government expenses)
and in the private sector. This occurs based on depositing, withdrawing,
amortizing, provisioning or paying the same amount of money; pay life
insurance or property insurance premiums, receive or pay fixed nominal
salaries (meaning salaries), housing rent payments, amortizations of
personal loans, mortgages, national or international financial leasing.
Both the payments, as well as the income, made in an

organization are fundamental for the strengthening of the institution,
which is why they must be constantly evaluated in order to determine
the impact they produce on the business environment, carry out financial
projections and performance studies. new projects or analysis of
replacement projects.
DEFINITION OF AN ANNUITY:
Annuity:
 It is a series of generally equal payments made at equal time
intervals and with compound interest31 .
 It is a set of equal payments made at equal intervals of time.32 .
31
Financial Mathematics, third edition. Alfredo Díaz Mata and Víctor M.
Aerie
32
Financial Mathematics, Third Edition. José Luis Villalobos, Page. 228.
 It is a cash flow with uniform amounts of money; That is, all flows
are equal and capital movements occur at regular intervals33 .
The proposed definition:

“An annuity is a cash flow of constant or variable amounts that
occur at equal or variable time intervals and that are linked to
some financial operation”
4.1.1- THE ELEMENTS INVOLVED IN AN ANNUITY ARE:
Income (deposit or payment) : the income, deposit, periodic payment or

payment per period is the amount collected or paid, as the case may be,
in each period and which does not change its amount over the course of
the annuity , it is denoted by R, TO .
Current value, present value or capital asset : it is the total monetary

expression of payments or deposits at the present moment.
It is the value equivalent to the income at the beginning of the term of a
financial operation. It is denoted by C, VA, VP, VPN, VNA, P.
Future value, amount or amount : it is the sum of all periodic payments

(A, R), capitalized at the end of the nth period.
It is the value of all payments or deposits at the time of maturity. It is
denoted by M, VF, S; depending on the bibliography consulted.
Payment or deposit interval, capitalization period or payment/deposit

frequency : it is the time between two successive payments or deposits .
It is the time interval between two successive flows or the capitalization
period of the interest rate. The time intervals can be monthly, weekly,
semiannual, etc.
33
Financial Mathematics for business decision making, César Aching
Guzmán .
Capitalization frequency or conversion frequency: It is the number of
times interest is capitalized in a year: It is denoted by “m”. The
capitalization periods can be
Daily compounding: 360 periods per year. m=360
Weekly compounding: m= 52 periods
Biweekly capitalization (cq): m= 24 periods.
Monthly capitalization (cm): m=12 periods.
Bimonthly or bimonthly capitalization (cb): m=6 periods.
Quarterly capitalization (ct): m=4 periods.
Quarterly capitalization C c): m=3 periods.
Semiannual capitalization (cs): m= 2 periods
Annual capitalization (ca): m=1 period
The time or term of the annuity : it is the time between the initial date of
the first period and the terminal date of the last period . It is
recommended to always express it in years or in the corresponding
fractional expression . Example: an annuity was agreed for two years and
8 months of term t: 2 8/12 or 2.66666666 years; To carry out technically
correct calculations, they must always be carried out using all decimals. It
is denoted by “t”.
The annual nominal rate or compound interest rate : is the rate

expressed in the document supporting the operation and is nominal per
year, can last the entire term of the annuity, and is capitalized with
interest at an agreed frequency ( m). It is denoted by “r”. The interest
rate is commonly expressed on an annual basis, indicating, if necessary,
its capitalization period.
28% annually compounded monthly
20% annually compounded semiannually
14.25% annually with quarterly capitalization
If the interest rate is expressed without any mention of its capitalization,

it should be understood that the capitalization is annual or that it is
convertible in periods equal to the flow periods.

There may be cases in which the interest rate does not coincide with the
payment or deposit periods, in these cases we must look for equivalent
rates to be able to resolve the exercise.
They will be worked at their effective equivalent rates and for
capitalization periods that must coincide with the payment period A or R.
The compounding period and the compound interest rate must always be
equivalent
The interest rate per capitalization period, prorated rate or proportional

rate: it is very important that, to solve any problem with compound
interest, the annual interest is converted to the corresponding rate
according to the capitalization period that is established; If the interest is
capitalized monthly, the annual interest rate must be transformed into an
equivalent monthly rate; if quarterly, at quarterly interest, etc. It is
denoted by “i” and is obtained by the following formula i= r/100/m
Total number of periods of the annuity: these are all the periods in which
interest will be capitalized during the entire term of the annuity. This
total is obtained by multiplying the time (expressed in years) by the
frequency of interest capitalization (m), that is: n= t*m.
4.1.2.- Classification of annuities:
Annuities can be classified according to:

a) Its time or defined period.
b) The way in which money flows should be carried out.
c) The way to calculate their values.
The classification of annuities can be seen in the following diagram:

As we see in the diagram, annuities are grouped into two classes:

CERTAIN ANNUITIES AND EVENTUAL OR CONTINGENT ANNUITIES.
Certain Annuities are those whose initial and terminal dates are known
to be specifically stipulated. In a car loan, for example, the payment of
the premium and the number of payments are established from the
purchase, as well as the date of each one and its respective maturity.
Eventual or Contingent Annuities: when at least one of the extreme

dates of the term is not known. An example of this type of annuity is the
monthly pension that a retired employee receives from the INSS, where
the pension is suspended or changes in magnitude when the retiree dies.
Insurance in general is the quintessential example since it depends on an
event to start paying; But, the insured amount is already established.
The subject program focuses on the study of the following annuities:
4.2.- SIMPLE ANNUITIES CERTAIN ORDINARY (ASCO) OR ANNUITIES

DUE:
Ordinary annuities, postpayable or due, are those in which the payment
or deposit of the income is made at the end of each interest period, for
example, the monthly payment of cable service, receiving our nominal

salary, payments of insurance premiums. insurance policies, leveled
amortization installments, etc.
Ordinary or mature annuities are the most common type of annuity, since
payments are generally made at the end of the period.
4.2.1-PRESENT VALUE OF AN ORDINARY ANNUITY DUE.

To calculate this PRESENT OR CAPITAL value we will use the zero point
(today) as a reference point or focal date in the flow diagram, that is; find
the present value P given the series of flows A, or R, in N time periods at
an interest rate i, (See graph 3.1).
Graph 3.1
The present value of a series of uniform flows is the sum of all the
present values of each of the flows at compound interest;
Applying the concepts of present value we obtain factors 3.1, with which
we update the constant flow of the annuity. We obtain the current value
by discounting each of the payments or installments at rate i at
compound interest, from where each capital is to the origin.
DEDUCTION OF THE FORMULA. Let's consider A = $1 in each period from

1 to n and set focal date to 0 (zero). Let's transfer each $1, with the
formula with F=1, at the focal date. The sum of all
the transfers will be P ni = P and we express it in the value equation.

1.
Multiplying equation (1) by (1 + i), we have the equation:
(2)
If the value of the periodic payment is $R instead of $1, then the sum in
equation (3) is called the present value P, that is:
Formula 3.1
Where, the factor It is defined as the discount
factor or update factor of the postpaid annuity.
EXAMPLE 3.1: How much should Mr. Maradiaga invest today, to obtain an
income of C$50,000.00 (fifty thousand córdobas), each year for the next 6
years, if the interest rate in the market is 12%. (See graph 3.2).

Graph 3.2
DATA:
A = C$50,000.00 annually (Remember that A = Income)
j = 0.12 (Nominal rate)
m – 1 (Capitalization periods)
i= j/m = 0.12/1 =0.12 annual
n = tn = .6 flows, P =?
SOLUTION:
Using formula 3.1 we obtain;
PROPOSED EXERCISES OF PRESENT VALUE DUE

1. The company “ Happy vacations” promotes a tourist package
payable in 2 ½ years with monthly installments of C$628.00, charging
an interest rate of 2.5% monthly. What is the amount of the
package? PV= C$ 13,144.22, n=30, i= 0.025
2. What is the current value of a weekly income of C$875. 00 deposited
at the end of each of the 44 weeks, if the interest rate is 4.16% per
year compounded weekly? PV= C$37,815.42
3. The “REMO” consortium purchased a property 12 years ago through
biweekly installments of C$2,750. 00 ; This was financed through a
financial institution that charges 48.48%, calculate the cash value
with which the credit operation was agreed. PV= C$ 135,709.46
4. Determine the present value of a series of deposits of C$150,000 at
the end of each year for 8 years, if the interest rate is 2.5 % effective
annually Answers: PV= C$1,075,520.58

5. Calculate the price of a truck that was sold with a premium of
US$2,000.00 and biweekly payments of US$102.50 with an annual
interest rate of 24% convertible biweekly over a period of two years.
PV= C$ 5,892.33
6. The company “fresca fruti” has an orchard that is estimated to
produce an annual income of C$58,900 in the next eight years. If the
company wishes to make its sale, what is the minimum price it will
accept today, if the cost of capital is 7% per year? M = C$351,709.48,
n=8, i=0.07
4.2.2.- VALUE OF THE PAYMENT AO ORDINARY INCOME: If we want to

find the value of the magnitude A or income, we will start from the
knowledge of the updated or present value P, the value of A, the value N
and interest rate i. (See graph 3.3).
The formula to determine the magnitude of the value A or R in this case is

obtained by solving it for formula (3.1). So:
Several formulas can be obtained from the previous one, including
Formula 3.2
Where the factor: It is called payment factor “R”
It is defined as a capital recovery factor and is the value of the payment,

installment or credit “R” or “A” of an annuity that amortizes a debt of one
monetary unit, in n payments at rate i per period.
EXAMPLE 3.2: A person deposits the amount of С$500,000.00 in a bank

that pays 15% effective annually with the objective of making equal

withdrawals at the end of each year. What will be the value of these
withdrawals? (see graph 3.4)
DATA:
P = C$500,000, m=1
i = 15% annually n = 10 years
n = 10 flows n = 10(1)
i e = 0.15 A =?
SOLUTION:
By formula 3.2 we have the following:
PROPOSED YEARS OF DUE RENT-PAYMENT

1. A small farmer accesses a line of credit, payable in 4 uniform
quarterly installments, the amount of the line of credit is C$18,500
with 15% convertible per quarter. Determine the amortization rate.
R= C$ 5,217.22, n=4, i= 0.05
2. A small businessman in expansion requires working capital to
expand production capacity and goes to a microfinance institution in
Jinotega, managing a loan for C$ 70,000. 00 , for settlement in five
annual payments over five years at 22% per year. R payment =
C$50,281.01
3. The company “El Huerto” receives a credit authorization from
FUNDECAN for a capital amount of C$95,000.00 at 36% annually
convertible semiannually to be paid within a period of 3 years in
equal semiannual installments, the first of which expires in 6
months . Calculate the value of each payment. R payment = C$
27,161.46
4. The restaurant “El Delfín” purchases furniture under the following
conditions: total price C$86,830.00, premium: 10%, four equal

bimonthly payments and an annual interest rate of 12.36%
convertible interest bimonthly. Calculate the value of the payments.
R payment = C$ 20,553.15
5. A young university student today purchases a laptop on credit that
costs C$28,850 and agrees to pay for it in 4 equal monthly payments.
How much will you have to pay each month if they charge you 3.8%
monthly interest?
6. If a person deposits C$165,000.00 in a savings account that pays
4.2% per year, compounded monthly, how much money can he
withdraw at the end of each month for two years to deplete the
fund? R payment = C$
7. The “REMO” consortium acquires machinery today for C$ 780,000.00
to be paid in two years at 18% annually convertible monthly.
Calculate the value of each monthly installment to pay to cancel said
financing. R payment = C$
4.2.3.- FUTURE VALUE OR AMOUNT OF AN ORDINARY ANNUITY DUE.

To calculate the future value F, we use the expiration date as the focal
date or reference point in the flow diagram, that is; find the future value
of the series of flows A in “n” period of time at an interest rate i. (See
graph 3.5).
F=?
0 1 2 3 4 n-1 N Periods
AAAAAA
Chart: 3.5
The amount and future value of a series of flows is the sum of all the
future values of each of the flows at compound interest. If the value of

the periodic payment is $R instead of $1, then the sum is called the
future value VF. Returning to equation (3) we have:
which is the same as F = A [
] Formula 3.3
Where, the factor
It is defined as the capital accumulation factor.
EXAMPLE 3.3: A company deposits the amount of C$ 12,000.00 in a

sinking fund at the end of each month. What will be the accumulated
value in the fund at the end of year 8, if the fund earns an interest rate of
12% per year compounded monthly? (See graph 3.6).
F=?
0 1 2 3 4 95 96
12,000 12,000 12,000 12,000 12,000 12,000

Graph 3.6
DATA:
A = C$12,000.00 monthly
N = 9(5 = (12x8) monthly periods
j = 0.12
m = 12
n = 8 years
i - j/m = 0.01 monthly effective rate
SOLUTION:
By formula 3.3 F = 12,000 [ ] = С$1,919,127.51

