Module 6

THE MATHEMATICS
OF FINANCE
Content
Simple and Compound Interest
Annuities
Objectives
Use mathematical concepts and tools in
other areas such as finance and business;
Differentiate compound interest from
simple interest;
Apply the interest and annuity formulas to
cases of loans, credits, stocks bonds,
property purchases, and investment
problems
The Mathematics of Finance
Mathematical concepts that govern
principles of borrowing and saving
Allows one to compare different financial
opportunities and make informed
decisions
Section 15

SIMPLE
INTEREST
Basic Definitions
Interest is the fee paid for borrowed money
We receive interest when we let others use
our money (depositing in a savings account
or making an investment)
We pay interest when we use other people’s
money (borrowing from a bank or lending
institution for small businesses, homes, cars)
The person who borrows money for any
purpose is a debtor/maker/borrower, and
the person or institution that loans the money
is the lender/creditor.
Basic Definitions
The percent used to determine the amount
of interest is called the interest rate
The amount of money lent or borrowed is
called the principal
The future/maturity value or final
amount is the amount that the debtor will
pay back to the lender, including the
principal and interest
Simple vs. Compound Interest
Simple interest is interest that is
calculated on the principal but not on
previous interest
Compound interest is interest calculated
on the principal including previous
interest
Simple Interest
Computed entirely on the original
principal
Associated with loans/investments which
are short term in nature
Formulas for Simple Interest
Exercise A
1. Find the simple interest earned in an
account where P4,500 is on deposit for 4
years at 3 1/4% annual interest.
2. Find the simple interest for a loan of
P12,400 due at the end of 8 1/4 years at
4 1/2% annual interest.
3. Find the principal necessary to earn
P814 in simple interest if the money is to
be left on deposit for 4 years and earns 5
1/2% annual interest.
Exercise A
4. Find the time necessary for a deposit of
P11,500 to earn P3,450 in simple interest if
the money is to earn 3 3/4% annual interest.
5. Calculate the maturity value of a simple
interest, 8-month loan of P7000 if the
interest rate is 8.7%.
6. Find the simple interest rate on a 3-month
loan of P5000 if the maturity value of the
loan is P5125.
Interest when time is given in days
Ordinary simple interest assumes 360
days per year
Exact simple interest assumes 365 days
per year

*Use ordinary simple interest unless

otherwise specified
Time between two dates
When time is given between two dates, the
time in days is determined using:
Actual time uses the exact number of
days in each month
Approximate time assumes 30 days per
month for all months
Ways to compute interest when time is
given between two dates
Ordinary interest using actual time
(Banker’s Rule)
Ordinary interest using approximate time
Exact interest using actual time
Exact interest using approximate time

*Use the Banker’s Rule unless otherwise

specified
Exercise B
1. On February 19, 2020, Trisha borrowed P50,000 from
a community cooperative at 9% simple interest. The
loan is payable on September 12, 2020. Compute the
simple interest using the four methods. How much will
be the maturity value if the Banker’s Rule is used?
2. Mike deposited on March 12, 2020 at 10.5% simple
interest. On September 8, 2020, the fund accumulated
to P12,630. How much was the amount originally
invested?
3. Mr. Tan borrowed P15,000 from the faculty fund at
13.25% simple interest for 210 days. How much would
he repay at the end of the term if he is charged exact
interest?