Chapter 1

DDWG 1113 BUSINESS
MATHEMATICS
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BUSINESS MATHEMATICS
2 DDWG 1113
Course Outcome:
Evaluate and interpreted the number derived.
2. Implement the basic business mathematics concepts and
theories in other subjects related such as in Finance and
Accounting
3. Adopt and apply the business mathematics basic knowledge
in their daily activities
4. Differentiate the techniques that suitable to use for some
circumstances that related with simple interest, compounded
and annuity
5. Calculate and understand why trade and cash discount, mark
up and markdown, and depreciation are happening in the
business situation.
6.
3
CHAPTER 1
ARITHMETIC
AND
GEOMETRIC SEQUENCES
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4 TOPIC OUTCOMES (LO1, LO2 & LO3)
By the end of this chapter, students should be able to:

Define Arithmetic & Geometric sequence (L1)
2. Calculate the nth term and sum of first terms of
Arithmetic's and Geometric sequences. (L3)
Understand and apply the concepts into daily activities.
(L3)
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1.1 SEQUENCE (PROGRESSION)

 A list of numbers arranged in a specified order.
 Two sequences namely:
arithmetic
geometric
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1.2 ARITHMETIC SEQUENCE

 One in which the difference between any term and
the preceding term is the same throughout.
 Example:
Arithmetic sequence Common difference
(a) 4, 8, 12, 16, …… 4
(b) ½, 1, 1½, 2, …… ½
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1.3NTH TERM AND SUM OF FIRST N TERMS OF
AN ARITHMETIC SEQUENCE
 If first term of an arithmetic sequence is a and common

difference is d, then the arithmetic sequence is written as:
a, a + d, a + 2d, a + 3d, ……
 To find the nth term:

Tn = a + (n – 1)d
where:
Tn = nth term
a = first term
n = number terms
d = common difference
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Example 1 pg 3
Given the following arithmetic sequence: 2,10,18,…… find
The tenth term,
The sum if the first ten terms.
Example 2 pg 4
Given the arithmetic sequence: 30,23,16,9,2…… find the 12th term
and the sum of the first 12 terms.
Example 3 pg 4
Find the number of terms in the following arithmetic sequence:
12,17,22,…., 67. hence, find the sum of all the terms.
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Example 4 pg 5
Find the minimum number if terms that must be taken from the
following sequence: 8,16,24,32,….. So that the sum is more
than 120.
Example 5 pg 5
Find the first term and the common difference if an arithmetic
progression if the fourth term is 33 and the tenth term is 120.
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Example 6 pg 6
Ishak starts with monthly salary of RM 1250 for the first year and
receives an annual increment of RM 80. how much is his monthly
salary for the nth year service? How much will he receive monthly
for his tenth year of service.
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1.4 GEOMETRIC SEQUENCE

 A sequence of numbers and the ratio between any
term. It is obtained by multiplying the first term by the
ratio to get the second term and so on.
 The ratio is known as common ratio and can be

obtained by dividing any term by the term before it.
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Example:
Geometric sequence Common ratio (r)

(a) 1, 2, 4, 8, 16, 32, …… 2 (4/2) or (8/4)
(b) -3, 6, -12, 24, …… -2 (6/-3) or (-12/6)
(c) 0.1, 0.01, 0.001, …… ½ (1 – ½) or (1½ - 1)
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1.5NTH TERM AND SUM OF FIRST N TERMS OF
AN GEOMETRIC SEQUENCE
 If a geometric sequence is a, ar, ar2, ar3, ……, arn-1,

thus:
Sn = a(1 – rn) / (1 – r) for r < 1
Sn = a(rn - 1) / (r – 1) for r > 1
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Example 1 pg 8
Given the following geometric sequence: 5, 15, 45, 135, ……,
find
a) the eighth term and the tenth term,
b) the sum if the first eight terms.
Example 2 pg 8
Find the number if terms in the following sequence: 2, 6, 18,
….., 39366. calculate the sum of all the terms.
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Example 3 pg 8
Maimunah saves RM 1000 in a saving account that pays 8% compounded
annually. Find the amount in her account at the end of 5 years.
Example 4 pg 8
The third term of a geometrics progression is 360 and the sixth term is
1215. find
a) the first term
b) the sum of the first ten terms.
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CHAPTER 2
SIMPLE INTEREST
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17 TOPIC OUTCOMES (LO1, LO2, LO3 & LO4)

By the end of this topic, students should be able to
1. Describe the concepts of Simple interest. (L1)
2. Calculate the simple interest, present value and future
value. (L3)
3. Identify four concepts of exact simple interest, ordinary
simple interest, exact time and approximate time.(L1)
4. Apply banker’s rules to some investments and loans
problems. (L3)
5. Use the concepts of equation of values to solve some
investment and loan problems (L4)
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2.1 INTEREST
 “Interest” comes from the Latin word intereo which
means “to be lost”.
 When developed into the concept of borrowing money,

the lender is likely to lose his money when he pays back
the money with interest.
 Nowadays, interest is not only paid but gained if we

make an investment.
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2.2 SIMPLE INTEREST FORMULA

 The simple interest amount is calculated by the
following formula:
I = Prt
Where: I = Simple interest
P = Principal
r = Interest rate (in decimals) t
= Time / Period (in years)
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2.3 SIMPLE AMOUNT FORMULA

 Simple amount is the sum of the original principal and the
interest earned.
 Therefore, the simple amount formula is given
as: S = P(1 + rt)

Where: S = Maturity value
P = Principal
r = Interest rate (in decimals)
t = Term / Period (in years)
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Example 1 pg 22
RM 10000 is invested for 4 years 9 months in a bank
earning a simple interest rate of 10% per annum. Find the
simple amount at the end if the investment period.
Example 2 pg 23
Raihan invested RM 5000 in an investment find for three
years. At the end of the investment period, his investment
will be worth RM 6125. find the simple rate that is offered.
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Example 3 pg 23
Twenty four month ago, a sum of money was invested. Now the
investment is worth RM 12000. if the investment is extended for
another twenty four months, it will become RM 14000. Find the
original principle and the simple interest that was offered.
Example 4 pg 24
Muthu invested RM 10000 in two accounts, some at 10% per annum and
the rest at 7% per annum. His total interest for one year was RM 820.
find the amount invested at each rate.
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2.4 FOUR BASIC CONCEPTS
 There are four different methods for determining terms (t):