PROPOSED EXERCISES OF AMOUNT DUE

1. With the last fortnight of the month, Doña Juanita deposits
C$475.00 monthly to cover the expenses of her daughter's
monograph. If your daughter studies a bachelor's degree at UPOLI
and graduates in 3 ½ years, how much will she have available in the
account if the bank pays an annual deposit rate of 4.62% with
monthly compounding?
M= C$21,608.51 , n=42, i= 0.00385 (
2. The Lic. Espinoza has decided to create a fund for his son, little
Martín, which he will be able to use in its entirety on the day of his
university graduation. To do this, he begins by depositing C$250.00
at the end of each month, starting when his daughter Andrea turned
one year old and until her 17th birthday. During the first 8 years the
account pays interest of 12% per year, compounded monthly. The
next 6 years I pay interest of 15% per year compounded monthly and
the last 2 years I pay interest of 18% per year compounded monthly.
What is the amount that Andreíta will receive when she turns 17?
*Remember that Andrea was already one year old when the account
was opened, therefore only 16 years are counted to reach her 17th
birthday. M= C$ 188,291.76
3. A property is sold for a 20-year term with payments of C$ 3,696 per
month at 18% with monthly capitalization, if the owner deposits the
money each month in a savings account; How much would be the
total available at the end of the agreed period? M= C$ 8,533, 525.75
4. What will be the total to pay if a property is financed with
installments of C$1,875 biweekly for a term of 11 years and a rate of
18.48% convertible biweekly? M= C$ 601,350.93
5. What amount would be accumulated in 27 months if C$1,250 were
deposited at the end of each month in an investment account that
yields 3.36% per year, compounded monthly? M= C$35,007.65
6. Don Marcial earns C$7,500 per month, he decides to start saving
12.5% of his salary monthly in a savings account that pays 3.12%
annually with monthly compounding. How much will you have after 2
¼ years of saving? M= C$26, 186.89
7. How much would you have accumulated in 18 months if C$3,250
were deposited each month for three years in a savings account that
pays 4.20% with semiannual compounding? M= C$ 9,956.18
8. Mrs. Luisa Amanda decides to set aside C$75 every two days from
today to deposit them together, within 30 days, in the “safe future”
account of the “XYZ” bank that pays 2.52% convertible monthly, this
will be done for two years and four months . Knowing that at that
moment a fixed-term deposit certificate that you have with the
“ABC” bank expires, which is for an amount of C$18,530.00 and you
will attach it, once canceled, to the “secure future” account to then
liquidate the Count 3.5 years later and start a business to be active in
your retirement. M= C$55,631.30
9. Ms. Andrea , 45 years old, deposits C$1,250.00 in a retirement
account at the end of each quarter until she turns 60 and then does
not deposit anything else. If the account pays a passive rate of 3.98%
interest compounded quarterly, how much will be in the account
when this person retires at age 65? M= C$124, 242.56
4.2.4.-Value of the deposit or overdue income A or R: On the other

hand, if we want to find the value of the magnitude A or income, we will
start from the statement: we know its future value F, the value of the
flows A, the number of “n” time periods at an effective interest rate i per
compounding period. (See graph 3.7).
F
0 1 2 n-1 n Periods
A=? A=? A=? A=? A=? A=?
Graph 3.7
To obtain the value A or desired income, we solve it in formula (3.3) and

it results:

A=F[ ] Formula 3.4
Where the factor [ It is defined as Amortization Fund
EXAMPLE 3.4: How much should the “San Francisco” Poultry Company
invest at the end of every 3 months, for 7 years in a fund that earns 16%
annually, compounded quarterly, in order to accumulate the value of the
principal of a loan of CS 1,000,000.00? (See graph 3.8).
F = 1,000,000
0 1 2 3 4 27 28 Quarters
A=? A=? A=? A=? A=? A=?
Graph 3.8
DATA:
A =?
F = C$1,000,000.00
j= 0.16 annually
m=4
i - j/m = 0.16/4 = 0.04 quarterly
n - 7 years
N = 28 quarters
SOLUTION: A = 1,000,000[ ] = С$ 20,012.98
PROPOSED DEPOSIT INCOME EXERCISES

1. A UPOLI student wants to have $600. 00 within 3 years to pay for
your degree modules. If you deposit into a savings account that
pays 4.56% annually compounded monthly, how much will each
monthly deposit be to achieve your goal? R deposit = $15.58

2. How much should Mr. López invest at the end of each month for the
next 7 years in a fund that pays 13.5% convertible monthly in order
to accumulate С$100,000.00 when making the last deposit? R deposit
= C$ 721.49
3. The company “NICAFOODS” must pay С$90,000.00 at the end of
each year as insurance premium. How much should you reserve at
the end of each month in a savings account that pays 2.4% annually,
compounded monthly? R deposit = C$ 7, 417.86
4. Nicaragua must pay С$1,500,000.00 on the 2nd day of each year for
10 years. The Minister of Finance and Public Credit delegates to you
the calculation of the equivalent monthly deposit in a “BANCREDIT”
account that pays 4.8% annually compounded monthly, you kindly
proceed… R deposit = C$ 122, 273.78
5. The company “EL MANGO” wants to make provisions at the end of
each month to replace the 8-ton truck that it uses to distribute its
products and which cost С$385,000. 00 , through biweekly
installments deposited in a savings account that pays 2.88%
compounded biweekly. If the useful life of the truck is 5 years,
calculate the value of each of the biweekly provision installments
that must be made. R deposit = C$2,984.80
6. The Masaya mayor's office issues C$1,200,000.00 in bonds to be
paid in 4 years and constitutes a fund to redeem them at maturity.
How much must be taken annually from taxes for this purpose if the
fund produces 2 ½% compounded annually? R deposit = C$ 288,
981.45
7. How much must the “REMO” consortium financially provision to
replace machinery that it purchases for C$ 780,000.00 and that has
a useful life of 10 years if it deposits at the end of each month in an
account that yields 6% convertible monthly?
4.4: TERM OR TIME OF AN ORDINARY ANNUITY DUE.

In many cases it is necessary to know the time in which a desired amount
will accumulate from a series of payments or deposits. We can calculate
the time by solving for (n) in formula 3.3, knowing that n = N/m where n
is defined as years that coincide with the capitalized periods, if m = 1,

with the effective rate, with a period equal to that of the payment , that
is to say;
n= Formula 3.7
We can deduce the previous formula from formula 3.7, we leave it to the
reader to check the result.
EXAMPLE 3.7: Let's take the data from example 3.4 and calculate n.
DATA:
FV = C$1,000,000.00
R = C$20,012.98 quarterly
J = 16% = 0.16 annual nominal
m=4
i = 0.16/4 = 0.04 quarterly
n = n/m years
n=?
SOLUTION:
Using formula 3.7 we calculate the time it will be in quarters.
n= = = 28 quarters
To know the time in years we use the equation n = N/m or 28/4 = 7 years
A person buys a policy that insures an income of C$20,000 each year-end,

for the next 15 years. You want to change your policy for another that
assures you an income of C$30,000. How long will you receive the new
income, if the interest rate is 8%?

=5.706319
In the update factor table for expired annuities it is found that: in the 8%
column, it is found (P/A, 8%,7)=5.20637006 AND (P/A, 8%,7)=
5.74663894; between these values is interpolated:
8 corresponds 5.74663894 still corresponds 5.70631900

7 corresponds 5.20637006 7 corresponds to 5.20637006
1 is 0.54026888 Since n – 7 is 0.49994894
n= 7.9253704
You would receive the income of C$ 30,000 for 7 years and a final
payment at the end of the eighth year of 0.9253704 (C$ 30,000) = C$
27,761.11
PROPOSED TIME EXERCISES

1. If the company “Campo Verde” wants to raise C$1,000,000.00 to
build a new poultry barn and decides to create a fund where it
earns 16% annually compounded quarterly by depositing C$20,012.
98
in the fund on a quarterly basis. In how many months will the
million be raised?

4.5.- INTEREST RATE ON AN ORDINARY ANNUITY.
When we are interested in determining the interest rate that allows us to

accumulate a certain amount of money, in a desired time and through a
series of equal periodic deposits, we solve for the interest rate in the
equation of formula 3.3; However, in this equation the variable i is found
implicitly, and cannot be solved based on the others. Furthermore, it is an
equation of degree n that may have no known solution.
Consequently, in these cases we will find the interest rate i using the
interpolation method. In general, interpolating means obtaining other
intermediate values from a series of given values. The most common
interpolation method consists of finding out, by means of a simple
proportion, the relationship that exists between a quantity and the two
between which it is included in a numerical table or values calculated
through the formula. The interpolation method is also known as
“proration”.
The application of “proration” is common in the calculation of the
internal rate of return (IRR) in the financial evaluation of an investment
project; Later we will make these applications.
EXAMPLE 3.8: We wish to calculate the interest rate at which a company

must invest to accumulate $500,000 within 4 years, if it can deposit
$22,000 quarterly.
DATA:
F^ $500,000 . i =? Quarterly
A-322,000 n = r (m) = 16 quarterly periods
n = 4 years m = 4 frequency of annual interest capitalizations
SOLUTION: Using formula 3.3 and selecting the 4% quarterly rate, we
obtain the future value at said rate, that is:
i = 4% F = $480,139.68

Since the value F is below the value we want, which is $500,000, we
increase the rate to 5% quarterly and perform the calculations again, = 5%:
F = $520,464.82
In the new calculation we observe that the F value exceeded the desired
value. Which indicates that the value of $500,000 is included between
the interest rates of 4% and 5% quarterly, that is:
i = 4% : 480,139.68
i = X : 500,000.00
i = 5% : 520,464.82
The relationship between the numbers on the right must be the same as
that between the numbers on the left, thus we establish the following
relationships:
Left Right
Minor difference Minor difference
Major difference Major difference
4-X 480,139.68 -
500,000
4-5 480,139.68 - 520,464.82-
(4 - X)/ (-1) = (-19,860.32)/(-40,325.14) = 0.492504675
4- X = -0.4925 so X = 4:4926%.
In this way the company can invest at approximately 4.5% quarterly cash
or equivalent to. 19.2520% annual effective.
COMMENT: With the interpolation method, the value found is
approximate and depends on the size of the interval selected to the left
and right of where said value is found. With this method, you can also
find the interest rate of any type of annuity, in addition to other variables
that you want to calculate such as the compounding periods n and time t.
Example: An insurance company offers, for an immediate payment of

C$90,000, an annual income of C$5,000 payable over 30 years, to the buyer
or his heirs. What interest rate does this company pay?
From the formula A (P/A, i%, n)= P
If you have (P/A; i%, n)= P/A where P=90,000; A= 5000; n=30
(P/A; i%,30)= 90,000/5,000 = 18

To find the values of (P/A; i%, 30) among which the value 18,000000 is
included, search in the corresponding table, in the corresponding line an=30.
These values are:
For (P/A, 4%, 30) = 17.29203330; i= 0.04

For (P/A, 3 ½%, 30) = 18.39204541; i= 0.035
Note that as i% increases, the factor values (P/A; i%, n) decrease.
0.035 corresponds to 18.38204541 ai corresponds to 18.00000000

0.04 corresponds to 17.29203330 0.04 corresponds to 17.29203330
- 0.005 is to 1.10001211 Since i – 0.04 is 0.70796670
4.3. ORDINARY EARLY OR PREPAID ANNUITIES

Early ordinary annuities are those in which the money flows occur at the
beginning of each capitalization period and the last one occurs a period
before the annuity term (see graph 3.11). We will assume that they are
flows that are carried out on the first days of each time period:
Examples are deposits in a bank account and rent.
4.3.1- PRESENT VALUE OF AN EARLY ORDINARY ANNUITY.

We need to find the present value of a series of uniform flows A, the first
starting today and the last one period before expiration, (figure 3.11)
AAAAAA
0

1 2 3 4 N-1 N Periods
Q=? Graph 3.11
To deduce the formula we start from the following aspects:
The present value of flow A that occurs today (zero value on the scale) is the
same, that is; The current value of R is R. The remaining flows from the first
period to the penultimate period, (n -1) can be treated as an ordinary annuity
due, thus, its present value is calculated by formula (3.1) by subtracting one
capitalization period. After simplifying a geometric series, we obtain the
expression that allows us to calculate the present value of the anticipated
ordinary annuity:
O well
87628878
EXAMPLE 3.9:
A company wishes to purchase a compressor in cash that is sold under
the following terms: the value of each installment is $450.00 paid in
advance monthly, for a 5-year term and at a credit rate of 18%
convertible monthly. What is the equivalent cash value of the medical
equipment? (See graph 3.12).

DAT0S:
A = $4 50.00 value of the advance monthly payment
j = 0.18 annual nominal rate.
m = 12 frequencies d capitalize interest in one year
i = 0.18/12 = 0.015 effective rate
n = 5 years term.
N = 60 monthly compounding periods.
Q=?
SOLUTION:
By formula 3.8 we obtain the cash value which is equivalent to calculating
the present value or discounted value, that is:
= $17,986.94
PROPOSED ANTICIPATED PRESENT VALUE EXERCISES

1. The company “ El Block SA” wishes to provision the replacement of
its main block through advance biweekly deposits of C$876.00. With
a useful life of 3 years and an interest rate of 3.76% annually
compounded biweekly, calculate the value of the machinery . PV=
C$ 59,832.68, n=72, i= 0.0015
2. Calculate the cash value of a property sold over a 2-year term, with
42% quarterly convertible interest and advance payments of
C$4,000. 00 and a final installment of C$3,200. 00 to 2 years and three
months. PV= C$ 23,157.21 + 1,302.84= C$ 24, 460.05
3. What is the present value equivalent to an income of C$1,650. 00
deposited at the beginning of each fortnight for fifteen years in a
savings account that pays 1.76% compounded biweekly PV= C$ 221,
78i.7.20
4. An insurance company offers to pay its commitment through a cash
flow of 60 advance payments of C$4,500.00. Don Felipe's widow
decides to take a single equivalent cash payment and the cost of the
money is 3% per year, compounded monthly. What is the amount
of money she will receive as compensation?
4.3.2.- VALUE OF ADVANCE PAYMENT “A” or “R”: To calculate the value

of the anticipated magnitude A, the starting point is knowledge of the
present value P, the effective interest rate i per capitalization period and
the term o numbers of flows N.
In this case, the value A is obtained by solving it in formula (3.8) in the
following way
Formula 3.9 either
EXAMPLE 3.10 : The Pérez y Juárez Company must pay a debt of

$4,000,000.00 pending with a Bank, through equal semiannual
installments paid in advance. If the bank's interest rate is 15% effective
annually and the term is 10 years. What will be the value of each
semiannual fee? (See graph 3 13).
DATA:
P = $4,000,000
n = 10 years
N = 20 semiannual flows
i =? biannual

SOLUTION:
First we need to transform the 15% annual interest rate to an effective
semiannual equivalent rate, since payments will be semiannual. We
achieve this using the distribution formula 3.6 as follows:
i = (1 f 0.15) 1/2 -1 = 0.072381 = 7.2381% semiannual
Now, according to equation 3.9 we obtain the value of the semiannual
and anticipated leveled fee:
= $358,631.73
PROPOSED ADVANCE INCOME EXERCISES

1. The company “El Trancazo” offers a washing machine with a price of
C$9,450.00. Promotional offer of payment in small biweekly
installments, beginning at the beginning of the financing, with an
annual interest rate of 24% convertible biweekly with a term of 24
months. Find the value of each installment. R= C$246.39, n=48,
i=0.01
2. The “Camila” store sells a motorcycle for $1,800 in cash or through
5 advance monthly payments. If the interest rate is 32.4%
convertible monthly, calculate the value of the monthly payment.
R=$379.43
3. The “ABC” company sells a poultry farm for two years for a total of
C$90,000. 00 ; with 12 bimonthly payments 4.2% annual interest
compounded bimonthly. How much should the bimonthly payments
be if you make the first today? Resp= C$ 7,791.08
4. A company finances pochote furniture for kitchens at C$8,500. 00 .
To promote your sales, create a 24-month financing plan with
“nanite” weekly installments, charging 52% convertible weekly
(customers will be told it is 1% weekly or 4% monthly), which Is the
value of the installments to promote the plan? Answer: R= C$
130.54

5. A company specialized in financial leasing recently acquired
equipment for C$ 380,000.00. If you want to obtain returns of 18%
per year convertible monthly, calculate the value of the monthly
rental if a financial lease contract were signed for 5 years.
4.3.3- AMOUNT, AMOUNT OR FUTURE VALUE OF AN EARLY ORDINARY

ANNUITY
To perform the future value calculation in this case, we will use “n” as the
focal date as a reference point in the time-value diagram. Find the future
value of the series of anticipated flows A in N time period at an effective
interest rate i per time period. (See graph 3.14) Let's look carefully at the
one in graph 3.14 that corresponds to an ordinary advance annuity. Since
we want to perform an analysis as a past due annuity, we will (artificially)
place a payment A in period N, and a payment in period (-1) before zero.
For the sole purpose of calculating the future value F of the anticipated
ordinary annuity, we will affirm that the period (N-1) in the diagram of
graph (3.14) will be defined as N period, since up to that period the N
flows of funds are contemplated. money that are actually stipulated.
F=?
n-1 n periods
0 1 2 3 4
CHART 3:14
That is why by locating a new flow A in period N in the time diagram, we

affirm that we are locating it according to the analysis previously presented
in (N + 1). Graph 3.15...

