WEEK 4-5

MATHEMATICS OF FINANCE
Intended Learning Outcome:

1.To understand the basic concept of consumers

mathematics.
2.To know the application of the formula of consumers
mathematics in real world.
Price tag at an outlet shows outlet price as a mark
up from the original price.

MARK UP is the amount added to the cost price of

goods to cover overhead (operating expenses) and profit
Businesses buy products at a cost price and then markup the
products to cover the expenses (overhead) of running the
business and the desired profits. The sum of cost plus markup
gives the selling price. Markup is also referred to as margin or
gross profit.
Mark-up and Mark Down
Mark-up is the value added to the price of an item to
cover the operating expenses and profit. It is the difference
between the cost and selling price of the item.

If SP – selling price
C – cost
M – mark – up
then,
Mark-Up = Selling Price – Cost
M = SP - C
Selling Price = Cost + Mark –Up
SP = C + M
Cost = Selling Price – Mark-Up
C = SP – M
Example 1.
Gem’s Gift Shop pays P10.00 for a picture frame.
If a mark – up of P7.50 is added, what is the selling price of the
frame?
Given:
C = P10.00
M= P 7.50
Find the Selling Price (SP)
Solution:
SP = C + M
SP = P10.00 + P7.50
SP = P 17.50
Example 2.
National Bookstore buys calculators from Taiwan for P1, 500.00
each. If they are sold for P1, 750.00, what is the amount for mark –
up?
Given:
SP = P1, 750.00
C = P 1, 500.00
Find: Mark-Up (M)
Solution:
M = SP – C
M = P1, 750.00 – P 1, 500.00
M = P 250.00
Example 3.
A mini store sells popcorn for P5.25 per pack. If the mark-up is P 4.15,
how much did the store pay?

Given:
SP = P 5.25
M = P 4.15
Find: Cost (C)
Solution:
C = SP – M
C = P 5.25 – P 4.15
C = P 1.10
Markdown is the decrease in price from the original sale
price of the item.

Markdown = Original Selling Price - Sale Price

Markdown percent =
Example 1.
A toaster that was originally sold for P600.00 was markdown and
sold for P450.00. What is the amount of the markdown and the
markdown percent?

Markdown = Original Price – Sale Price

= P600.00 – P 450.00
Markdown = P 150.00

Markdown Percent = = = .25

= 25 %
A sale price is the promotional price of merchandise after a
markdown.

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

percent)
Example 2.
Bench, a clothing store, originally sold a T-shirt for P300.00 each. If
the store manager decides to mark them down 30% for a clearance
sale, what is the sale Price of a T-shirt?

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

Percent)
= 300 (100% - 30%)
= 300 (0.7)

Sale Price = P 210.00

Simple Interest
Simple Interest
The payment for the use of borrowed money.
The rate percent of money paid as fee for the use of another’s
money.

The transaction is entered into by the person who borrows money

for some purpose called “debtor “ or “maker” and the person who
lends the money is called “creditor” or “lender”.
The debtor or the creditor can be a person, institution, government
or any judicial person.
Variables:
Principal (P), the capital or sum of money investment;

rate of interest (r), usually expressed as percent, is the price or value

of the transaction; and

Time or term (t), the number of days, months or year for which the
money borrowed and

Interest (I) is the product of the principal, interest rate and time
expressed in years.
In symbol I = Prt
 
where
I = simple interest
P = principal
r = annual rate of interest
t = time in years
When interest is paid only on the principal
borrowed at the end of the term is called simple
interest.
Interest is an income to the creditor but an expense
to the debtor.
To find the principal, rate of interest and time,
the relations are as follows in symbol form
The terms are in various forms. To find interest, the
following are important to remember.

