A Self-Instructional Module on

Mathematics of Investment
2021 Edition

Dr. Floriza N. Laplap Dr. Glen M. Pesole

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A Self-Instructional Module on Mathematics of

Investment

Schedule ID

34119

Course Name/Title

Mathematics of Investment

Name/s of Faculty

Dr. Floriza N. Laplap

Professor VI

Dr. Glen M. Pesole

Professor IV
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I. Module Overview/ Introduction

Why is it important to know about interests, discounts, annuities, amortization,
depreciation? Why is there a need to invest money, whether just to save for a phone or
laptop?

This module aims to provide you with a basic understanding of the applications of
mathematical knowledge and skills on mathematics of investment to help in
understanding the basic concepts of the value of money using simple and compound
interest as well as discounting, variation of annuities, amortization, sinking fund and
depreciation. It aids the learners in real world applications in terms of saving, credit and
debit as well as fund accumulations.

Mathematics of Investment is a 3-unit course which primarily deals with money

transactions associated with interest and time. This course equips you with mathematical
tools in the practical applications of mathematical concepts in finance and guides you in
looking into situations that will enable wise financial planning and utilization.

II. Desired Learning Outcomes

At the end of the semester, you must be able to:

1. Identify various financial concepts as well as types of investment problems and

relate these to other curricular areas if possible

2. Solve financial problems involving simple and compound interest, discounting,

annuities, amortization and others using appropriate teaching and assessment
methods/techniques

3. Develop critical thinking in making sound plans and decisions pertaining to

financial matters

4. Apply the financial knowledge and skills in real-world situations

5. Develop the sense of responsibility and commitment in the world of finances

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III. Learning Contents, Tasks and Assessments

Unit 1: SIMPLE INTEREST

If you borrow money from the bank or from your friend, you are expected to pay
a certain amount for the use of that money. The payment for the use of another’s money
is called interest. There are three contributory factors that will determine the amount of
interest:

Principal (P) refers to the amount of money borrowed

Interest rate (r) is the rate in percent, decimal or fraction to be paid each unit of

time

Time of term (t) refers to the period of repayment of the money borrowed

(generally, expressed in years)

SIMPLE INTEREST

The Interest (I), as mentioned, refers to the money paid for the use of
borrowed money and it is an expense to the one who borrows the money but
income to the one who lends the money. The amount of money borrowed or
loaned or invested is the Principal (P). If you add the principal and the interest,
you get the sum called Final Amount/Value (F).

In computing the interest, the Interest rate (r) in percent/decimal/fraction

plays an important role in the determining the Final amount (F) to be paid as well
as Time (t) which is the length of time over which the principal is used (in years).

In calculating simple interest, the formula is:

I = Prt

The final amount or maturity value at the end of the t years can be solved
using:

F=P+I

What formulas can you derive from I = Prt and F = P + I?

● P = I/rt
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● r = I/Pt
● t = I/Pr
● F = P + I = P + Prt = P (1 + rt) where I = Prt
● P = F/(1 + rt)
● I=F-P

The rate r is expressed as a decimal number or fraction and the time, t, is expressed in
years. Thus, if the time is given in months or days, it can be converted to year by using
these formulas:

a. t= (number of months) / 12

b. t= (number of days) / 360

Here is a sample problem on finding the interest:

Example 1: Find the Interest on ₱5,000 that you borrowed from your cousin at 6.5 %
simple interest for 1 year.

Given: P = P5,000.00 r = 6.5 % t = 1 year

Required: I

Solution/Answer: I = Prt = P5,000 ( 0.065) (1) = P325.00

Repayment happens when money is borrowed, then the total amount to be

paid back equals the principal borrowed plus the interest, wherein the money paid back
is in regular installment is either weekly or monthly.

NOTE: 1 year = 12 months = 52 weeks

Total Repayments = Principal + Interest

Monthly payment amount = principal + interest

loan period, T, in months

Weekly payment amount = principal + interest

loan period, T, in weeks

Here is a situation dealing with interest using specific installment arrangement for the
repayment of loan.
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Example 2: You purchase a laptop by obtaining a simple interest loan. The laptop costs
₱40,000.00, with an interest rate on the loan of 6%. If the loan is to be paid back in weekly
installments over 2 years, calculate:

(a) the amount of interest paid over 2 years

(b) the total amount/repayment to be paid back

(c) the weekly payment amount

GIven: P = P30,000.00 r = 6% t = 2 years

Required: I, F, weekly payment amount

Solution/Answer:

(a) I = Prt = P30,000.00 (0.06) (2) = P3,600.00

(b) Total Repayment = P + I = P30,000.00 + P3,600.00 = P33,600.00

(c) Weekly payment amount = Total Repayment = P33,600.00 = P323.08

Loan period, T, weeks 2 (52)

Activity 1: SIMPLE INTEREST

1. Your parents borrowed money for your school-related expenses in the amount
of P6,000.00 with a simple interest of 6.5% payable in 2 years, find the interest
they paid on top of the amount.

