FINANCIAL

MATHEMATICS
 LEARNING OUTCOMES
At the end of the lesson, the students are able to:
• Illustrate simple and compound interest
• Distinguish simple interest from compound interest
• Compute the accumulated value of a certain amount of
money
• Compute the accumulated value of a series of periodic
payments (annuity)
• Construct an amortization schedule when paying off a
loan
INTRODUCTION
Almost everyday, money is
borrowed and loaned in thousands
of transactions amounting, in total,
to hundreds of millions of pesos.

It is essential that every individual

would perform and explain the
computation of interest in
borrowing/lending transactions.
 Lender or creditor = person (or
institution) who invests the money or
makes the funds available.
 Borrower or debtor = person (or
institution) who owes the money or
avails of the funds from the lender.
Origin or loan date= date on which
money is received by the borrower.
Repayment date or maturity date =
date on which the money borrowed,
or loan, is to be completely repaid.
A component that is common to all
financial transactions is the
investment of money at interest.
Interest = the fee or rent that lenders
charge to borrowers for the
temporary use of the borrowed
money.
SIMPLE AND COMPOUND
INTEREST
 SIMPLE INTEREST

The type of interest that most

commonly calculated in short-
term loans. It is based on the
entire amount of the loan for
the total period of the loan.
 Interest = Principal (P) x Rate (r) x Time (t)

P
Principal amount of the loan or
investment
r
Interest rate – percentage of the principal that will be charged
for specified period of time
t
Time / term of the
investment,
 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒅𝒂𝒚𝒔 𝒃𝒆𝒕𝒘𝒆𝒆𝒏𝒕𝒘𝒐 𝒅𝒂𝒕𝒆𝒔
𝒕=
𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒅𝒂𝒚𝒔 𝒊𝒏 𝒂 𝒚𝒆𝒂𝒓

Since simple interest is usually assumed for short-term

transactions, the abovementioned time is considered to
be a fraction of a year and is determined under different
conventions: (1) Exact Interest
(2) Ordinary Interest
 Exact number of days between
dates is used and the number of
days in a year is taken to be 365
days (366 days for leap years)

EXACT INTEREST
Each month is said to have 30 days
and the number of days in a year is
taken to be 360 days (i.e. 12 x 30)

ORDINARY INTEREST
 EXAMPLE 1

Find the interest on ₱28,700 at 7.3% from March

14, 2017 to August 16, 2017 using
(a) Exact interest
(b) Ordinary interest
 NOTE
(1) Rate must be converted to a decimal or
fraction before substituting to any
formula.
(2) Time period is computed in terms of
years. This means that time period
expressed in months or days must be
converted to a fraction of a year before
substituted into the formula for t unless
stated otherwise.
 SOLUTION
MONTH TIME - DAYS TIME - DAYS
(EXACT INT.) (ORDINARY
INT.)
MARCH (14) 31 – 14 = 17 30 – 14 = 16

APRIL 30 30
MAY 31 30
JUNE 30 30
JULY 31 30
AUGUST 16 16
(16)
TOTAL 155 152
SOLUTION AND ANSWERS
The principal amount is ₱28,700. The interest
rate is 0.073 (7.3% in decimal form).
The time for each convention are the following:

Thus, the amounts of interest (using I = Prt)

accordingly are
 EXAMPLE 2
Suppose that Felisa borrowed ₱25, 000 from the
Provident Fund on March 8 and pays the entire sum
including interest on October 3 of the same year, and that
the interest rate is 5%. Find the amount of interest
earned, if it is computed using
(a) Exact interest
(b) Ordinary interest
 SOLUTION
MONTH TIME - DAYS TIME - DAYS
(EXACT INT.) (ORDINARY INT.)

