Learning Activity Sheet No. 6 1, INT] o 'RODUCTORY ConcEprT; __ This learning seth includes analyan ec uvity Sheet will explain how interest is applied on either investment or obligation. This packet also lyzing and solving vari fied in buying and selling of rious problems which involve concepts of interests and how it is app or ch involve concepts of interests an Let's begin UU: AS YOU Ro through, a scientific calculator is essential for significant computations. n. Aer ‘going BARNING SKILLS FROM MELCe: ee Mortgage, amore anne activity sheet, you are expected to compute interest specifically as applied ‘0 ” amortization, and on services utilities and on deposits and loans. ML. activites: A. Let us Review Interest, Ifyou borrow money from someone or ft Th nt from someone or from a bank, you are expected to pay for the use of money. The payme: {or the use of money is called interest. The three factors to determine how much interest is charged for a loan Gre Principal (the sum borrowed), interest rate (percent of the principal to be paid each unit of time) and time terms (is the period within which the money borrowed is repaid and expressed in year/s). Basic Formula: J = Prt, where 1 is interest, P is Principal, r is interest rate, ¢ is time/term To determine the final amount or maturity value at the end of term, simply add the principal and interest: F =P + 1, where F is Final Amount, P is principal, Fs interest. Since I = Prt, F can be expressed as F = P + Prt or F=P(1 + rt) B. Let Us Study Lesson 1: ‘Simple and Compound Interest on Deposit and Loan Example 1 (Simple Interest on Deposits) You deposited P 500,000.00 in a bank that offers 6% per annum interest. Ifyou intend to withdraw the money after 8 years. How ‘you-carn after S years) How much ts the final Solution Given: 500,000 Seta P At the end of 8 years, you would have earned an interest of ? 240,000.00. Add it to your deposit, you would have P 740,000.00 in your bank account. Example 2 (Simple Interest on Loans) Masha borrowed 950,000 from a bank. The bank charges 12% simple interest per year. How much is the maturity value of the loan after 3 years? Solution: 500,000) (0.06 (8) 240,000 Given: = P950,000 12% = 3 years T= Prt (® 950,000) (0.12) (3) =2.342,000 After 3 years, Masha must pay ? 342,000 interest, Add it to her loan, she will have to pay P 1,292,000 worth of money, Compound Interest It is the interest on the first compounding period is added on the principal, which will then be the basis for the interest to be computed for the next period. It is important that you get familiar with compounding frequency, You will use m to denote the compounding frequency. See the table provided on the next page. Sat ‘Compounding Frequency Value of m ‘Annually I = Semi-annually 2 Quarterl 4 Monthly 12 (_______Bi-montnly mage | Weekly 52 Daily [Exact 365 You will use this formula in order to compute for compound interest”°pastymiee ms P(t) where: P is the Principal ris the interest rate es Tae tke niiber of times interest applied per time period tis the number of time periods elapsed Example 3 (Compound Interest on Deposits} Ht ‘a ow Suppose you decided to deposit P480,000 in another bank that ofers 69% compounded semi-annual much interest would you earn after 5 years? Solution: Given: P = P480,000 r =6% t —-=Syears m = 2 (semi-annually) 1 = [raso,oo0cs +2242) - 490,000 1 = {P480,000(1 + 0.03)"*] ~ 480,000 1 = [P480,000(1.03)'°] — P480,000 1 = [480,000(1.343916379)] ~ P480,000 1 = 645,079.86 ~ 480,000 1 ound 165,079.86 Aner 5 years, you would have earned 165,079.66 interest in a bank that offers semi-annual comp interest. sities and Services - these are products/schemes that make business transactions ea Howitt oii emgunt must be paid in exchange for the services offered. sy and comfortable. Bxample 4 y nple “aters is the only distributor