Republic of the Philippines

Surigao del Sur State University

Bislig Campus
Maharlika, Bislig City
MATHEMATICS IN THE MODERN WORLD
Module Number 5
MATHEMATICS AS A TOOL FOR BUSINESS AND FINANCE

In this topics, the real world scenarios referring on the business and financial management are
given much significance wherein, students are given the privilege to search and study literature
that expound on how investing and borrowing impacted one’s life as to their living standards,
and on how advantageous if anyone could manage their savings and/or financial capability as a
whole.

Introduction
Suppose you won Php 10,000 and you plan to invest it for 5 years. A cooperative group offers
2% simple interest per year. A bank offers 2% compounded annually. Which will you choose
and why?
Before we proceed to solve and answer the problem, let us first define terms that are almost
always encountered in this topic.
 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.
 Time or term (t ) – amount of time in years the money is borrowed or invested; length of
time between the origin and maturity dates
 Principal ( P) – amount of money borrowed or invested on the origin date
 Rate (r ) – annual rate, usually in percent, charged by the lender, or rate of increase of the
investment
 Interest ¿) – amount paid or earned for the use of money
o Simple Interest – interest that is computed on the principal aid and then added to
it
o Compound Interest – interest is computed on the principal and also on the
accumulated past interests
 Maturity Value or Future Value ( F ) – amount after t years; that the lender receives from
the borrower on the maturity date
Now that we have the terms already defined, we can now solve for the problem.
There are two entities offering investment scheme of your recently won money.
The cooperative group offers r =2 % simple interest annually.
The bank offers r =2 % compounded annually.
Obviously, you will choose whichever scheme will give you a larger amount after five years.
The question now, which of the two gives a larger amount after five years?

Solution:
Corporate Group: Simple Interest, 2% annually
Time Simple Interest Amount after t years (Maturity
Principal (P)
(t) Solution Answer Value)
1 (10,000)(0.02) 200 10,000 + 200 = 10,200
2 200 + (10,000)(0.02) 400 10,000 + 400 = 10,400
3 10, 000 400 + (10,000)(0.02) 600 10,000 + 600 = 10,600
4 600 + (10,000)(0.02) 800 10,000 + 800 = 10,800
5 800 + (10,000)(0.02) 1000 10,000 + 1000 = 11,000

Bank: Compound Interest, 2% annually

Tim Principal (P Compound Interest Amount after t years (Maturity
e (t) ) Solution Answer Value)
1 10,000 (10,000)(0.02) 200 10,000 + 200 = 10,200
2 10,200 (10,200)(0.02) 204 10,200 + 204 = 10,404
3 10,404 (10,404)(0.02) 208.08 10,404 + 208.08 = 10,600
10,612.08 + 212.2416 =
4 10,612.08 (10,612.08)(0.02) 212.2416
10,824.3216
10,824.3216 + 216.486432 =
5 10,824.3216 (10,824.3216)(0.02) 216.486432
11,040.808032

As seen from the tables above, after five years we have these amounts:
 if invested in the corporate group, we have Php 11,000 in 5 years.
 if invested in the bank, we have Php 11,040.808032 in 5 years.
Considering these two amounts, in order to get a larger amount in the investment, you should
choose to invest in the bank.
SIMPLE INTEREST
An annual simple interest is based on three factors:
a. principal which is the amount invested or borrowed (P)
b. simple interest rate, usually expressed in percent (r)
c. time or term of loan, in years (t)

I =Prt

EXAMPLE 1. A bank offers 0.25% annual simple interest rate for a particular deposit. How
much interest will be earned if one million pesos is deposited in this savings account for 1 year?
Given: P=1,000,000
r =0.25 %=0.0025
t=1 year
I =Prt
I =( 1,000,000 ) ( 0.0025 )( 1 )
I =2,500
Answer: The interest earned is Php 2,500.

