CONSUMER

MATHEMATICS
Subject: Mathematics in the Modern World
Instructor: Ma’am Mylene Cahayag
Student: Tañeza Reinalyn S.
BSBA FM1-2
Lesson 5.1
Simple and Compound Interest
A. Simple Interest
■ The person who borrows money for any purposes is a debtor or
maker, and the person or institution that loans money is the lender
or creditor.
■ Interest is the payment for the use of borrowed money. The sum of
money invested is called the principal.
■ The fractional part of the principal that is paid on the loan is the
interest rate and is usually expressed as percent. The time or the
term of the loan is the length of time for which the money is
borrowed.
■ The sum of the principal and the interest which is accumulated at a
■ There are two ways of simple interest, ordinary and exact. And there
are two ways of finding time in between dates – approximate and
actual.
■ When interest is paid at the end of the term, the method is called
accumulation. If interest is paid at the beginning of the term, the
method is called discounting. A simple discount is often called
interest-in-advance. And the amount a borrower receives is called
proceeds.
■ The formula for simple amount and simple interest:
■ I = P * r * t, where
I = Interest
P = Principal amount the amount of money borrowed)
r = rate (change the percent to a decimal)
t = time (in years) When the time is given in months or days, it must be
converted to years
 B. Compound Interest
■ Compound interest is the interest resulting from the periodic
addition of simple interest to the capital creating a new capital every
now and then. In transactions covering an extended period of time,
interest may be handled in different ways.
■ Whenever at stipulated intervals, known as compounding or conversion
period, during the term of an investment or loan, the interest due is
added to the principal and thereafter earns an interest, the sum
which represents the increase in the original principal at the end of
the term is called compound interest.
■ The compound amount or the final amount is the sum of the principal
and the compound interest.
■ There are two types of interest rates used in the
computation for investments earnings – nominal rate and
effective rate. To be able to compare rates one must be
converted in the same compounding period as the other.
■ Financial entities usually convert multiple loans of
different rates into a loan that will equality replace the
many loans either by single payment, equal payments or
unequal payments.
■ Effective rate is the interest rate when interest is
compounded once a year.
■ Nominal rate is the interest rate when interest is
compounded more than a year.
Lesson 5.2
Accumulation and Discounting
■ The principal which, if invested for a given time (t) and
interest rate ( r ), will accumulate on its maturity data is
called the present value (P) of the investment. The
difference between the final amount F and the present
value P is called the compound discount (Ia).
■ When the problem is “to discount” an amount at a certain
compounded rate the problem is equivalent to finding the
present value of the specified amount.
■ The following formulas will be used to solve problems on
present value and discount.
■ A discount amount is deduction from the final amount (F) or maturity value (MV)
of a loan or obligation. A simple discount is often called bank discount or
interest- in- advance (Ia). The amount of money that the borrower receives is
called proceeds.
Illustrative Examples:
SIMPLE DISCOUNT
■ 1. A fruit vendor at the market borrows ₱9, 000 for 6 months at
10¼ % simple interest. What amount must he repay?
■ Given:
F = ₱9, 000 r = 10¼ % = .1025 t = 6 months or ½ years
■ Solution:
F = P (1+rt)
= ₱9, 000 [ 1 + (.1025 x 0.5)]
=₱9, 461.25
■ Thus, the initial amount of the obligation is P10,416.33 and
the compound interest added to it is P12,383.67.
Proof:
I = P22, 800 – P10, 416.33
= P 12, 383.67
Note:
The term interest in advance is used only when the
interest is taken in advance and when the proceeds are to be
computed, but not when finding for the present value.
Lesson 5.3
Types of Consumer Credit & Loans
■ Loan contracts come in all kinds of forms and with varied terms,
ranging from simple promissory notes between friends and family
members to more complex loans like mortgage, auto, payday and
student loans.
■ Regardless of type, every loan – and its conditions for repayment – is
governed by the constitution and Banko Sentral ng Pilipinas guidelines
to protect consumers from unsavoury practices like excessive interest.
In addition, loan length and default terms should be clearly detailed
to avoid confusion or potential legal action.
■ In case of default, terms of collection of the outstanding debt should
clearly specify the costs involved in collecting upon the debt. This is
also applies to parties of promissory notes as well.
■ Types of Credit:
1. Open – End
2. Closed- End credit Options
■ The two basic categories of consumer credit are open-end
and closed-end credit. Open-end credit, better known as
revolving credit, can be used repeatedly for purchases that
will be paid back monthly, though paying the full amount are
credit cards.
