Simple and Compound Interest

Formula for Simple Interest

𝐼=𝑃𝑟𝑡
where:
𝐼=𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑃=𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
𝑟=𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒
𝑡=𝑡𝑖𝑚𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

Example 1:
Calculate the simple interest earned in 1 year on a deposit of P10,000 if the interest rate is 5%.

Example 2:
Calculate the simple interest due on a 3-month loan of P25,000 with an interest rate of 4.75%.

Example 3:
Calculate the simple interest due on a 2-month loan of P55,000 if the interest rate is 1.5% per month.

Example 4:
Calculate the simple interest due on a 35-day loan of P37,500 if the annual interest rate is 8%.
Example 5:
The simple interest charged on a 6-month loan of P18,000 is P600. Find the simple interest rate.

The total amount of money due at the end of a loan period–The amount of the loan and the interest–is
called the maturity value of the loan.

Maturity Value = Principal + Interest

Example 6:
How much is paid at the end of the two years for a loan of Php8,000,000 if the total interest is
Php660,000?

Example 7:
Mr. Manrisa can purchase furniture with a two-year simple interest loan at 9% interest per year. What
is the maturity value for a Php250,000 loan?
Example 8:
To buy food preparation equipment for his restaurant, the owner of Eusebio Company borrowed
Php1,800,000 for 1 ½ years and paid Php 202,500 simple interest on the loan. What rate of interest did
he pay?

Example 9:
Mrs. Fernandez wanted to borrow money to expand her photography business. She was told she could
borrow a sum of money for 18 months at 6% simple interest per year. She thinks she can afford to pay
as much as Php 54,000 in interest charges. How much money could she borrow?

Example 10:
Iviona’s Company borrowed Php 240,000 at 7% simple interest per year to buy new computers. If it
paid Php 42,000 interest, what was the duration of the loan?

Example 1:
Find the ordinary and exact interest for a loan of 500 at a 7% annual interest rate. The loan was made
on March 15 and is due May 15
Example 11:
How much interest is earned in 2 years on P40, 000 deposited in banks paying 6% interest,
compounded quarterly?

Example 12:
Calculate the compound amount when P10,000 is deposited in an account earning 8% interest,
compounded semi-annually, for 4 years.

Example 13:
Calculate the future value of Php5000 earning 9% interest, compounded daily, for 3 years.

Equivalent Rates
● The annual equivalent rate (AER), or effective rate, is the interest rate on a loan or financial
product restated from the nominal interest rate expressed as the equivalent interest rate if
compounding occurred annually.

𝑟 𝑛
𝐴𝐸𝑅 = (1 + 𝑛
) −1
where:
n–number of compounding periods
r–stated interest rate or nominal interest rate

Example 1:
Ms. Bordador buy a certificate deposit with a 12% stated annual interest rate. If the bank compounds
the interest every month (that is, 12 times per year). What is the annual equivalent rate of 12%?

Example 2:
Bond A offers a semi-annual coupon rate of 3%. The nominal rate of the bond is 6% since it is two 3%
coupons. Bond B, on the other hand, offers a quarterly coupon rate of 1.5%. The nominal rate of the
bond is still 6%. A rational investor will select which of the two bonds?

Example 3:
An investor wishes to sell all the securities in their investment portfolio and place all the proceeds in a
savings account. The investor is deciding between placing the proceeds in Bank A, Bank B, or Bank C,
depending on the highest rate offered. Bank A has a quoted interest rate of 3.7% that pays interest on
an annual basis. Bank B has a quoted interest rate of 3.65% that pays interest quarterly, and Bank C
has a quoted interest rate of 3.7% that pays interest semiannually

Annuities

What is an annuity?
● A contract between a person(annuitant) and an insurance company(insurer) for receiving and
disbursing money for the annuitant or the beneficiary of the annuitant.

PHASES
Accumulation phase of an annuity: the time when money is being paid into the fund and earnings
are being added to the fund
Liquidation or payout phase of an annuity: the time when the annuitant or beneficiary is receiving
money from the fund
 ● During both phases of the annuity the fund balance may earn compound interest
● An annuity is purchased by making either a single lump-sum payment or a series of periodic
payments
● Under the terms of the contract, the insurer agrees to make a lump-sum payment or periodic
payment to you beginning at some future date
● This investment option is a long-term investment option that is commonly used for
retirement planning as a college fund for small children
● Pension: an arrangement to provide people with an income when they are no longer earning a
regular income from employment, typically provided by an employer
● Penalties are normally applied if funds are withdrawn before a time specified in the
agreement
● There are many options to consider when purchasing an annuity. You can choose how the
money is invested (stocks, bonds,money market instruments or a combination of these) and
the level of risk of the investment
● High-risk options have the potential to earn a high rate of return but the investment maybe at
risk
● Low-risk options normally earn a lower rate of interest but the risk is also lower
● A guaranteed rate of interest has no risk at all on the principal and guarantees a specific
interest rate

PERA is a voluntary retirement account established by and for the exclusive use and benefit of the
contributor for the purpose of being invested solely in PERA investment products in the Philippines.
PERA is tax deductible for a maximum of Php100,000 per year.