EXAMPLE 2. How much interest is charged when Php 50,000 is borrowed for 9 months at an
annual simple interest rate of 10%?
Given: P=50,000
r =10 %=0.1
9
t=9 months= year =0.75 year
12
I =Prt
I =( 50,000)(0.1)(0.75)
I =3,750
Answer: The simple interest charged is Php 3,750.

EXAMPLE 3. Complete the table below by finding the unknown.

Principal (P Interest (I
Rate (r) Time (t)
) )

(a) 2.5% 4 1,500

36,000 (b) 1.5 4,860

250,000 0.5% (c) 275

500,000 12.5% 10 (d)

 (a) The unknown principal can be obtained by:
I 1,500
P= =
rt (0.025)(4 )
P=15,00 0
(b) The unknown rate can be obtained by:
I 4,860
r= =
Pt ( 36,000 ) ( 1.5 )
r =0.09=9 %
(c) The unknown time can be obtained by:
I 275
t= =
Pr ( 250,000 ) ( 0.005 )
t=0.2 2 years
(d) The unknown interest can be obtained by:
I =Prt=( 500,000 ) ( 0.125 )( 10 )
I =625,000

Many persons or institutions are interested to know the amount that a borrower will give to the
lender on the maturity date. For instance, you may be interested to know the total amount of
money in a savings account after t years at an interest rate r. This amount is called the maturity
value or future value F.

We solve for the future value by adding the principal amount and the interest.
F=P+ I
We know that I =Prt. Substituting it in the equation above, we get;
F=P+ Prt
F=P(1+rt )

EXAMPLE 4. Find the maturity value if one million pesos is deposited in a bank at an annual
simple interest rate of 0.25% after 5 years?
Given: P=1,000,000 r =0.25 %=0.0025 t=5 years
F=P ( 1+ rt )
F=(1,000,000)(1+0.0025 ( 5 ) )
F=1,012,500
Answer: The future or maturity value after 5 years is Php 1,012,500.
COMPOUND INTEREST
Many bank savings accounts pay compound interest. In this case, the interest is added to the
account at regular intervals, and the sum becomes the new basis for computing interest. Thus, the
interest earned at a certain time interval is automatically reinvested to yield more interest.

The following table shows the amount at the end of each year if principal P is invested at an
annual interest rate r compounded annually.

Principal = P

Year (t) Interest rate = r, compounded annually

Amount at the end of the year

1 P(1+r )

2 P ( 1+ r )( 1+r )=P(1+r )2

2 3
3 P ( 1+ r ) ( 1+r ) =P ( 1+r )

4 P ( 1+ r )3 ( 1+r ) =P(1+r )4

Observe the amount at the end of each year is just the amount from the previous year multiplied
by (1+r ). In other words, 1+r is multiplied each time the year ends. This results in the following
formula for the amount after t years, given an annual interest rate of r:

F=P(1+r )t

The compound interest is given by:

I =F−P

EXAMPLE 1. Find the maturity value and the compound interest if Php 10,000 is compounded
annually at an interest rate of 2% in 5 years.
Given: P=10,000 r =2 %=0.02t=5 years
 F=P(1+r )t
F=(10,000)(1+0.02)5
F=11,040.81

I =F−P
I =11,040.81−10,000
I =1,040.81
Answer: The maturity value is Php 11,040.81 and the compound interest is Php 1,040.81.

The present value or principal of the maturity value F due in t years any rate r can be obtained
from the maturity value formula F=P(1+r )t .

Solving for the present value P,

F=P(1+r )t
F
=P
(1+r )t
F
P= t
=F (1+r )−t
(1+ r)

EXAMPLE 2. What is the present value of Php 50,000 due in 7 years if money is worth 10%
compounded annually?
Given: F=50,000 r=10 %=0.1 t=7 years
F
P=
( 1+ r)t
50,000
P= 7
( 1+ 0.1)
P=25,657.91
Answer: The present value is Php 25,657.91.
PRACTICE PROBLEMS:
Instructions: Practice solving these given problems as a way to prepare for your final exam. Rest
assured that questions for the final exam will be from the problems given below.