According to graph 3.15, we will obtain the amount or future value F of

an ordinary annuity due, from the flows A payable during-(N+1) periods.
We observe that S2 finds an extra flow or payment A, which corresponds
to the aggregate period (N+1), so we are going to subtract it. Let us
remember that the future value of a flow of money on its maturity date is
the same value.
Therefore, making an extension of formula (3.3), we deduce the formula to
determine the future value F, VF or M of an anticipated annuity, that is:
Example: A family rents a house located in a residential area of Managua

for $800.00 payable monthly in advance. If the rental contract is signed
for a period of 4 years. What will be the total amount the homeowner
will receive if the payments are deposited into an account that earns
6.96% CM? (See graph 3.16).
DATA:
A = S£00 advance monthly payments
j = 6.93% = 0.0696
m = 12; i =j/m = 0.0696/12 = 0.0058 monthly; n. = 4 tubs
SOLUTION:
Replacing the information in formula 3.10, we have the accumulated value of the
deposits:

=$ 44,387.34
PROPOSED EXERCISES OF ADVANCE AMOUNT:

1. Don José María decides to save at the beginning of each quarterly
harvest period (first-last-apante) the equivalent of C$1,100.00 . If
this is done for a period of eight years. What is the available balance
if the financial institution where you decide to deposit pays an
annual rate of 4.72% compounded quarterly? M= C$32,276.24,
n=24, i=0.01573333333
2. Mrs. Mirna deposits C$985 at the beginning of each quarter, in a
savings account that pays 3.75% annually with quarterly
capitalization, with the objective of having funds for when her son
Jorge, five years old, starts university at age 17 What will be the
amount available for studies? M= C$59,922. 16
3. A designer wants to save C$400. 00 monthly for 5 years. If the
interest rate paid on the savings account is 3.84% compounded
monthly, how much will it accumulate the month following the last
deposit? R= 26, 496.91
4. What is the value at maturity of a public deed that supports
financing authorized by “BANCONICA” if to cancel it C$8,716.52
were deposited on January 13 to September in an account that pays
1.6% monthly compounded interest.
5. Calculate the total available for a woman who, as a retirement plan,
decides to deposit C$275 in an account that pays 12% compounded
monthly at the beginning of each month. 00 from the age of 30 until
he turns 42, then he will liquidate the account and purchase state

bonds (worth C$1,000) that pay 8% annually and are redeemable
after 5 years.
6. How much is the total available with 18 advance monthly deposits
of C$ 1,350.00, if the investment offers to pay 2.4% annual
compounded monthly for the first semester, 2.64% annual
compounded monthly for the second semester and 3% annual
compounded monthly for the third semester?
4.3.4.- VALUE OF THE ADVANCED DEPOSIT “A” OR “R” KNOWING VF: To

calculate the anticipated value of the magnitude A knowing the value of
the other variables VF, we can use formula 3.10 (See graph 3.17).
The resulting formula for calculating A is:
Formula 3.11 or
EXAMPLE 3.12: A person wishes to accumulate the amount of

C$400,000.00 at the end of 7 years to pay off the principal of an
outstanding debt with a bank and has arranged to make equal bimonthly
deposits in advance in a fund that earns 12% CB What is the value of each
deposit? (see 3.18).

DATA:
F = C$400,000. Default fund value. j = 0.12
m = 6, n = 7 years
i = 0.12/6 = 0.02 effective bimonthly rate N = m(n) = 42 bimonthly deposits. A
=?
SOLUTION:
According to the previous formula we have:
=$44,387.34
O well
=$44,387.34
PROPOSED EXERCISES OF ADVANCE INCOME FROM THE VF

1. A couple of UPOLI students want to get married in 5 years and to
celebrate they want to raise C$90,000. 00 . If they can deposit a
certain amount each month at 6.56% compounded monthly, and
considering that rate will remain unchanged, how much should they
deposit monthly exactly before making the last deposit?
2. Substitute a series of payments of C$16,000. 00 at the end of each
year, for the equivalent in advance monthly deposits, with an
interest rate of 2.24% compounded monthly
3. An SME plans to replace all its refrigeration equipment in 3.5 years,
the capitalized cost of said assets is C$78,560. 00 . Calculate the
amount of the deposit at the beginning of each fortnight if the
financial instrument chosen to create the amortization fund is an
investment account that pays 5.76% compounded biweekly.
4. The “Green Planet” farm will expand the organic coffee growing
area by 20 blocks. For this purpose, the feasibility study shows that
the initial investment to be made should be C$135,000. The
company determines that the investment will be made within three
years; But, you immediately decide to open an investment account
for this purpose in “BANCONICA” that pays 2.2% compounded
monthly. What is the monetary amount of each of the monthly
deposits that must be made to start the project?
5. The “ABC” company will renew its poultry warehouse in two years
for a total of C$90,000. 00 ; To raise this amount, you decide to make
12 bimonthly deposits in an investment account that yields 4.2%
bimonthly interest. How much should the bimonthly deposits be if
you make the first today?
6. The block company “El duro” must pay C$ 115,000.00 in 8 months
as the last payment for the land it bought on credit. How much
should you place in advance, monthly, of your income in a sinking
fund that offers to pay 4.5% annually compounded monthly?
Construct the corresponding sinking fund table.
4.4.- DEFERRED ANNUITIES DUE.
Deferred annuities are those that contain grace periods, which are
common elements in many financial transactions. The grace period is
based on the cancellation or interest of a loan being capitalized, without
affecting the principal, (in the case of updating payments). In other
words, it is the variable period between the release of some borrowed
money and the beginning of repayments.
We will say then that deferred annuities are those whose flows begin
after several intervals or capitalization periods that are part of the grace
period have elapsed.
4.4.1.- PRESENT VALUE OF AN EXPIRED DEFERRED ANNUITY.

The characteristic of these annuities is that: in addition to stipulating the
grace period, the last flow A coincides with the maturity of the annuity.
(See graph 3.19). In all graphs related to deferred annuities, we will
denote the grace period by a double dash.
To calculate the present value P we will use, as in previous cases, the

concept of ordinary annuity due. In graph 3.19 we can see what
Following:
1.- The value r = 3 (in this case) represents the number of capitalization
periods corresponding to the grace period where no payment or flow A
occurs.
2.- In the periods between the value r and N, the annuity in reference is
due. Therefore, its present value P up to the value according to formula
(3.1) is:
3.- The value P r found in the previous formula does not solve the problem,
since we are really interested in calculating the present value P in period (0)
zero.
Formula 3.12
To find this value we update P r through formula (2.4) of single payment

compound interest, as follows:
Formula 3.13

Or, combining formulas (3.12) and (3.13) we obtain the two-factor

formula es;
EXAMPLE 3.13: Formula
3.14
Example: A farmer, through a bank, purchased a truck on January 15, 2000

to use on his farm, understanding that he would make monthly payments
of $500.00 for 60 months, the first due on May 15, 2000. If the bank's
financing interest is 18% per year, CM What is the cash value of the truck?
(See graph 3.20).
From January 15 to May 15 there are 4 months which means that there is
a grace period of 3 months, given that at the end of month 4 the first
installment will be paid
DATA:
A = $500' monthly payments
j- 18% = 0.18
r = 3 months corresponding to the grace period.
m = 12
¡= 0.13/12 = 0.015
n - 60 months payment term
n = 60 + 3 - 63 total time including grace period

Q=?
$18,830.01
SOLUTION: EXAMPLE 3.14:

A project in the northern part of the country, related to coffee cultivation,
has estimated (according to net flow) that it will generate annual net
income in the amount of $60,000 starting in year 4. The useful life of the
project will be a total of 20 years. If the opportunity interest rate is 26%
effective... What is the updated value of the returns? (See graph 3.21).
DATA:
A = $60,000 value of annual income
i = 26% = 0.26 annually
n =20 years
r = 3 years (deferred period).
n = 20 years of capitalizations
N - r - 17 annual income streams
P=?
SOLUTION' Replacing the data in formula 3.14. We obtain:
= $113,094.28
PROPOSED PRESENT VALUE EXERCISES FOR DUE DEFERRED ANNUITIES

1. The recently constructed grade-separated bridge will not need
repairs for a period of 7 years, when it should begin to budget
C$375,000 annually for repairs for its useful life period, which is 22
years. How much did the bridge cost if it is worked at a rate of
3.28% per year?

2. Calculate the current value of an income of C$5,000 per semester; if
the first payment must be received within 2 years and the last
within 6 years, with an interest rate of 8% with semiannual
compounding. Apply both methods.
3. A man owns a garden that is estimated to produce an annual
income estimated at €2,800 in the next eight years. With
maintenance costs of 5% per year. If you decide to sell it, what is
the minimum price you will accept, if the market interest is 7%
effective annually?
4. The company “New business SA” decides to invest in the
production of biodiesel from African palm. What is the current value
of the investment if the first annual income is projected to be
$148,500.0 from the sixth year through the 20th? The rate to be
used in the analysis is 5.26% per year
5. What is the price of a refrigerator that is paid over a 24-month
period with monthly installments of C$385.00, paying a premium of
C$800.00 today 12-03-2010 and the first installment on 04-03-2011
with an interest rate 3.25% monthly
4.4.2.- VALUE OF THE DEFERRED PAYMENT “R” or “A”: To calculate the

magnitude of the value A of the annuity, we start from the knowledge of the
other variables of the formula (3.14); (see graph 3.22). Thus, by eliminating A
from the aforementioned formula, we obtain:
Formula 3.15

The previous formula is also used to calculate the value of the leveled
installment C, when a loan has a grace period and the interest is not
settled periodically, but is capitalized and then paid in the installments
that were provided.
EXAMPLE 3.15: An international organization grants the government of

Nicaragua a loan in the amount of US$ 10 million dollars. The government
will pay off the loan with interest of 3.5% effective annually through 10
equal annual payments. The first payment must be made 6 years after
the transaction. What is the value of each annual payment? (See graph
3.23)
DATA:
P = $10,000,000 loan value.
i = 3.5% = C.035 annually
r = 5 years (grace period)
n = 15 annual capitalized periods.
n - r = 10 equal annual installments
A or R = ? annual fee value
SOLUTION:
Let's note that during the grace period the government does not liquidate the
interest so it is capitalized. Through formula 3.15 and replacing the information,
we calculate the value of the annual fee.
= $1,
428,090.26

PROPOSED INCOME YEARS DEFERRED PAYMENTS

1. An SME (small and medium-sized business) acquires an electrical
plant to supply electricity in the event of blackouts, if the plant costs
C$48,850 and must pay a 15% premium. How much will you pay in
each weekly installment if the interest with which it is financed? It is
0.82% weekly and within the total period of one and a half years, a
period of one and a half months (6 weeks k=6) of extension is
granted for the duration of the installation period. R= C$808.49,
2. The financial company FUNDECAN approves financing for
C$80,000.00 for the renovation of coffee farms with a fixed interest
rate of 22% convertible quarterly for 10 years, with a grace period of
six years, beginning to pay the quarterly installments in the first
semester of year 7. Calculate the value of each installment. R=
C$36,645.84
3. An agricultural promotion program allows small producers to
purchase equipment for C$60,000. 00 , to begin paying them within
two years with 8 semi-annual installments, if the program
contemplates a rate of 6% convertible per semester, find the value of
the installments.
4. A marketer promotes sales at the company where she works through
a “ take now, pay later” plan. Items valued at C$10,000.00 can be
purchased on credit in June, for Dad's gift, and begin paying them in
10 monthly installments starting in September with a modest interest
of 4.25% monthly interest. Calculate the value of the fees to be paid
by the clients you persuade with the created plan
5. The company “Campo Verde” finances irrigation pump producers
with a total cost of C$150,000.00, gives them a non-payment period
for the duration of the installation of the pump of 3 months and gives
them a total period of 2 years with a 24% annual rate convertible
biweekly. How much is the monetary amount of each of the fees that
the producer must pay?
6. Mrs. Marcela, who turns 33 today, wishes to deposit in an
investment, which yields 18% per year, compounded monthly, an
amount that allows her to receive C$10,000. 00 monthly for 20 years,
starting on the day you turn 40, how much should you deposit?