of potable water in the locality. Your family received 678.40 water bill OF May with due date on June 5. A 10% penalty is charged for delayed payment. Ifyou pay 3 days after the due date, May whch is the penalty? How much is your total expenditure on water ‘consumption for the month? ‘Solution: Penalty = (678.40) (0.10) eae, ot Lt al Total expenditure 7678.40 + 967.84 wet ot ah Ge FD ett at oe Mortgenes “9 th” hee eral, The lender usually requires a down payment for the Joan. The ‘A mortgage loan uses property as collate down payment represents a certain percentage of the purchase Pris of the property. Example 1 Me ne that you wish to purchase a second-hand motor bie worth 'P44,000 and the seller requires 20% down payment. How much would your initial eash out be? ‘Find the amount of the mortgage. Solution: Remember t price. To compute for the down payment: hat down payment is a percentage of the purchase Down payment = (Purchase price) (Down payment rate) = (44,000.00) (20%) int of the morigage loan 1s the balanee alter paying the down payment: “The amou! Mortgage loan = Purchase price = Down payment = 744,000.00 - 78,800.00 35,200.00 Example 2 Min Quevarra decided to borrow P1,500,0 an must be paid in fuil in one year. How mucit by Mr, Guevarra after one year? Note: SINGLE PAYMENT COMPOUND INTEREST Formul P= P+ On Where Pis the principal fis the interest rate a aie total number of payments the name refers to te dea that a single payment Is ue a the end of the loan and that paymen ‘ esa rmea: A clea appcadon of it Gomis aa eaeetenauet of eat Se of the compounded nee ope per of ine This formula canbe used t calle baw mach money wil be in the account at the end of that time. 00 to buy a residential lot. The effective rate of interest is 7.57%. The ‘must Mr, Guevarra pay after one year? How much interest is paid Solution: Given: P (loan’s initial amount) = 71,500,000 i interest rate) = 78% (total number of payments) - Oe iatal amount due efct PMEAt) > T (total amount of interest paid)Fo =P(L+a = P1,500,000 (1 + 7.5%)! = P1,500,000 (1 + 075)" 1,500,000 (1.075) = 21,612,500 The amount P1,612,500 must be paid by Mr. Guevarra after one year. To compute for interest, we simply denned Toan’s initial amount from the maturity value. Tears 1 =P1,612,500.00 - P1,500,000.00 1 = 112,500.00 Lesson Interest and Amortization " ents. If A Joan is amortized if both the principal and interest are paid by a sequence of equal periodic Pavey collect there were no interest rate, determining your periodic payment would be simple, A banks Rett tization. \d of the loan term interest in order to make money. The series of payments made until the en¢ Example 1 (Amortization on Loans) Suppose you obtain #350,000.00 loan payable in 3 years. The bank charged you 5% payments must be made monthly. Determine your monthly amortisat interest annually. Hox Solution: Before you proceed to the computation, it is impo ‘The 5% is APR. Since you will make monthly payments, you must convert You must divide 5% by 12 to get 0.416%. Your monthly rate is 0.416%, To det use the following formula: tant that you understand annual percentage rate or APR: 4 the 5% APR into a monthly rate. ‘ermine the monthly payment, ip(atiy” Aq aso! Ga where Ais the monthly payment is the loan’s initial amount dis the monthly interest rate; and is the total number of payments Going back to our example: _ [Co-1s%)(rasooon00)](a+04r6%)20 A (1+0.4169)020—1 4 = [osotzonessomnn0)}c+n00416 a eargrt (rns ont Cpa a 856.00/(4.461194667) ae ns 0.161194667 we od A= 10,488, 56 09D nat Lesson 4: ae Amortization Schedule ‘An amortization schedule is a table which shows the division of each payment into principal and interest, together with the outstanding loan balance after each payment is made. This part of the module will help you construct an amortization