If time is expressed in number of years the formula

is I = Pr (number of years)

If time is expressed in number of months the

formula is I = Pr

If time is expressed in number of days, there are two

ways to compute interest
1. Ordinary Interest

On the idea that 1 year = 360 days

2. Exact Interest

On the idea that 1 year = 365 days

Example:
1. Given: P = P1, 000; r = 6 % ; t= 4 ½ years
Find : I = ?
Solution : I = Prt
= 1, 000 ( 0.06)(4.5) by Substitution
= P 270

(To convert percent to decimal) 6% ⇿6/100 =0.06

2. Given: P = P 2, 000 ; r = 12 ½ % ; t = 8 months
Find: I= ?
 
Solution : I = Prt
= 2, 000 (0.125) by Substitution
= P 166.67
To convert months to year, divide months by 12
3. Given: P = P3, 000; r = 15 ¼ % ; t=180 days
Find : I = ?
 Solution A (Ordinary Interest):
= Prt
= 3, 000 ( 0.1525) by Substitution
= P 228.75
 Solution A (Exact Interest):
= Prt
= 3, 000 ( 0.1525) by Substitution
= P 225.62

The ordinary interest has a higher interest than the

exact interest.
4. Find the simple interest on P 8, 000 at 5 ½ %
simple interest for 4 years and 9 months.
1. Given: P = P8, 000; r = 5.5 % ; t= 4.75 years
Find : I = ?
 
Solution : I = Prt
= 8, 000 ( 0.055)(4.75) by Substitution
= P 2, 090
5. The interest on P 10, 500 is P590.625, invested for 9
months, what is the rate of interest?
Given: P = P10, 500; I = P 590.625 ; t= 0.75 years
Find : r = ?
 Solution:

= 0.075 x 100%
= 7.5 %
6. A principal amount earns interest of P 3, 166.67 for
2 years and 6 months at a simple interest of 12 2/3 %.
Find the Principal amount.
Given: I = P 3, 166.67; r = 0.12666; t= 2.5 years
Find : P = ?
 
Solution:

= P 9, 999.99
 
7. How many years, months and days will it take P10,000 to earn
P1, 500 if invested at 8 ½ %, Simple interest?
Given: P = P10,000.00; r = 0.085; i= P1,500.00
Find : =?
 
 Solution:

= 1.7647 or 1 year, 9 months and 5 days

 
COMPOUND INTEREST It is when the interest is computed
on the principal and any previously earned interest.

Convert 0.7647 to months

0.7647(12) = 9.1764 months

Convert 0.1764 to days

0.1764(30) = 5.29 or 5 days
Formula

Where:
A = the future value (P + I)
r = the yearly interest rate in decimal form
n = the number of times per year the interest is compounded
t = the term of investment in years
Example:
Find the compound interest on P1, 000 for 3 years at 9 % converted annually.
Solution:
The Original Principal is P1, 000.00
Interest for 1 year on P 1, 000 at 9% is P 90.00
Amount at the end of the first year or new principal - P 1. 090.00
Interest on the new principal for 1 year is P 1, 090.00 x 9% - 98.10
Amount at the end of the second year or new principal P 1. 188.10
Interest on the new principal for 1 year is P 1. 188.10x 9% - 106.929
Amount at the end of the third year or new principal P 1, 295.03
 
The difference of the amount at the end of the third year P1, 295.03
and the original principal P1, 000 represents the compound interest.
The Illustration above is known as direct method.

Interest is charge after each period and always added to

the principal. The interest over an ever-increasing
principal is called compound Interest.
Example.
1. Find the compound amount and interest if P 1, 300 is invested for 2 years at
8% compounded semi – annually.
Given: P = P 1, 300 m = 2 t = 2years = = .04 nt = (2)(2) = 4
Find : A = ? and I = ?
 Solution: A
 
A
= P1, 520.816
 
I =A– P
= P1, 520.816 - P1,300
= P 220.816
EFFECTIVE RATE The effective rate is also known as the Annual
Yield à this is the simple interest rate which would yield the same
future value over 1 year as the compounded interest rate

Formula: E-1

Where:
E = effective rate
n = number of periods per year the interest is calculated
r = interest rate per year (stated rate)
Example:
Find the effective interest rate when the stated rate is 4% and the interest is
compounded annually. Solution: r = 4% n = 2 (compounded semiannually)

E-1

E-1

E = 0.0404 or 4.04%
*The effective rate is 4.04%*
MATURITY VALUE : the total amount of money due by the end of a loan
period; the amount of the loan and interest. Take note that If the principal and
the interest are known, add them.
Formula:
MV = P + P x R x T