Exact time : It is the exact number if days between two given dates.
2. Approximate time :Time computed on the assumption that each month has 30
days.
3. Exact interest : Interest calculated based on 365 days a year or 366 days
for a leap year.
Ordinary interest : Interest is calculated based on 360 a year.
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Example 1 pg 25
Find a) exact time,
b) approximate time
From 15 March to 29 August of the same years.
Example 2 pg 25
RM 1000 was invested on 15 March 2005. if the simple interest rate offered was 10% per annum, find
the interest received on 29 August 2005 using
a) Exact time and exact simple interest.
b) Exact time and ordinary simple interest.
c) Approximate time and exact simple interest.
d) Approximate time and ordinary simple interest.
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2.5 PRESENT VALUE
 Present value may be debt or an investment amount that is lent

or invested today, and that will be mature in a specific time
together with interest.
By transposing the maturity value formula, we have the present
value formula as follows:
P = S / (1 + rt)
or
P = S (1 + rt)-1
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2.6 EQUATION OF VALUE
 Every value of money has an attached date, the date on

which it is due.
 An equation that states the equivalence of two sets of
dated values at a stated date is called an equation of
value or equivalence.
 The stated date is called the focal date, the comparison
date or the valuation date.
 To set up and solve an equation of value, the following
procedure should be carried out:
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1. Draw a time diagram with all the dated values.
2. Select the focal date.
3. Pull all the dated values to the focal date

using the stated interest rate.
4. Set up the equation of value and then

solve.
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Example 1 pg 26
Find the present value at 8% simple interest of a debt RM 3000 due in
ten months.
Example 2 pg 27
A debt of RM 800 due in four months and another of RM 1000 due in
nine months are to be settled by a single payment at the end of six
months. Find the size of this payment using
the present as the focal date,
b) the date of settlement as the focal date,
Assuming money is worth 6% per annum simple interest.
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Example 3 pg 28
A debt of RM 500 due two months ago and RM 900 due in
nine months are to be settled by two equal payments, one at
the end of three months and another at the end of six
months. Find the size of the payment using
a) the present as the focal date
b) the end of six months as a focal date
Assuming money is worth 10% per annum simple interest.
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CHAPTER 3
COMPOUND INTEREST
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31 TOPIC OUTCOMES (LO1, LO2, LO3 & L04)

By the end of this topic, students should be able to:
Explain the concepts of time value of money (L1)
Identify compound amount formula (L1)
3. Use the formula to calculate the future value, present value
of investment and loan (L3)
Determine the effective rate and nominal rate. (L2)
Identify the relationship between two nominal rates (L2)
Use the equation to solve the problems relating to
investment and loan (L4)
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3.1 TIME VALUE OF MONEY
 Money has time value, that is a ringgit today is

worth more than a ringgit tomorrow.
 Money has time value because of its investment
opportunities.
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3.2 COMPOUND INTEREST
 In compounding, after the interest is calculated, it

is then added to the principal and becomes an
adjusted principal.
 Processes are repeated until the end of the loan
or investment term.
 Normally used with long-term loan or investment,
and the interest is calculated more than once during
the loan or investment term.
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 The interest earned is called compound interest,

and the final sum at the end of the period of
borrowing is called the compound amount.
 Therefore, compound interest is the difference

between the original principal and the amount.
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3.3 SOME IMPORTANT TERMS

 Some of the common terms used in relation to
compound interest are:
1. Original principal
2. Nominal interest rate
3. Interest period or conversion period
4. Frequency of conversions
5. Periodic interest rate
6. Number of interest periods in the investment
period
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3.4 COMPOUND INTEREST FORMULA
The method used in finding compound amount at the
end of the nth period is as follow:
S = P(1 + i)n
Where:
P = Principal / Present Value
S = Future Value
n = Number of Periods (number of
years multiplied by number
of times compounded per
year)
i = Interest rate per compound period
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Example 1 pg 41
Find the future value of RM 1000 which was invested for
4 years at 4% compounded annually,
b) 5 years 6 months at 14% compounded semi annually,
c) 2 years 3 months at 4% compounded quarterly
d0 5 years 7 months at 5% compounded monthly
2 years 8 months at 9% compounded every 2 months
f) 250 days at 10% compounded daily.
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Example 2 pg 42
RM 9000 is invested for 7 years 3 months.This investment is offered 12%
compounded monthly for the first 4 years and 12% compounded quarterly for
the rest of the period. Calculate the future value of this investment.
Example 3 pg 42
Lolita saved RM 5000 in a saving account which pays 12% interest
compounded monthly. Eight months later she saved another RM 5000. Find
he amount in the account two years after her first saving.
Example 4 pg 43
What is the nominal rate compounded monthly that will make RM 1000
become RM 2000 in five years?
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3.5 EFFECTIVE, NOMINAL AND EQUIVALENT

RATES
 Effective rate : Simple rate that will produce the
same accumulated amount as the nominal rate is
compounded each period after one year.
 Nominal rate : Stated annual interest rate at which

interest is compounding more than once a year.
 Equivalent rate : Two different rates that yield the

same value at the end of one year.
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RELATIONSHIP BETWEEN EFFECTIVE
3.6
AND NOMINAL RATES
 The relationship between the nominal rate and

effective rate is derived as follows:
 Assume a sum RM P is invested for one year. Then
the future value after one year:
(a) At r% effective = P(1 + r)
(b) At k% compounded m times a year = P(1 + k/m)m
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Example 1 pg 41
Find the effective rate which is equivalent to 16% compounded semi annually.
Example 2 pg 45
Find the nominal rate, compounded monthly which is equivalent to 9% effective
rate.
Example 3 pg 45
Kang wishes to borrow some money to finance some business expansion. He has
received two difference quotes:
Bank A: Charged 15.2% compounded annually
Bank B: Charged 14.5% compounded monthly.
Which bank provides a better deal?
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3.7 RELATIONSHIP BETWEEN TWO NOMINAL
RATES
 The relationship between two nominal rates is
given as follows:
(1 + k/m)m + (1 + K/M)M
Where:
k and K are two different annual rates with
respectively two different frequencies of
conversions, m and M.
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Example 1 pg 46
Find K% compounded quarterly which is equivalent to 6%
compounded monthly.
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3.8 PRESENT VALUE
 Present value or discounted value is the value which
will yield the sum (S) after certain time and at a
specific interest rate.
 We can find present value by transposing the formula
as below:
S = P(1 + i)n
transpose
P = S / (1 + i)n or P = S(1 + i)-n
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Example 1 pg 47
A debts of RM 3000 will mature in three years’ time. Find
a) the present value of this debts
b) the value of this debt at the end of the first year
c) the value of this debts at the end if four years.
Assuming money is worth 14% compounded semi
annually. Example 2 pg 49
A debt of RM 7000 matures at the end of the second year and another of RM 8000
at the end of six years. If the debtor wishes to pay his debts by making one
payment at the end of the fifth year, find the amount he mist pay if money is
worth 6% compounded semi annually using
the present as the focal date
b) the end of the fifth year as the focal date.
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Example 3 pg 50
A debt of RM 7000 matures at the end of the second year and another RM
8000 at the end of six years. If the debtor wishes to pay his debts making
two equal payments at the end of the fourth year and the seven year, what
are these payments assuming money is worth 6% compounded semi
annually.
Example 4 pg 51
Roland invested RM 10000 at 12% compounded monthly.This investment
will be given to his three children when they reach 20 years old. Now his
three children are 15, 16 and 19 years old. If his three children will receive
equal amounts, find the amount each will receive.
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3.9 EQUATION OF VALUE
 An equation that expresses the equivalence of
two sets of obligations at a focal date.
 In other words, it expresses the following:
What is owed = What is owned at the focal date
or
What is given = What is received at the focal date
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3.10 CONTINUOUS COMPOUNDING
 We have been discussing compounding of interest on
discrete time intervals (daily, monthly, etc).
 If compounding of interest is done on a continuous basis,
then we will have a different picture of the future value as
shown below:
Discrete compounding
Continuous compounding
Future Future
value value
Time
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CHAPTER 4
ANNUITY
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50 TOPIC OUTCOMES: (LO1, LO2, LO3 & LO4)

