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Chapter 5 (Mathematics of Finance and Optimization)
Chapter 5 (Mathematics of Finance and Optimization)
Chapter 5 (Mathematics of Finance and Optimization)
in the Modern
World
Chapter 5:
Mathematics of
Finance and
Optimization
5.1 Types of Interest
According to Biehler (2008), interest is the “rent”
that a borrower pays a lender to use the lender’s
money. It is paid in addition to the original
amount borrowed. There are various types of
interest rates.
• Simple interest
• compound interests
Definition of terms
A = P (1+RT)
Example 1
Marjorie borrowed ₱5000.00 at 10% simple interest rate for 6 months. How
much must she pay at the end of the period?
Solution:
Solution:
10660
A = P(1 + RT) so that 𝑃 = 1 = ₱10,250.00
1+(0.12)(3)
Compound interest includes interest earned on
interest.
In general, we let
A = the total amount to be earned at the end of the term
P = the amount of money borrowed (the principal)
R = the interest rate
n = term (in years).
𝑛
𝐴 =𝑃 1+𝑅
If the interest is compounded q times per year,
then
𝑅 𝑛𝑞
𝐴 = 𝑃〖(1 + )〗
𝑞
Example 3
Solution:
𝐴 = 5000(1 + 0.06)10 = ₱ 8,954.24
5.2 Annuity
An annuity is a series of payments made at equal
time periods with interest. It should be
emphasized that in annuities, there is a succession
of deposits or a succession of payments made at
equal time periods. Examples of annuities include
payment of social security premium, loans and
mortgages. The term of an annuity is the time
from the start of the first payment period to the
end of the last payment period.
A sum of money to which an annuity’s payments
and interest accumulate in the end is called the
annuity’s future value. A sum of money paid at the
beginning of an annuity to which the annuity’s
payments are accepted as equivalent, is called the
annuity’s present value. Corresponding to future
value, we ask how much money will be accrued,
including interest, if we make regular deposits into
a bank. In present value, we ask how much money
we need to have in the bank now, taking into
account interest, in order to make a sequence of
regular payments in the future.
Example 1
Solution:
𝑎 1−(1+𝑖)−𝑛 .
𝑛|𝑖= 𝑖
Example 2
The City School District I of Parañaque, Philippines acknowledges itself to owe and, for value
received, promises to pay the bearer SIX HUNDRED THOUSAND PESOS on December 23, 2019, with interest
on said sum after December 23, 2016, at the rate of 4.3% per annum, payable semi-annually, until the
principal is paid. Furthermore, all such sums are payable at the main office of the Metro National Bank of
the Philippines. Signed by authority of the School Board of said school district.
Hernan Luna ___
Chairman of the School Board
No. 6 ₱12, 900 No. 5 ₱12, 900
On December 23, 2019, City School District I, On June 23, 2019, City School District I,
Parañaque, Philippines, will pay the bearer at the Parañaque, Philippines, will pay the bearer at the
Metro National Bank of the Philippines the sum of Metro National Bank of the Philippines the sum of
Twelve Thousand and Nine Hundred Pesos for Twelve Thousand and Nine Hundred Pesos for
interest due then on its School Building Bond of interest due then on its School Building Bond of 2016
2016 dated December 23, 2016. dated December 23, 2016.
𝐹−𝐿
NAV = 𝑂
Where:
F = Fund Assets L = Fund Liabilities O= Outstanding Shares
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
No. of Shares =
𝑁𝐴𝑉
Example 1
(b)
x 10 500,000 10,000
y 10 950,000 15,000
Available resource 14.5 million
The relationship between the cost of construction
and the available budget can be described as
Protein (g) Carbohydrates (g) Fat (g) Cost per serving (PhP)
A 6 2 3 10
B 3 3 4 12
Let
x be the number of servings of food A that the student should take
y be the number of servings of food B that the student should take.