Mathematics in the Modern World

Chapter 5

The Mathematics of Finance

 Chapter 5: THE MATHEMATICS OF FINANCE
Introduction
Everybody uses money. Sometimes you work for your money and other times
your money works for you. For example, unless you are attending college on a full
scholarship, it is very likely that you and your family have either saved money or
borrowed money, or both, to pay for your education. When we borrow money, we
normally have to pay interest for that privilege. When we save money, for a future
purchase or retirement, we are lending money to a financial institution and we expect
to earn interest on our investment. We will develop the mathematics in this chapter to
understand better the principles of borrowing and saving. These ideas will then be used
to compare different financial opportunities and make informed decisions

Learning Objectives

At the end of this chapter, the student is expected to:

 Differentiate simple and compound interest;
 Define credit cards, stocks, bonds, and mutual funds;
 Solve problems involving simple and compound interest; and
 Display perseverance and patience in dealing with problems associated with
mathematics of finance.
Duration

Topic 1: Simple and Compound Interest = 2 hours

Topic 2: Credit Cards and Consumer Loans = 1.5 hours
Topic 3: Stocks, Bonds, and Mutual Funds = 1.5 hours

Lesson Proper

1.1 Simple Interest and Compound Interest

In the business world, an investor who places capital in a productive enterprise
expects not only the eventual return of his capital but also additional payment. An
individual who lends his capital expects the debtor to pay back not only the money
originally borrowed but also an additional amount. This additional payment or amount
is called interest. The interest is the compensation that a borrower of capital pays to a
lender for its use. It can be viewed as a form of rent that the borrower pays to the lender
to compensate for the loss of opportunity to use the capital to other productive financial
transaction.
Therefore, interest is the fee paid for borrowed money. We receive interest when
we let others use our money (for example, by depositing money in a savings account or
making a loan). We pay interest when we use other people’s money (such as when
borrow from a bank or a friend).

5.1.1 Simple Interest

It is an interest that is calculated on the balance owned but not on previous
interest or in other words if interest is computed on the original principal during the
whole life of the investment, the interest due at the end of the time is called simple
interest. It is computed entirely on the original principal (P), multiplied by the rate of
interest (r), and the time (t). This leads to simple interest formula.

Simple Interest Formula:

𝐼 = 𝑃𝑟𝑡
𝐼 𝐼 𝐼
𝑡 = 𝑃𝑟 𝑃 = 𝑟𝑡 𝑟 = 𝑃𝑡

where
I = amount of interest
P = principal
r = rate per period of time
t = time between the date of loan is made and the date it matures

Definitions of Basic Terms

 Principal (P) – It is the original amount borrowed.

 Rate of Interest (r) – It is the percent that the borrower pays for the use of the
money commonly expressed as annual interest rate.
 Time (t) – It is the length of time usually expressed in years.
 Maturity Date or Due Date – It is the date on which the loan is to be repaid.
 Maturity Value (M) – It is the total amount the borrower would need to pay
back.

Examples:
1. Natasha invests P250,000 in a building society account. At the end of the year
her account is credited with 2% interest. How much interest had her P250,000
earned in the year?

Solution:
P = P250,000 r = 2% or 0.02 t = 1 year

𝐼 = 𝑃𝑟𝑡
= (250,000)(0.02)(1)
= 𝑃5,000

2. A business borrowed 10 million pesos from the bank. If he agrees to pay an 8%

annual rate of interest, calculate the amount of interest in (a) 5 years, (b) 10
years, and (c) 15 years.

Solution:
P = P10,000,000 r = 8%

a. For t = 5 years

𝐼 = 𝑃𝑟𝑡
= (10,000,000)(0.08)(5)
= 𝑃4,000,000.00
 b. For t = 10 years

𝐼 = 𝑃𝑟𝑡
= (10,000,000)(0.08)(10)
= 𝑃8,000,000.00
c. For t = 15 years
𝐼 = 𝑃𝑟𝑡
= (10,000,000)(0.08)(15)
= 𝑃12,000,000.00

Two methods for converting time from days to years

a. Exact Method
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝑡=
365

b. Ordinary Method (mostly used by businessmen)

𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝑡=
360

3. Compute the simple interest of a loan amounting to P50,000.00 payable in 6

months if the interest rate is 3.5%.

Solution:
P = P50,000.00 r = 3.5% t = 6 months

𝐼 = 𝑃𝑟𝑡
6
= (50,000)(0.035)( )
12
= 𝑃 875.00 𝑖𝑛 𝑠𝑖𝑥 𝑚𝑜𝑛𝑡ℎ𝑠

4. Mr. Flores plans to buy a Sala set from Department Store which cost
P12,000.00. The loan charges P1, 800.00 interest in 6 months. Find the simple
interest rate.

Solution:
P = P 12,000.00 I = P 1,800.00 t = 6 months

𝐼 1,800.00
𝑟= = = 0.3(100%) = 30%
𝑃𝑡 6
(12,000)(12)
 5. Ryan borrowed P750,000 from a bank to buy a car at 10% interest rate and
earned P30,000 interest while clearing the loan, find the time for which the loan
was given.