4.4.3.- AMOUNT, AMOUNT OR FUTURE VALUE OF A DUE DEFERRED

ANNUITY.
We will use the maturity date as the focal date or reference point, in Diagram
3.19, to find the future value F of the series of flows A deferred in r time
periods, with (N - r) periods capitalized at an interest rate Yo.
In this graph, we notice that from the value r to the value N, the annuity in
reference is ordinary expired, so the formula to find the future value in this
case is deduced from formula (3.3), making the adjustment corresponding to
the value r, where the exponent (N - r) is the number of effective flows of the
annuity, then:
Formula 3.16
COMMENT: When in a series of deferred flows there are different flows of money
before said series and we wish to calculate F of all the values presented, we resort to
the sum of the values calculated using formulas 3.16 and 2.
EXAMPLE 3.16: A shrimp industry estimates that the annual profit that a
project will generate is $200,000 dollars starting in year 3. The reinvestment
rate of the released funds is 24% per year. The project will: will be
exhausted at the end of 18 continuous years of exploitation. What is the
amount of the reinvestment in year 18? (See graph 3.2.4)
DATA:
A = $200,000 annually starting in year 3,
i = 24% = 0.24 annually
r = 2 years
N = 18 total time in years of the project

N - r = 16 lazy flows
VF = ?
SOLUTION:
You might notice that in year 1 and 2: there is no money flow since they
start in year 3. Substituting the data into the previous formula, we obtain:
4.4.4.- VALUE OF DEFERRED PAYMENT “A” KNOWING F: From formula

(3.16) we can calculate the value of magnitude A knowing the other
values of it, (See graph 3.25) in this case the formula is:
Formula 3.17
EXAMPLE 3.17: A Company must pay off a loan - the amount of which will be
worth C$4,250,870.45 at the end of 8 years. If the Company agrees to make
equal semiannual payments, at 16% CS What will be the value of the payment,
if you make the first 12 months after the transaction? (See graph 3.26)
DATA:
F = C$4, 250,870.45 j = 16% = 0.16

m=2
i = 0.16/2 = 0.08 semiannual
r= 1 semiannual grace period
N - 16 total semester periods
N '•• r = 15 semiannual payments
A=?
SOLUTION:
Substituting the previous values into the formula, 3.17 we obtain the
payment value:
4.5.- PERPETUAL ANNUITIES.

We will address a type of annuities that frequently occur in businesses,
these are annuities or perpetual income. For example, the rent of land;
legacies made to charitable institutions; dividends on preferred shares;
the sums of money that need to be reserved each year or each period of
time by companies for the replacement of assets, operating expenses and
project maintenance that are assumed to have an indefinite useful life,
among others. In short, a perpetual annuity is an annuity, whose term
theoretically has no end; that is, it is indefinite, forever, (see graph 3.33)

We will study simple ordinary, anticipated, expired and deferred

perpetual income. If they are not simple, they will be converted by
adjusting the equivalent effective interest rate or adjusting the payment
to the interest rate period. ‘
4.5.1- FUTURE VALUE PERPETUAL ANNUITY . ,

Because the payments of a perpetual annuity do not end, it is impossible
to calculate its amount, since its term is not known.
4.5.2.- PRESENT VALUE OF AN EXPIRED PERPETUAL CANCELLATION

Suppose a perpetual annuity or. income A payable that is received, at the
end of each period at the rate i per period, as shown in graph 3.33. We
deduce that the present value P of the perpetual income is that amount
that the sum of money A produces as interest in each period, that is
A = P(i) Formula 3.22
Where
P= A Formula 3.23
Formula 3.23 can also be obtained by applying a limit to formula 3.1

when N tends to infinity, (N → ∞) that is, it grows indefinitely, that is:
EXAMPLE 3:22:

The construction of a highway between two cities in Nicaragua cost $18
million dollars. The planners estimate that it is necessary to create a fund
to cover the annual maintenance cost, which is estimated at
approximately 2.3% of the initial value of the construction. Determine the
value that should be placed in the fund to ensure maintenance, if the
interest rate is 6% per year.
DATA:
C 0 = $18,000,000 initial project cost
A = 18,000,000(0.023) = $414,000 perpetual annual cost
i = 6% = 0.06 annually, P = ?
SOLUTION:
The value that must be deposited in the fund is P; Therefore, from
formula 3.23 we have:
4.5.3.- Present value of an anticipated perpetual annuity: When the

payment of the perpetual annuity is immediate, as shown in graph 3.34,
we deduce that the present value P of said annuity is that amount, which,
decreased by The first payment (A) produces interest on the sum of
money (A) in each period; that is: (P - A) (i) = A
From where, when we solve for P, we have;

Formula 3.24 O well
Formula 3.25
Where C 0 is a value that is disbursed immediately and is not necessarily

equal to the perpetual income A.
EXAMPLE 3.23: A non-governmental organization makes a donation of

medical equipment to a Hospital in Nicaragua. The donation consists of a
disbursement of $500,000 for the acquisition of the equipment and $17,500
annually for its maintenance. What is the current value of the donation, if the
interest rate is 10% per year?
SOLUTION: Since we are trying to find the present value P, we perform
this calculation according to formula 3.25, since C 0 = $500,000, A =
$17,500 and the rate i = 10%, that is.
4.5.4.- PRESENT VALUE DEFERRED PERPETUAL ANNUITY.

A perpetual and deferred annuity is one that contains a grace period and
theoretically does not end as shown in Figure 3.35

The methodology for calculating the present value P in period zero is as
follows:
Calculate P r using formula 3.23 up to period r.
Move the previous value to the zero focal date with the single payment
present value formula, which is summarized in the following two-factor
formula:
4.5.5.- CALCULATION OF DEFERRED AND PERPETUAL PAYMENT . From

the previous formula, variable A is eliminated to find the deferred and
perpetual income A, when we know the value P, i and the deferred
period r, that is;
r
Formula 3.27
EXAMPLE 3.24:
Determines the current value of a series of semiannual disbursements of
$20,000 indefinitely, the first disbursement will be at the end of year 2 at
an interest of 12% CS (figure 3.36)
DATA:
A = $20,000 value of the semiannual perpetual and deferred annuity I
«0.12/2 «0 06 semiannual
r * 3 semesters P = ?
SOLUTION:
By formula 3.26 we obtain the current value
P=, 20,000- 0.06., (1+0.06)- -3. =$276,873.09
EXAMPLE 3.25
A company pays at the end of each year a maximum of $50,000 in social benefits, at
a rate of 1% per month, determine the value of the equivalent monthly payments
and the current value of said payments. (Graph 3.37)

DATA:
A = $50,000 annually
i = 1% = 0.01 monthly
h = 12 equivalent monthly payments
X = ? equivalent monthly payment value
Q=? Present value of payments
SOLUTION:
As the disbursements are perpetual on an annual basis, then by the formula of
3.18, we distribute each payment of $50,000 into 12 payments equivalent X
perpetual monthly (Graph 3.38)
Since the value X is perpetual monthly, we calculate the present value P using
formula 3.25, that is:
P=, 3,942.44- 0.01. = $39,424.40

CHAPTER 5: AMORTIZATION SYSTEMS

At the end of this chapter the student will be able to:
 Explain the concept of amortization and establish the difference and

similarities between its applications.
 Learn to identify and build the various basic amortization systems
that exist.
 Identify the main sectors of application of these systems, as well as
the main segments towards which they are directed.
Specific objectives:
 Calculate interest on late payment for amortization systems

 Calculate the balances outstanding to the debtor and/or
accumulated at any time during an amortization process.
 Build amortization tables from the various systems
 Develop skills in calculating the amount of installments in the various
amortization systems.
 Develop skills in constructing payment tables for amortization.
 Determine the concepts involved in the construction of an
amortization system.

 Distinguish the situations where both amortization and the sinking
fund are applied.
 Carry out installment calculations to amortize a debt with grace
periods.
Syllabus

5.1.2.- Loans
5.3.1.- Gradual amortization systems ( French system )
5.3.5.- Amortization systems in increasing installments
In the financial market, most placement operations are carried out

through credit granted in the form of lines of credit or in the form of
loans. These are aimed at natural and legal persons (individuals and
companies) that seek to obtain financing or credit, either for working
capital or for the acquisition of capital goods (assets) and even to
consolidate debts with various institutions.
The financing or credit acquired must be repaid within a period
previously established by common agreement between the lender(s)
(financial institutions) and the borrower(s) (natural or legal persons),
either in uniform periodic installments due or in advance, or with equal

installments. amount, decreasing or increasing proportionally, in quantity
or percentage.
These payments are made to settle both the capital or principal, as well
as interest and other items or charges generated by a certain debt;
according to its condition, that is, if it is a current debt or if it is a deferred
debt or in arrears.
We must remember that amortizing is not the same as paying, the

difference is that generally a credit, installment or payment is made up of
the pending charges (if it is in default: default interest, administrative
expenses, extrajudicial collections, etc.), as well as the current interest
due until the date of payment plus a portion of the principal owed.
Amortization is the amount of money that is determined to be used to

pay the principal owed .
Amortization systems are based on the rule of unpaid balances; That is,
interest is on balances and is calculated each time a payment is made or
planned to be made. In Nicaragua this statement is compiled in the
general law of banks and other financial institutions which cites:
Article 57: Prohibitions on banks. It is strictly prohibited for any bank to:

Section 13. Establish interest rates that fall at once on the total amount
of the loan, therefore the interest rate must be calculated on the debtor
balance.34
The unpaid principal (debt balance) at the beginning of the term

is the original debt. The principal that will result at the end of
each of the installments or payment at the end of the term is the
one that must be used to calculate the interest for the following
period; until in the last installment the debtor balance is zero
and in this way the debt is paid.
The debt amortization process is an important element for the internal or

external financing of an investment; In the amortization process, the
investor needs to know the calculation process that is necessary to follow
to estimate the amount of debt service, as well as the repayment or
consideration period and the capital recovery factor.
Amortizing
Amortizing isis the
the process
process of
of canceling
canceling aa debt
debt and
and
its
its interest
interest through
through aa series
series of
of payments
payments that
that may
may
or
or may
may not
not be
be equal
equal in
in amount
amount andand paid
paid in
in equal
equal
or not equal periods of time.
or not equal periods of time.
34
Ditto 7
The so-called active products in financial institutions are those obligations

that natural and legal persons contract with them, these obligations
constitute the “accounts receivable” of financial institutions and
therefore are part of their assets, hence the name active products. for
lines of credit and loans. These are the ones that generate profits for
financial institutions through the collection of interest, charges and
commissions to be able to carry out said operations.
All of these operations are directed towards various market segments

classified according to the criteria of the single account manual for
financial institutions issued by the superintendence of banks and other
financial institutions, which generally establishes the following active
products:
 Commercial credits (commercial loans, lines of credit to cover

overdrafts, discounted documents, debtors by issue). 14010135
 Consumer credits (personal credit cards, personal loans) 140102
 Mortgage loans for housing 140103
 Credits for financial leasing (properties, machinery and equipment,
transport equipment, others) 140104
 Microcredits (commercial loans, credit cards for microfinance
operations) 140105
Characteristics
A) Maximum limit: To calculate the maximum financing, entities follow
basic criteria:
Character: the analysis of the personal qualities of the beneficiary is of

fundamental importance, in terms of their morals, compliance with
previous credits, initiative, prudence, responsibility, etc.
Capital: refers to the financial strength of the prospect
35
Superintendence of banks and other financial institutions (Single
manual of accounts)
Capacity: it is necessary to verify the legal capacity of the natural or legal
person making the loan request; as well as its ability to pay.
The entity collects information about the borrower's financial situation,
payment receipts, income, etc., to ensure payment of the installments or
its solvency.
Collateral:
They stipulate a maximum for the product. The entity, when marketing
the product, and regardless of the user's risk, establishes the maximum
loan amount.
B) Credit or non-payment risk: As we already pointed out at the

beginning, these funds can be used for any purpose. As collateral, the
loan is supported by the borrower's personal guarantee. In order to
quantify the risk assumed, the entity uses a large amount of information;
requires the borrower to take out insurance (such as life insurance).
C) Interest rate: As we specified in the previous points, loans can be at a

fixed interest rate or referenced to an index. Fixed rate loans have this
expressed in the contract and is known from the beginning, while index-
referenced loans only have the indicator to be used on them established
in the contract, but its evolution is unknown and depends on the market.
D) Commissions and associated expenses: The commissions detailed

below are applicable to all types of personal loans:
1. Opening. Percentage of the total granted. Generated to cover the costs

of processing the loan. It normally has a minimum amount associated
with it. Applied at the beginning of the loan and collected only once.
2. Study. Percentage of the total granted. Generated to cover the study
expenses of the loan. Applied at the beginning of the loan and collected
only once.
3. Amortization and advance payments. Applicable only to capital paid in
advance and exists only if the event is carried out. It serves to
compensate entities for the loss of profits resulting from prepayment at
the borrower's will. In variable loans there is a legal maximum. On the
other hand, in fixed loans, except in the case of subrogation, there is no
established maximum, due, in large part, to the greater risk associated.
Interest risk
The risk depends on the characteristics of the loan. The fixed rate loan
has a different risk percentage than a variable rate. We distinguish 2
situations:
1. Increase in interest rates: Variable rate loans harm the borrower due
to the increase in interest, while fixed rate loans benefit the borrower,
the installments remain constant. Some entities offer variable rate loans
with a maximum limit on the interest rate (through a clause that would
limit the possible loss to the borrower).
2. Lower interest rates: It is the opposite situation. Variable rate loans

benefit the borrower due to the lower interest rates, whereas fixed rate
loans harm the borrower, as the installments remain constant. From the
entity's point of view, it is riskier to lend at a fixed rate than at a variable
rate, for this reason financial institutions usually associate higher
commissions with these loans and thus transfer the demand for loans to
those referenced at variable rates. For that same reason, the maximum
term for fixed ones is shorter than that of variable ones. In fixed rate
loans, the commission is usually high, so that the user does not pay the
loan in the event of any drop in interest rates.
BASIC ELEMENTS OF AMORTIZATION
The national financial system and international banks that provide loan
money generally calculate interest for base periods on the updated
balance of the debt (unpaid balances); This procedure is known as
amortization with interest on balances; However, there are also
institutions that charge interest on the original principal, this is what is
known as amortization with flat interest. This last system is widely used
by commercial houses that operate in Nicaragua and provide financing to
their clients through banks and microfinance companies. At flat interest,
the decrease in the balance does not affect the decrease in the interest
paid, as we will see later.
In all amortization processes, once the model or system to be used has

been selected, the amortization table, also known as the debt payment
schedule, is prepared. The table is managed by the parties involved
(creditor - debtor) in the financial operation to facilitate monitoring of
compliance with all agreed payments, as well as the preparation of cash
flows of projects that are subject to financing.
Analysis of the forms of amortization since this will depend on how the
client can comply since not all activities have the same operating cycle
(agriculture, commerce, construction, services, etc.)
The repayment periods should be such as to facilitate payment.