MARCH (8) 31 – 8 = 23 30 – 8 = 22

APRIL 30 30
MAY 31 30
JUNE 30 30
JULY 31 30
AUGUST 31 30
SEPTEMBER 30 30

OCTOBER (3) 3 3

TOTAL 209 205

SOLUTION AND ANSWERS
Thus, the principal amount is ₱25, 000. The
interest rate is 0.05 (5% in decimal form).
The time for each convention are the following:

Thus, the amounts of interest (using I = Prt)

accordingly are
 EXAMPLE 3
What amount of interest will be charged on ₱7,300
borrowed for 3 years at a simple interest rate of 12% per
annum?
SOLUTION

Given: P (principal) = ₱7,300, r (rate) = 12% = 0.12

t = 3 years
The amount of interest payable at the end of the loan
period is 𝑰 = Prt = (7,300) × (0.12) × (3) = ₱2,628.
Thus, the principal will earn an interest of ₱2,628.
 ACCUMULATED VALUE
In an investment transaction, the value of a principal plus the total
interest accrued during the term is termed as its accumulated value
or future value and we shall denote it by A. Thus,

Where P is the principal amount and I is the interest earned.

At times, it is called the maturity value of the

CREDITS: This presentation template was created by
loan or
Slidesgo, incluiding icons investment
by Flaticon, and
infographics & images by Freepik.
 ACCUMULATED VALUE UNDER
SIMPLE INTEREST
If a principal amount P is invested for a term t ()
earns simple interest at a rate r, then its accumulated
value at the end of the term is given by

CREDITS: This presentation template was created by

Slidesgo, incluiding icons by Flaticon, and
infographics & images by Freepik.
 EXAMPLE 4
Aaron makes an investment by lending ₱24,000 to
Bartolome for 2 years at an interest rate of 11% per
annum. What is the accumulated value of the
investment?
SOLUTION
Given: P (principal) = ₱24,000, r (rate) = 11% =
0.11, t = 2 years
The accumulated value of the investment is:
𝐴 = 𝑃(1 + 𝑟𝑡)
= Thus, Bartolome should
= pay Aaron ₱29,280.
= ₱29,280
 EXAMPLE 5
Maria paid ₱9,250 on a loan made 6 months before at
10% simple interest. Find the interest generated.
SOLUTION
Given: A (accumulated value) = ₱9,250,
r (rate) = 10% = 0.10, t = 6 months = 0.50 year
In this particular example, the formula for accumulated
value will be used to solve in terms of the principal, P.
𝐴 = 𝑃(1 + 𝑟𝑡)


 EXAMPLE 5
Maria paid ₱9,250 on a loan made 6 months before at
10% simple interest. Find the interest generated.
SOLUTION
After obtaining the value of the principal, compute for
the interest, using the accumulated value formula,
solving for I
𝐴=𝑃+𝐼



Thus, the interest will amount to ₱440.48.
 SEATWORK

1. If a nine-month term deposit at a bank earns a simple interest

rate of 9% per annum, how much will have to be deposited to
earn ₱225 of interest?
2. Abel placed ₱18,000 in a 240-day term deposit earning 8 ½%
per annum. How much will the bank pay Abel on the maturity
date?
3. What is the principal amount of ₱5,275 due in 6 months if 11%
interest is paid?
1. If a nine-month term deposit at a bank earns a simple interest rate
of 9% per annum, how much will have to be deposited to earn ₱225
of interest?
2. Abel placed ₱18,000 in a 240-day term deposit earning 8 ½% per
annum. How much will the bank pay Abel on the maturity date?
3. What is the principal amount of ₱5,275 due in 6 months if 11%
interest is paid?
 COMPOUND
INTEREST
The type of interest that is periodically
calculated and added to the principal.
Investments made at a compound interest has
the property that the interest earned at the end
of one period is automatically invested in the
next period to earn additional interest.
 EXAMPLE