Solution:
P = P 750,000 r = 10% I = P 30,000
𝐼
𝑡=
𝑃𝑟
30,000
=
( 750,000)(0.01)
= 4 𝑦𝑒𝑎𝑟𝑠

Year Table
Day – of – the – Year – Table
Day of
the Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Month
1 1 32 60 91 121 152 182 213 244 274 305 335
2 2 33 61 92 122 153 183 214 245 275 306 336
3 3 34 62 93 123 154 184 215 246 276 307 337
4 4 35 63 94 124 155 185 216 247 277 308 338
5 5 36 64 95 125 156 186 217 248 278 309 339
6 6 37 65 96 126 157 187 218 249 279 310 340
7 7 38 66 97 127 158 188 219 250 280 311 341
8 8 39 67 97 128 159 189 220 251 281 312 342
9 9 40 68 99 129 160 190 221 252 282 313 343
10 10 41 69 100 130 161 191 222 253 283 314 344
11 11 42 70 101 131 162 192 223 254 284 315 345
12 12 43 71 102 132 163 193 224 255 285 316 346
13 13 44 72 103 133 164 194 225 256 286 317 347
14 14 45 73 104 134 165 195 226 257 287 318 348
15 15 46 74 105 135 166 196 227 258 288 319 349
16 16 47 75 106 136 167 197 228 259 289 320 350
17 17 48 76 107 137 168 197 229 260 290 321 351
18 18 49 77 108 138 169 199 230 261 291 322 352
19 19 50 78 109 139 170 200 231 262 292 323 353
20 20 51 79 110 140 171 201 232 263 293 324 354
21 21 52 80 111 141 172 202 233 264 294 325 355
22 22 53 81 112 142 173 203 234 265 295 326 356
23 23 54 82 113 143 174 204 235 266 296 327 357
24 24 55 83 114 144 175 205 236 267 297 328 358
25 25 56 84 115 145 176 206 237 268 298 329 359
26 26 57 85 116 146 177 207 2382 269 299 330 360
27 27 58 86 117 147 178 208 239 270 300 331 361
28 28 59 87 118 148 179 209 240 271 301 332 362
29 29 --- 88 119 149 180 210 241 272 302 333 363
30 30 89 120 150 181 211 242 273 303 334 364
31 31 90 151 212 243 304 365
 According to Richard Aufmann, the day of the year table can be used to
determine the number of days from one date to another date. For instance, because June
30 is day 181 on the table and November 11 is day 315, meaning there are 315 – 181 =
134 days from June 30 to November 11.
The table can also be used to determine the due date of a loan. For instance, an
85 – day loan made on march 15, which is day 74 is due on day 74 + 85 = day 159
which is June 8.

Example:
1. Calculate the simple interest due on a P20,600.00 loan made on February 8 and
repaid on December 8 of the same year. The interest rate is 7%.
Solution:
February 8 is day 39 and December 8 is day 342.

342 – 39 = 303 days (term of the loan)

𝐼 = 𝑃𝑟𝑡
303
= (20,600)(0.07)( )
360
= 𝑃1,213.68

5.1.2 Maturity Value

It is the total amount the borrower would need to pay back and is usually
denoted by M.

To find the maturity value, we simply add interest to the principal.

Maturity Value

M=P+I

M = Maturity Value P = Principal I = amount of interest

Examples:
1. Calculate the maturity value of a P10,000.00 loan with 8% interest rate (a) in 5
years and (b) in 8 months.
Solution:
P = P10,000.00 r = 8%
a. In 5 years
Find I:
𝐼 = 𝑃𝑟𝑡
= (10,000)(0.08)(5)
= 𝑃4,000.00
 Find M:

𝑀=𝑃+𝐼
= 10,000 + 4,000
= 𝑃14,000.00

b. In 8 months
Find I:
𝐼 = 𝑃𝑟𝑡
8
= (10,000)(0.08)( )
12
= 𝑃533.33

Find M:

𝑀=𝑃+𝐼
= 10,000 + 533.33
= 𝑃10,533.33

We can also make use of other formula in computing for the maturity value. This can
be done by substituting Prt for I (interest).

M = P + I = P + Prt = P(1 + rt)

2. Calculate the maturity value of a simple interest, 9 months loan of P15,300. The
interest rate is 8%.
Solution:
P = P15,300.00 r = 8% t = 9 months

𝑀 = 𝑃(1 + 𝑟𝑡)
9
= 15,300 [1 + (0.08) ( )]
12
= 15,300(1 + 0.0675)
= 15,300(1.0675)
= 𝑃16,332.74

3. The maturity value of a 4-month loan of P5,000.00 is P5075.00. What is the

simple interest rate?
Solution:
P = P5,000.00 M = P5,075.00 t = 4 months
Find I:

𝐼 = 𝑀−𝑃
= 5,075 − 5,000
= 75
 Find r:
𝐼
𝑟=
𝑃𝑡
75
=
4
(5,000)( )
12
75
=
1,666.67
= 0.045(100%) = 4.5%

5.1.3 Compound Interest

Compounding is the concept that any amount earned on an investment can be

reinvested to create additional earnings that would not be realized based on the original
principal, or original balance, alone The interest on the original balance alone would be
called simple interest. The additional earnings plus simple interest would be equal to
the total amount earned from compound interest.
In other words, an investment earns compound interest when the interest from
each time period is added to the principal. And the earns interest in the following time
periods. As the principal grows, the rate at which you earn interest grows as well,
because you are earing “interest on interest”. Compounding makes a significant
difference in the final value of an investment. Compounding increases the amount you
earn when investing, but increase the costs when you borrow money.
The compound interest formula calculates the amount of interest earned on an
account or investment where the amount earned is reinvested. By reinvesting the
amount earned, an investment will earn money based on the effect of compounding.