Otherwise, default and portfolio loss are encouraged.
Amortization. Repayment of the principal of the loans received, according

to the maturity schedule of the contract, through generally equal periodic
installments. Amortizing a loan is determining the different combinations
of money equivalence over time.

Define and expand
5.1.2.- Loans
Loan : financial operation by which a natural or legal person ( the lender )

provides money (a certain capital) to another ( the borrower ) in exchange
for a commitment by the borrower to return it, adding interest and
charges as appropriate on the agreed dates.
Amount of money requested, generally from a financial institution, with

the obligation to return it with interest .
Loan is the contract in which one of the parties (lender) delivers physical,
financial assets or cash and the other (borrower) undertakes to return
them on a specific date or dates and to pay interest on the value of the
loan.
A.1.- Components of the Quota
In the study of partial payments we analyze that every installment or

payment in the standard amortization process of a financial obligation is
composed of the elements detailed in equation 3.1 in the following way:
Ck = Ak + Ik 3.1
Where:
Ck= Value of the leveled or provisional periodic quota
Ak = Principal of the installment, it is an amount that is directly applicable
to the debt and reduces it.
Ik = Interest on the installment, it is an amount of money that accrues on
the balance of the loan or adequate principal.
K = Period or payment number that we want to cancel
Installments or partial payments.
We have already studied this procedure, it is a flexible amortization

method, it establishes a series of equal or different partial payments in
equal or different periods included in the term of the debt; Interest is
calculated on balances updated as of the debt maturity date and to do so
we use the American Rule algorithm.
Level Dues Due

This is a gradual amortization system with interest on balances, where
unequal and periodic payments constitute an annuity due. This form of
amortization was created in France, which is why it is known as French
gradual amortization and it is the most used in the field of finance to
recover loans.
To calculate the quota in any of its forms, we resort to the annuities
already studied previously. In this system there may be variants such as:
Level Dues Due
Early Level Dues
Deferred leveled installments (grace periods are stipulated)
Graph 3.1
When it is agreed to pay off a loan through level installments due, each
installment payable is of equal value, made at the end of equal time
periods.
We define C k as the value of the installment, which contains the
amortization of the principal or payment A k and the interest I k accrued in
the payment k with 1≤ k ≥N. The process followed by the payment
method is shown in graph 3.1; where C k = C and which represents a
series of flows C (ordinary annuity due).
Thus, replacing C with A in formula 2.2 we obtain the value of the leveled
quota, then:
3.2
Where:
C = Level installment payable over the term of the loan.
I = Effective current interest rate per installment period; i=j/m
n = Total number of periods or agreed overdue installments; n = tm

P = Original debt or borrowed principal
5.3.1.- GRADUAL AMORTIZATION SYSTEMS ( FRENCH SYSTEM )
It consists of a system of constant value installments, with interest on

balances. It was created in EUROPE and is the most widespread and
widely applied in the financial field.
It is mainly used by regulated financial institutions with the objective of
maximizing their income in the same period of time with the same
capital. Interest is calculated on the unpaid principal balance and has the
following characteristics:
System caracteristics
1. The installments, subscriptions or payments are of equal monetary
value.
2. The interest paid in each installment is decreasing
3. The capital amortization in each installment increases gradually.
The payments made to amortize a debt are applied to first cover the
interest and reduce the amount of the debt (understood as capital), this
when the credit is current.
In the event that the borrower is late in his payments, the institution will
proceed in the first instance to pay the collection expenses, the default
interest pending payment, then the current interest and lastly the capital
(if the payment covers all the other concepts pending payment).
Characterized by constant payment installments throughout the life of

the loan. It also considers that the interest rate is the same throughout
the entire operation. Payment of the debt is in constant or uniform
installments. The fee payable during the established terms is constant
until settlement. The interest is on rebate, that is, applied on the existing
balances of the debt in a period. It is widely used by banks and stores that
sell on credit. Examples of this payment system are personal loans from
the banking system, active operations of financial intermediaries (MFI),
etc...

AMORTIZATION TABLE (PAYMENT TABLE)
PAYMENT
PER INTEREST AMORTIZAT CAPITAL
PAYMENT
PERIOD, FEE DUE FOR ION, BALANCE,
DATE OR
OR THE CAPITAL OR PRINCIPAL
PERIOD
SUBSCRIPTI PERIOD PRINCIPAL BALANCE
ON
IT IS THE
PORTION
OF CAPITAL
IT IS THAT WILL IT IS
IT IS THE CALCULA BE PAID IN CALCULAT
DATE TED BY EACH ED BY
IT IS MULTIPL
ACCORDING PERIOD. IT SUBTRAC
CALCULAT YING THE IS
TO THE TING THE
ED WITH CAPITAL
PERIODICITY CALCULAT PREVIOUS
THE BALANCE ED
AGREED BY BY CAPITAL
FORMULA BY THE SUBTRACTI
THE BALANCE
AGREED RATE OF NG
CREDITOR THE MINUS
ANNUITY EACH
AND THE VALUE THE
BORROWER PERIOD INTEREST AMORTIZE
(i) FROM THE D CAPITAL
CALCULAT
ED FIXED
FEE
CASE 1: A growing Nagaro microentrepreneur requests working capital to

expand the offer in her business and goes to a Microfinance Company,
managing a loan for C$ 70,000. 00 , to be paid in five equal annual
payments over a period of five years at 22% per year.
Amortization table
Date Capital balance Amortization interest share
0 70000.00 0.00 0.00 0.00
1 60955.58 9044.42 15400.00 24444.42

2 49921.40 11034.19 13410.23 24444.42

3 36459.69 13461.71 10982.71 24444.42
4 20036.41 16423.28 8021.13 24444.42
5 0.00 20036.41 4408.01 24444.42
TOTAL 70000.00 52222.08 122222.1
CASE 2: The company “El Huerto” receives a credit authorization from

FUNDECAN for a capital amount of C$95,000.00 at 36% annually
convertible semiannually to be paid within a period of 3 years in equal
semiannual installments, the first of which matures in 6 months. Make
the amortization table.
Amortizatio
Date Capital balance interest share
n
0 95,000.00 0.00 0.00 0.00
1 84,938.54 10,061.46 17,100.00 27,161.46
2 73,066.01 11,872.53 15,288.94 27,161.46
3 59,056.43 14,009.58 13,151.88 27,161.46
4 42,525.13 16,531.30 10,630.16 27,161.46
5 23,018.19 19,506.94 7,654.52 27,161.46
6 0.00 23,018.19 4,143.27 27,161.46
Total 95,000.00 67,968.77 162,968.76
PROPOSED EXERCISES OF GRADUAL AMORTIZATION SYSTEM

1. Build the amortization table, using the French system, of a loan for
C$ 35,000.00 that is signed at 3.75% per month for a 6-month term
and with a monthly payment installment
2. The company “El Estudiante SA” offers financing for postgraduate
courses with the following conditions: Financing of 80% of the
course, 4 months term with a preferential rate of 13% per year on
the balance and decreasing amortization installments; If the course
costs C$7,800 córdobas, calculate the value of each fee and make
your amortization table. The contract includes maintenance of value.

3. A small footwear producer requires working capital to buy a molding
machine and improve current production capacity. For this purpose,
he goes to a microfinance company, managing a loan for C$46,000,
to be settled in equal monthly payments, over a period of one year.
anus. Build the amortization table knowing that the monthly interest
rate is 3.75%…
4. Don Carmelo is a producer of basic grains and requests financing for
C$24,000. The credit institution approves a disbursement for 85% of
the requested capital with a financed commission of 3% on the
financed capital and an annual interest rate of 8.46% convertible
quarterly and six equal installments. Calculate the value of the
installments and make the amortization table for Don Carmelo.
5. A courier purchases a bicycle that costs C$1,600. You pay a 12%
premium in cash and the rest will be paid with a social interest loan
with a rate of 6% annually with monthly capitalization, the term is
four equal monthly installments. The contract includes a value
maintenance clause of 5% per year. Calculate the value of the
installments and make the corresponding amortization table.
6. The company “sweet honey” takes out a debt of C$100,000. 00 with a
bank. If it charges this type of loan 24% annually convertible
monthly, how much would the company have to pay monthly to pay
off its debt within 15 months?
7. The shipping company “Smilingfish” accesses a line of credit for C$
120,000 to be paid in six months, through uniform monthly
installments and with a monthly rate of 1.25%. Build the payment
schedule if you decide to use the entire line of credit only once.

Payment system in decreasing installments (German System)
«Payment system with application of compound interest»
System caracteristics
1. Fees decrease period by period,
2. Amortization is constant until the debt is extinguished.
3. Interest applied to balances is simple
4. Interest and a portion of the principal are paid periodically.

To solve cases with this payment system, knowing the amortization, we
necessarily operate with the amortization tables.
PROPOSED CONSTANT AMORTIZATION EXERCISES
1. The “El Delfín” restaurant has furniture under the following conditions:
total price C$86,830.00, premium: 10%, four bimonthly payments of
constant capital and an interest rate of 12.32% per year, convertible
interest bimonthly. I=0.02053333
2. Mrs. Tina requests a loan for working capital at FUNDIME, which is

approved for the amount of C$15,000 and must be paid within 4
months in decreasing monthly installments, with an active rate of 3%
per month .
3. A university student wants to pursue a postgraduate degree at UPOLI.

They offer you a 30% discount if you pay in cash, the total cost of the
course is C$ 8,000.00. Financing is provided by a company at 12% per
year, convertible monthly with a 6-month term and through decreasing
installments. Make the appropriate amortization table.
DEFERRED LEVEL FEES.
This amortization system has a grace period and two situations can arise
that we will analyze.
Interest is capitalized in the grace period.
The deferred leveled fee is calculated by formula 3.3, which was studied
in the topic of annuities.
Graph 3.2

3.3
Where
Pr = P (1 + i) r Principal adjustment in the chart period
The value of r marks the number of deferred or grace periods of the loan.
Interest is settled in the grace period

IF the interest that accrues on the debt in the grace period is settled per
period , the capital does not increase and remains unchanged P = P r then
the leveled installment is calculated using formula 3.4. Graph 3.3
Graph 3.3
3.4
The interest that is settled in the grace period is calculated through I = P

(i)

Balance immediately after the K-th installment
As each installment C contains principal and interest, we need to

calculate some important values to prepare the payment schedule.
Because all payments are equal and periodic, that is, they constitute an
annuity due, we can calculate the unpaid balance S k after the installment
k, as the present value of the remaining Nk payments that are calculated
by formula 2.1 where P = S k (Balance), that is:
3.5
When the adopted amortization system stipulates a grace period r, the

balance in the kth installment is given by the following formula
3.6
Interest on the kth installment
If we want to distribute the paid installment C k between interest I k and

principal payment A k , without constructing the entire amortization table,
we will use the following procedure: first we calculate the unpaid balance
of the previous period using the adjusted formula 3.7, that is say;
3.7
Since the interest I k is calculated on the unpaid balance, that is, from the
previous period, then

3.8
Simplifying the previous expression we obtain the formula that
determines the interest of an installment k that is chosen.
3.9
When the leveled installment contains a grace period r at the beginning,
then the interest on the kth installment is given by:
3.10
Example 3.1: The Pacific Bank grants a loan to the ROCA company of
$200.00 to finance an industrial project. The loan will be paid off within a
period of 5 years, through 10 equal semiannual installments. An effective
annual rate of 16.64% is stipulated and that the first payment occurs one
semester after receiving the loan:
Calculate the value of each semiannual fee
Calculate the balance just after installment 6
Calculate the balance just before installment 6
Establish the amortization schedule for the loan
Data
P= S200, 000 current heat or principal of the loan
I e = 16.64% annual effective interest rate
n= 5 years term
m=2 payment frequency per year
N=m(n) = 2(5) = 10 number of semiannual periodic installments
I = semester
C=?
Solution

Since the interest rate is effective annually, we will first find the
equivalent semiannual periodic rate i, that is:
That is
8% every six months

The value of the semiannual fee is calculated by formula 3.2, that is;
= $ 29,805.90
The balance just after installment 6 is calculated by formula 3.5, taking

into account that n = 10 and k = 6, the present value of the remaining 4
installments is the following balance.
= $ 98,720.92
The balance just before the kth installment (in this case number 6), is
determined by calculating the balance of the previous period by formula
3.4. The value of the interest for the following period is added to this
balance, as follows:
The Balance after the fifth installment is;
= $ 119,006.32
The interests corresponding to period 6 by formula 3.9 are:

= $9,520.51
The balance we want to find is: $119,006.32 + $9,520.51 = $128,526.83

The amortization table is presented in table 3.1,
Conclusions: In table 3.1 we can see the following:

The value of the installment remains constant and each one contains
principal and interest accrued on balances.
The amortization column increases with each payment, because the
interest column decreases; cause-effect interest on balances.
The balances calculated above match the loans in the table.
The internal rate of return of the loan is 16.64% effective annually, since
it is the interest rate paid on unpaid balances.