1. Explain the term ordinary annuity (L1)
2. Identify the future value and the present value of ordinary
annuity certain (L2)
3. Calculate the future value and present value of annuity (L3)
4. Solve for annuity payment, R, the number of payments, n,
and the interest rate, i. (L4)
5. Evaluate the problems where the present value and the future
value of annuity formulae can be appropriately applied. (L6)
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4.1 FUTURE VALUE OF ORDINARY ANNUITY
CERTAIN
 Future value (accumulated value) of an ordinary annuity
certain is the sum of all the future values of the periodic
payments.
 The derivation of the formula of future value of ordinary

annuity certain are as follow:
Periodic payments = RM R
Interest rate per interest period = i%
Term of investment = n interest periods
Future value of annuity at end of n interest periods = RM
S
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FORMULA:
S = R[(1 + i)n – 1 / i]
Interest earn:
I = S- nR
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Example 1 pg 64
RM 100 is deposited every month for 2 years 7 months at 12%
compounded monthly. What is the future value of this annuity at the
end if the investment period? How much interest is earned?
Example 2 pg 64
RM 100 is deposited every 3 months for 2 years 9 months at 8%
compounded quarterly. What is the future value of this annuity at the
end if the investment period? How much interest is earned?
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Example 3 pg 64
RM 100 was invested every month in an account that pays 12% compounded
monthly for two years. After the two years, no more deposit was made. Find the
amount of the account at the end of five years and the interest earned.
Example 4 pg 64
Lily invested RM 100 every month for 5 years in an investment scheme. She
was offered 5% compounded monthly for the first 3 years and 9 %
compounded monthly for the rest of the period. Find the accumulated amount
at the end of five years. Hence, determine the interest earned.
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EXAMPLE 5 PG 66
The table below shows the monthly deposits that were

made into an investment account that pays 12%
compounded monthly.
Find the value of this investment at the end of 2005.
find also the interest earned.
Year Monthly
deposit
2003 RM 100
2004 RM 200
2005 RM 300
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4.2 PRESENT VALUE OF ORDINARY ANNUITY
CERTAIN
 Consist of the sum of all the present values of
periodic payments.
 The deviation of the formula of present value of

ordinary annuity certain is illustrated in the following:
Interest rate per interest period= i%
Future value of annuity at end of n interest periods =
RM A
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FORMULA:
-n
A = R[1 - (1 + i) / i]
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4.2 PRESENT VALUE OF ORDINARY ANNUITY
CERTAIN
 Consist of the sum of all the present values of

periodic payments.
 The deviation of the formula of present value of

ordinary annuity certain is illustrated in the following:
Interest rate per interest period= i%
Future value of annuity at end of n interest periods =
RM A
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EXAMPLE 1 PG 70
Raymond has to pay RM 300 every month for 24 months to settle a
loan 12% compounded monthly.
a) What is the original value of the loan?
b) What is the total interest that he has to pay?
Example 2 pg 70
John won an annuity that pays RM 1000 every three months for three
years.What is the present value of this annuity if money is worth
16% compounded quarterly?
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Example 3 pg 71
James intends to give a scholarship worth RM 5000 every year for six years.
How much he deposit now into an account that pays 7% per annum to
provide this scholarship?
Example 4 pg 72
Under a contract, Jenny has to pay RM 100 at the beginning of each month for 15
monhts.What is the present value of the contract if money is worth 12%
compounded monthly? Find the interest paid by Jenny?
Example 5 pg 73
Find the present value of an annuity of RM 500 every year for 5 years if the
first payment is made in 2 years. Assuming money is worth 6% compounded
annually.
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SOLVING FOR R, N AND I

Example 1 pg 75
Find the amount to be invested every three months at 10% compounded
quarterly to accumulate RM 10000 in three years. Find the interest
earned.
Example 2 pg 75
Maria invested RM 12000 in an account that pays 6% compounded
monthly. She intends to withdraw an equal amount every month for
two years and when she makes her last withdrawal, her account will
have zero balance. Find the size of these withdrawals.
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Example 3 pg 75
A RM 10000 used car is bought for RM 2000 down, 14 payments of RM 500 a
month and a final 15th payment. If interest charged is 9% compounded
monthly, find the size of the final payment.
Example 4 pg 78
Joanne purchase a shop and mortgaged it for RM 100000. the mortgages
required repayment in equal monthly payments over ten years at 16%
compounded monthly. Just immediate making the 80th payment, she had the
loan refinanced at 14% compounded monthly.What is the new monthly
payment if the number of payments remained the same?
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Example 5 pg 78
Jimmy has to pay RM 443.21 every month to settle a loan of
RM 10000 at 6% compounded monthly. Find the number of
payments he has to make.
Example 6 pg 78
Roger borrowed RM 100,000 at 12% compounded monthly.
How many monthly payment of RM 2000 should roger
make? What would be the concluding size of the final
payment?
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4.3 AMORTIZATION
An interest bearing a debt is said to be amortized when
all the principal and interest are discharged by a
sequence of equal payments at equal
intervals of time.
4.4 AMORTIZATION SCHEDULE
A table showing the distribution of principal and interest
payments for the various periodic payments.
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EXAMPLE 1
A loan of RM 1000 at 12% compounded monthly is to be

amortised by 18 monthly payment.
a) Calculate the monthly payment
b) Construct an amortisation schedule.
Solution
From A= Ra n 1%
1000 = Ra 18 1%
1000= R(16.398)
= RM 60.98
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66 Period Beginning Ending Monthly Total Paid Interest Total Total Interest
Balance Balance payment Principle paid paid
1 1000 949.02 60.98 60.98 10.00 50.98 10.00

2 949.02 897.53 60.98 121.96 9.49 102.47 19.49
3 897.53 845.52 60.98 182.95 8.98 154.48 28.47
4 845.52 792.99 60.98 243.93 8.46 207.01 36.92
5 792.99 739.94 60.98 304.91 7.93 260.06 44.85
6 739.94 686.36 60.98 365.89 7.40 313.64 52.25
7 686.36 632.24 60.98 426.87 6.86 367.76 59.11
8 632.24 577.58 60.98 487.86 6.32 422.42 65.44
9 577.58 522.37 60.98 548.84 5.78 477.63 71.21
10 522.37 466.61 60.98 609.82 5.22 533.39 76.44
11 466.61 410.30 60.98 670.80 4.67 589.7 81.10
12 410.30 353.42 60.98 731.78 4.10 646.58 85.20
13 353.42 295.97 60.98 792.77 3.53 704.03 88.74
14 295.97 237.95 60.98 853.75 2.96 762.05 91.70

15 237.95 179.35 60.98 914.73 2.38 820.65 94.08
16 179.35 120.16 60.98 975.71 1.79 879.84 95.87
17 120.16 60.38 60.98 1036.69 1.20 939.62 97.07

18 60.38 0.00 60.98 1097.68 0.64 1000.00 97.68
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4.5 SINKING FUND
 When a loan is settled by the sinking fund method, the
creditor will only receive the periodic interest due.
 The face value of the loan will only be settled at the
end of the term.
 In order to pay the face value, debtor will create a
separate fund in which he will make periodic deposits
over the term of the loan.
 The series of deposits made will amount to the
original loan.
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4.6 ANNUITY WITH CONTINUOUS COMPOUNDING
 Future value of annuity:
S = R[ekt – 1 / ek/p – 1]
 Present value of annuity:
A = R[1 – e-kt / ek/p – 1]
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Where:
S = Future value of annuity

A = Present value of annuity
R = Periodic payment or deposit
e = natural logarithm
k = annual continuous compounding rate
t = time in years
p = number of payments in 1 year
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EXAMPLE 1
James wins an annuity that pays RM1000 at the end of every six
months for four years. If money is worth 10% per annum
continuous compounding what is
a) The future value of this annuity at the end of four years.
b) The present value of this annuity
S= R[e kt -1 / e k/p -1] From A= R[1-e-kt / e k/p

-1]
S= 1000[e10%(4) -1/ e 10%/2 -1] = 1000[1-e-10%(4)/ e 10%/2 -1]
= RM 959 = RM 6430.13
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CHAPTER 5
TRADE AND CASH DISCOUNT

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72 TOPIC OUTCOMES: (LO3 & LO5)

1. Explain trade discount terms, chain discount & cash
discount (L2)
2. Calculate trade discount and the net price of goods
purchase. (L3)
3. Find a single discount that is equivalent to a chain discount.
(L3)
4. Determine the balance after partial payments are made
(L2)
5. Solve the problems involving trade and cash discount. (L4)
6.
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5.1 TRADE DISCOUNT
 Trade discount is a reduction from the list price offered by

wholesalers to retailers so they can resell the merchandise at a
profit.
 The amount of discount that retailers receive from wholesalers
is known as trade discount amount.
 Trade discount = List price – Net price
 Trade discount rate is normally a manufacturer quotes a discount
rate in percentage to the retailer. The trade discount rate must be
calculated on the list price.
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The Formula for calculating the net price is

NP= L ( 1-r)
Example 1 pg 94
1. The list price of a leather belt is RM 180. a trade discount of 30% is
offered. What is the net price of the belt?
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EXAMPLE 2 PG 95
Weendy jean offers a discount of 32 ¼ % on all the jeans it sells.What
is the net price of a pair of jeans that is listed at RM 420?
Example 3 pg 95
The net price of a camera with 40% trade discount is RM 480. what is
the list price.
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Example 4 pg 95
A bill of RM 1200 including a prepaid handling charge of RM 200
is offered a trade discount of 15%. What is the net price?
Example 5 pg 95
Blue Danube sells an item for RM 100 less 20% while Yellow
River sells the same item for RM 120 less 40%
a) Find the net prices of the item for the two shops.
b) What further discount percentage must offered by the shop
that sells at a higher net price in order to meet
the competitor’s price?
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5.2 CHAIN DISCOUNT
 A trade discount in a series of two or more successive

discounts.
 Wholesaler lists the chain discount as a group, for example 15%,
10%, 5%.
 These discounts might also be given in circumstances such as
when a large quantity is ordered.
NP = L(1 - r1) (1 – r2) (1 – r3)

Where:
NP = Net price
L = List price
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78
EXAMPLE 1 PG 97
A computer is advertised for RM 4800 less 20% and 10%. Find

a) The net price
b) The total discount.
Example 2 pg 98
A television set with a catalogue price of RM2500 is offered a chain
discount lf 30%, 10% and 5%. Calculate the net price.
Example 3 pg 98
A washing machine is advertised at RM 2000 less RM 40%, 12% and 2
½ %. Find the net price.
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5.3 SINGLE DISCOUNT EQUIVALENT
 A single discount equivalent is a single discount which is

equivalent to a chain discount.
 The single discount equivalent, r for a chain discount of r1, r2 and
r3 is given by:
r = 1 – (1 - r1) (1 – r2) (1 – r3)
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EXAMPLE 1 PG 99
A product is advertised at RM 1500 less 20%, 10% and 5%. Find

a) The single discount equivalent,
b) The net price.
Example 2 pg 99
Find the single discount equivalent of 10% and 3%
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5.4 CASH DISCOUNT
 Cash discounts are often stated under the heading of invoice as,
for example 3/10, 2/20, n/30.
 This means, if the buyer pays the invoice within 10 days of the
invoice date, the buyer is entitled to receive a 3% discount or, if
payment is made within 20 days from the invoice date, the buyer
will receive a 2% discount.
 N/30 (sometimes written net 30) means the credit period is 30
days.
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EXAMPLE 1 PG100
An invoice dated 2 January 2005 for RM 4010 was offered cash

discount terms of 1/10, n/30. if the invoice was paid on 11 January
2005, what was the payment?
Example 2 pg 101
An invoice dated 10 April 2005 for RM 2300 was offered cash discount
terms if 3/10, 2/20, n/60. find the payment if the invoice was paid on
28 April 2005?
Example 3pg 101
The total of an invoice with cash discount terms if 3/10, n/30 amounts
to RM 2090 which includes a prepaid freight charge of RM 50. find
the amount that is needed to pay the invoice within the cash
discount period.
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BORROWING TO TAKE ADVANTAGE OF THE
CASH DISCOUNT
Not many businesses have sufficient cash in hand to take advantage if

the cash discounts offered. Many if these companies borrow form
banks using short term loans to take advantage of the offer.
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EXAMPLE 1 PG 102
On 20 may, Mei Lan purchased some goods invoiced at RM 3000 with

cash discount terms of 3/10, n/30. in order to pay the invoice on 30
May, she borrowed the money for 20 days at 9% per annum simple
interest. How much did she save by borrowing to the advantage of
the discount?
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 If a buyer pays only part of the invoice within the discount

period, he receives a proportionate fraction of the cash discount
that is offered.
 He will only receive the full amount of the cash discount if he
settles all the payment
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EXAMPLE 1PG 102
An invoice amounting to RM 3000 and dated 15 July 2004 offered cash

discount terms of 10/15, n/30. find the amount outstanding if the
buyer paid RM 1000 on 20 July 2004
Amount paid = (credit given) x (1- discount rate)

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TRADE AND CASH DISCOUNT
Example 1 pg 103
An invoice of RM 10 000 and dated 18 April 2005 was offered 25%
trade discount and cash discount terms of 9/10, n/30. find
The trade discount offered,
b) The cash discount offered
c) The net payment if the invoice was paid on 28 April 2005
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EXAMPLE 2PG 104
An invoice of RM 9000 dated 19 April 2005 was offered 13% trade

discount and cash discount terms of 3/10, n/30. find the net payment
if the invoice was paid on 30 April 2005.
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CHAPTER 6
MARKUP AND MARKDOWN

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1. Explain retail price, cost price, mark up and markdown
2. Compute mark-up percent
3. Compute markdown percent
4. Compute gross profit. Operating expenses, net profit and
breakeven price.
6.1 MARKUP
 In order to gain profit from selling, the company must sell their
product at a higher price than the product cost.
 The difference between a product’s cost and selling price is
refereed to as markup.
 It can be either in money value or percentage.
 The rate of mark-up is known as markup percentage.
 Markup = Selling Price – Cost Price
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6.2 MARKUP PERCENT
 Markup is usually expressed as a percent.

 It can be expressed as:
a) Markup percent based on retail price (selling price) = %Mr = M/R x 100%
b) Markup percent based on cost price = %Mc = M/C x 100%
R= C + M
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EXAMPLE 1 PG 114
The cost price of an antique table is RM 5000. what is the retail price if
the seller wants a 20% mark-up based on
a) Cost price
b) Retail price.
Example 2 pg 115
Mariam’s shop purchase 90 shirts at a cost of RM 20 each.The shop
expects that 10% of the shirts will be sold at a reduced price of
RM 15.00 each. If the shop is to maintain a 75% mark-up on cost
on the entire purchase, find the regular price of the shirts.
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Example 3 pg 115
A retailer purchased 200 kg of cucumber at 50 cents per
kilogram. A 5% spoilage is expected. If he plans to make
a 40% mark-up based on overall cost, what is the selling
price of the cucumber?
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6.3 CONVERSION OF MARKUP PERCENT
 Markup percent based on retail price:
Since R = C + M
1 + %Mc = 100% + %Mc
Hence :
Markup percent based on retail price:
%Mr = %Mc / 1 + %Mc

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 Markup percent based on cost price:
Since R = C + M
100% = 1 - %MR + %MR
Hence :
Markup percent based on cost price:
%Mc = %MR / 1 - %MR
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EXAMPLE 1 PG 116
a) The mark up percent based in cost price of an item is 20%.What is

the mark up based on retail price.
b) The mark up percent based on retail price of an item is 15%.What

is its mark up percent based on cost price.
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6.4 MARKDOWN
 Sometimes retailer may reduce the marked price due to special

promotions, festive seasons or the items being obsolete.
 Markdown is the reduction from the selling price or marked
price, normally in terms of percentage.
 Markdown Amount = Old Selling Price – New Selling Price
 Markdown percent based on old price, %MD = MD/OP x 100%
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EXA M PLE 1 PG 117
The markdown percent on a TV set is 10%. If the new retail price is

RM 900, find the old retail price.
Example 2 pg 117
During a clearance sale, an appliance department marked down a
microwave oven by 12%, making the selling price RM 400. at
this selling price, the department make a 30% markup on the
selling price. Find
the regular price of the oven

b) the cost of the oven
c) the mark up per cent of the oven at the regular price.
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Example 3 pg 118
A retailer wants to sell an item that costs RM 200 at a
price less 15% discount that will give him a 28%
mark up based on cost. Find
a) The actual selling price
b)
c) The list price.
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6.5 PROFIT AND LOSS
 Business does not always generate income or profit.

 If the business is not managed properly, it may increase
operating expense and indirectly increase cost of the product.
 The actual cost of the product is the purchase price plus
operating expenses.
 In accounting, operating expenses include cost of goods sold,
official rental, advertising, salary, commission and so on.
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 In general, there are three possibilities in business:

M = OE : Break-even
b) M > OE : Profit
c) M < OE : Loss
The mark up equation, retail price= Cost + markup
Retail price= cost+ net profit+ Operation expenses
R= C+ NP+ OE
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FORMULA:
 Break-even Price, BEP = Cost Price + OE

 Retail Price = Cost + Net Profit + OE
 Net Profit / (Loss) = Retail Price – BEP
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EXAMPLE 1 PG 119
A retailer bought a radio for RM 200. buying expenses amounted to

RM 20. operating expenses incurred were 20% of the cost price. If
the retailer made a 25% net profit based in cost, find
a) the retail price
b) the gross profit
c) the net profit
d) the breakeven price
e)the maximum markdown that could be offered so that there is no
profit or loss
f) the net profit or loss of the retail price was RM 280.00
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Example 2 pg 119
A dealer bought a hi-fi set fir RM 2000 less 10% and
5%. He sold it at a discount of 20%. If the gross profit
earned by the dealer is 20% in the net retail price,
find the list price of the hi-fi set.
Example 3 pg 119
An item costing RM 200 was listed in a catalogue at
RM 400 with a trade discount of 20%. After some
time, the cost of the item decreased to RM 180. if the
dealer wants to maintain the same mark-up percent as
before the cost reduction, find the extra trade discount
that may be given to a customer.
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Example 4 pg 121
A retailer purchased 12 watched for RM 10800. the operating
expenses incurred for the sale of the watched were 20% if the cost.
The retailer made a 30% net profit based on cost/ for each watch,
find
a) the selling price.
b) the breakeven price,
c) the maximum markdown percent that could be offered without
incurring any loss.
d) the net loss or profit if the retail price is RM 1200.
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EXAMPLE 5 PG 122
A retailer bought a computer for RM 3600. the estimated operating

expenses incurred for the sale of the computer are 5% of the retail
price. If the retailer wants a 20% net profit based in the retail price,
find
a) the retail price

b) the net profit
c) the markup
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CHAPTER 7
PROMISSORY NOTE
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109 TOPIC OUTCOME (LO5)