2. If ₱1,500 is the interest that you paid for the amount you borrowed at 8% rate
after 4 months, how much did you borrow?

3. Find the simple interest rate used on P10,000.00 that you invested if it earns
P300.00 for :
a. 60 days b. 5 months

4. If you have an amount to be saved/deposited, how long will it take for your
₱5,000.00 to earn P600.00 at 5% simple interest?

5. Accumulate or find the final amount that you would pay if you borrow ₱6,000.00
at 8% for 3 years.
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Ordinary and Exact Interests are the types of interest which may be used
when time is in terms of days, instead of years.

Ordinary Interest (Io) = 360 days in a year

Exact interest (Ie) = 365 days in a year

Note: Io > l e

Formula:

Io = P r (D/360)

Ie = P r (D/365)

where D = days

Here is a situation dealing with ordinary and exact interests used in the money
borrowed/loaned/invested.

Example 3: Find the ordinary and exact interests of ₱5,000 that you borrowed at 5%
which you agreed to pay in 90 days.

Given: P = P5,000.00 r = 5%=0.05 D = 90 days

Required: Io and Ie

Solution/Answer:

Io = P5,000.00 (0.05) (90/360) = P62.50

Ie = P5,000.00 (0.05) (90/365) = P61.65

Activity 2: ORDINARY AND EXACT INTEREST

1. Find the ordinary interest imposed if you borrow ₱3,500.00 to buy a cabinet at 5
½ % payable in 60 days.

2. Find the exact interest at 6% payable in 100 days on P8,500.00 that you lent to
your cousin.

3. Find the ordinary interest and the final amount to be paid on the ₱4,500.00 that
you borrowed to avail of the discounted price of a smartphone at 6.5% payable
in 90 days.

4. Find the exact interest and final amount based on the ₱10,500 that you invested
at 7.5% for 100 days.
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Finding the Exact Time and Approximate Time between Two Dates

When the time given occurs between two specific dates, you can compute the
exact or the actual time and the approximate time in the computation for the simple
interest.

In the exact time, you consider that in one calendar year, there are 365 days and
366 days for leap year; while in approximate time you consider 360 days in one year (30
days per month).

General Rule: Exclude the first day and include the last day in counting the exact number of days
between two dates.

Example 4: Find the approximate number of days from June 20, 2008 to April 27, 2010.

Note: Use the format YY MM DD or Year Months Days

Given: June 20, 2008 April 27, 2010

Required: Approximate number of days

Solution/Answer:

For June 20, 2008: YY = 2008 MM = 06 DD = 20

For April 27,2010: YY = 2010 MM = 04 DD = 27

YY (year) MM (months) DD Total

(days)

2010 04 => 4 27
=360+300+7
2008 06 => (Dec-Jun)=(12-6)=6 20

1 year 10 months => 4+6 7 days

1 (360) 10 (30) => 300 7 = 667 days

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Example 5: Find the exact or actual time from July 27, 2002 to May 18, 2003.

July 27 (31-27) = 4 days

August = 31 days

September = 30 days

October = 31 days

November = 30 days

December(2002) = 31 days

January (2003) = 31 days

February = 28 days

March = 31 days

April = 30 days

May = 18 days

------------------------------

295 days

Activity 3: EXACT TIME AND APPROXIMATE TIME

1: Find the approximate number of days from March 15, 2010 to August 22,
2011.

2: Find the exact number of days from October 10, 2010 to February 24, 2012.

3: Find the approximate number and exact/actual number of days from March
16, 2000 to December 10, 2000.
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Simple Discount

Discount (D) is the deduction from the maturity or final amount (F) of an
obligation for paying it on time. If interest is calculated based on the principal (P) at the
beginning of the interest period, discount (D) is calculated based on the amount (F) at
the end of the period.

The discount rate (d) for a given period of time (t) is the ratio of the discount
(D) for the period to the maturity value (F):

d = D/Ft

D = Fdt

P=F–D

P = F – Fdt

P = F(1 – dt)

where: D = Simple discount

F = Maturity value or Final amount

d = discount rate

t = time or term of discount (years)

P = Present value/Proceeds

Here is an example applying the concept of simple discount.

Example 6: Find the present value of ₱5,000.00 that you borrowed due at the end of 90
days if you would be given a simple discount of 6% for paying on time.

Given: F = ₱5,000 d = 0.06 t = 90 days or 1/4 year

360 days/year

Required: P

Solution/Answer:

D = Fdt

= (P5,000.00) (0.06) (1/4) = P75.00

P=F-D

= P5,000.00 - P75.00 = P4,925.00

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Activity 4: SIMPLE DISCOUNT

1. Find the amount due at the end of 60 days if the present value of the amount
that you lent is ₱8,000 with 5.5% simple discount.

2. A bank charges a simple discount rate of 8% per annum for a note due in 6
months. Calculate the maturity value of the note if the amount of the discount is
P75.