P.E.R.A. - Personal Equity and Retirement Account (R.A. 9505)

Some private companies that offer PERA products:

● Security Bank
● BDO
● AXA
● Manulife

Types of Annuity according to when payment is made into the fund

Ordinary annuity: an annuity for which payments are made at the end of each period
Annuity due: an annuity for which payments are made at the beginning of each period
Future Value of an Ordinary Annuity

( )(1 + 𝑅)
𝑁
(1+𝑅) −1
𝐹𝑉𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒 = 𝑃𝑀𝑇 𝑅

Where:
PMT=periodic payment
R=periodic interest rate
N=number of payment

Example
Find the future value of an ordinary annuity of Php1,000 paid monthly at 5.25% for 10 years.

Find the future value of an annuity due of Php500 monthly at 5.75% for 5 years.

Sinking Funds
● An account containing money set aside to pay off a debt or bond
● It is often used to accumulate a desired amount of money by the end of a certain period of
time to pay off a financial obligation, to use for a retirement or college fund, or to reach a
specific goal such as retiring a bond issue or paying for equipment replacement and
modernization.

Paymet Future Value

Sinking Fund Unknown Known

Accumulation Phase of an Known Unknown

Annuity

Present value of an annuity: the amount needed in a fund so that the fund can pay out a specified
regular payment for a specific amount of time.

Sinking Fund Payment

𝑃𝑀𝑇𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 = 𝐹𝑉 ( 𝑅
(1+𝑅) −1
𝑁 )
FV=desired future value
R=periodic interest rate
N=number of payments
For an annuity due the formula is:
𝑟
𝑛
𝑃𝑀𝑇 = 𝐹 𝑟 𝑟 𝑛𝑡
(1+ 𝑛 )⎡(1+ 𝑛 ) −1⎤
⎣ ⎦

Problem:
Debbie wants to have ₱1,000,000 in a retirement fund to supplement her retirement. She plans to work
for 20 more years and has found an annuity fund that earns 5.5% annual interest. How much does she
need to contribute to the fund each month to reach her goal?

Statistics
● Derived from the latin word status or ‘state’. Early uses of statistics involved compilation of
data and graphs describing various aspects of the state of country
● Has two basic meanings. Sometimes used when referring to an actual numbers derived fro4m
data and the other refers to statistics as a method of analysis.

Some importance of statistics:

● In public health
● In education/schools
● In sports
● In business and economy
● In Social Science
● In Agriculture
● In Psychology

Statistics is a science that deals with the collection, presentation, analysis and interpretation of
quantitative data
Collection refers to the gathering of information or data
Organization or presentation involves summarizing data or information in textual, graphical or
tabular form
Analysis involves describing the data by using statistical methods and procedures
Interpretation refers to the process of making conclusions based on the analyzed data

Natures of Statistics
● The origin of statistics can be traced to two areas of interest that have very little in common:
government(political science) and games of chance
● Governments have long used censuses to count persons and property. The problem of
describing, summarizing, and analyzing census data has led to the development of methods,
which, until recently, constituted about all there was to the subject of statistics. These
methods make up what we know call descriptive statistics. This includes anything done to the
 data, which is designed to summarize or describe, without going any further, that is, without
attempting to infer anything that goes beyond the data
● Statistical information based on analyses made on only a part of a large set of data utilizes
methods that go beyond mere description of the data. Tat is statistical inference

Divisions of Statistics
● The study of statistics is divided into two categories: descriptive statistics and inferential
statistics
● Descriptive Statistics is a statistical procedure concerned with describing the characteristics
and properties of a group of persons, places or things. Generally, descriptive statistics involves
gathering, organizing, presenting, and describing data
● Inferential Statistics is a statistical procedure that is used to draw inferences or information
about the properties or characteristics by a large group of people, places, or things or the
bases of the information obtained from a small portion a large group
● It comprises those methods concerned with the analysis of a subset of data leading to
predictions about the entire set of data

