MATHEMATICS OF FINANCE

MARK UP, MARK DOWN / SIMPLE INTEREST / COMPOUND INTEREST

AN N U IT I E S / AMORTIZATI ON / SIN KIN G FU N D / L IFE IN SU R AN C E
MARK UP, MARK DOWN
MARK UP
→ the value added to the price to cover the operating expenses and provide profit
to the owners.

M = SP - C SP = C + M C = SP - M

where
M = Mark up
SP = Selling Price
C = Cost
Ex:
1. A washing machine costing ₱3,544 is sold for ₱4,792. What is the amount for mark
up?

Solution:
M = ₱4,792 - ₱3,544
= ₱1,248
MARK DOWN
→ a price reduction from the original selling price of merchandise.

Markdown = Original Selling Price - Sale Price

Markdown rate = Markdown / Original Selling Price

SALE PRICE
→ the promotional price of merchandise after a markdown

Sale Price = Original Selling Price x (100% - Markdown rate)

Ex:
1. Sofia has some shirts in her boutique that have not been sold. She decided to mark
them down from ₱850 to ₱552.50, what percentage did she mark them down.

Solution:
Markdown = ₱850 - ₱552.50
= ₱297.50

Markdown rate = ₱297.50 / ₱850

= 0.35 or 35%
SIMPLE INTEREST
INTEREST
→ the fee or rent that lenders charge to borrowers for the temporary use of the borrowed
money.

SIMPLE INTEREST
→ calculated only on the original principal amount and is paid at the end of the loan
period.

I I
I  Prt P t
where: rt Pr
I = simple interest r = annual rate of interest
P = principal t = time
Ex:
What amount of interest will be charged on ₱7,300 borrowed for 3 years at a simple
interest rate of 12% per annum

Solution:
P = ₱7,300 r = 12% = 0.12 t = 3 years

I = Prt
= ₱7,300(0.12)(3)
= ₱2,628
ORDINARY INTEREST (Io)
→ computed based on 360 days in a year.
Io = Pr (no. of days / 360 days)

EXACT INTEREST (Ie)

→ computed in a 365 days in a year
Ie= Pr (no. of days / 365 days)

INTEREST BETWEEN DATES

1. Actual Time - uses the exact number of days in every specific month
2. Approximate Time - uses 30 days in every month
Ex:
Find the interest on ₱28,700 at 7.3% from March 14, 2020 to August 16, 2020 using
the following:

(a) Ordinary interest using actual time,

(b) Exact interest using actual time
Solution:
(a) Ordinary interest using actual time Month Actual Time

March 14, 2020 31 - 14 = 17

Io = ₱28,700(0.073)(155 / 360)
April 30
= ₱ 902.06
May 31
June 30

(b) Exact interest using actual time July 31

August 16, 2020 16
Ie = ₱28,700(0.073)(155 / 365)
TOTAL 155
= ₱889.70
Ex:
Determine the exact and ordinary interest on ₱15,800 at 12% from March 1, 2020 to
October 6 of the same year using approximate time.

Month Approximate Time

March 1, 2020 30 - 1 = 29
April 30
May 30
June 30
July 30
August 30
September 30
October 6
TOTAL 215
Solution:
(a) Ordinary interest using approximate time
Io = ₱15,800(0.12)(215 / 360)
= ₱ 1,132.33

(b) Exact interest using approximate time

Ie = ₱15,800(0.12)(215 / 365)
= ₱1,116.82
Final Amount
→ It is the amount due a lender receives at the end of the term.

F=P+I
or
F = P + Prt

F = P ( 1 + rt ) By factoring
Ex:
Ms. A makes an investment by lending ₱24,000 to Mr. X for 2 years at an interest rate of 11%
per annum. What is the maturity value of the investment?