3. If your loan of ₱6,300 will be paid with ₱7,100 at the end of two years and 4
months, what is the simple discount rate?

4. Find the proceeds of P4,800 due in 6 months at 7% discount rate.

Promissory Notes

A promissory note is a written promise by a borrower (maker of the note) to

pay a sum of money (maturity value) on a date (maturity date).

It is an interest bearing note if the note states the rate of interest, thus, it is non-
interest bearing note if it does not state the rate of interest.

There are two types of notes:

● the simple interest note

● the bank discount note

These are the terms for you to take note:

Maker – refers to the borrower

Payee – is the person whom payment is due

Face value - connotes the principal amount borrowed

Maturity value - refers to the sum of face value and interest

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Maturity date – reflects the date when maturity value is due to the payee

Term of the note – is the length of time from the beginning date until maturity

Bank discount refers to the interest computed on the maturity value of the loan
to be deducted from the loan amount at loan date, to determine the net amount
to be received by the borrower.

Here are examples of Interest Bearing (IB) Promissory Note and Non-Interest Bearing
(NIB) Promissory Note.

Interest Bearing (IB) Promissory Note

Cebu City
August 19, 2020

P60,000.00

Ninety days after this date, I promise to pay Mr. Samuel Nuez the amount of
Sixty Thousand Pesos (P60,000.00).

Interest is at 8% simple interest.

Signed:

Mrs. Zinnia De Leon

As shown, the note has the following features:

● Face value is ₱60,000

● Date of the note is August 19, 2020 (the date when the promissory note was

made)

● Term of the note is ninety days

● Payee of the note is Mr. Nuez
● Maker of the note is Mrs. De Leon
● Interest rate of the note is 8% simple interest
● Maturity date of the note will be ninety days after August 19, 2020
● Maturity value is the total of the principal and interest earned which is due on
the maturity date.
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Non-Interest Bearing (NIB) Promissory Note

Example 7 : If you wrote a 90 day note for ₱10,000 on April 3, 2005 at 8% simple
interest and you sold the note to a bank giving a discount of 9% on June 5, 2005. How
much would you receive as proceeds from the sale of the note?

Given: P = ₱10,000

r = 8% or 0.08

d = 9% or 0.09

t = 90 days or 90/ 360 or ¼ or 0.25

Required:

(a) Maturity date (using actual number of days)

(b) Maturity value

(c) Term of discount

(d) Bank discount

(e) Proceeds

Solutions/Answers:

(a) Maturity Date

April 3 (30-3) = 27

May = 31

June = 30

July = 2 Maturity Date

90 days

(b) Maturity Value:

F = P(1 + rt)

= P10,000.00 (1 + (0.08)(90/360))

= P10,200.00
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(c) Term of discount:

June 5 (30-5) = 25

July 2 = 2

27 days

(d) Bank discount:

D = Fdt

= P10,200.00 (0.09) (27/360)

= P68.85

(e) Proceeds:

P=F-D

= P10,200.00 - P68.85

P = P10,131.15

Activity 5: PROMISSORY NOTES

1. Let’s assume that you signed a 150 day note with interest at 7% on August 20,
2020 and discounted at 6.5% on September 20, 2020. If the proceed was
P8,500.00, find the:
a. Maturity date
b. Term of discount
c. Maturity value
d. Face value of the note

2. On February 22, 2002, Peter draws a note promising to pay John P10,500, with an
interest of 6% for 90 days and a bank discount of 8% on March 16, 2002.

Find: a. maturity date (use actual days)

b. maturity value

c. term of discount

d. proceeds
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V REFERENCES

Arao, CoPo, Laddaran, Gabuyo, Villanueva (2015) Mathematics of Investment 2015

Edition

REX Bookstore, Manila Philippines

Mejia, L. DP, Y.A. Gabuyo, J.C. Ignacio, and J. Sajise (2008) Business Mathematics: A

Complete Textbook and Workbook. Books Atbp.Publishing Corp.

Arce, Ma. Teresa B. ,et al. (2010) Mathematics of Investment. REX Bookstore, Manila

Philippines

Caras, Madeleine S., et al. (2008) Mathematics of Investment. Bookstore Publishing 2008

Edition

Slater, J. (2008) Practical Business Math Procedures. Mc Graw Hill Irwin, Ninth Edition

Naval, Victoria C., et. al., (2007) Mathematics of Investment C& E Publishing

Inc.,2007 Edition

Hart, William L. Mathematics of Investment. 5th edition. DC Health and

Company, 1980

Sta. Maria, Antonina C., et. al., Mathematics of Investment National Bookstore

1988 Edition.

https://francisjosephcampena.weebly.com/uploads/1/7/8/6/17869691/chapter_1_mathe
matics_of_investment.pdf

https://www.youtube.com/watch?v=xWrAg5A7n4k&t=38s

https://www.youtube.com/watch?v=ZrWdptBwEPE&t=782s

VI MODULE EVALUATION

Kindly make use of this portion to express freely how you feel about this module as a
basis for its improvement and future revision.

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