DEFINITIONS
● Population - to a large collection of objects, persons, places, or things
● Sample - a small portion or part of a population, it could also be defined as a subgroup, subset
or a representative of the population
● Parameter - any numerical or nominal characteristic of a population it is a value or
measurement obtained from a population
● Statistics - an estimate of a parameter, it is any value or measurement obtained from a sample
● Data (singular form-datum) are facts or a set of information or observations under study.
More specifically, the researcher gathers data from the population or from the sample. Data
may be classified into two categories; qualitative and quantitative
● Qualitative data are data that can assume values that manifest the concept of attributes.
These are sometimes called categorical data. Data falling in this category cannot be subjected
to meaningful arithmetic. They cannot be added, subtracted or divided (ex: gender, year level,
subjects enrolled this sem, student number)
● Quantitative data are data that are numerical in nature. These are data obtained from
counting or measuring. In addition, meaningful arithmetic operations can be done with this
type of data (ex: age, height, weight)
● Variable is a characteristic or property of a population or sample, which makes members
different from each other. If a class consists of boys and girls, then gender is a variable in this
class. Height is also a variable since different people have different heights. Variables may be
classified on the basis of whether they are discrete or continuous and whether they are
dependent or independent
● Discrete variables represent count data such as a number of students in class, number of
defective items in a box, number of highway fatalities in a year in a given province.
● Continuous Variable represent measure data such as heights, weights, temperatures,
distances, or life periods
● Dependent variable is a variable, which is affected or influenced by another variable
● Independent variable is one that affects or influences another variable
● Constant is a property or characteristic of a population or sample, which makes the members
of the group similar to each other.
LEVELS OF MEASUREMENT
● another common way to classify data is to use four levels of measurement. The level of
measurement of data determines the algebraic operations that can be performed and the
statistical tools that can be applied to the data set

Level 1. Nominal
- This is the most primitive level of measurement. The nominal level of measurement is used
when we want to distinguish one object from another for identification purposes. In this
scale, we can only say that one object is different from another, but the amount of difference
between them cannot be determined. We cannot tell that one is better or worse than the
other. Gender, nationality, and civil status are of nominal scale
Level 2. Ordinal
- In the ordinal level of measurement, dta are arranged in some specified order or rank. When
objects are measured in this level, we can say that one is greater than the other, but we cannot
tell how much more of the characteristics one has than the other. The ranking of contestants
in a beauty contest, of siblings in a family, of honor students in a class are of ordinal scale.
Level 3. Interval
- If data are measured in the interval level, we can say not only that one object is greater or less
than another, but we can also specify the amount of difference. The scores in an examination,
and temperature (in C) are of the interval level of measurement
Level 4. Ratio
- The ratio level of measurement is like the interval level. The only difference is that the ratio
level always starts from the absolute or true zero point. In addition, in the ratio level, there is
always the presence of units of measures. Examples are height, width, and area.

DESCRIPTIVE MEASURES
Measures of Central Tendency
● A single value that is used to identify the ‘center’ of the data
○ It is thought of as a typical value of the distribution
○ Precise yet simple
○ Most representative value of the data

Mean
● Most common measure of the center
● Also known as arithmetic average
● Properties
● May not be an actual observation in the data set
● Can be applied in at least interval level
● Easy to compute
● Every observation contributes to the value of the mean
● Subgroup means can be combined to come up with a group mean (use weighted mean)
● Easily affected by extreme values

Median
● Divides the observations into two equal parts
○ If the numbers of observations is odd, the median is the middle number
○ If the number of observations is even, the median is the average of the 2 middle
numbers

● Sample median denoted as , while the population median is denoted as \

● Properties
● May not be an actual observation in the data set
● Can be applied in at least ordinal level
● A positional measure; not affected by extreme values
Mode
● Occurs most frequently
● Nominal average
● May or may not exist
● Properties
● Can be used for qualitative as well as quantitative data
● May not be unique
● Not affected by extreme values
● Can be computed for ungrouped and grouped data

Mean, Median, and Mode

Use mean when:
● Sampling stability is desired
● Other measures are to be computed
Use median when:
● The exact midpoint of the distribution is desired
● There are extreme observations
Uses mode when:
● When the ‘typical’ alue is desired
● When the dataset is measured on a nominal scale

Measures of Location
● Summarizes a data set by giving a value within the data values that describes its location
relative to the entire data set arranged according to magnitude (called an array)
Some common measures:
● Minimum, maximum
● Percentiles, deciles, quartiles

Maximum and Minimum

● Minimum is the smallest value in the data set, denoted as MIN
● Maximum is the largest value in the data set, denoted as MAX

Percentiles
● Numerical measures that give the relative position of a data value relative to the entire data
set
● Divide an array (raw data arranged in increasing or decreasing order of magnitude) into 100
equal parts
𝑡ℎ
● The 𝑗 percentile, denoted as 𝑃µ is the data value in the data set that separates the bottom j%
of the data from the top (100-j)%
 ● Example:
○ Suppose LJ was told that relative to the other scores on a certain test, his score was
the 95th percentile
■ This means that (at least) 95% of those who took the test had scores less than
or equal to LJ’s score, while (atleast) 5% had scores higher than LJ’s.