Explain the meaning of a promissory note
List the main features of a promissory notes
Compute the face and maturity values of promissory notes
Compute bank discounts and the proceeds obtained when
a promissory note is discounted.
5. Compute simple interest rate that a bank earns when a
promissory note is discounted.
6.
110
7.1 PROMISSORY NOTES
 A written document made by one person or party to pay a stated

sum of money a specified future date to another person or party.
 Are negotiable documents and can be of two types; interest
bearing notes and non-interest bearing notes.
 The main features of a promissory note are as follows:
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1. Maker
The maker is the person that signs the note.
2. Payee
The payee is the person to whom the payment is to be made.
3. Date of the note
The date of the note is the date on which the note is made.
4. Term of the note
The term of the note is the length of time until the note is due
for payment.
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5. Face value
The face value of the note is the amount stated on the note.
6. Maturity value
The maturity value of the note is the total sum of money which
the payee will receive on the maturity date. The maturity value
of a non-interest bearing note is the face value while the
maturity value of an interest-bearing note is the face value plus
day interest that is due.
7. Maturity date
The maturity date of the note is the date on which the maturity
value is due.
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EXAMPLE OF PROMISSORY NOTE
RM2500.00 20 APRIL 2005

Sixty days after date I promise to pay the
order of Mohammed Ali
Ringgit Malaysia: Two thousand five hundred only
for value received with interest at the rate of 8.00%
per annum until paid.
No. 1234 Due: 19 June 2005
Mat Jenin
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EXAMPLE 1 PG 135
In the promissory note above,

a) who is the maker of the note,
b) who is the payee of the note
Calculate the maturity value of the date.
Example 2 pg 135
A promissory note dated 22 February 2005 reads ‘ three months from date,
I promise to pay RM 1000.00 with interest at 9% per annum.’
Find
a) the maturity date of the note.
b) the maturity value of the note.
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Example 3 pg 136
The maturity value of a 60 day interest bearing promissory
note is RM 450. if the interest rate is 6% per annum, what is
the face value of the note?
Example 4 pg 136
The interest on a 90 day promissory note is RM 46. if the
interest rate is 7% per annum, find the face value of the note.
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7.2 BANK DISCOUNT
 Bank discount is computed in much the same way as simple

interest except that it is based on the final amount (to be paid
back) or maturity value.
 D = Sdt
Where:
D = Bank discount
S = Amount of maturity value
d = Discount value
t = term of discount in years
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Bank proceeds = Maturity Value – Bank Discount
P=S–D
P=S–
Sdt
P = S(1 – dt)
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EXAMPLE 1
Sharifah borrows RM 8000 for three months from a lender who

charges a discount rate of 10%. find
the discount
b. the proceeds.
Example 2
If Tong needs RM 4000 now, how much should he borrow from his
bank for 1 ½ years at 12% bank discount
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Example 3
Sheela receives an invoice of RM 2000 with cash discount terms of
3/10, n/40
a) How much should be borrowed for 30 days from a bank
that charges a 9% discount rate to take advantage of the
cash discount.
b) How much will be saved by borrowing the money to take
advantage of the cash discount.
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7.3 SIMPLE INTEREST RATE EQUIVALENT TO
BANK DISCOUNT RATE
 At interest rate, r% and a discount rate, d% are said to be

equivalent if the two rates give the same present value for an
amount due in the future.
 If the present value is S, then the present value of S, at r% simple
interest rate is S(1 + rt)-1 and the present value of S, at d% bank
discount rate is S(1 – dt).
 Equating the two present value, we get:
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S(1 + rt)-1 = S(1 – dt)
1/1 + rt = 1 – dt
Solving for d, we get
dt = 1 – 1/1 + rt
dt = rt / 1 +rt
d = r / 1 + rt
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Solving for r, we get
1 + rt = 1 / 1 – dt
rt = 1 / 1 – dt -1
rt = dt / 1 – dt
r = d / 1 - dt
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EXAMPLE 1 PG 139
A bank discounts a RM 4000 note due in six months using a bank
discount rate of 12%. Find the equivalent simple interest rate that is
charged by the bank.
Example 2 pg 140
What discount rate should a leader charge to earn an interest rate of

20% on nine-month loan?
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7.4 DISCOUNTING PROMISSORY
NOTES
 A promissory note can be sold to a bank before its maturity
date if the holder is in need of cash.
 Selling the note to the bank is called discounting the note.
 The amount received on the date of discounting is called the
proceeds.
 The proceeds of a promissory note are computed as follows:
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(a) Find the maturity value of the note. For non-interest bearing
note, it is the face value. If the note is interest bearing, then
Maturity value = Face Value + Interest
(b) Find the bank discount, D with the formula

D = Sdt
(c) Compute the proceeds
Proceeds = Maturity Value – Bank Discount
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EXAMPLE 1 PG 141
Marina , a businesswoman, received a promissory note for RM 1500
with interest at 10% per annum that was due in 60 days.The note
was dated 10 April 2005.The note was discounted on 15 April 2005
at a bank that charges 12% discount. Determine
a. the maturity date
b. the maturity value
c. the discount period
d. the proceed.
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EXAMPLE 2 PG 141
On 22 February 2005, Rahman received a 90 day promissory note with

a simple interest rate of 8% per annum. On 13 April 2005, he
discounted the note at 7%.The proceeds he received were RM
9108.60. find
a. the maturity date of the note
b. the maturity value of the note
c. the face value of the note
d.the simple interest rate earned by the bank which is equivalent to
the discount rate.
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EXAMPLE 3
Tai Sing Auto company had a note dated 15 December 2005 for RM
4800 with interest at 8% per annum.The term of the note was three
months. If the company discount the note on 30 January 2006 at a
bank that charged a discount rate of 7%, what were the proceeds?
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CHAPTER 8
INSTALMENT PURCHASES
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130
Explain the meaning of instalment purchases.
2. Understand how the interest rate is charged on the original
balance and the reducing balance of credit
3. Compute the interest charged on the original balance of
credit
4. Compute the interest charged on the reducing balance of
credit
Compute the outstanding balance and unearned interest of
the lender under the Rule of 78
131
8.1 INSTALMENT PURCHASES

 Many items like electrical appliances can either be
purchased on cash term or instalment basis.
 In an instalment purchase normally a down
payment is made, to be followed by a series of
regular payments (usually monthly or weekly).
 All hire purchase sales in Malaysia are controlled
by the Hire Purchase Act (1967).
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8.2 INTEREST CHARGE BASED ON
ORIGINAL BALANCE
 Simple interest formula is used to calculate the interest charged.
 Original Balance = Cash Price – Down Payment
 Installment Price = Cash price + Total Interest or
Installment Price = Down Payment + Total
Monthly Payment
Monthly Payment = Original
+ Total Balance
Interest
Number of payments
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EXAMPLE 1 PG 153
Jenny bought a refrigerator listed at RM 800 cash trough an installment plan.