Where:
MV = Maturity Value
P = Principal
R = Rate
T = Time
Thus, MV = P (1+RT)
Example:
Camilla can purchase furniture on a 2-year simple interest loan at 9%
interest per year. What is the maturity value for a ₱ 2,500 loan?
Solution:
MV = P (1 + RT) Substitute known values.
MV = ₱ 2,500 ( 1 + 0.09 x 2)
MV = ₱ 2,500 (1 + 0.18)
MV = ₱ 2,500 (1.18)
MV = ₱ 2,950
Camilla will pay ₱ 2,950 at the end of two years
Simple Annuities
An Annuity is a series of payments made at equal intervals.
The interval between consecutive payments is called payment
interval. The interval may be monthly, quarterly, semi-annually and
annually. The term of an annuity is the time from the beginning of the
first payment interval through the last day of payment. Examples of
annuities are regular deposits to a savings account, monthly house
rental, monthly insurance payments and pension payments.
Three Kinds of Annuity:
Ordinary Annuity is an annuity whose payments are made at
the end of each payment interval.
Annuity Due is an annuity whose payments are due at the
beginning of each payment interval.
Deferred Annuity is an annuity whose first payment is to start
at some future date.
Amount and Present Value of an Ordinary Annuity
The Amount of an Ordinary Annuity (S) is the total of all the
periodic payments at the end of the term. It is the value of the
annuity on the date of the last payment.
In finding the Amount of an Ordinary Annuity we use the formula:

S
 Where
S = the amount of an ordinary annuity at
the end of n periods
R = periodic payment
S n= number of periods or payments
i = rate per conversion period
j – quoted or nominal rate
m – number of conversion period per
year
t – number of years
Example:
1. Jane deposit P1, 500 every 6 months for 1 ½ year in a bank to create a fund to
be used to buy a hard tractor. The bank pays him 10% compounded semi-annually.
How much would be his account at the end of 1 ½ years if no withdrawals will be
made?
Given: R = P 1, 500 j = .10 m = 2 t = 1.5 years i = 0.05 n =
1.5(2) = 3
Find: S = ?
Solution:

= P 4, 728.75
The Present Value (A) of an Ordinary annuity is the total of the present
value of all the periodic payments.
 
The present value of an ordinary annuity for n payment periods is
given by the formula:

where
A = Present Value of an ordinary annuity
R = periodic payment
n = number of conversion period
i = interest rate per conversion period
2. If money is worth 5% compounded quarterly, find the
present value of P 5, 500 for 10 years and 9 months.
Given: R = 5, 500 m= 4 t = 10.75 years i = .0125 n = 43
Find : A = ?
Solution:

= P 182, 091.11
Annuities are classified as annuitycertain , contingent annuity or
perpetuity.
Annuity Certain is an annuity whose term is fixed, the term start and
end on definite date like monthly payments on installment purchases.
Contingent Annuity is one whose term depends on some uncertain
events such as life insurance policies.
Perpetuity is an annuity whose payments continue forever.
Simple Annuity is an annuity whose payment intervals is the same as
the interest period.
Amortization Schedule
Outstanding Principal
Payment Principal Interest at 6% Periodic Repaid

at the beginning of
Number yr at the end of yr Payment every 6 months
1 10, 000.00 600.00 2, 033.66 1, 433.66
2 8, 566.34 513.98 2, 033.66 1, 519.65
3 7, 046.69 422.80 2, 033.66 1, 610.83
4 5, 435.86 326.15 2, 033.66 1, 707.48
5 3, 728.38 223.70 2, 033.66 1, 809.93
6 1, 918.45 115.11 2, 033.66 1, 918.52
Total   2, 201.74 112, 201.96 10, 000.00
Sinking fund formula

or
Example:
In order to discharge a debt of P5, 000 due in 5 years without interest, Lian
decided to place 5 equal annual deposits in a fund, the first due in one year. If
money is invested at 3% find the periodic payment?
Given: i = 0.03 n = 5 S= P5, 000
Find : R= ?
Solution:

= P 941.78