Amortization Interest Dues
Period Balance
To the main accrued leveled
$
0 $ 0000000 $ 0000000 $0000000
200,000.00
1 $ 13,805.90 $ 16,000.00 $ 29,805.90
186,194.10
2 $ 14,910.37 $,14,895.53 $ 29,805.90
171,194.10
3 $ 16,103.20 $ 13,702.70 $ 29,805.90
155,180.53
4 $ 17,391.46 $ 12,414.44 $ 29,805.90
137,789.07
5 $ 18,782.77 $ 11,023.33 $ 29,805.90
119,006.30
6 $ 20,285.40 $ 9,520.51 $ 29,805.90
98,720.90
7 $ 21,908.23 $ 7,897.67 $ 29,805.90
76,812.67
8 $ 23,660.89 $ 6,145.01 $ 29,805.90
53,151.78
9 $ 25,553.76 $ 4,252.14 $ 29,805.90
27,598.02
10 $ 27,598.02 $2,207.84 $ 29,805.90
00,000,00
$
Total $ 98,059.00 $298,059 Balance paid
2000.000.00
Example 3.2: The Téllez company buys a truck to transport its products to
supermarkets. The value of this is $25,000. They require an initial
payment of 20% and the rest is paid in 12 equal monthly installments. To
reduce the cost of the monthly installment, offer to make 2 extraordinary
installments of $4,000 and $4,500 at 6 and 12 months respectively.
Construct the amortization table at an interest rate of 18%CM.
Data
$25,000 cash value of the truck
C 0 = 25,000(0.20) = $5,000 down payment
P 0 = 25,000 – 5,000 = $20,000 balance to be financed
m= 12 frequency of capitalizing interest
I = 0.18/12 = 1.015
n = 1 year
N = n (m) = 12 monthly payments
C 1 = $4,000 extra fee month 6
C 2 = $4,500 extra fee month 12
C=? value of the ordinary fee
Solution

As the company agrees to pay two extraordinary installments, in the
future, we need to calculate the current value of both. We will call this
current sum P 1 and we will deduct it from the initial balance P 0 , in the
following way:
So; The current value P of the debt considering the extraordinary
installments is:
P 1 = 4,000 (1 + 0.015) -6 + 4,500(1+0.015) -12 =3,658.17 + 3,763.74 =
$7,421.91
P = P 0 – P 1 = 20,000 – 7,421.91 = $12,578.09
Using formula 3.2 we calculate the value of the monthly leveled quota,
that is:
$1,153.16
The payment or amortization schedule is presented in table 3.2

Period Balance
0 $ $ $0000000 $ 25,000.00

0000000 0000000
0 5,000.00 20,000.00
5,000.00 0000000
1 1,153.16 19,146.84
853.16 300.00
2 1,153.16 18,280.88
865.96 287.20
3 1,153.16 17,401.93
878.95 274.21
4 1,153.16 16,509.80
892.13 261.03
5 1,153.16 15,604.29
905.51 247.65
6 1,153.16 10,685.19
4,919.09 234.06
7 1,153.16 9,692.31
992.88 160.28
8 1,153.16 8,684.53
1,007.78 145.38
9 1,153.16 7,661.64
1,022.89 130.27
10 1,153.16 6,623.40
1,038.24 114.92
11 1,153.16 5,569.60
1,053.82 99.35
12 5,653.16 00,000.00
5,569.60 83.54
Total $ 25,000.00 $ 2,337.89 $27,337.89 Balance paid
Example 3.3: A farmer obtains a loan of $200,000 to renew 100 coffee

plants; The financing contract stipulates the following: in the grace period
is 3 years, the farmer will pay interest annually, the term to pay the debt
will be 7 years through leveled annual installments that include
amortization and interest, the interest rate It is 15% effective annually.
Build the payment table for the total term of 10 years.
Data
P = $200.00;
I = 15% annual effective interest rate;
n = 10 years total term;
r = 3 years grace period

Period Balance
0 0000000 0000000 000000 200,000.00
1 0000000 30,000.00 0 200,000.00
2 0000000 30,000.00 30,000.00 200,000.00
3 0000000 30,000.00 30,000.00 200,000.00
4 18,072.07 30,000.00 30,000.00 181,927.93

48,072.07
5 20,782.88 27,289.19 161,145.05
48,072.07
6 23,900.31 24,171.75 137,244.73
48,072.07
7 27,485.36 20,586.71 109,759.93
48,072.07
8 31,608.16 16,463.91 78,151.77
48,072.07
9 36,349.31 11,722.76 41,802.46
48,072.07
10 41,802.46 6,270.37 00,000,00
48,072.07
Total $ 25,000.00 $ 2,337.89 $27,337.89 Balance paid

Table 3.3
Solution
First let's calculate the value of the annual interest for the grace period
with the simple interest formula.
I = Pin = (0.05) (1) = $30,000
Thus, in the grace period, the annual interest for the period is $30,000.00.
We calculate the leveled annual fee with formula 3.2
Table 3.3 represents the loan amortization

Let us observe the following in table 3.3:
During the grace period the farmer only pays annual interest.
During the grace period there is no payment to the principal, therefore
the capital does not decrease.
Starting in year 4, the debt begins to be amortized and the balance
decreases each year.
Decreasing proportional fee
This is a current amortization system A k , the value of the installment C k

is proportionally decreasing because the interest I k decreases in each
period because they are calculated based on balance. Graph 3.4
Graph 3.4:
It is a system used in personal loans, small businesses (industry, service
and commerce), individual companies, societies, cooperatives, among
others. When the loan settles obligations with this system, it pays less
interest, because in the first periods it pays larger amounts than in the
leveled installment system.
Fee calculation
The proportional share C k is calculated in two parts, as follows:

Ck = Ak + Ik
Amortization A k :
3.11
Interest I k = Interest is calculated by formula 3.6

I k = S k-1 = (Balance of the previous period) (rate of the period)
It is important to keep in mind that the balance S k is reduced only by the
amount corresponding to the amortization A k . Therefore, we can
establish other important relationships in this system such as: The
difference between two successive installments represents the decrease
in interest due to the constant payment to the capital.
h = A k (i)
Balance after K-th installment
The balance after calculating the value of the installment k is

S k = P - KA k

Example 3.4: The bank grants a loan of C$ 225,000 to the company “San
Marcos”, which trades shrimp. The interest rate is 30% CM on balance.
The term of the debt is twelve months and the form of payment is
through proportional monthly installments due with constant
amortization. Determine the value of the installments and prepare the
amortization table.
Data
P = C$225,000 current or principal value of the loan
j = 30% annual nominal interest rate
m = 12 annual interest conversion frequency
i = j/m =0.30/12 = 0.025% monthly effective rate
N = 12 number of agreed payments
Solution
Constant amortization is:
Ak = P/n = 225,000/12 = C$18,750 Constant amortization
S0 = P = C$ 225,000 initial principal, period 0
I1 = S0 (i) = 225,000 (0.025) = C$ 5,625 interest for period 1
C1 = A1 + I1 = 18,750 + 5,625 = C$ 24,375.00 Installment number 1
S1 = S0 – A1 = 225,000 (0.025) = C$ 5,156.25 Balance of period 1
I2 = S1 (i) = 206,250 (0.025) = C $ 5,156.25 Period 2 interest
C2 = A2 + I2 = 18,750 + 5,156.25 = C$23,906.25 Installment number 2
C3 = A3 + I3 = 18,750 + 4,687.50 = C$ 23,437.50 Installment number 3
I3 = S2 (i) = 187,500 (0.025) = C$ 4,687.50 Interest for period 3
S11 = S10 – A2 = 37,500 – 18,750 = C$ 18,750.00 Balance of period 11
I12 = S11 (i) = 18,750 (0.025) = C$ 468.75 Interest for period 12
C12 = A2 + I2 = 18,750 + 468.75 = Period 12 interest
C12 = A12 + I12 = 18,750 + 468.75 = C$ 19,218.75 Installment number 12
S2 = S1 – A2 = 206,250 – 18,750 = C $ 187,500.00 Balance of period 2
b) the calendar is presented in table 3.4
Using formula 3.12 of the nth sum of a decreasing sequence at a constant
value, we can determine the total amount of interest paid in full on the
loan.
3.12
Where:
n = number of payments or terms
a = Interest earned in the first month (First Term).
d = Common interest difference for each payment
S n = Total interest paid (sum of the estate)
According to the previous example we have:
N= 12 payments
a= C$5,625.00
d= C$468.75, then:

Period Balance
0 $ 0000000 $ 0000000 $ 0000000 $225,000.00
1 17,875.00 5,625.00 24,375.00 206,250.00
2 17,875.00 5,156.25 23,906.25 187,500.00
3 17,875.00 4,687.50 23,437.50 168,750.00
4 17,875.00 4,218.75 22,968.75 150,000.00
5 17,875.00 3,750.00 22,500.00 131,250.00
6 17,875.00 3,281.25 22,031.25 112,500.00
7 17,875.00 2,812.50 21,562.50 93,750.00
8 17,875.00 2,343.75 21,093.75 75,000.00
9 17,875.00 1,875.00 20,625.00 56,250.00
10 17,875.00 1,406.25 20,156.25 37,500.00
11 17,875.00 937.50 19,687.50 18,750.00
12 17,875.00 468.75 19,218.75 00000000
Total $ 225,000.00 $ 36,562.2 $261,562.25 paid
Table 3.4
It is a mistake to calculate the interest rate that actually acts on the loan,
if it is done in the following way: I =
36,562.50/225,000 = 0.1625 = 16.25%

Because interest is not disbursed all at once, that is, the time value of
money is not taken into account.

Leveled installments with flat interest.
It is a system that is frequently applied in the credit policy of Nicaraguan

commercial houses and very little in bank loans, unless the interest rate is
reduced and becomes equivalent to an interest rate on balances.
The installment C k to be paid in this type of amortization has the same
value throughout the debt payment process. Both the part that amortizes
the principal A k and the interest I k in each installment are equal.
Amortizations do not reduce the interest in each installment, which is
why it is called flat interest, that is, they are fixed interest on the initial
principal.
In this amortization system, the installment is calculated in a similar way
to the proportional installment, the difference is the way of calculating
flat and fixed interest. Interest is calculated on the original balance;
Because of this, the effective interest rate paid on a loan is high.
Calculation of the installment with flat interest

As we know the fee is:
C k = A k + I flat
Where, the amortization part A k is calculated using formula 3.11 that is;
3.11
The equal interests I k in each installment are determined by:
3.13
Example 3.5: A person receives an offer from a commercial house to buy

a well-known brand of sound equipment in the national and international
market. The offer consists of the following: cash value with 3% discount
(December 10, 2001, TCO = C$13,794 x $1.00) is C$ 7,782,048 córdobas.
If purchased on credit, a premium of C$ 500 is paid and the balance is
paid in equal monthly installments over a period of 20 months at 5% flat
monthly interest. The person decided on the 12-month term credit,
prepare the payment schedule.
Data
C 0 = C$500 initial fee or premium; P = C$7,782.48 – C$500 = C$ 7,282.48
balance to be financed; I = 5% monthly flat interest rate; N = 12 number
of scheduled payments
Solution
The constant amortization value will be
Table 3.5 is debt amortization
Amortizatio Dues
End of Interest
n With
period accrued Balance
To the main flat
Monthly flat
one interest

0 C$000000 C$ 000 C$7,782.48
C$00.00
0 500.00 500.00 7,282.48
364.12
1 606.87 970.99 6,675.61
364.12
2 606.87 970.99 6,068.74
364.12
3 606.87 970.99 5,461.87
364.12
4 606.87 970.99 4,855.00
364.12
5 606.87 970.99 4,248.13
364.12
6 606.87 970.99 3,641.26
364.12
7 606.87 970.99 3,034.39
364.12
8 606.87 970.99 2,427.52
364.12
9 606.87 970.99 1,820.65
364.12
10 606.87 970.99 1,213.78
364.12
11 606.87 970.99 606.87
364.12
12 606.87 970.99 0,000,00
C$12.1519 Balance
Total C$7,782.48 C$4,369.44
2 paid
We determine the value of the flat interest in each installment as follows:
The constant monthly fee is;

C k = A k + I flat = 606.87 + 364.12 = C$ 971.00
Observations corresponding to table 3.5
The fee is leveled at flat interest
Amortization is constant
The interest is fixed in each installment even if the balance decreases
Quotas with monetary correction
In countries where structural adjustment programs are common,

permanent devaluation of the value of local currencies becomes a
permanent necessity. Due to this situation, governments, making use of
monetary policy instruments, in the search for sustained economic
development are forced to stimulate and protect investments through
the creation of laws. Generally, in these countries, bank loans are

investments that are protected by the maintenance of value law of
UPACs (units of purchasing power of constant value).
It is important to note that medium and long-term investments are
protected from both monetary devaluation and national and
international inflation.
In the case of Nicaragua, the exchange parity policy has been maintained
for the last 20 years, (1992 – 2011) establishing an index of monetary
variation or annual devaluation of 12%, 9% and 6% and 5% of the
Córdoba currency. With respect to the United States dollar, converting
the córdoba into a currency of current value and the dollar into a
currency of constant value and through a law approved by the National
Assembly, all loans granted by the National financial system are
protected through the maintenance of dollar value.
The installments to amortize loans that carry value maintenance clauses
are determined in the same way as the common loans already studied
and the results are converted to the corresponding monetary units;
according to the Monetary Correction Factor (FCM) that governs or is in
force on the date of each installment.
In Nicaragua, the maintenance of value of loans or credits in córdobas is
with respect to the dollar, these are dollarized, according to the official
exchange rate (TCO) on the date of formalization, then all adjustments
are made in the córdoba or current currency on the date of each
payment.
Monetary correction factor
The FCM on a given date is determined through the formula:

3.14 Where:
i v : monetary variation rate of the period (slip rate)
n: period number
The official TCO exchange rate from one period to another is calculated
through formula 3.15 and for various periods through 3.16, thus we have:
TCO 1 = (TCO 0 ) (FCM) 3.15

n
TCO 1 = (TCO 0 ) (FCM) 3.16
Where:
TCO 1 = Official exchange rate on the current date
TCO 0 = Official exchange rate on the previous date
FCM = Period monetary correction fact
N = Period number (days, weeks, months, years, etc.)
For example, if in Nicaragua the córdoba is devalued at an effective
annual variation rate of 6%, then the effective monthly variation rate is:
Slip rate
per month
In this way the monthly FCM will be: FCM = (1.00486755)

Again, the daily variation rate is calculated equivalently based on the
number of days in the year. If the year is a leap year it has 366 days and if
it is a normal year it has 365. For example, the year 2000 was a leap year
and the daily slip rate used by the Central Bank of Nicaragua was
calculated using the following expression:
Slip rate per
day
Analogously, the daily FCM in 2000 is: FCM= (1.000159217)
The year 2002 is normal 365 days and the daily slip rate is:
Slip rate per
day
Therefore, the daily FCM for the year 2002 is: FCM = (1.000159654)
To better understand the process of calculating the TCO of the dollar

against the córdoba from one date to the next, we take as an example
the period between July 1, 2000 and January 1, 2001. The data that
follows is in accordance with “Economic Indicators” for the month of
December 2000 of the BCN. By formula 3.16 using the daily correction
factor, we have the following results published in the Official Exchange