Examples:
1. Jonathan deposits P5,000.00 in a savings account earning 2% interest
compounded annually.
Solution:
Compounded annually means that the interest will be calculated once a
year.
𝐼 = 𝑃𝑟𝑡 = (5,000)(0.02)(1) = 𝑃100.00

At the end of one year, his money on bank will be

𝑀 = 𝑃 + 𝐼 = 5,000 + 100 = 𝑃5100.00

During its second year,

𝐼 = 𝑃𝑟𝑡 = (5,100)(0.02)(1) = 𝑃102.00

At the end of the second year, the total amount in the account is
 𝑀 = 𝑃 + 𝐼 = 5,100 + 102 = 𝑃5,202.00

the interest earned during the third year is calculated using the amount
in the account at the end of the second year (P5,202.00)

𝐼 = 𝑃𝑟𝑡 = (5,202)(0.02)(1) = 𝑃104.04

Notice that the interest earned every year increases. This is what compound
interest is all about. However, compound interest is not only limited to annually, we
also have semiannually or twice a year, quarterly or four times a year, monthly or even
daily. We call this frequency as compounding period.
For instance, in our example number 1, if the interest is compounded
semiannually, meaning the first interest payment occurs after 6 months and the earned
interest is added to the account.
Interest earned after six months:
6
𝐼 = 𝑃𝑟𝑡 = (5,000)(0.02) ( ) = 𝑃50.00
12
𝑀 = 𝑃 + 𝐼 = 5,000 + 50 = 𝑃5,050.00

Interest earned after second six months:

6
𝐼 = 𝑃𝑟𝑡 = (5,050)(0.02) ( ) = 𝑃50.50
12
𝑀 = 𝑃 + 𝐼 = 5,050 + 50.50 = 𝑃5,100.50

The total amount in the account at the end of the first year is P5,100.50 which
is called compound amount.
Maturity value formula of 𝑀 = 𝑃(1 + 𝑟𝑡) can also be used to calculate M at
the end of six months.

2. Mr. Agoncillo deposited P16,400.00 in an account earning 3% interest,

compounded quarterly. How much is in the account at the end of 1 year.
Solution:

a. First Quarter
𝑀 = 𝑃(1 + 𝑟𝑡)
3
= 16,400 [1 + (0.03) ( )]
12
= 𝑃16,523.00 (end of the 1st quarter)

b. Second Quarter
𝑀 = 𝑃(1 + 𝑟𝑡)
 3
= 16,523 [1 + (0.03) ( )]
12
= 𝑃16,646.92 (end of the 2nd quarter)

c. Third Quarter

𝑀 = 𝑃(1 + 𝑟𝑡)
3
= 16,646.92 [1 + (0.03) ( )]
12
= 𝑃16,771.77 (end of the 3rd quarter)

d. Fourth Quarter

𝑀 = 𝑃(1 + 𝑟𝑡)
3
= 16,771.77 [1 + (0.03) ( )]
12
= 𝑃16,897.56 (end of the 4th quarter)

The total amount in the account at\ the end of 1 year is P16,897.56 known as the
compound amount.

Compound Amount Formula

𝑟 𝑛𝑡
𝑀 = 𝑃 (1 + )
𝑛

where:
M = compound amount
P = amount of money deposited
r = interest rate
n = number of compounding periods per year
t = the number of years

Examples:
1. Mr. Misa deposited P15,000.00 in an account earning 5% interest, compounded
quarterly, for a period of 2 years.
Solution:
P = P15,000.00 r = 5% or 0.05 n = 4 t=2
𝑟 𝑛𝑡
𝑀 = 𝑃 (1 + )
𝑛
0.05 (4)(2)
= 15,000 (1 + )
4
= 𝑃16,567.29 (compound amount after 2 years)
 2. Calculate the future value of P7,500 earning 9% interest, compounded daily, for
3 years.
Solution:
P = P7,500.00 r = 9% or 0.09 n = 360 t=3
𝑟 𝑛𝑡
𝑀 = 𝑃 (1 + )
𝑛
0.09 (360)(3)
= 7,500 (1 + )
360
= 𝑃 9,824.40 (the future value after 3 years)

3. How much interest is earned in 4 years on P8,000.00 deposited in an account

paying 6% interest, compounded semiannually.
Solution:
P = P8,000.00 r = 6% or 0.06 n = 2 t=4
Find M:
𝑟 𝑛𝑡
𝑀 = 𝑃 (1 + )
𝑛
0.06 (2)(4)
= 8,000 (1 + )
2
= 𝑃10,134.16 (compound amount)

Find I:

𝐼 = 𝑀−𝑃
= 10,134.16 − 8,000
= 𝑃2,134.16 (earned interest in 4 years)

5.2 Credit Cards and Consumer Loans

Credit Card
A credit card is a payment card issued to users (cardholders) to enable the
cardholder to pay a merchant for good and services based on the cardholder’s promise
to the card issuer to pay them for the amounts so paid plus the other agreed charges.
The card issuer (usually a bank) creates a revolving account and grants a line of credit
to the cardholder, from which the cardholder can borrow money for payment to a
merchant or as a cash advance. In other words, credit cards combine payment services
with extensions of credit. Complex fee structures in the credit card industry may limit
costumers’ ability to comparison shop, helping to ensure that the industry is not price-
competitive and helping to maximize industry profits. Due to concerns about this, many
legislatures have regulated credit card fees.
Credit cards are best suited for financing extending over a shorter time period.
Remember that it does not give you more money, rather it enables you to have higher
purchasing power in your everyday life. And so it is important to be aware of the price
of having a credit card. Similar to all the services and products you use, you should be
aware of the terms and prices. Remember that it is expensive to postpone payments.
Also keep in mind that the sooner you pay, the least interest you pay. As long as you
make your payments on time, there are no accruing interests.
Many credit cards charge annual fees but also come with interest-free grace
periods, balance transfers and rewards.
Usually credit card companies issue monthly bills. If the bill is paid in full
before its due date no charges is added otherwise interest charges will start to accrue.
The most common method of determining finance charges is the average daily balance
method
𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑤𝑒𝑑 𝑒𝑎𝑐ℎ 𝑑𝑎𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑚𝑜𝑛𝑡ℎ
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑖𝑙𝑙𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
Examples:
1. An unpaid bill for P2,500.00 had a due date of January 15. A purchase of
P1,650.00 was made on January 18 and P560.00 was charge on January 27. A
payment of P2,000.00 was made on January 20. The next billing date is
February 15. The interest on the average daily balance is 1.25% per month. Find
the finance charge on the February 15 bill.