Solution: Alternative solution:

I = Prt
F = ₱24,000[1 + (0.11)(2)] = ₱24,000(0.11)(2)
= ₱24,000(1.22) = ₱5,280
= ₱29,280
F=P+I
= ₱24,000 + ₱5,280
= ₱29,280
COMPOUND INTEREST
COMPOUND INTEREST
→It is interest calculated on the initial principal, which also includes all of the
accumulated interest of previous periods of a deposit or loan.

where
S = compound amount

S  P(1  i) n P = principal
i = interest rate per conversion period
n = number of conversion period for t years
t = number of years
Ex:
2. What principal you have to deposit in a 4.5% saving account compounded
monthly in order to have a total of ₱10,000 after 8 years?

Solution:
A = P(1 + 0.045 / 12) 12 × 8 = 10,000
P = 10,000 / ( (1 + 0.045 / 12) 12 × 8 )
= ₱6981.46
Present Value At Compound Interest

→ The principal that will amount to a given or specified future date.

S
S  P(1  i) n
P or P  S(1  i) -n

(1  i) n

where
P = present value
S = compound amount
i = nterest rate
n = number of years
Ex:
1. Find the present value of P 9,260 due in 10 years if money is worth 15%
compounded quarterly.

Solution :
P = P9,260 ( 1+ .15/4)^-40
= P9,260 (1+0.0375)^-40
= P9,260 (1.0375)^-40
= P2,123.67
EFFECTIVE RATE

→ the equivalent of an interest rate for conversion period to an annual rate.

where
w = effective rate
j
w  (1  )  1m m = number of conversion period per year
m j = nominal rate
Ex:
1. Find the effective rate equivalent to 7% compunded semi-annually.

Solution:
j m
w  (1  ) 1
m
0.07 2
w  (1  ) 1
2
 0.0712 or 7.12%
NOMINAL RATE

→ an interest compounded more than one per year.

where
w = effective rate

j  m  (1  w)
1
m 
 1 m = number of conversion period per year
 
j = nominal rate
Ex:
1. Find the nominal rate equivalent to 12% compounded quarterly.

Solution:

j  m (1  w)  1
 1
m

 
j  4 (1  .12) 4  1
 1

 
 0.1149 or 11.49%
ANNUITIES
Annuities
→ a series of payments made at equal intervals.

Classification of Annuity
(1) Annuity Certain - an annuity whose term is fixed , the term start and end on definite
date like monthly payments on installment purchases.
(2) Contingent Annuity - one whose term depends on some uncertain events such as life
insurance policies
(3) Perpetuity - an annuity whose payments last forever.
(4) Simple Annuity - an annuity in which the payment period is same as the interest period.
Three kinds of annuity

(1) Ordinary Annuity - the payment is made at the end of each period.
(2) Annuity Due - the payment is due at the beginning of each period.
(3) Deferred Annuity - an annuity whose first payment will be at some
future date.
AMOUNT OF AN ORDINARY ANNUITY (S)

→ the total of all the periodic payments at the end of the term.

 (1  i) n  1
S  R 
 i 
where
S = the amount of an ordinary annuity at the end of n periods
R = periodic payment
n = number of periods or payments
i = rate per conversion period
PRESENT VALUE
→ an ordinary annuity is the total of the present value of all the
periodic payments.

1 - (1  i) n 
A  R 
 i 
where
A = Present value of an ordinary annuity
R = periodic payment
n = number of conversion period
i = interest rate per conversion period
Ex:
AMORTIZATION
AMORTIZATION
→ an accounting technique used to periodically lower the book value of a loan or
intangible asset over a set period of time.

→ used in the process of paying off debt through regular principal and
interest payments over time.
AMORTIZATION SCHEDULE

→ is a complete table of periodic loan payments that shows the amounts of

principal and interest that comprise each payment, until the loan is paid off at the end of
its term.
Ex:
SINKING FUND
SINKING FUND

→ an account that is used to deposit and save money to repay a debt or replace a
wasting asset in the future.
1
RS
 (1  i ) n  1
where  
 i 
R = periodic payment
s = amount of an ordinary annuity at the end of n periods
n = number of periods or payments
i = rate per conversion period
LIFE INSURANCE
LIFE INSURANCE

→ an insurance policy whose holder will benefit from the insurer a

designated sum of money in exchange for a premium.
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