Rate notices. Note that the exact number of days between dates is taken
into account.
TCO = C$ 12.6824 per dollar on July 1, 2000
TCO = (12.6824) (1.000159217) 31 = 12.7451 August 1, 2000
TCO = (12.7451) (1.000159217) 31 = 12.8082 September 1, 2000
TCO = (12.80.82) (1.000159217) 31 = 12.8695 October 1, 2000
TCO = (12.8695) (1.000159217) 31 = 12.9332 November 1, 2000
TCO = (12.9332) (1.000159217) 30 = 12.9951 December 1, 2000
TCO = (12.9951) (1.000159217) 31 = 13.0594 January 1, 2001
Directly to calculate the TCO from July 1, 2000 to January 1, 2001, we use
formula 3.16 taking into account that the number of days is 184 between
the mentioned dates, therefore we obtain the same value;
TCO = (12.6824) (1.000159217) 184 = 13.0594 January 1, 2001
Example 3.6
The “El Águila” land transportation cooperative of the Tipitapa
municipality, obtained a loan to reactivate two trucks from the “Buen
Fin” bank on December 3, 2001 for the amount of 40,000 C$, at TCO = C$
13.7790, for a term of 8 months and payable through 8 monthly level
amounts in dollars or installments in córdobas adjusted by the TCO at the
time of making payments. The current interest rate was 20.4% CM;
monetary interest of 10% and controlled variation rate (Slide) is 6%. The
installment dates are established around the 10th of each month. Build
the Payment calendar.
Data
P = C$40,000 loan in current córdobas
TCO = C$ 13.7790 X $1.00
P = 40,000/13.7790 = $2,902.97 dollar value of the loan
I v = 6% annual slip rate
I m = 10% default slip rate
j = 20.4% annual nominal interest rate
m = 12 interest conversion frequency in the year
i=j/m = 0.20/4 = 0.017 monthly effective interest rate on balances
n = 8/12 term in years
N =m(n) = 12(8/12) 8 number of monthly payments
I d = 0.0159654% daily currency slippage
C=?
Solution
Using formula 3.2 we calculate the value of the leveled quota in dollars,
that is:
To make the adjustments of the installments in dollars to córdobas on the

payment date, the respective TCOs are calculated or simply use the TCOs
that the monetary authorities (BCN) determine and set for the purposes
of the financial transaction.
The TCO that was used in these operations was according to 6% annually
or equivalent to 0.0159654% daily, in this way the FCM = (1.000159654)
The amortization schedule is presented in table 3.6 where the reader can
verify the information contained.
No
. Fee dollar Quota
Fee No. Balance Balance in
Sh value in exchang value in
date Days in dollars cordobas
ar dollars e rate dollars
e
03-12- $2,902.9 $40,000.0
0 0 $ 00000 13.7790 0000000
01 7 0
03-01- $5,416.6 $2,561.1 $35,465.2
1 31 $391.17 13.8474
02 9 5 7
04-02- $4,444.4 $2,213.5 $30,808.4
2 32 $391.17 13.9183
02 2 2 4
04-03- $5,468.8 $1,859.9 $26,003.8
3 28 $391.17 13.9807
02 3 8 2
03-04- $5,495.0 $1,500.4 $21,077.7
4 30 $391.17 14.0478
02 8 3 4
03-05- $5,521.4 $1,134.7 $16,017.3
5 30 $391.17 14.0478
02 4 6 6
03-06- $5,548.8 $10,821.6
6 31 $391.17 14.1852 $762.68
02 2 0
03-07- $5,575.4 $
7 30 $391.17 14.2533 $384.68
02 6 5,482.30
03-08- $5,603.1 $
8 31 $391.17 14.3240 $000000
02 2 0000000

Methodology to Construct table 3.6
Dollarize the TCO on the date the loan is formalized.
Build the payment table in dollars according to the agreed upon fee.
Project the TCO on the expected installment payment date taking into
account the devaluation rate
Adjust or correct the quotas from dollars to equivalent córdobas.
Correct balances in córdobas.
Quota with projected monetary correction
When a project needs financing to carry out investments, in a scenario of

inflation or monetary devaluation, it is common for financial analysts to
make projections in current currency, both the payment of installments,
as well as expenses and income, using the rate of interest inflated from
previously studied:
d = i + i v + (i) (i v ) 3.17
In this case the formula translates into:

d: inflated or periodic nominal interest rate.
i v : rate of variation or periodic monetary slippage (devaluation)
i: real interest rate of the period
In this last formula 3.16 is the one used for the projections of the quotas
in current currency to settle the financing loans for medium and long-
term projects. This inflated rate d can be calculated taking into account
the annual average estimates of the monetary variation rate, which will
prevail throughout the useful life of the project and represents a good
approximation for the projection of the quota in monetary values in the
future.
The leveled interest rate with the projected devaluation included is
calculated through formula 3.2, replacing in said formula the interest rate
i with the inflated interest rate d. First we calculate the inflated interest
rate d by and then the installment c with formula 3.18
3.18
Example 3.7
An agricultural project needs financing of C$ 1,500,000 to use it for
investments in equipment and furniture. Suppose that the controlled
devaluation of the córdoba for the next 6 months is estimated at an
average of 12% annually. The planning horizon is 6 years and the real
interest rate on the loan is 18%. Prepare the payment schedule using the
system of leveled installments in current córdobas that contain the
adjustment for monetary slippage.
Data
P = C$ 1,500.00 loan value
I v = 12% monetary variation rate or devaluation
I e = 18% effective annual interest rate
N = 6 number of annual installments
C=? Current leveled fee value
d=? inflated interest rate
Solution
To project the value of quota C in current córdobas we use formula 3.18,
first calculating the inflated or nominal rate d, that is;
d = i + i v + (i) (i v ) = 0.18+0.12 + (0.18) (0.12) then d=32.16%
Now we calculate the annual level installment which contains the real
interest, the maintenance of value and the amortization of the principal
C$593,848.90
Observations table 3.17
The value of the loan does not change
The value of the interest payment contains real interest and maintenance
of value.
The leveled installment value contains principal amortization, real
interest and maintenance of value.
This amortization system is used in the preparation and evaluation of
projects in a scenario of inflation and devaluation.

The percentage of monetary variation (devaluation) is estimated for the
planning horizon of the economic activity or useful life of the project.
The loan amortization schedule is presented in table 3.7

Amortizatio
n Inflated inflated Outstandi
Periods
To the main interest quota ng balance
one
1,500,000.
0
1,388,551.
1
0 C$000000 C$000000 C$000000
1,241,260.
1 111,448.90 482,400.00 593,848.90
2
2 147,290.86 446.558.03 593,848.90
1,046,600.
3 194,659.60 399,189.29 593,848.90
6
4 257,262.14 336,586.76 593,848.90
789,338,4
5 339,997.64 253,851.26 593,848.90
8
6 449,340.88 144,508.01 593,848.90
449,340,8
8
00000000
0
2,063.093.3 3,563,093.4 Balance
Total 1,500,000
5 0 paid
Table 3.7
CHAPTER VI: CONSTITUTION OF DEPRIVING FUNDS

Basic introduction and concept
Passive products
2101 Demand deposits (current accounts – with interest, interest-free,
demand deposits, other demand deposits)
2102 Savings deposits (savings deposits, secured savings deposits)

2103 Term deposits (due term deposits, current term deposits, term
deposits assigned as collateral)
2104 Other public deposits)
2105 Obligations for acceptances
2106 Obligations for bonds issued
2107 Certified checks
The sinking fund is an amount that is capitalized (grows) through periodic

payments that accrue certain interest, so that a desired or predetermined
mode is obtained in a finite number of deposits. In financial practice, the
creation of the sinking fund can obey the following objectives:
Pay the principal of a debt when it matures through periodic installments,
the current interest that the debt accrues is paid separately.
Accumulate by companies a certain amount of capital to replace fixed
assets, which degrade with use.
Have reserves to provide the payment of retirement and old-age
pensions to company workers.
Withdraw the funds from the bond issue at maturity, among others.
Having studied amortization in the previous point, we now present the

mathematical model to constitute a “Depreciation Fund”. We pointed out
that amortizations are used in the field of finance and commerce to
calculate the gradual payment of a debt, since we know that in financial
activity it is common for companies and people to seek financing or
credit, either to capitalize or to the acquisition of goods (assets). Now the
point could be the other way around, that is, when we have a short or
long-term obligation, we can start saving gradually until we reach the
desired amount, of course, with their respective returns. This is when the
figure of the “Depreciation Fund” becomes necessary.
In a sinking fund, each payment that is set aside periodically is an annuity

that earns interest that is capitalized, each period and interest. All the
problems are similar to those already studied in annuities.
It is important to establish the difference between the sinking fund and
amortization itself, although both are methods of paying off a loan or
settling an obligation. In the first, the amount of the installments is used
only to pay the capital; In the second, on the contrary, the terms are
sufficient to pay the capital and the current interest on it. Another
difference is that; In the sinking fund the debt remains constant until the
fund is completed, while in the case of amortization, the debt decreases
with each successive payment.
Model 1: Constant Overdue Fee
The operation scheme assuming that the fee is constant and due per
period is
To calculate the installment D k at the end of each period, we start from

knowing the value or amount F that we wish to accumulate, the periodic
interest rate i that the fund accrues and the number of capitalization
periods N. In this way, through formula 3.19 we calculate the payment or
quota of the fund, that is:
3.19
Amount of the fund in the kth installment
When payments have been made to a sinking fund for a number of years
or periods, it is useful to quickly calculate the capital or total accumulated
amount S k , just after the kth payment D k , where 1 ≤ k ≥ N. To perform
the calculation, we use formula 3.20 in this way it results:
3.20

Capitalization table
The capitalization table of the amortization fund serves to show the

period-by-period growth of capital and standardly contains 5 columns, as
shown in table 3.8.
Example3.8
An industrial company estimates that within 10 years it will have to
change certain types of machinery due to wear and tear due to its use.
This change will cost $850,000, and with the objective of having this
capital at the time, he has decided to create a amortization fund in a local
bank, which accrues an interest rate of 9.5%
Data
F= $850,000 value that you want to accumulate
I = 9.5% annual effective interest rate
N= 10 number of scheduled annual payments
D=? annual payment value for the fund
S 7 =? Amount accumulated after payment 7
Solution
We calculate the value of the amortization payment using 3.19
= $54,626.23
We will find the accumulated amount after payment k=7 by 3.20, it is

about calculating the future value F of 7 payments that constitute an
annuity due.
The balance F k after k payments is determined by: F k = F – S k where F is

the value or amount that you want to accumulate. Thus the balance is;

Comments table 3.8

The figures in column B represent the periodic payments to the sinking
fund.
Column E shows the total in the fund after each payment. One line
further down in column C, the interest for one period appears on each
figure in column E.
Each periodic payment in column B, plus the corresponding interest in
column C, add up to the total increased to the fund at the end of each
period in column D.
Table 3.8 shows the capitalization of the sinking fund.
TO b c d AND
Capital in
End of
Fund Interest on Increase to the the
annual
payment the fund bottom backgroun
period
d
54,626.23
114,441.9
5
179,940.1
6
1 54,626.23 $ 0.00 $ 54,626.23
251,660.7
2 54,626.23 5,189,49 59,815.72
0
3 54,626.23 10,871.98 65,498.22
330,194.7
4 54,626.23 17,094.32 71,720.55
0
5 54,626.23 23,907.77 78,534.00
416,189.4
6 54,626.23 31,368.50 85,994.73
2
7 54,626.23 39,538.00 94,164.23
510,353.6
8 54,626.23 48,483.59 103,109.26
4
9 54,626.23 58,279.03 112,905.26
613,463.4
10 54,626.23 69,005.04 123,631.27
7
726,368.7
3
850,000.0
0

546.262.3 Desired
Total 303,737.70 $ 820,000.00
0 amount
Table 3.8
Model 2: initial payment with constant overdue payment
The operation scheme in the assumption that the fund is opened with an
initial fee and is subsequently allocated a constant fee due per period is:
The calculation of the constant periodic fee is in accordance with:
3.21
The capital accumulated in the kth period is:
3.22
Model 3: Constant Advance Fee
The operation scheme assuming that the fund is opened with a constant
and anticipated fee per period is given by:

The calculation of the constant periodic fee is in accordance with:
3.23
The capital accumulated in the kth period is:
3.24
PROPOSED EXERCISES ON DUE DEPRIVING FUNDS

1. “La masatepina” wants to build a sinking fund to pay the insurance
premium of C$ 60,000, which must be paid within 4 months. The
“DKY” bank offers you to pay a rate for said fund of 3.6%
compounded monthly, build the corresponding amortization fund
table.
PROPOSED EXERCISES FOR THE CONSOLIDATION OF THE STUDY OF

CASH FLOWS
1. A company dedicated to financial leasing purchases a warehouse for

$15,000.00. The purchase of said warehouse generates the following
financial operations for the company:
a. The company requests a loan from a banking institution at 12%

capitalized monthly and a term of 5 years with monthly installments.
Calculate the value of the loan installment.
b. The company decides to create a sinking fund for the reconstruction
of the winery. Calculate the value of the deposit at the beginning of
each month if the financial institution pays 9% annually compounded
monthly.
c. If you want to financially rent said warehouse and it is established
that the payment is made in advance and that it generates 26% of
annual profit convertible monthly, how much should the rental fee
be?
d. If the deposits calculated in part “b” were made from the projected
income in part “c”, what is the net present value of this operation?
e. Compare the accounting cash flow against the cash flow resulting
from the proposed operations, write your conclusions
Consolidation exercises
(From Lincoyan Portus, Chapter 6, p. 153, 154)
13.- Calculate the cash value of a property sold under the following
conditions: C$ 20,000 cash; C$ 1,000 for monthly payments due for 2
years and 6 months and a final payment of C$ 2,500 one month after the
last monthly payment is paid. For the calculation use 9% with monthly
compounding. Answer: C$48,758.17
15.- What is the cash value of a device purchased with the following plan:
C$ 14,000 initial payment; C$ 1,600 monthly for 2 years 6 months with a
last payment of C$ 2,500, if 12% is charged with monthly capitalization?
Answer: C$57,128.78
19.- At the time of his daughter's birth, a man deposited C$ 1,500 in an
account that pays 8%; This amount is deposited every birthday. When he
turned 12, he increased his contributions to C$3,000. Calculate the
amount that will be available to her at age 18. Answer: C$ 75,553.60
21.- A person deposits C$ 100 at the end of each month in an account
that pays 6% interest compounded monthly. Calculate your account
balance after 20 years. Answer: C$ 46,204.09
(From Lincoyan Portus, Chapter 6, p. 170, 171)