■ Closed-end credit is used to finance a specific purpose for a
specific period of time. They also called instalment loans
because consumers are required to follow a regular payment
schedule (usually monthly) that includes interest charges,
until the principal is paid off.
Types of Loans
■ Mortgages
Mortgages are loans distributed by banks to allow consumers to
buy homes they can’t pay for upfront. A mortgage is tied to your
home, meaning you risk foreclosure if you fall behind on payments.
Mortgages have among the lowest interest rates of all loans.
■ Auto Loans
Like mortgages, auto loans are tied to your property. They can
help you afford a vehicle, but you risk losing the car if you miss
payments. This type of loan may be distributed by a bank or by the
car dealership may be more convenient, they often carry higher
interest rates and ultimately cost more overall.
■ Personal Loans
Personal loans can be used for any personal expenses and don’t
have a designated purpose. This makes them an attractive option
for people with outstanding debts, such as credit card debt, who
want to reduce their interest rates by transferring balances. Like
other loans, personal loan terms depend on your credit history.
■ Consolidated Loans
A consolidated loan is meant to simplify your finances. Simply
put, a consolidate loan pays off all or several of your outstanding
debts, particularly credit card debt. It means fewer monthly
payments and lower interest rates. Consolidated loans are typically
in the form of second mortgage or personal loans.
 A. ANNUITIES AND MORTGAGES
An amortized loan is a loan paid off in equal payments – consequently, the loan
payments are an annuity. Examples include home mortgage loans and auto loans
among others. In an amortized loan, the present value can be thought of as the
amount of borrowed, n is the number of periods the loan lasts for, i is the interest
rate per period, and payment is the loan payment that is made.
■ Annuity
An annuity is a series of equal payments that are made at the end 9or at the
beginning) of equidistant points in time such as monthly, quarterly, or annually over
a finite period of time.
• If payments are made at the end of each period, the annually is referred to as
ordinary annuity.
• Annuity due is an annuity in which all the cash flows occur at the beginning of
the period. For the example, rent payments on apartments are typically annuity due
as rent is paid at the beginning of the month.
 B. EQUATION OF VALUES AND
CONSOLIDATION OF LOANS
■ Consolidation means that your various debts, whether they are credit
card bills or loan payments, are rolled into one monthly payment.
When you consolidate your credit card debt, you are taking out a new
loan. If you have multiple credit card accounts or loans, consolidation
may be a way to simplify or lower payments.
■ An equation of values is a mathematical statement that shows that
the dated values on a common date of two sets of payment are equal.
This common date is called the comparison date denoted by cd. This is
sometimes referred to as the focal point. This is the identified date
where accumulation or discounting of values are done from the last
date these values are due. The following is graphical illustration of
the concept.
In Figure 1, values at a1 and a2 are accumulated over a period of time
up to the comparison date while values at a3, a4 and a5 are discounted
(or the present values are computed) up to the comparison date.
Comparison dates can be chosen arbitrarily. Equation of values is
used to find a single payment to replace a set of different amounts
due at different times.
Illustrative Examples:
■ 1. If money is worth 10% compounded semi-annually, what single
payment at the end of 5 years will equitably replace the following
set of obligations:
a) P6, 000 due at the end of 3 years
b) P7, 000 due at the end of 4 years and 6 months with 5% simple
c) P5, 200 due at the end of 6 years with interest at 8% converted
quarterly
d) P3, 900 due at the end 9 years with interest at 9% compounded
quarterly.
Lesson 5.4 Superannuation
■ Superannuation is just a fancy word which means ‘savings for retirement’.
Personal superannuation (often simply known as ‘super’) is money that’s put
aside and saved while you’re working, so you can enjoy a regular income later in
life when you retire. In the Philippines, this is basically known as retirement
management or pension plan.
■ Superannuation funds receive contributions and invest them for the benefits
of their members. Generally, contributions are made by both employers and
their employers and their employees or by self- employed people for their own
benefit. Superannuation contributions and their earnings are then applied by
the trustees of the fund to pay benefits to the fund’s members on their
retirement (or, in the case of their death to a nominated beneficiary). Benefits
may be paid either as a lump sum or as an income stream.
■ Superannuation is a combination of fund-building and fund withdrawals.
The basic operation of superannuation can be illustrated by
the following diagram: