Business

Mathematics
 Overview

Business mathematics is used by

commercial institutions in making
their systems work. Business
mathematics has vast applications in
the areas of accounting, inventory
management, marketing, sales
projection, market analysis and etc.
Definition of terms
- Interests (I)
It is the amount paid for the use of
another amount of money, called the
principal amount or simply principal.
It is expressed in terms of percent,
and is stated as the rate of principal
involved per annum.
- Principal (P)
It is the base in which the interest
is computed. If an amount is loaned
or borrowed, this amount I referred
to as principal.
- Term or Time (t)
It is the unit of time for which the
principal is loaned, or the length of
time of the principal is borrowed.
- Interest Rate (r)
It is the multiplier expressed as percent of
the principal to be paid each term.
- Maturity Value (A)
It is the sum of the principal and the
interest that accumulates over the agreed
term. It could be: quarterly, semiannually, or
monthly.
- Compound Amount
It is the accumulated amount of a given
principal at the end of a given time interval.
 Simple
and
Compound Interests
Simple Interest
 It refers to the amount earned for
one year calculated by multiplying the
principal by the interest rate. This
kind of interest is applied for
transactions that usually only last for
less than a year. Simple interest is
proportional to the principal, interest
rate, and term. In symbols,

I = Prt
Example

1. An amount of ₱150,000 is
invested for 9 months at 4%. Find
the:
a.) Interest
b.) Maturity Value
a.) Given:
Principal (P) = ₱ 150,000
Rate (r) = 4% or 0.04
Term (t) = 9 months or
= 0.75
Solution:
Is = Prt
= (₱ 150,000)(0.04)(0.75)
= ₱ 4,500
b.) A = P + I
= ₱ 150,000 + ₱ 4,500
= ₱ 154,500
 2. An amount of ₱ 1,000,000 is
invested in a financial institution.
a.) How long will it take for the
amount to reach ₱ 1,001,000 at 2%
simple interest?
b.) At what interest rate will it earn
₱ 1,000 in 10 months?
a.) Given:
P = ₱ 1,000,000
r = 2% or 0.02
A = ₱ 1,001,000
Solution:
Is = A - P
= ₱ 1,001,000 – ₱ 1,000,000
= ₱ 1,000
 t=
=
= 0.05

Since there are 12 months in a year, it

will take (12)(0.05) = 0.6 months or
(0.06)(30days) = 18 days for ₱ 1,000,000
to amount to ₱ 1,001,000 at 2% simple
interest.
b.) Given:
P = ₱ 1,000,000
I = ₱ 1,000
t = 10 months = 10/12 = 5/6
Solution:
r =
= = 0.0012 or 0.12%
 Term
Ordinary Time
and
Exact Time
Two ways by which a term is
determined:

1. Ordinary Time
It is based on 30-day month
computation. This means that a 6-
month transaction cover
(6)(30days) = 180 days.
2. Exact Time
It is based on the exact number of
inclusive dates of transaction. For
instance, a loan is entered on Dec.
24,2014 and matured on April 11,2015
has:
 7 days - from Dec. 25,2014 to
Dec. 31,2014
31 days - from Jan. 1,2015 to Jan. 31,2015
28 days - from Feb. 1,2015 to Feb.
28,2015
31 days - from March 1,2015 to
March 31,2015
+ 11 days – from April 1,2015 to
April 11,2015
= 108 days total
 Interest
Ordinary Interest
and
Exact Interest
 The choice of whether to adopt
ordinary (or approximate) time or
exact time in financial transaction
affects the computation of interest.
The divisor to be used in computer
the term in days is contingent on the
agreement of parties involved.
 The term in days has two divisors: a
divisor of 365 (the actual number/days in
a year), and 360 (the usual practice in
business since this number offers many
factors).
There are two ways of computing for
the term, the two choices for the divisor
for the term may result in four ways of
computing simple interest.
 Exact Time Ordinary Time

Ordinary Interest
360 days with exact time Ordinary Interest
(Banker’s Rule) with ordinary
time

Exact Interest Exact interest

365 days with exact with ordinary
time time
Example
1. Find the exact interest and the ordinary
interest given the following values: ₱ 5,000 for 120
days at 5%.
Solution:
a. Exact Interest
I = Prt
= (₱ 5,000)(0.05)(120/365)
= ₱ 82.19
b. Ordinary Interest
I = Prt
= (₱ 5,000)(0.05)(120/360)
= ₱ 83.33
 2. Mr. Seniro issued a promissory
note on May 8,2015 to BPI amounting
to ₱100,000 with interest at 6%. The
due date is October 8,2015. Determine
the maturity values to be paid.
Given:
P = ₱ 100,000
I = 6% = 0.06
t = 153/360
23days – May 9,2015 to May 31,2015
30days – June 1,2015 to June 30,2015
31days – July 1,2015 to July 31,2015
31days – Aug. 1,2015 to Aug. 31,2015
30days – Sept. 1,2015 to Sept. 30,2015
+ 8days – Oct. 1,2015 to Oct. 8,2015
153 days total
Solution:

A = P (1 + rt)
= (₱ 100,000)(1 + ((0.06)(153/360))
= ₱ 102,550
 3. Find the ordinary interest where the
amount or principal is ₱ 543,000 at 6%
for 60 days.
Given:P = ₱ 543,000
r = 6% = 0.06
t = 60/360 or 1/6
Solution:
I = Prt
= (₱ 543,000)(o.06)(1/6)
= ₱ 5,430
*Note:

6% - 60 – Day Method
The ordinary simple interest I on
principal P at 6% for 60 days is

I = P (o.o1)
 4. Compute for the ordinary interest where the
principal is ₱ 180,000 at 5% for 75 days.
Solution:
Interest at 6% for 60 days
= ₱ 180,000 (0.01) = ₱ 1,800
Interest at 1% for 60 days
= ₱ 1,800/6 = ₱ 300
Interest at 5% for 60 days
= ₱ 1,800 – ₱ 300 = ₱ 1,500
Interest at 5% for 15 days
= ₱ 1,500 / 4 = ₱ 375
Interest at 5% for 75 days
= ₱ 1,500 + ₱ 375 = ₱ 1,875
Installment
Payments
Paying on Installment Basis Rule No. 1

Payment received must be deducted first

from the amount with interest due. The
balance, the amount due after deducting
the payment, is then subjected to the
agreed interest and is computed from the
date to the agreed interest and is computed
from the date of the last payment and the
balance of the principal.
Example

Mr. Torres borrowed ₱ 200,000 from the

Manila Teachers Savings and Loan
Association (MTSLA) on May 1,2015 with
interest at 6%. On June 15,2015, he paid ₱
60,000. Determine the amount Mr. Torres
should pay MTSLA on Sept. 5,2015, the due
date agreed by both parties.
Solution:
The Principal = ₱ 200,000.00
Interest due from May 1 to June 15
(₱ 200,000.00)(0.06)(46/360) = ₱ 1,533.33
Balance before June 15 = ₱ 201,533.33
Payment made on June 15 - ₱ 60,000.00
Balance after payment on June 15
= ₱ 141,533.33
Interest on balance from
June 16 to Sept. 5
(₱ 141,533.33)(0.06)(82/360) = + ₱1,934.29
₱ 143,467.62
Paying on Installment Basis Rule No. 2
(Merchant’s Rule)
The interest for the entire term of the
principal amount is added to the maturity
value. If the installment payments are
made, these payments plus the interest on
each installment payment from the date
that payment is made to the due date are
subtracted from the computed maturity
value to obtain the amount due.
 Refer to the first example. Apply the
Merchant’s Rule in determining the amount Mr.
Torres should pay the MTSLA.
Given: P = ₱200,000 r = 6% = 0.06
Solution:
*Since there are 128 days from May 1 to Sept. 5, the
value of t is 128/360

A = P ( 1 + rt)
= ₱200,000 (1+(0/06)(128/360))
= ₱ 204,266.67
Payment on June 15 = ₱ 60,000.00
Interest from June 15
to September 5 = + ₱2.766.677
Total credits = ₱ 62,766.67

Therefore, the amount due on September

5 is:

₱204,266.67 - ₱ 62,766.67 = ₱ 141,500.00

Present
Value
 The formula for the maturity value A is
A = P (1 + rt)
By dividing sides of this equation by
1 + rt, the result is

This formula is used to find the principal if

the maturity value, the rate, and the term
are given. In this case, the pricipal is referred
to as the present value.
*Present Value at a Simple Interest Rate

The present value P at a simple interest

rate r of a given amount of A for a given
term t can be determined by the formula
Example
1. Find the present value of a loan due on
December 24,2014, with a maturity value of
₱340,600 and a rate of 6% in 159 days.