schedule using two repayment programs namely: 1, Equal Principal Payments- under this arrangement, the loan is repaid in equal amounts of principal. The installments are unequal, however, because the interest payment is largest in the first year and becomes smaller as the principal is gradually paid. 2, Equal Amortization: the loan is repaid in equal installments. The amount applied to principal is smallest in the first year, then the same payments to principal gradually increases through the payment years, the largest of which is made on the last year. The decreasing payments on interests, however, equalizes the uneven payments on principal. ‘Example 1 (Equal Principal Payments) ‘Assume a P120,000 loan payable in 12 years at 8% annual interest. Construct an amortization schedule using the equal principal payments program. ‘The amortization schedule will be constructed using the following steps Step 1, Determine the amount of principal repaid each period by dividing the principal by the number of paymen For the above example, it would equal to P120,000 + 12 years = P10,000. al Ree erate cons osteo: vote hy cha cecatancing tate haa talhoinning of uearea/darardrat aeer of this payment will go toward interest. For the first row, 120,000 x 8% = P9,600 ‘Step 3. Add the prineipel portion to the interest portion to determine the total payment for the period. For the first row, P10,000 + P9,600 = P19,600 Jor thee Bat Step 4. Go to the next row and repeat anly steps 2 through 4 Below is the illustration of the equal principal payment scheme above, Outstanding Re tof en Banal at evs oa] Interest due at | Total payment beginning of year nd of year | at end of year i 120,000.00 10,000.00 9,600.00 St ia po} Freaaean |RT 100,000 | 10,000.00 | 8,000 18,000 4 90,000 10,000.00 7,200 7, oa 5 80,000 10,000.00) 6,400 16,400 6 70,000, 10,000.00, 5,600 15,6 7. 60,000, 10,000.00 4,800 14,800. 8 50,000, 10,000.00, 4,000. 14,000. o 40,000, 10,000.00, 3,200 13,200: 10 30,000 10,000.00 2,400 12,400 A 20,000 10,000.00. 1,600 11,600 12 10,000 10,000.00. 800 Liu Example 2 (Equal Amortization Payments) i Assume a F120,000 ioan parable 4 i year ai 6% annual inicresi compounded monthly. Construct 41 amortization sched Solution: The amortization Step 1. Determine For the beginning of the month shall decre Step 2. lule using the equal amortization payments program. the ai = wasn Grp re) 12 schedule will be constructed using the following steps: ‘mount of amortization payment for each period using this formula: 0.667% A. = £0.667%)(P120,000.00)](1+0,66796) 02) (+0.667%4)000)—1 ‘A = {(0.00667)(P120,000.00)}(1+0.00667)!2 (1+0.00667)22-1 (A = £0800.40)(1.083042541) o.o83042541 A= P10,438,83 ‘ above example, the monthly amortization is equal to 10,438.83. The outstanding balance at the ase by P10,438.83. fultiply the periodic interest rate by the outstanding balance at the beginning of month to determine how much of this payment will go toward interest. For the first row, 120,000 x 0.00667 = P800.40 Step 3. Subtract the interest determine the amount of pri For the first row, 710,438.83 - P800.40 = 9,638.43 Step 4. Go to the next row and repeat only steps 2 through 4, Below is the illustration of the equal amortization payment scheme above. p.00bhT yucar ok tle aanuck portion from the total payment at the end of the month to incipal paid for the period. 200 -o exenpte - 5 ‘ PH yee infos wompard anth, , OUTSTANDING / Repoynent Pri (npeust Morty Peyt ° (20 000. 4 110 91°57. 1638-43 7 200-40, 10,429 -€3 2 (00 ,653-%6 970% 72 Tse: s 3 46, Ga/-4 | 476744 fC 7 Si 21,v5% $3 ageceay Coy. 26 { S| thou 4296-17 S40-b0 G ee Za 1964-19 eae eh al SU Ibo +82 10 5020 6S 406 1g, ] 3 ej 0U9 27 10 097.55. 341.29 zy 20,903 37 10164 40 a3 i fo |_ 20,679. 67 | tor 232.10 24.13 | A Jo, a6%-1__(| 10, 300-96 _| 37.87 | {2 o-0F 10 269-66 ott Wpaen a is