ENGGECON

THE TIME VALUE OF MONEY

(Interest and Money-Time Relationships)
Exercises:
A. Simple interest
1. Determine the ordinary simple interest on P10,000 for 9 months and 10 days if the rate
of interest is 12%.
Solution
9(30) + 10
𝐼 = 𝑃𝑖𝑛 = (𝑃10,000)(0.12) ( )
360
𝑰 = 𝑷𝟗𝟑𝟑. 𝟑𝟑𝟑𝟑

2. Determine the ordinary and exact simple interests on P5,000 for the period from January
15 to June 20, 1993, if the rate of simple interest is 14%.
Solution:
Ordinary simple interest:
15 + 4(30) + 20
𝐼 = 𝑃𝑖𝑛 = (𝑃5,000)(0.14) ( )
360
𝑰 = 𝑷𝟑𝟎𝟏. 𝟑𝟖𝟖𝟖

Exact simple interest:

16 + 28 + 31 + 30 + 31 + 20
𝐼 = 𝑃𝑖𝑛 = (𝑃5,000)(0.14) ( )
360 MUST BE 365
𝑰 = 𝑷𝟑𝟎𝟑. 𝟑𝟑𝟑𝟑

B. Compound interest
1. By the condition of a will the sum of P25, 000 is left to be held in trust by her guardian
until it amounts to P45, 000. When will the girl receive the money if the fund is invested
at 8% compounded quarterly?

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2. Jones Corporation borrowed P9, 000 from Brown Corporation on Jan. 1, 1978 and P12,
000 on Jan. 1, 1980. Jones Corporation made a partial payment of P7, 000 on Jan. 1,
1981. It was agreed that the balance of the loan would be amortizes by two payments
one of Jan. 1, 1982 and the other on Jan. 1, 1983, the second being 50%larger than the
first. If the interest rate is 12%. What is the amount of each payment?

Solution:

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3. A woman borrowed P3, 000 to be paid after 1 ½ years with interest at 12% compounded
semiannually and P5, 000 to be paid after 3 years at 12% compounded monthly. What
single payment must she pay after 3 ½ years at an interest rate of 16% compounded
quarterly to settle the two obligations?

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C. Equation of value: Inflation, discount and continuous compounding

1. A man deposits P50, 000 in a bank account at 6% compounded monthly for 5 years. If
the inflation rate of 6.5% per year continues for this period, will this effectively protect the
purchasing power of the original principal?

2. An economy is experiencing inflation at an annual rate of 8%. If this continues, what will P1,000
be worth two years from now, in terms of today’s pesos?
Solution:
𝑃 𝑃1,000
𝐹= 𝑛
=
(1 + 𝑓) (1 + 0.08)2
𝑭 = 𝑷𝟖𝟓𝟕. 𝟑𝟑𝟖𝟖

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