Given: r = 6% or 0.06 t = 159/360

Solution:

331,807.11
 2. On May 8,2015, Mrs. Siega borrowed ₱
100,000 from Mr. Singh at 6% payable in 90
days. If this amount is equivalent to 5% in the
bank, find its present value.
Solution:
- Maturity value at 6%

Present value transacted on May 8,2015 at 5%

-
 QUIZ:

 1. On May 8,2015, Mrs. Siega

borrowed ₱ 100,000 from Mr. Singh at
6% payable in 90 days. If this amount
is equivalent to 5.5% in the bank, find
its present value on July 16,2015.
Compound
Interest
 Compound interest is also the amount earned
for one year calculated by multiplying the
principal by the interest rate. Compound interests
are usually used for long-term transactions.

Example
If a 100,000 principal is subjected to 6% simple
interest for 60 days, it will accumulate an interest of
I = (100,000)(0.01) By the 6%-60 Day Method
I = 1,000
and will have the maturity value of
A = 100,000 + 1,000
A = 101,000
* If the maturity value is rolled at 6% every
60 days for 2 years, at the end of the period,
it will accumulate an interest of:
Period Term Interest ( I = Prt ) Maturity Value
(A=P+I)
1 1,000.00 101,000.00

2 1,010.00 102,010.00

3 1,020.10 103,030.10

4 1,030.30 104,060.40

5 1,040.60 105,101.00
6 106,152.01

7 1,061.52 107,213.53

8 1,072. 14 108,285.67

9 1,082.86 109,368.53

10 1,093.69 110,462.22

11 1,104.62 11,566.84

12 1,115.67 112,682.51
* Note:

When interests are added to the principal

to become a new principal, the resulting
interest is said to be compounded. The
periods of time when the addition of
interest and the principal occur is referred
to as conversion period. These time intervals
could be: annually, semiannually, quarterly,
or monthly.
Key Concepts
Term
Time
Semi-
Interval Annually annually Quarterly Monthly

1 year 1 period 2 periods 4 periods 12 periods

2 years 2 periods 4 periods 8 periods 24 periods

3 years 3 periods 6 periods 12 periods 36 periods

* Nominal rate – The quoted rate which is
the bass for converting the interest rate per
conversion period.
Interest per Conversion Period
Nominal
Rate Semi-
Annually annually Quarterly Monthly

1 year 1% ½% ¼% 1/12 %

2 years 2% 1% ½% 1/6 %

3 years 3% 1½% ¾% ¼%
Example
Compute for the compound amount and
compound interest on 100,000 principal for
2 years at 3% compounded quarterly.
Given:
P = 100,000
Nominal rate = 3% = 0.03
*Interest rate per conversion period is 3%;
4 quarters ¾ % = 0.0075

*Number of conversion periods

2 years x 4 quarters = 8 periods
Interest for 1st period:
(100,000.00)(0.0075) = 750.00
1st compound amount
100,000.00 + 750.00 = 100,750.00

Interest for 2nd period:

(100,750.00)(0.0075) = 755.625
2nd compound amount
100,750.00 + 755.625 = 101,505.625
Interest for 3rd period:
(101,505.625)(0.0075) = 761.292
3rd compound amount
101,505.625 + 761.292 = 102,266.917

Interest for 4th period:

(102,266.917)(0.0075) = 767.002
4th compound amount
102,266.917 + 767.002 = 103,033.919
Interest for 5th period:
(103,033.919)(0.0075) = 772.754
5th compound amount
103,033.919 + 772.754 = 103,806.673

Interest for 6th period:

(103,806.673)(0.0075) = 778.550
6th compound amount
103,806.673+778.550 = 104,585.223
Interest for 7th period:
(104,585.223)(0.0075)=
7th compound amount
104,585.223+ =105,369.612

Interest for 8th period:

(105,369.612)(0.0075)= 790.272
8th compound amount
105,369.612+790.272= 106,159.884
The compound interest is

106,159.884 - 100,000
= 6,159.884
Formula for Compound Amount and
Compound Interest
Let P be the original principal, I the
interest rate per period, and n the number
of conversion periods. The compound
amount at the end of the nth period is
=
and the compound interest for n
conversion period is
Example
In the example, the principal P= 100,000
interest rate per conversion period i=0.0075,
and the number of conversion periods n=8.
Using the formula for compound amount
=
=
= 106,159.8848
and the compound interest

= 106,159.8848 100,000.00
=
Present Value at Compound Rate
The present value P of a given amount at
compound interest rate i per period for n
period is

Example
Find the present value of 50,000.00 due
in 8 years at 4% compounded monthly.
Given:
50,000.000
Compound interest rate = 4% = 0.04
Number of conversion periods = 98
Solution:

1,158.16
In 8 years, the principal 1,158.16 will
amount to if invested at 4% interest
compounded monthly.