She paid RM 100 as a down payment.The balance was settled by making
ten monthly installments. If the interest rate charged was 8.5% per annum on
the original balance, find
a. the total interest
b. the installment price
c. the monthly payment
Example 2 pg 154
Marianna bought an electric appliance through an instalment plan in which
she paid RM 200 down. She had to make 12 monthly payments of RM 120
each to settle the unpaid balance. If the dealer charged her an interest of 5% per
annum on the original balance, find the cash price of the item.
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8.3 INTEREST CHARGE BASED ON

REDUCING BALANCE
 Interest charged on reducing balance is an annual rate which is
applied only to he balance due at the time of each payment.
 Two methods of reducing balance namely:
(a) Annuity Method

(b) Constant Ratio Method
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a) Annuity method:
It is also called as amortization method. If A is the amount of loan borrowed,

I the interest rate per interest period and n the number of interest
periods or the number of installment repayments, then
A = R [1 – (1 + i)-n ]/ i
Where R is the instalment payment for each period. Solving for R, we get:
R = Ai / (1 – (1 + i)-n )
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Example 1 pg 155
A washing machine is selling for RM 2000 cash.Through an
instalment purchase, the buyer has to pay RM 400 down and ten
monthly instalments. If the interest charged is 8% per annum on
reducing balance, find
the monthly payment

b) the total interest charged
c) the instalment price
By using the annuity method

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Example 2 pg 156
Jasmin purchased some equipment from a wholesaler.The wholesaler
offered her terms under which 12% of the purchase price will be
added to the purchase price and the debt would be settled by 12
monthly payments. She can borrow from a finance company which
charges 15% compounded monthly and repay the finance company
by making 12 monthly payments.Which alternative should Jasmin
choose?
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(b) Constant Ratio formula

 Frequently used to approximate the actual annual
percentage rate APR or effective rate.
r = 2MI / B(n + 1)
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Where
r = Annual interest rate
M = 12 for monthly instalments and 52 for
weekly instalments
I = Total interest charged for instalment
plan
B = Original balance outstanding or
principal of original debt
N = Total number of instalments
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 The Constant Ratio formula can also be used to

calculate total interest charged if interest rate on
reducing balance is given, that is:
I = B(n + 1)r / 2M
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Example 1 pg 158
A washing machine is being sold for RM 2000 cash.Through an
insatlment purchase, the buyer has to pay RM 400 down and 10
monthly instalments. If the interest charged is 8% per annum on the
reducing balance, find
the total interest charged
b) the monthly payment
c) the instalment price
By using the Constant Ration Formula
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Example 2 pg 159
Zaleha purchased a RM 8000 piano through an instalment plan. She has to pay
RM 2000 down and 18 monthly payments of RM 350 each. Find the
a) instalment price
b) total interest charged
c) flat rate (simple interest rate) charged
d) approximate APR by using the Constant Ratio Formula
Example 3 pg 160
Nelly bought a hi-fi set listed at RM 800 cash through an instalment plan in
which she had to make six monthly instalment payments at 10% per annum
simple interest. By using the Constant Ratio Formula, what was the
approximate effective rate charged by the dealer.
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UNEQUAL INSTALMENT PAYMENTS

AND REPAYMENTS SCHEDULES
 Some instalment purchases may not require equal payments.

 There may be a variation on the method which total interest for the
whole term of payment is distributed equally.
 And it must be noted that this type of variation is identical to the
Constant Ratio method.
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Example 1 pg 161
Diana bought a RM 4600 stereo set on an instalment basis in which an
interest of 1% per month in any outstanding balance was charged.
She made a RM 1000 down payment. For the balance, she had to pay
RM 600 every month (principal payment) plus any interest due.
Construct an repayment schedule to show the monthly payments.
Example 2 pg 162
Rosita bought a television worth RM 3000 on an instalment basis in
which she was charged 1 ¼ % per month on any outstanding balance.
She made a RM 1000 down payment and paid RM 600 every month.
Find the number of payments she made and the value of the final
payment. Construct a repayment schedule.
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8.5 RULE OF 78 IN HIRE PURCHASE ACT

(1967)
 In Malaysia under the Hire And Purchase Act (1967) which
controls the hire purchase agreement, the Rule of 78 (which is
sometimes called the sum of digits method) is used to calculate
the balance outstanding of any hire purchase agreement.
 The Rule of 78 states that the outstanding balance of a hire
purchase loan with a flat (simple) interest rate is given by:
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B = RN – I[1 + 2 + 3 + …… + N / 1 + 2 + 3 +
…… + n]
B= RM – I
N (N+1)
n ( n+1)
Where:
R = Monthly payment
N = Number of payments yet to be settled
I = Total interest charged
n = Total number of payments
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Example 1 pg 164
The finance charge in one year hire purchase loan is RM 390. find the
interest that was unearned by the lender if the loan was settled two
months early.
Example 2 pg 164
A loan of RM 10000 at a flat rate of 10% per annum was repaid by
making 24 monthly instalments. Find
a) the total interest charged
b) the monthly payment
c) the outstanding loan just after the tenth payment using Rule of 78
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Example 3 pg 165
Juliet purchased a car listed at RM 49000 form Car
Finance Bhd. trough a hire purchase agreement in
which she had to pay RM 10000 down ad 24 monthly
instalments of RM 2000 each. After one year of
payment defaults, the car was legally repossessed and
sold for RM 25000. find the amount of refund that she
would be receive form the company for the amount of
the money she would have to pay.
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CHAPTER 9
DEPRECIATION
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150
Explain the meaning of depreciation
Explain the difference in the various depreciation methods
3. Compute annual depreciation, accumulated depreciation
and book value
Construct a depreciation schedule
151
9.1 DEPRECIATION
 Depreciation is an accounting procedure for allocating
the cost of capital assets, such as buildings, machinery
tools and vehicles over their useful life.
 Can also be viewed as decline in value of assets
because of age, wear and tear or decreasing efficiency.
 Many properties such as buildings, machinery, vehicles,
and equipment depreciate in value as they get older.
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 Several terms are commonly used in calculation

relating to depreciation:
1. Original cost
The original cost of an asset is the amount of
money paid for an asset plus many sales taxes,
delivery charges, installation charges and other
costs incurred.
2. Salvage value
The salvage value (scrap value or trade-in
value) is the value of an asset at the end of its
useful life.
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3. Useful life
The useful life is the expectancy of the asset or the
number of years the asset is expected to last.
4. Total depreciation
The total depreciation or the wearing value of an
asset is the difference between cost and scrap value.
5. Annual depreciation
The annual depreciation is the amount of depreciation
in a year. It may or may not be equal from year to year.
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7. Accumulated depreciation
The accumulated depreciation is the total
depreciation to date.
8. Book value
The book value or carrying value of an asset is
the value of the asset as shown in the accounting
record. It is the difference between the original
cost and the accumulated depreciation charged to
that date.
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 Three methods of depreciation are commonly

used.
 These methods are:
Straight line method
Declining balance method
Sum of years digits method
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156 9.2 STRAIGHT LINE METHOD
 The simplest of the three methods and probably the most common method
used.
The total amount of depreciation is spread evenly to each accounting period
through the useful life of the asset.
Annual depreciation
= Cost – Salvage Value / Useful life
= Total depreciation / Useful life
Annual rate of depreciation

= Annual depreciation / Total depreciation x 100%
= 1 / Useful life x 100%
Book value = Cost – Accumulated depreciation
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Example 1 pg 181
Lau company bought a lorry for RM 38000.The lorry is expected to last five
years and its salvage value at the end if five years is RM 8000. using the
straight line method,
calculate the annual depreciation
b) calculate the annual rate of depreciation
c) Calculate the book value of the lorry at the end of the third years
d) Prepare a depreciation schedule
Example 2 pg 182
The book value of an asset after the third year and fifth year using the straight
line method are RM 700 and RM 5000 respectively. What is the annual
depreciation of the asset?
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9.3 DECLINING BALANCE METHOD
 Declining balance method is an accelerated in which higher

depreciation charges are deducted in the early life of the asset.
 BV = C (1 – r)n
Where:
BV = Book value
C = Cost of asset
r = Rate of depreciation
n = Number of years
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The book value at the end of the useful life is the salvage value, S.
Hence, the annual rate of depreciation is given by
r= 1- n√ s/c
where r= annual rate of depreciation

n= useful life in years
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Example 1 pg 183
The cost of a fishing boat is RM 150000.The declining balance method is
used for computing depreciation. If the depreciation rate is 15%,
compute the book value and accumulated depreciation of the boat at the
end of five years.
Example 2 pg 183
Given
Cost of asset = RM 15000
Useful life = 4 years
Scrap value= RM 3000
a) find the annual rate of depreciation
b) construct the depreciation schedule
Using the declining method
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9.4 SUM OF YEARS DIGITS METHOD
 Based on the sum of the digits representing the number of years of
useful life of the asset.
 If an asset has a useful life of 3 years, the sum of digits is S = 1 + 2 + 3
=6
 It can be calculated with the formula:
S = n(n + 1) / 2
Where:
S = Sum of years digits
n = Useful life
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162
Example 1 pg 185
A machine is purchase for RM 45000. Its life expectancy is five years
with a zero trade in value. Prepare a depreciation schedule using the
sum of year digits methods.
Example 2 pg 186
A computer is purchased for RM 3600. It is estimated that its salvage
value at the end of eight years will be RM 600. Find the depreciation
and the book value of the computer for the third year using the sum
of year digits method.
DDG1113

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DDWG 1113 BUSINESS

4 TOPIC OUTCOMES (LO1, LO2 & LO3)

By the end of this chapter, students should be able to:

1.1 SEQUENCE (PROGRESSION)

1.2 ARITHMETIC SEQUENCE

 If first term of an arithmetic sequence is a and common

 To find the nth term:

1.4 GEOMETRIC SEQUENCE

 The ratio is known as common ratio and can be

Geometric sequence Common ratio (r)

 If a geometric sequence is a, ar, ar2, ar3, ……, arn-1,

Sn = a(1 – rn) / (1 – r) for r < 1

Sn = a(rn - 1) / (r – 1) for r > 1

17 TOPIC OUTCOMES (LO1, LO2, LO3 & LO4)

 When developed into the concept of borrowing money,

 Nowadays, interest is not only paid but gained if we

2.2 SIMPLE INTEREST FORMULA

2.3 SIMPLE AMOUNT FORMULA

 Therefore, the simple amount formula is given

as: S = P(1 + rt)

 There are four different methods for determining terms (t):

Ordinary interest : Interest is calculated based on 360 a year.

2.5 PRESENT VALUE

 Present value may be debt or an investment amount that is lent

2.6 EQUATION OF VALUE

 Every value of money has an attached date, the date on

1. Draw a time diagram with all the dated values.

2. Select the focal date.

3. Pull all the dated values to the focal date

4. Set up the equation of value and then

31 TOPIC OUTCOMES (LO1, LO2, LO3 & L04)

3.1 TIME VALUE OF MONEY

 Money has time value, that is a ringgit today is

3.2 COMPOUND INTEREST

 In compounding, after the interest is calculated, it

 The interest earned is called compound interest,

 Therefore, compound interest is the difference

3.3 SOME IMPORTANT TERMS

2. Nominal interest rate

3. Interest period or conversion period

5. Periodic interest rate

6. Number of interest periods in the investment

3.5 EFFECTIVE, NOMINAL AND EQUIVALENT

 Nominal rate : Stated annual interest rate at which

 Equivalent rate : Two different rates that yield the

AND NOMINAL RATES

 The relationship between the nominal rate and

(a) At r% effective = P(1 + r)

(b) At k% compounded m times a year = P(1 + k/m)m

P = S / (1 + i)n or P = S(1 + i)-n

What is owed = What is owned at the focal date

What is given = What is received at the focal date

50 TOPIC OUTCOMES: (LO1, LO2, LO3 & LO4)

 The derivation of the formula of future value of ordinary

The table below shows the monthly deposits that were

 The deviation of the formula of present value of

 Consist of the sum of all the present values of

 The deviation of the formula of present value of

SOLVING FOR R, N AND I

A loan of RM 1000 at 12% compounded monthly is to be

1 1000 949.02 60.98 60.98 10.00 50.98 10.00

11 466.61 410.30 60.98 670.80 4.67 589.7 81.10

12 410.30 353.42 60.98 731.78 4.10 646.58 85.20

13 353.42 295.97 60.98 792.77 3.53 704.03 88.74