Solution:
Prepare first a table showing this information
Payments No. of days Unpaid
Balance
Date or unit balance balance times
each day
Purchases changes no. of days
Jan 15 – Jan 17 2,500 3 7,500
Jan 18 – Jan 19 1,650 4,150 2 8,300
Jan 20 – Jan 26 -2,000.00 2,150 7 15,050
Jan 27 – Feb 14 560 2,750 19 51,490
Total P82,340.00

𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑤𝑒𝑑 𝑒𝑎𝑐ℎ 𝑑𝑎𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑚𝑜𝑛𝑡ℎ

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑖𝑙𝑙𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
82,340.00
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 = 31
= P2,656.13

Use the day of the year table to identify the number of days in the billing period.

Finding the finance charge on the February 15 bill

𝐼 = 𝑃𝑟𝑡 = (2,656.13)(0.0125)(1) = 𝑃33.20

2. An unpaid bill P4,585.00 had a due date of March 2. A purchase of P15,000.00

was made on March 8 and another was on March amounting to P3,200.00. An
P875.00 was charge on March 21. A payment of P10,000.00 was made on
March 15. The interest on the average daily balance is 2.3% per month. Find
the finance charge on the April 2 bill.
 Solution:
Prepare a table that shows the given data from the cited problem.
Payments No. of days Unpaid
Balance
Date or unit balance balance times
each day
Purchases changes no. of days
March 2 – March 7 4,585 6 27,510
March 8 – March 9 15,000 19,585 2 39,170
March 10 – March 3,200 22,785 5 113,925
14
March 15 – March -10,000 12,785 6 76,710
20
March 21 – April 2 875 13,660 13 177,580
Total P434,895.00

𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑤𝑒𝑑 𝑒𝑎𝑐ℎ 𝑑𝑎𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑚𝑜𝑛𝑡ℎ

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑖𝑙𝑙𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑

434,895.00
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 = = P14,028.87
31

Use the day of the year table to identify the number of days in the billing period.

Finding the finance charge on the April 2 bill

𝐼 = 𝑃𝑟𝑡 = (14,028.87)(0.0235)(1) = 𝑃329.68

Annual Percentage Rate (APR)

A credit card’s interest rate is the price you pay for borrowing money. For credit
cards, the interest rates are typically stated as a yearly rate. This is called the annual
percentage rate (APR). On most cards, you can avoid paying interest on purchases if
you pay your balance in full each month by the due date.
Annual percentage rate is the annualized interest rate on a loan or investment
which doesn’t account for the effect of compounding. It is the annualized form of the
periodic rate which when applied to a loan or investment balance gives the interest
expense or income for the period. In most cases, it is the interest rate quoted by banks
and other financial intermediaries on various products like loans, mortgages, credit
cards, deposits, etc. It is also called the nominal annual interest rate or simple interest
rate.
This APR was covered by the Republic Act No. 3765 otherwise known as the
“Truth in Lending Act”. It is an act requiring the disclosure of finance charges in
connection with the extension of credit.
The policy behind the law is to protect the people from lack of awareness of the
true cost of credit by assuring full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy.
The law covers any creditor, which is defined as any person engaged in the
business of extending credit (including any person who as a regular business practice
make loans or sells or rents property or services on a time, credit, or instalment basis,
either as principal or as agent) who requires as an incident to the extension of credit,
the payment of a finance charge.
 A finance charge includes interest, fees, service charges, discounts, and such
other charges incident to the extension of credit as may be prescribed by the Monetary
Board of the Bangko Sentral ng Pilipinas through regulations.
This formula can be used to estimate the annual percentage rate (APR) on a
simple interest rate instalment loan.

2𝑛𝑟
𝐴𝑃𝑅 =
𝑛+1

where:
n = number of payments
r = simple interest rate
Examples:

1. An investors borrowed P35,000.00 from a bank that advertises a 12% simple

interest rate. He agrees to a 5 monthly instalment.
a. Calculate its monthly payment
Solution:
P = P35,000.00 r = 12% or 0.12 t = 5 months or 5/12
5
𝐼 = 𝑃𝑟𝑡 = (35,000)(0.12) ( ) = 𝑃1,750.00
12

𝑀 = 𝑃 + 𝐼 = 35,000 + 1750 = 𝑃36,750.00

36,750
𝑴𝒐𝒏𝒕𝒉𝒍𝒚 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 = = 𝑃7,350.00
5
Solving for the interest on the first month
1
𝐼 = 𝑃𝑟𝑡 = (35,000)(0.12) ( ) = 𝑃350.00
12