Suppose you received ₱10,000 as a Valentine’s

gift and you plan to invest it for 5 years. A
cooperative group offers 2% simple interest rate
per year. A bank offers 2% compounded
annually. What will you choose and why?
 SIMPLE INTEREST
Time Principal Interest Simple Interest Amount after t years (Maturity
(t) (P) rate (r) value)
Solution Answer

1 10,000 2% = 0.02 10,000(0.02)(1) 200 10,000 + 200 = 10,200

2 10,000 2% = 0.02 10,000(0.02)(2) 400 10,000 + 400 = 10,400
3 10,000 2% = 0.02 10,000(0.02)(3) 600 10,000 + 600 = 10,600
4 10,000 2% = 0.02 10,000(0.02)(4) 800 10,000 + 800 = 10,800
5 10,000 2% = 0.02 10,000(0.02)(5) 1,000 10,000 + 1,000 =
11,000
 COMPOUND INTEREST
Time Principal Interest Compound Interest Amount after t years (Maturity
(t) (P) rate (r) value)
Solution Answer

1 10,000 2% = 0.02 10,000(0.02)(1) 200 10,000 + 200 = 10,200

2 10,200 2% = 0.02 10,200(0.02)(1) 204 10,200 + 204 = 10,404

3 10,404 2% = 0.02 10,404(0.02)(1) 208.08 10,404 + 208.08 =

10,612.08
4 10,612.08 2% = 0.02 10,612.08(0.02)(1) 212.24 10,612.08 + 212.24 =
10,824.32
5 10,824.32 2% = 0.02 10,824.32(0.02)(1) 216.49 10,824.32 + 216.49 =
11,040.81
 SIMPLE INTEREST

COMPOUND INTEREST
 REMARK
Simple interest remains constant
throughout the investment term. In
compound interest, the interest
from the previous year also earns
interest. Thus, the interest grows
every year.
 ACCUMULATED VALUE UNDER
COMPOUND INTEREST
If a principal amount P is invested for a term t ()
earns interest at a rate r compounded n times in a
year, then its accumulated value at the end of the
term is given by

𝑛𝑡
𝑟
𝐴= 𝑃 (1 + )
CREDITS: This presentation template was created by

𝑛
Slidesgo, incluiding icons by Flaticon, and
infographics & images by Freepik.
 EXAMPLE
What will be the accumulated value of ₱12,000 invested
for 4 years at 15% compounded quarterly?
SOLUTION
Given: P (principal) = ₱12,000, r (rate) = 15% =
0.15, t = 4 years, n = 4
The accumulated value of the investment will be:

Thus, the
investment will
grow to ₱21,626.73
after 4 years.
 EXAMPLE
Bathsheba wants to provide a ₱200,000 graduation gift
for her daughter Magdalene who is now 16 years old.
She would like the fund to be available by the time her
daughter is 20. She decides on an investment that pays
10% compounded quarterly. How large must the deposit
be?
SOLUTION

Given: A (acc. value) = ₱200,000, r (rate) = 10% =

0.10, t = 4 years, n = 4
 EXAMPLE
SOLUTION
Given: A (acc. value) = ₱200,000, r (rate) = 10% =
0.10, t = 4 years, n = 4


Thus, Bathsheba should
₱134,724.99 deposit ₱134,724.99 in
order to grow as much as
₱200,000 after 4 years.
 SEATWORK

1. Find the interest earned at the end of 4 years if ₱36,700 is

invested at 12% compounded bimonthly.
2. Salome paid ₱8,600 on a loan made 2 years before at 6%
compounded bimonthly. Find the interest generated.
3. A person can buy a piece of property for ₱6,500,000 cash or
₱4,000,000 down payment and ₱4,200,000 in 5 years. If the
person has money earning 8% converted quarterly, which is a
better purchased plan and by how much?
 ANNOUNCEMENT
As previously announced, Quiz # 1 is on
February 7, Monday. The coverage is
Statistics and Data Management until
Measures of Dispersion.

Quiz # 2 is on February 21, Monday. The

coverage will be announced later.