37.- How much should be deposited at the end of each quarter, in an
investment fund that pays 10%, convertible quarterly, to accumulate C$
50,000 after 5 years? Answer: C$ 1,957.36

39.- What sum must be deposited annually in a fund that pays 6%, to
provide the replacement of a company's equipment whose cost is C$
8,000,000 and the useful life period of 6 years, if the salvage value It is
estimated at 15% of the cost? Answer: C$ 974,865.88
41.- A machine worth C$ 18,000 in cash is sold in installments, with an
initial payment of C$ 3,000 and the balance in 18 monthly installments,
charging 16% monthly convertible interest. Calculate the value of the
monthly installments. Answer: C$942.85
43.- Replace a series of payments of C$ 10,000 at the end of each year,
with the equivalent in monthly payments due, with an interest of 8%
convertible monthly. Answer: C$869.85
45.- The present value of an income of C$ 10,000 per year in arrears is C$
100,000; If the interest rate is 6%, calculate the time indicating the
mathematical solution and the practical solution. Answer: Mathematical
solution 15,731 years, practical solution 15 installments of C$ 10,000 and
one of C$ 7,310 at the end of the sixteenth year.
47.- The future value of an income of C$10,000 per year in arrears is
C$100,000. If the interest rate is 6%, calculate the time indicated by the
mathematical solution and the practical solution. Answer: 8,064 years,
practical solution: 7 installments of C$ 10,000 and an eighth of C$
11,025.32
49.- For a debt of C$ 20,000, with interest of 10% capitalized
semiannually, it is agreed to pay it off with semiannual payments of C$
4,000; Find the number of payments and the value of the final payment.
Answer: 5 payments of C$ 4,000 and a last payment of C$ 3,594.26
(From Lincoyan Portus, Chapter 7, pages 189,190, 191)

11.- Calculate the cash value of a property sold for a 15-year term, with
payments of C$ 3,000 per month per month in advance, if the interest
rate is 12% convertible monthly. Answer: C$252,464.64
13.- A person receives three offers for the purchase of his property:
a. C$400,000 cash
b. C$190,000 cash and C$50,000 semiannually, for 2 ½ years.
c. C$20,000 per quarter in advance for 3 years and a payment of
C$250,000 at the end of the fourth year.
Which offer should you choose if the interest rate is 8% per year?
Answer: Offer b
15.- What is the present value of an income of C$ 500 deposited at the
beginning of each month, for 15 years in a savings account that earns 9%
convertible monthly? Answer: C$ 49,666.43
17.- What amount must be deposited at the beginning of each year, in a
fund that pays 6%, to provide the replacement of a company's equipment
whose cost is C$ 2,500,000 and with a useful life of 5 years, if Salvage is
estimated at 10% of the cost? Answer: C$ 301,239.17
19.- Replace a series of payments at the beginning of each year, with the
equivalent in advance monthly payments, with an interest of 9%
convertible monthly. Answer: 0.08680047 (annual payment).
21.- An employee deposits C$ 300 at the beginning of each month in a
savings account that pays 8%, convertible monthly. How long and with
what final payment will you be able to save C$30,000? Answer: in 76
months and a last payment of C$239.66
(Taken from Lincoyan Portus, p. 311,312)

13.- A debt of C$ 20,000, with interest of 8% capitalized quarterly, must
be amortized with installments of C$ 5,000 per quarter in arrears.
Prepare the amortization table. Answer: C$
17.- A debt of C$100,000 with interest of 8% must be amortized with
annual payments of C$2,000. Prepare an amortization table, until the
debt is extinguished.
21.- A debt of C$ 100,000 must be paid with quarterly payments due in
18 installments, with interest of 12% compounded semiannually. Find the
unpaid balance when making the ninth payment. Ans: C$ 56,517.93
23.- A property is sold for C$300,000, payable as follows: C$100,000 in
cash and the balance in 8 equal semiannual installments with interest of
10%, convertible semiannually. Find the rights of the seller and the buyer,
when the fifth payment is made. Answer: Buyer's rights C$ 215,730.83,
seller's rights C$ 84,269.17
(Taken from Lincoyan Portus, p. 327, 328,329)
9.- A fund of C$ 5,000.00 is established every six months that pays 6%,
capitalized every six months; Find the accumulated value in 5 years and
prepare the fund table.
11.- An artisan needs to replace all his tools whose value is C$10,000.00
every 5 years. What monthly deposit should you make in a savings
account that pays 8% compounded monthly? Answer: C$136.28
13.- To pay off a debt of C$ 80,000.00 within 5 years, annual reserves are
established in a fund that pays 6%; After two years, the fund raises its
interest to 7%. Find the annual reserves and make the fund table.
Answer: The first two years C$ 14,191.71, the last three years C$
13,744.11
15.- A municipality issues 10-year bonds for C$2,000,000 that accrue 8%
interest. What annual deposits must be made in a fund that pays 6% and
what annual expenditure will the municipality have until the debt is paid?
Answer: Annual deposit C$ 151,735.92, annual disbursement C$
311,735.92
21.- An industrialist pays C$2,500,000 for the rights to exploit a patent for
10 years. Calculate the semiannual profit that must be made for the
investment to yield 12% with semiannual capitalization, taking into
account that to recover the investment you can make semiannual
deposits in a fund that pays 8% nominal.
Answer: C$ 333,954.37
BIBLIOGRAPHY
 Aching Guzmán Cesar; Excel financial applications, with
financial mathematics, electronic edition.
 Aching Guzmán Cesar; Financial Mathematics for decision
making. Electronic edition
 Ayres, Jr. Frank; Mathematics of Finance..., First edition 1963
 Baca Urbina Gabriel, Fundamentals of Economic Engineering,
first edition
 Díaz Mata Alfredo and Víctor M. Aerie; Financial mathematics.
Third edition
 García Santillán Arturo; “Financial Administration I”, Electronic
edition. Full text at www.eumed.net
 Portus Govinden Lincoyan; Financial mathematics. Third
edition

 Reyes Alvarado Noel; “Introduction to Financial
Management”, first edition.
 Villalobos José Luis; Financial mathematics... Third edition,
2007


Table II for the calculation of ordinary days
Day JAN FEB SEA APR MAY JUN JUL AUG SEPT OCT NOV DEC Day
1 1 31 61 91 121 151 181 211 241 271 301 331 1
2 2 32 62 92 122 152 182 212 242 272 302 332 2
3 3 33 63 93 123 153 183 213 243 273 303 333 3
4 4 34 64 94 124 154 184 214 244 274 304 334 4
5 5 35 65 95 125 155 185 215 245 275 305 335 5
6 6 36 66 96 126 156 186 216 246 276 306 336 6

7 7 37 67 97 127 157 187 217 247 277 307 337 7
8 8 38 68 98 128 158 188 218 248 278 308 338 8
9 9 39 69 99 129 159 189 219 249 279 309 339 9
10 10 40 70 100 130 160 190 220 250 280 310 340 10
11 11 41 71 101 131 161 191 221 251 281 311 341 11

12 12 42 72 102 132 162 192 222 252 282 312 342 12
13 13 43 73 103 133 163 193 223 253 283 313 343 13
14 14 44 74 104 134 164 194 224 254 284 314 344 14
15 15 45 75 105 135 165 195 225 255 285 315 345 15
16 16 46 76 106 136 166 196 226 256 286 316 346 16

17 17 47 77 107 137 167 197 227 257 287 317 347 17
18 18 48 78 108 138 168 198 228 258 288 318 348 18
19 19 49 79 109 139 169 199 229 259 289 319 349 19
20 20 50 80 110 140 170 200 230 260 290 320 350 20
21 21 51 81 111 141 171 201 231 261 291 321 351 21

22 22 52 82 112 142 172 202 232 262 292 322 352 22
23 23 53 83 113 143 173 203 233 263 293 323 353 23
24 24 54 84 114 144 174 204 234 264 294 324 354 24
25 25 55 85 115 145 175 205 235 265 295 325 355 25
26 26 56 86 116 146 176 206 236 266 296 326 356 26

27 27 57 87 117 147 177 207 237 267 297 327 357 27
28 28 58 88 118 148 178 208 238 268 298 328 358 28
29 29 59 89 119 149 179 209 239 269 299 329 359 29
30 30 60 90 120 150 180 210 240 270 300 330 360 30

Table III: Number of each day. Exact time

Day JAN FEB SEA APR MAY JUN JUL AUG SEPT OCT NOV DEC Day
1 1 32 60 91 121 152 182 213 244 274 305 335 1

2 2 33 61 92 122 153 183 214 245 275 306 336 2
3 3 34 62 93 123 154 184 215 246 276 307 337 3
4 4 35 63 94 124 155 185 216 247 277 308 338 4
5 5 36 64 95 125 156 186 217 248 278 309 339 5
6 6 37 65 96 126 157 187 218 249 279 310 340 6

7 7 38 66 97 127 158 188 219 250 280 311 341 7
8 8 39 67 98 128 159 189 220 251 281 312 342 8
9 9 40 68 99 129 160 190 221 252 282 313 343 9
10 10 41 69 100 130 161 191 222 253 283 314 344 10
11 11 42 70 101 131 162 192 223 254 284 315 345 11

12 12 43 71 102 132 163 193 224 255 285 316 346 12
13 13 44 72 103 133 164 194 225 256 286 317 347 13
14 14 45 73 104 134 165 195 226 257 287 318 348 14
15 15 46 74 105 135 166 196 227 258 288 319 349 15
16 16 47 75 106 136 167 197 228 259 289 320 350 16

17 17 48 76 107 137 168 198 229 260 290 321 351 17
18 18 49 77 108 138 169 199 230 261 291 322 352 18
19 19 50 78 109 139 170 200 231 262 292 323 353 19
20 20 51 79 110 140 171 201 232 263 293 324 354 20
21 21 52 80 111 141 172 202 233 264 294 325 355 21

22 22 53 81 112 142 173 203 234 265 295 326 356 22
23 23 54 82 113 143 174 204 235 266 296 327 357 23
24 24 55 83 114 144 175 205 236 267 297 328 358 24
25 25 56 84 115 145 176 206 237 268 298 329 359 25
26 26 57 85 116 146 177 207 238 269 299 330 360 26

27 27 58 86 117 147 178 208 239 270 300 331 361 27
28 28 59 87 118 148 179 209 240 271 301 332 362 28
29 29 88 119 149 180 210 241 272 302 333 363 29
30 30 89 120 150 181 211 242 273 303 334 364 30
31 31 90 151 212 243 304 365 31
Lic. William A. Reyes Urroz
Professor at the Polytechnic University of Nicaragua since

2008, he teaches the subjects of Financial Mathematics,
Formulation and evaluation of investment projects, Project
Administration, Credit and collections, Finance II, Finance
III, SME Administration, Business Development.
With extensive experience in the field of

Microfinance, he has been a manager of Microfinance
branches and with knowledge of credit techniques and the
application of financial mathematics in this field.
Graduate in agricultural business administration

with a major in business economics, postgraduate degree
in distance education and a specialty in business finance.
An entrepreneur at heart…

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Fundamentals of Financial Mathematics

Lic. William A. Reyes Urroz

Lic. William A. Reyes Urroz 1

This work aims to contribute to the teaching-learning

The current global context demands that new professionals be better

The purpose of this material is to present the financial mathematical

The course studies the basic foundations of financial mathematics , the

In addition to the calculation of interests and amounts, the valuable

The goal is for future professionals to acquire comprehensive training so

This material is dedicated to these professionals, business men and

Lic. William A. Reyes Urroz 3

William A. Reyes Urroz

CHAPTER I: INTRODUCTION TO FINANCIAL MATHEMATICS

1.1.- Concept of financial mathematics

1.2.- The time value of money

1.3.- What is the application of financial mathematics?

1.4.- Basic concepts

1.5.- Some legal aspects in Nicaragua

Lic. William A. Reyes Urroz 4

CHAPTER II: CAPITALIZATION AND SIMPLE UPDATE

2.1.- Introduction and basic concepts

2.2.- Calculation of simple interest

2.3.- Calculation of time or deadline

2.4.- Capital calculation

2.5.- Calculation of the interest rate

2.6.- Calculation of the amount

2.7.- Calculation of present value

2.9.- Amortization with simple interest (Partial payments – credits –

CHAPTER III: CAPITALIZATION AND COMPOSITE UPDATE

3.1.- Introduction and basic concepts

3.2.- Composite Amount

3.7.- Equivalence of values or value equations with compound interest

CHAPTER IV: CAPITALIZATION AND UPDATE OF CASH FLOWS

4.1.- Introduction, basic concepts and classification of constant cash

4.2.- Ordinary annuities due or postpaid

4.3.- Ordinary advance or prepaid annuities

4.4.- Deferred annuities

CHAPTER 5: AMORTIZATION SYSTEMS

5.1.- Introduction and basic concepts

CHAPTER 6: SINKING FUNDS

Lic. William A. Reyes Urroz 7

CHAPTER I: INTRODUCTION TO FINANCIAL

1. Define what financial mathematics is, its importance and the

1.2.- The time value of money

Lic. William A. Reyes Urroz 8

1.3.- What is the application of financial mathematics?

1.4.- Basic concepts

1.5.- Some legal aspects in Nicaragua

1.1.- CONCEPT OF FINANCIAL MATHEMATICS

“Financial Mathematics, also called investment analysis, investment

From a mathematical point of view, the basis of financial mathematics is

With accounting , it provides, at precise or specific times, reasoned

With economics , as it provides economists with the possibility of

With political science , because political science studies and solves

With engineering , which controls production costs in the manufacturing

Lic. William A. Reyes Urroz 10

With sociology , financial mathematics works with investments and

With marketing, since the impact of income on companies can be