Solving for the interest on the second month

1
𝐼 = 𝑃𝑟𝑡 = (28,000)(0.12) ( ) = 𝑃280.00 Principal – 7,000 = 28,000
12
7,350 – 280 = 7,070
Solving for the interest on the third month
1
𝐼 = 𝑃𝑟𝑡 = (20,930)(0.12) ( ) = 𝑃209.30 28,000 – 7,070 = 20,930
12
7,350 – 209.30 = 7,140.70
Solving for the interest on the fourth month
1
𝐼 = 𝑃𝑟𝑡 = (13,789.30)(0.12) ( ) = 𝑃137.89 20,930 – 7,140.70 = 13,789.30
12
7,350 – 137.89 = 7,212.11
Solving for the interest on the fifth month
1
𝐼 = 𝑃𝑟𝑡 = (6,577.19)(0.12) ( ) = 𝑃65.77
12 13,789 – 7,212.11 = 6,577.19
First Payment: P7,000.00; Second Payment: P7,070.00; Third Payment: P7,140.70;
Fourth Payment: P7,212.11; and Fifth Payment: P6,577.19
These shows that each month the amount you owe is decreasing and not by a
constant amount.
Republic Act No. 3765 tells us that the interest rate for a loan be calculated only
on the amount owed at a particular time, not on the original amount borrowed.

b. Compute for the APR

n=5 r = 12% or 0.12

2𝑛𝑟 2(5)(0.12)
𝐴𝑃𝑅 = 𝑛+𝑟 = = 0.2 or 20%
5+1

The annual percentage rate on the loan is approximately 20%. Recall that the
simple interest rate was 12% much less than the actual rate. The Truth in Lending act
provides the consumer with a standard interest rate, APR, so that it is possible to
compare loans. The 12% simple interest loan described in problem no.1 is equivalent
to an APR loan of about 20%.

2. A manager bought a brand new car amounting to P750,000.00 He gave a

downpayment of 25% and the balance was agreed to be paid in 18 equal
monthly instalments. The finance charge on the balance was given at 12%
simple interest.
a. Calculate for the finance charge.
b. Calculate the annual percentage rate in tow decimal places.
Solution:
a. Solving for the finance charge
Downpayment = 25% of 750,000
= 0.25(750,000)
= P187,500.00

Amount Finance = 750,000 – 187,500

= P562,500.00

Interest Owed = finance rate x amount financed

= 0.12(562,500)
= P67,500.00 (is the finance charge)

b. Solving for the annual percentage rate (APR)

n = 18 r = 0.12
2𝑛𝑟 2(18)(0.12)
𝐴𝑃𝑅 = 𝑛+𝑟 = = 0.227369 or 22.74%
18+1
Consumer Loans
A consumer loan is when a person borrows money from a lender, either
unsecured or secured. There are several types of consumer loans and some of the most
popular ones include mortgages, refinances, home equity lines of credit, credit cards,
auto loans, student loans, and personal loans.
A consumer loan is a good alternative to a credit card if you want predictability
with your monthly expenses. A consume loan provides a set plan for your monthly
down payments which gives many a sense of security. You can arrive back from a
vacation paid with a consumer loans and not expect any surprises. You will simply start
paying back a pre decided amount each month. It is also called as consumer credit or
consumer lending.

The payment amount for these loans is given by the following formula

Payment Formula for an APR Loan

𝑟
𝑃𝑀𝑇 = 𝐴 [ 𝑛 ]
𝑟 −𝑛𝑡
1 − (1 + 𝑛)
where:
PMT = is the payment
A = is the loan amount
r = is the annual interest rate
n = is the amount of payments per year
t = is the number of years

Example:
1. A certain computer company is offering an 8% annual interest rate for 2 years
on all their computer gadget products. Joshua Emmanuel, a computer
technician, decided to buy one set of computer unit for P45,000.00. Find his
monthly payment.
Solution:
r = 8% or 0.08 n =12 t = 2 years
𝑟
𝑃𝑀𝑇 = 𝐴 [ 𝑛 ]
𝑟 −𝑛𝑡
1 − (1 + 𝑛)

0.08
= 45,000 [ 12 ]
0.08 −(12)(2)
1 − (1 + 12 )
= 𝑃2,035.23 (monthly payment)

Calculate APR on Payday Loans

To calculate the APR on a short-term payday loan:
1. Divide the finance charge by the loan amount.
2. Multiply the result by 365.
 3. Divide the result by the term of the loan.
4. Multiply the result by 100.
Example:
1. You get a payday loan for P500.00, and you pay a fee of P50.00. The loan must
be repaid within 14 days. What is the APR?
Solution:

50
𝐼=( ) 365
500
50
( ) 365
𝐼 = [ 500 ] 100%
14

36.50
𝐼=( ) 100%
14
36.50
𝐼=( ) 100%
14
𝐼 = 260.71%

Calculating Loan Payoffs

Loan payoffs is a complete repayment of a loan (principal plus interest), full
discharge of an obligation, or the return from a deal, decision or investment.
Your payoff amount is how much you will actually have to pay to satisfy the
terms of your mortgage loan an completely pay off your debt. Your payoff amount also
includes the payment of any interest you owe through the day you intend to pay off
your loan.

APR Loan Payoff Formula

The payoff amount for a loan based on APR is given by
𝑟 −𝑈
1 − (1 + 𝑛)
𝐴 = 𝑃𝑀𝑇 [ 𝑟 ]
𝑛

where:
A = is the loan payoff
PMT = is the payment
r = is the annual interest rate
n = is the number of payments per year
U = is the number of remaining (or unpaid) balance

Example:
1. A lady wants to pay off the loan in 32 months. Her monthly obligation is
P850.00 on a 3-year loan with an annual percentage rate of 7.5%. Find the
payoff amount.
 Solution:
PMT = P850.00 r = 7.5% or 0.075 n = 12 U = 4 months
𝑟 −𝑈
1 − (1 + 𝑛)
𝐴 = 𝑃𝑀𝑇 [ 𝑟 ]
𝑛
0.75 −4
1 − (1 + 12 )
= 850 [ ]
0.75
12
= 𝑃3,347.53 (is the loan payoff)

5.3 Stocks, Bonds, and Mutual Bonds

Stocks
A stock is ownership in a company. When you buy a stock, (you are called
stockholders) you buy a piece of the company. So if the company does well, you do
well. Congruently, if the company tanks, your stock tanks. Just like bonds, there are
many types of stocks because there are many different types of companies out there.
Large company stocks (large cap), mid cap stocks, small cap stocks, international
stocks, emerging stocks, tech stocks, etc. Historically, stocks have an annual average
return. However, remember that with more return comes more risk. So when investing
in stocks, keep in mind that you have to be able to handle the extra risk or volatility to
reap the potential reward in the long run.
A company may distribute profits to the owners (stockholders) in the form of
dividends. Most dividends are paid in the form of cash—for example, a company might
declare a quarterly dividend of P0.50 per share. However, though it’s less common,
companies also have the option of declaring stock dividends. When paying a stock
dividend, a company issues additional shares of stock proportional to existing investors’
holdings.

Calculate Dividends Paid to a Stockholder

Example:
1. A stock pays an annual dividend of P0.75 per share. Calculate the dividend paid
to a shareholder who has 350 shares of the company’s stock.
Solution:

(0.75 per share) (350 shares) = P262.50 (the shareholder receives P262.50 in
dividends)

Before the stock dividends are handed out, they’re known as “stock dividends
distributable” and are listed in the stockholders’ equity section of the company’s
balance sheet.
The first step in calculating stock dividends distributable is to divide that
percentage by 100 to convert it inti a decimal. In our example, 10% would become 0.10.
Next, multiply the company’s total outstanding shares by this decimal. You can find
the number of outstanding shares in most stock quotes.
 Finally, multiply this amount by the par value of the stock, which can usually
be found in the stockholders’ equity section of the balance sheet. This is typically a
small amount, such as P0.01, and it has no relation to the actual share price of the stock.
Once you multiply these figures by one another, the result is the amount the company
would list as stock dividends distributable.

𝑆𝑡𝑜𝑐𝑘 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 %
𝑆𝑡𝑜𝑐𝑘 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 = × 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 × 𝑝𝑎𝑟 𝑣𝑎𝑙𝑢𝑒
100

Examples:
1. A company declares a stock dividend of 0.05 shares per outstanding share, and
there are 100 million total shares outstanding before the stock dividend is paid.
A quick look at the balance sheet tells us that the stock’s par value is P0.01 per
𝑆𝑡𝑜𝑐𝑘 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒
𝑆𝑡𝑜𝑐𝑘 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 %
= × 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 × 𝑝𝑎𝑟 𝑣𝑎𝑙𝑢𝑒
100
share, so the stock dividend distributable that the company will list on its
balance sheet can be calculated as follows:
Solution:

2. Joshua invested P120,000 in = 0.05 × 100,000,000 × 0.01 stocks

and bonds. If he made a 20% profit on
his stocks and a 5% profit on = 𝑃50,000.00 his bonds, and the
combined profit was P10,500.00, how much
did Joshua invest in stocks.
Solution:
Let x = amount invested in stock at 20%
120,000 – x = amount invested in bonds at 5%

Equation:
[(x)(20%)] + [(120,000 – x)(5%)] = 10,500
[(x)(0.20)] + [(120,000 – x)(0.05)] = 10,500
(0.20x + 6,000 – 0.05x) = 10,500
(20x + 600,000 – 5x) = 1,050,000
15x = 1,050,000 – 600,000
15x = 450,000
x = 30,000 (amount invested in stocks)

120,000 – x = 120,000 – 30,000

= 90,000 (amount invested in bonds)
Checking:
[(30,000)(20%)] + [(120,000 – 30,000)(5%)] = 10,500
[(30,000)(0.20)] + [(90,000)(0.05)] = 10,500
(6,000 + 4,500) = 10,500
10,500 = 10,500
Bonds
The best way to describe a bond is to think of it like a loan. You loan your
money to the government or a company, and in return they pay you interest for the term
of that loan. Typically, bonds are considered conservative types of investments because
you can choose the length and term of the bond and know exactly how much money
will you get back at the end of the term or “maturity”. There are many types of bonds:
government bonds, corporate bonds, short-term bonds, long-term bonds, municipal and
inflation protection bonds, etc. Generally, bonds are less risky than stocks and the main
way you lose money on a bond is if the company or government issuing the bond
defaults on their obligations. Historically, bonds have an annual average total return of
6.3%.
Bonds are subject to market risk and interest rate risk if sold prior to maturity.
Bond values will decline as interest rates rise and bonds are subject to availability and
change in price.
Examples:
1. Harold invested P30,000.00 in various stocks and bonds. He earned 6% on his
bonds and 12% on his stocks. If Harold’s total profit on both types of
investments was P2,460.00, how much of the P30,000.00 did he invest in
bonds?
Solution:
Let x = is the amount invested at 6% on his bonds
30,000 – x = is the amount invested at 12% on his stocks

Equation:
(interest earned at 6%) + (interest earned at 12%) = 2,460
[(x)(0.06)] + [(30,000 – x)(0.12)] = 2,460
0.06x + 3,600 – 0.12x = 2460
6x + 360,000 – 12x = 246,000
-6x = 246,000 – 360,000
-6x = -114,000
x = 19,000 (amount invested in bonds)

30,000 – x = 30,000 – 19,000

= 11,000 (amount invested in stocks)

Checking:
[(19,000)(0.06)] + [(30,000 – 19,000)(0.12)] = 2,460
1,140 + (11,000)(0.12) = 2,460
1,140 + 1,320 = 2,460
2,460 = 2,460

Mutual Funds
Mutual funds represent another way to invest in stocks, bonds, or cash
alternatives. You can think of a mutual fund like a basket of stocks or bonds. A mutual
fund investor is buying part ownership of the mutual fund company and its assets.
Basically, your money is pooled, along with the money of other investors, into a find,
which then invests in certain securities according to a stated investment strategy. The
fund is managed by a fund manager who reports to board directors. By investing in the
fund, you own a piece of the pie (total portfolio), which could include anywhere from
a few dozens to hundreds of securities. This provides you with both a convenient way
to obtain professional money management and instant diversification that would be
more difficult and expensive to achieve on your own. Every mutual fund publishes a
prospectus. Before investing in a mutual fund, get a copy and carefully review the
information it contains, such as the fund’s investment objective, risks, fees, and
expenses. Carefully consider those factors as well as others before investing.
Mutual fund units, or shares, can typically be purchased or redeemed as needed
at the fund’s current net asset value (NAV) per share, which is sometimes expressed as
NAVPS. A fund’s NAV is derived by dividing the total value of the securities in the
portfolio by the total amount of shares outstanding.

The Net Asset Value of a Mutual Fund Formula is

𝐴−𝐿
𝑁𝐴𝑉 =
𝑁
where:
A = is the total fund assets
L = is the total fund liabilities
N = is the number of shares outstanding
Example:
1. A mutual fund has P600,000,000.00 worth of stock, P5,000,000.00 worth of
bonds, and P1,000,000.00 in cash. The fund’s total liabilities amount to
P2,000,000.00. There are 25,000,000 shares outstanding. You invest
P15,000.00 in this fund.
a. Solve for the Net Asset Value.
b. How many shares will you buy?
Solution:
a. Find the NAV:
𝐴−𝐿
𝑁𝐴𝑉 =
𝑁
(600,000,000 + 5,000,000 + 1,000,000) − 2,000,000
=
25,000,000
= 𝑃24.16

b. Find the number of shares:

𝑎𝑚𝑜𝑢𝑛𝑡 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑑
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 =
𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
15,000
=
24.16
= 621 shares
Treasury Bills
Treasury bills or popularly known as T-Bills, are peso-denominated short-term
fixed income securities issued by the Republic of the Philippines through Bureau of
Treasury. With a minimum of P200,000.00, you can already enjoy high yields.
T-Bills are issued at a discount to the maturity value. Rather than paying a
coupon rate of interest, the appreciation between issuance price and maturity price
provides the investment return. For instance, a 26-week T-bill is prices at P9,800.00 on
issuance to pay P10,000 in six months. No interest payments are made.
Investors buying treasury bills on auction day, in the days when paper bills were
still issued. You can purchase treasury bills at a bank, though a dealer or broker, or
online from a website like Treasury Direct. The bills are issued through an auction
bidding process, which occurs weekly.
Treasury bills among the safest investments in the market. They are backed by
the full faith and credit of the Philippine government, and they come in maturities
ranging from four weeks to one year. When buying Treasury bills, you will find that
quotes are typically given in terms of their discount, so you will need to calculate the
actual price.
Keep in mind that the Treasury does not make separate interest payments on
Treasury bills. Instead, the discounted price accounts for the interest that you will earn.

Example:
1. A certain Electric Company invest in a P60,000.00 Philippine Treasury bill at
4.46% interest for 30 days. The bank through which the bill is purchased charges
a service fee of P20.00. What is the cost of the treasury bill?
Solution:
Principal = P60,000.00 r = 4.46% or 0.0446 t = 30 days or 30/360

𝐼 = 𝑃𝑟𝑡
30
= (60,000)(0.0446)( )
360
= 𝑃223.00

Cost = (face value – interest) + service fee

= (60,000 – 223) + 20
= P59,797.00
References/Additional Resources/Readings

Aufmann, R. et al. (2018). Mathematical Excursions 4th Edition.

www.cenage.com/students/MINDTAP

Baltazar, E. C. et al. (2013). Mathematics in the Modern World. Quezon City: C&E
Publishing, Inc.

Nocon, R.C. & Nocon, E.G. (2018). Essential Mathematics for the Modern World. Quezon
City: C&E Publishing, Inc.

Quintos, R.T. et al. (2018). Mathematics in the Modern World. St. Andrew Publishing
House
 Activity Sheet 14

Name: __________________________________________ Date: ________________

Year & Section: ___________________________________ Score: _______________

A. Direction: Solve the following problems.

1. Mrs. Rodriguez wants to purchase a washing machine listed at P25,000.00 cash

and P25,950.00 if paid at an instalment basis of 4 months. What is the rate of
interest?

2. An interest of P850.00 was earned in 5 months on an investment at 10%. How

much was invested?

3. What principal will accumulate to P215,000.00 in 3 years at 12% simple

interest?

4. A bank issued a 6-year loan of P500,000.00 with a simple interest of 7% to an

employee. Determine the interest which the employee must pay.

5. A cash of P250,000 is deposited to an account paying at 5% simple interest.

How much is the account after five years?

6. Find the interest on a loan of P65,000.00 at 12% interest which will be paid after
6 months.

7. A P10,000.00 savings account earned P1,400.00 interest in 3 years. What was

the rate of interest given?

8. Find the number of days from March 15 to September 15 of the same year and
calculate the simple interest due on a P35,800.00 loan made with an interest rate
of 1.5%.

9. Calculate the simple interest due on a P25,400.00 loan made on June 30 and
repaid on February 25 of the following year with 1.65% given interest rate.

10. Find the due date on a 60-day loan made on November 11.
 Activity Sheet 15

Name: __________________________________________ Date: ________________

Year & Section: ___________________________________ Score: _______________

A. Direction: Solve the following problems.

1. Calculate the maturity value of a simple interest, a 10-month loan of P20,000.00

if the interest rate is 3.75%.

2. A credit union has issued a 6-month loan of P10,500.00 at a simple interest rate
of 2.5%. What amount will be repaid at the end of six months.

3. An employee applied a P50,000.00 loan from the bank. If she agrees to pay the
loan in 6 months with a simple interest rate of 1.25% per month. How much
should he repay the bank?

4. P45,000.00 is borrowed for 90 days at a 5% interest rate. Calculate the maturity

value by the exact method and by the ordinary method.

5. Joshua borrowed P4,895.00 from his employer. He promised to repay him in 60

days with an interest of 10%. How much will he pay using the exact interest?
 Activity Sheet 16

Name: __________________________________________ Date: ________________

Year & Section: ___________________________________ Score: _______________

A. Direction: Solve the following problems.

1. Find the compound amount of P35,000.00 compounded semiannually for 3

years at 15% interest rate.

2. Tom deposits P2,000.00 into an account with an interest rate of 2.5% that is
compounded quarterly. Rounding to the nearest peso, what is the balance in
Tom’s account after 5 years.

3. An engineer deposited P18,000.00 in a savings account at 8% interest rate. If

the interest is compounded monthly, what will be the amount of the deposit at
the end of three years.

4. Accumulate P5,600.00 for 3 years at 5.5% compounded semiannually.

5. How much money should be invested in an account that earns 6% interest,

compounded semiannually in order to have P25,500.00 in 33 years. Use the
formula below to find the present value which was derived from the compound
amount formula for P.
𝑀
𝑃=
𝑟 𝑟𝑡
(1 + 𝑛)
 Activity Sheet 17

Name: __________________________________________ Date: ________________

Year & Section: ___________________________________ Score: _______________

A. Direction: Solve the following problems.

1. A bill for P65,200.00 was due on August 2. Purchases of P3,800.00 were made
on August 8 and P1,800.00 was charged on August 23. A payment of P2,500.00
was made on August 16. The interest on the average daily balance is 2.1% per
month. Find the finance charge on the September 2 bill.

2. Mrs. Guanzon bought a gold necklace amounting to P15,000.00. A 10% was

given as a required down payment and the balance is to be paid in 12 equal
monthly instalments. The finance charge on the balance is 5% simple interest.
a. Solve for the finance charge.
b. Calculate the annual percentage rate in a tenths place.

3. A doctor purchased a second-hand vehicle from his bestfriend’s show room for
P175,000.00. He was given a 20% annual interest rate for 2 years. Find his
monthly payment.

4. An Engineer borrowed P2,500.00 for 21 days and pays a fee of P50.00. What is
the APR?

5. Mr. Soriano applied a loan for 16 months. His monthly payment is P750.00 on
a 2-year loan at an annual percentage rate of 10%. Find the payoff amount.
 Activity Sheet 18

Name: __________________________________________ Date: ________________

Year & Section: ___________________________________ Score: _______________

A. Direction: Solve the following problems.

1. Bob earned P420.00 on his investment in bonds and stocks. If his bonds return
2% and his stock returned 6% and his total investment was P10,000.00, how
much did he invest in bonds and stocks?

2. A stock pays an annual dividend of P0.85 per share. Calculate the dividends
paid to a shareholder who has 650 shares of the company’s stock.

3. Mr. Mendoza invested some of his P18,000.00 in bonds and made a 5% profit
and the rest in bonds that made a 12% profit. If the profit on the 12% bond was
P885.00 more than the profit on the 5% bonds, how much did Mr. Mendoza
invest in the 5% bonds.

4. A manager invested a P20,000.00 in bonds that made an 8% profit and the rest
in bonds that made a 7% profit. If the profit on the 8% bonds was P700.00 more
than the profit on the 7% bonds, how much did he invest in the 7% bonds?

5. Mr. Cruz has P36,000.00 to invest, some in bonds and the rest in stocks. He has
decided that the money invested in bonds must be at least twice as much as that
in stocks. But the money invested in bonds must be greater than P20,000.00. If
the bonds earn 5% and the stocks earn 7%, how much money should be invested
in each to maximize profit?

6. A mutual fund has P659 million worth of stock, P550,000.00 in cash, and
P2,500,000.00 in other assets. The fund’s total liabilities amount to
P2,500,000.00. There are 20 million shares outstanding. You invest P12,000.00
in this fund.
a. Solve for the NAV.
b. How many shares will you buy?

7. A P30,000.00 Philippine Treasury bill, purchased at 1.6% interest, matures in

85 days. The purchaser is charged a service fee of P30.00. What is the cost of
the treasury bill?
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