Deciles
● Divide an array into 10 equal parts, each part having then percent of the distribution of the
data values, denoted by 𝐷𝑗.
● The 1st decile is the 10th percentile; the 2nd decile is the 20th percentile….

Quartiles
● Divide an array into four equal parts, each part having 25% of the distribution of the data
values, denoted by 𝑄𝑗.
● The 1st quartile is the 25th percentile; the 2nd quartile is the 50th percentile, also the median
and the 3rd quartile is the 75th percentile

Measures of Variation
● A measure of variation is a single value that is used to describe the spread of the distribution
○ A measure of central tendency alone does not uniquely describe a distribution

A look at dispersion
TWO TYPES OF DISPERSION

Absolute Measures of Dispersion

● Range
● Interquartile range
● Variance
● Standard deviation
Relative Measure of Dispersion
● Coefficient of Variation

Range
● The difference between the maximum and minimum value in a data set, i.e.
𝑅 = 𝑀𝐴𝑋 − 𝑀𝐼𝑁
● Example:Pulse rates of 15 male residents of a certain village

● Properties
○ The larger the value of the range, the more dispersed the observations are
○ It is quick and easy to understand
○ A rough measure of dispersion

Inter-Quartile Range (IQR)

● The difference between the third quartile and first quartile, i.e.
𝐼𝑄𝑅 = 𝑄3 − 𝑄1

● Example:Pulse rates of 15 residentes of a certain village

● Properties
○ Reduces the influence of extreme values
○ Not as easy to calculate as the range
Variance
● Important measure of variation
● Shows variation about the mean
Population variance:

Sample variance:

Standard Deviation (SD)

● Most important measure of variation
● Square root of variance
● Has the same units as the original data

● Computation of Standard Deviation

● Remarks on Standard Deviation

○ If there is a large amount of variation, then on average, the data values will be far
from the mean, hence, the SD will be large
 ○ If there is only a small amount of variation, then on average, the data values will be
close to the mean. Hence, the SD will be small
● Comparing SD (comparable only when units of measure are the same and the means are not
too different from each other)

● Properties
○ The most widely used measure of dispersion (chebychev’s inequality)
○ Based on all the items and is rigidly defined
○ Used to test the reliability of measures calculated from samples
○ It is sensitive to the presence of extreme values
○ It is not easy to calculate by hand (unlike the range)
Chebyshev’s Rule
● Permits us to make statements about the percentage of observations that must be within a
specified number of standard deviation from the mean
● The proportion of any distribution that lies within k standard deviations of the mean is at
1
least 1 − ( 2 ) where k is any positive number larger than 1
𝑘

● This rule applies to any distribution

● For any data set with mean (µ) and standard deviation (SD), the following statements apply:
○ At least 75% of the observations are within 2SD of its mean
○ At least 88.9% of the observations are within 3SD of its mean
Illustration

● Example:
The midterm exam scores of 100 STAT 1 students last semester had a mean of 65 and a
standard deviation of 8 points.
● Applying the Chebyshev;s Rule, we can say that:
a. At least 75% of the students had scores between 49 and 81
b. At least 88.9% of the students had scores between 41 and 89.

Coefficient of Variation (CV)

● Measure of relative variation
● Usually expressed in percent
● Shows variation relative to mean
● Used to compare 2 or more groups
Formula:
𝐶𝑉 = ( 𝑆𝐷
𝑀𝑒𝑎𝑛 ) × 100%
● Comparing CV’s
● Stock A: Average Price=P50
SD=P5
CV=10%
● Stock B: Average Price=P100
SD=P5
CV=5%
Measure of Skewness
● Describes the degree of departures of the distribution of the data from symmetry
● The degree of skewness is measured by the coefficient of skewness, denoted as SK nad
computed as;
3(𝑀𝑒𝑎𝑛−𝑀𝑒𝑑𝑖𝑎𝑛)
𝑆𝐾 = 𝑆𝐷

What is Symmetry?
● A distribution is said to be symmetric about the mean, if the distribution to the left of the
mean is the ‘mirror image’ of the distribution to the right of the mean. Likewise, a symmetric
distribution has SK=0 since its mean is equal to its median and its mode

Measure of Skewness

Measure of Kurtosis
● Describes the extent of peakedness or flatness of the distribution of the data
● Measured by coefficient of kurtosis (K) computed as;
Box-and-Whiskers Plot
● Concerned with the symmetry of the distribution and incorporates measures of location in
order to study the variability of the observations
● Also called as box plot or 5-number summary (represented by Min, Max, 𝑄1, 𝑄2, 𝑎𝑛𝑑 𝑄3)
● Suitable for identifying outliers
● The diagram is made up of a box which lies between the first and third quartiles
● The whiskers are the straight lines extending from the ends of the box to the smallest and
largest values that are not outliers
STEPS: