Reviewer on Mathematics of Investment

CHAPTER 1
SIMPLE INTERESTAND SIMPLE DISCOUNT

INTEREST is the income received from invested capital. The invested capital is called the principal; at
any time after the investment of the principal, the sum of the principal plus the interest due is called
the amount. The interest charge is usually stated as a rate per cent of the principal per year.
If 𝑃 is the principal, 𝑟 is the rate expressed as a decimal, and 𝑖 the interest for 1 year, the by definition
𝑖
𝑖 = 𝑃𝑟 or 𝑟 =
𝑃
Example:
If $1000 earns $36.60 interest in one year what is the rate percent used?
36.60
𝑟= = 𝟎. 𝟎𝟑𝟔𝟔 or the rate is 3.66%.
1000

SIMPLE INTEREST is the income generated from the investment computed based on the principal
invested, the rate in which earning is determined, and the time in years over which investment is to
end. An investment is any business activity that generates income.
*Business activities may include “buy-and-sell”, “lending”, “depositing money in the bank”,
“catering services”, etc.
Formula
Simple Interest
Interest = Principal x rate x time
I= Prt
Where: P= principal or the sum invested
r = rate, expressed as decimal
t = time, expressed in years

Lesson 1.1: Types of Simple Interest

1. Ordinary Interest – requires that a year consists of 360 days
t=D/360 where: D- Number of days of investment

2. Exact Interest – requires that a year consist of 365 days.

t= D/365
 Approximate time – requires that a month consist of 30 days
 Exact time – requires the counting of actual number of days in a month

Examples:
Problem 1: Compute the ordinary and exact interest of 6% on Php8, 000 at the end of 71 days.
Solutions: P=8,000, r= 0.06, t= 71/360 or 71/365
71
Ordinary Interest: 𝐼 = (8,000)(. 06) ( ) = 94.67
360
71
Exact Interest: 𝐼 = (8,000)(. 06) ( ) = 93. 37
365
Time Between Dates
Time between dates refers to the period that has elapsed from a specified date to the next. The
common method of computing the time between two dates are the following steps:
a) Determine the corresponding number of days that have elapsed from the start of the year to the
specified dates.
b) Subtract the two periods to determine the number of days in between them.
Problem 2. Compute the actual and approximate time between March 29, 2008 and June 10, 2009.
Solutions:
a. Actual time
June 10, 2009: 161st day of 2009 (counting from January 1, 2009)
March 29, 2008: 88th day of 2008 (counting from January 1, 2008)
73 days + 1 year (subtracting the days and year)
Time between dates: 73 + 365= 438 days
b. Approximate time
June 10, 2009 March 29, 2008
Year: 2009 2008 = 1 or 360 days
Month: 4 2 = 2 or 60 days
Day: 40 29 = 11 days
Time between dates: 431 days

Since the number of days (10) in June is less than the number of days (29) in March, we convert one
month of 2009 to days and add them to the number of days (10) in June to make subtraction possible
with positive difference.
Problem 3: Find the simple interest on PHP8, 000 at 4% from March 15, 2009 to July 25, 2009.
Solutions:

Actual time:
July 25, 2009: 206th day of 2009
March 15, 2009: 74th day of 2009
132 days + 0
Time between dates: 132 days
Approximate time:
July 25, 2009 March 15, 2009
Year: 2009 2009 0
Month: 6 2 4 or 120 days
Day: 25 15 10 days
Time between dates: 130 days

132
Ord. int., actual time: 𝐼 = (8,000)(. 04) ( ) = 117.33
360
130
Ord. int., approximate time: 𝐼 = (8,000)(. 04) ( ) = 115.55
360
132
Exact int., actual time: 𝐼 = (8,000)(. 04) ( ) = 115.73
365
130
Exact int., approximate time: 𝐼 = (8,000)(. 04) ( ) = 113.97
365
Check your understanding
Find the Simple Interest based on the following data:
1. Php10, 000 at 4% from March 15, 2010 to August 25, 2010.
2. Php5, 000 at 4.5% from February 10, 2008 to June 13, 2009.
3. Php4, 500 at 3% from January 13, 2005 to May 18, 2006.
Lesson 1.2: Accumulation and Discount at Simple Interest
Accumulation is increasing the value of an initial amount through a business activity while discount
is reducing a given amount to yield its original value.
An accumulated amount (F) is the total amount realized at the end of investment. It consists of the
amount of money (P) invested at the beginning of investment plus the interest (I) earned at the end of
investment. Thus;
Formula:
F=P+I
= P + Prt because I = Prt
= P (1 + rt) extracting the common factor P from the two terms
Example
Problem 4. If Php200, 000 is invested at 5% for 3 years, then find the total amount that is expected to be
realized at the end of the investment?
Solutions: Given: P= 200,000 r= 0.05 t= 3

F = P (1 + rt) = 200,000 [1 + (0.05) (3)] = Php230, 000.00

A discount (I) is an amount representing the difference between the investment’s future value (F)
and its present value (P).
Formula:
I=F–P
Example:
Problem 5. If the price (F) of a refrigerator is P23, 000 and this amount is discounted to a new price of P18,
500, then what is its discount amount?
I = F – P= 23,000 – 18, 500 = 5, 500
Problem 6. Php50, 000 is invested at 6% for 6 years. How much income is generated from the investment
at the end of the term?
Solution. Given: P = 50,000 r = 0.06 t=6 I =?
F = P (1 + rt) = 50,000 (1 + (.06) (6)) = Php68, 000
I = F – P = 68,000 – 50, 000 = Php18, 000
A discounted value (P) by way of simple interest is the present value of a given worth of investment which
accumulated by simple interest.
𝐹
𝑃=
(1 + 𝑟𝑡)
Where: F – Total amount realized at the end of the investment
r- Interest rate
t –time (in years) to elapse for discount
𝐼
𝑟=
Examples
𝑃𝑡
Problem 7. The present value of a parcel of lot is Php125, 000. If this value is a result of accumulation at
8% for 5 years, then what is the original value of the lot 5 years ago?
Solution: Given. F= 125, 000 r= 0.08 t= 5 P=?

𝐹 125,000 125,000
𝑃= = = = Php89, 285.7
(1+𝑟𝑡) (1+(0.08)(5)) 1.4
So, the original price of the lot 5 years ago is Php89, 285.7.

Problem 8. Find the Interest rate applied in an investment if a capital of Php250, 000 accumulates to
Php400, 000 at the end of the fourth year.
Solution. Given: P = 250,000 F = 400,000 t = 4 r =?

I= F- P = 400,000 – 250, 000 = 150,000

𝐼 150,000
𝑟= = = 0.15 or 15%
𝑃𝑡 250, 000(4)

Problem 9. If money can be invested at 5.75% simple interest for 5 years and 8 months, find the present
value of Php35, 000.
Solution: Given: F = 35, 000 r = .0575 t = 68/12 = 17/3 P =?
F = P (1 + rt)
𝐹 35,000
𝑃= = 17 = Php26, 398.49
(1+ 𝑟𝑡) ( 1+(0.057)( 3 )

Problem 10. Find the present value of Php4, 500 discounted at 4% simple interest for 8 months.
Solution: Given: F = 4,500 r = 0.04 t = 8/12 = 2/3 P=?

𝐹 4,500
𝑃= = 2 = Php4, 326.92
(1+ 𝑟𝑡) ( 1+(0.06)( 3 )

Problem 11. Fourteen months ago, the price of a washing machine worth at present of Php22, 000 is Php18,
000. What rate was used to determine the present value of the washing machine?
Solution: Given: F = 22,000 P = 18,000 t = 14/12 = 7/6 r =?
I = F – P = 22,000 – 18, 000 = 4, 000
𝐼 4,000
𝑟= = 7 = 0.1905 = 19.05%
𝑃𝑡 (18,000)( )
6

Simple Discount refers to the portion of the projected sum to be deducted to yield its discounted value.
I= Fdt where: d- rate of discount
P= F(1- dt) P- original amount, or the discounted value of F
Problem 12. What sum is generated if an amount of Php50, 000 is discounted at 6% for 3 months?
Solution: given: F = 50,000 d = .06 t = 3/12 = ¼ P=?
1
𝑃 = 𝐹 (1 − 𝑑𝑡 ) = 50,000 (1 − 0.06 𝑥 ) = 𝑃ℎ𝑝49, 250
4
Problem 13: Suppose the present value of an investment is Php15, 000. Find the value of the investment at
the end of 10 months if a) it accumulates at 5% and b) it is discounted at 5%.
Solutions: Given: P = 15,000 t = 10/12 = 5/6 r = 0.05 d = 0.05
a) Find F when P accumulates at 5%
F = P (1 + rt) = 15,000(1 + 0.05 x 5/6) = Php15, 375
b) Find F when P is its discounted value at 5%
𝑃 15,000
𝐹= = = 𝑃ℎ𝑝15, 652.17
1 − 𝑑𝑡 5
1 − (0.05) ( )
6
Check your understanding
1. The amount of Php10, 000 is due at the end of 16 months. Find its present value if it is discounted at 5%.
Find the amount of discount.
2. What is the discounted value of Php15, 500 if discount rate is pegged at 4.5% for 6 months?
3. What is the discount rate if Php12, 400 is the future value of Php5, 500 after 8 months?

Lesson 1.3: Discounting a Promissory Note

A promissory note is a written promise to pay a stipulated amount, known as the maturity value, on
a specified date, known as the maturity date. The time between the notes is dated and the maturity date is
called the term of the note. The face value of the note may or may not include the interest. If the face value
is the same as its maturity value, then interest is already included in the face value, except when the note
specifies no interest to be charged.
Steps in computing for the discounted value (P*) of a promissory note
1. Compute first for the value of F at the give interest rate (r)
F = P (1 + rt)
2. Compute for the value of P* based on the value of F and at the given discount rate (d).
P* = F (1 – dt)
Problem 14: A promissory note with face value of Php65, 200, dated March 6, 2008, due in 70 days, bears
interest at 6%, and discounted for sale at 5% on April 20, 2008. What proceeds was generated from the
sale?
Solution: given: P = 65,200 r = 0.06 t = 70/360 d = 0.05
F = P (1 + rt) = 65,200(1 + 0.06 x 70/360) = Php65, 960.67
P* = F (1 – dt) = 65,960.67(1 – 0.05 x 26/360) = Php65, 722.48
So, the proceeds generated from sale is Php65, 722.48.
Problem 14: A note will mature in 25 months with expected value of Php1, 000,000. If this note was sold at
Php600, 000 after 10 months what discount rate was applied?
Solution: given: P = 65,200 r = 0.06 t = 70/360 d = 0.05
F = P (1 + rt) = 65,200(1 + 0.06 x 70/360) = Php65, 960.67
P* = F (1 – dt) = 65,960.67(1 – 0.05 x 26/360) = Php65, 722.48
So, the proceeds generated from sale of the promissory note is Php65, 722.48.
Check your understanding
Find the proceeds from sale of the promissory note with the following stipulations:
1. Face value of Php50, 000; dated Jan. 5, 2009; due in 1 year; bears interest at 11%; discounted for sale on
June 6, 2009 at the discount rate of 7%.
2. Face value of Php150, 500; dated May 2, 2008; due in 2 years; bears interest at 8%; sold at a discount
rate of 6% after 7 months.
3. A note is to mature in 13 months with expected value of Php650, 000. What discount rate was applied if
this note was sold at Php450, 500 four months before its maturity date?
 CHAPTER 2: COMPOUND INTEREST

COMPOUND INTEREST refers to that type of interest in which the interest due at the end of every
interval is added to the principal and thereafter earns interest over the whole period (or term) of
investment. The interval is the length of time in which the principal earns interest. The term consisting of
a set of intervals is the whole duration of investment. The sum realized at the end of the investment is
called compound amount or future value (F).

Working Formula
F  P(1 i)n
I = F – P = P(1 + i)n – P
= P[(1+i)n - 1]
Where: F – Compound amount (or final value of investment)
P – Principal (or invested capital)
i –interest rate per conversion period
j –nominal rate (or interest per year)
n –number of interest conversion over the term of investment
The factor (1 + i)n is called the accumulation factor of the principal P
Examples
Problem 1: Pedro, was contemplating of investing his Php50, 400 to a commercial bank that offers interest
at 6.5 % compounded annually for four years. If he has pushed through with his plan, then how much has
his money become after four years?
Solution: Given: P = 50,400 j = .065 m=1 t=4
i = j/m = 0.065/1 = 0.065
n = mt = 1(4) = 4
F = P(1 + i)n = 50,400(1 + 0.065)4 = Php64,837.90

Problem 2: Find the compound interest to be earned if a capital of Php25, 000 is invested for 6 years at 6%
compounded quarterly
Solution: given P = 25,000 j = 0.06 t=6 m=4
i = j/m = 0.06/4 = 0.015
n = mt = (4)(6) = 24
I = P [(1+i)n – 1] = 25,800[(1+0.015)24 – 1] = Php11,081.17

Check your understanding

1. Find the compound amount if a capital of Php100, 500 is invested for 20.5 years at a) 5% compounded
annually, b) 3% compounded bimonthly.
2. Suppose that a capital of Php20, 000 is invested now for a term of 10 years at the rate of 4% compounded
quarterly for the first 6 years and then at 6% compounded semiannually for the remaining 4 years, find the
sum to be yielded at the end of the term.

Simple Discount, discounting a given amount F, determined by way of compound interest, is the same as
finding its present value P on the date which is n interest intervals before F is due. In this case, P is viewed
as the discounted value of the accumulated amount, F, at any given time.
Formula

Problem 3: The man who shopped online, is arguing that the reason he ordered a pair of shoes is because
of the discount that the owner allegedly posted in the internet. The original price of the item is Php6, 500
and the discount is allegedly pegged at 12% compounded monthly for 8 months. So the man computed the
discounted value and accordingly paid the amount via credit card. However, there was no delivery at all
within the indicated time of 3 days. Upon verification, the owner informed the man that the discount is no
longer in effect and he need to pay the original price in order to get the item. How much more should the
man pay in order to get his order?
Solution: given F = 6,500; j = 0.12; m = 12; t = 8 mos. = 2/3 yr
i = j/m = 0.12/12 = 0.01
n = mt = 12(2/3) = 8
P = 6,500/ (1+0.01)8 = 6, 002.64
I = F – P = 6,500 - 6, 002.64 = 497.36
So, the man needs to pay Php497.36 more in order to get the item.
Check your understanding
1. In order to be able to purchase a parcel of land worth Php800, 000 five years from now, how much
money should be invested today at 8% interest compounded semiannually?
2. Determine if these transactions are the same: a) accumulating an amount of Php50, 000 at 7%
simple interest for 15 years and then discounting the result at 7% simple discount for 5 years, and
b) accumulating the given amount at 7% simple interest for 10 years?
Nominal and Effective Rates
Nominal rate (j) is the statement of rate per year based on which the compound interest rate per
conversion period is determined.
Effective rate (w) is the rate of interest earned in one year. It is equal to nominal rate compounded
annually. So, the statement of interest, “3% effective”, is equivalent to the statement of interest, “3%
compounded annually.
Working Formula

Examples
Problem 4: What is the effective rate corresponding to the nominal rate of 8% compounded bimonthly?
Solution: given: j = 0.08 and m = 6
w = (1 + 0.08/6)6 – 1 = 0.082715 = 8.27%
Problem 5: What nominal rate compounded quarterly is required to yield a 5% effective rate?
Solution: given w = 0.05 and m=4
j = 4[(1+ 0.05)1/4 – 1] = 0.049089 = 4.91%
Equivalent Rates

Examples
Problem 6: Find the nominal rate compounded quarterly that is equivalent to 12% compounded bimonthly.
Solution: given: j2 = 0.12, m2 = 6, m1 = 4
J1 = 4[(1 + 0.12/6)6/4 – 1] = 0.120598 = 12.06%
Problem 7: Juana invested her money of Php25, 000 to a company that offers interest of 6% compounded
monthly. After 3 years, she received an income of about Php4, 917. Another company is also accepting
investment but allows interest conversion to happen semi-annually. What interest rate should this other
company offer so that Juana will receive the same amount of income should she decide to invest in this
company?
Solution: given: j1 = 0.06, m1 = 12, m2 = 2
J2 = 2[(1+0.06/12)12/2 – 1] = 0.060755 = 6.0755%
Check your understanding
1. What rate compounded semiannually will yield the same yearly earnings equivalent to 6% simple
interest.
2. What simple interest rate is equivalent to 4% compounded quarterly?

Interest When n is not an integer

Problem 8: If a capital of Php50, 000 is invested at 6% compounded quarterly for 22 months, find the
approximate compound amount at the end of the term.
Solution: given: P = 50,000, J = 0.06, m = 4, t = 11/6 yrs. (22 mos.)
n = mt = 4(11/6) = 22/3 = 7 1/3 t = n/m
i = j/m = 0.015
F = P(1+i)n = 50,000(1.015)22/3 = Php55, 769.33
Problem 9: How much money was generated from a sale of a promissory note worth Php35, 500 that was
discounted at 4% for 28 months compounded semiannually?
Solution: given: F = 35,500, j = 0.04, t = 2 1/3 (28 mos), m = 2
i = j/m = 0.04/2 = 0.02
n = mt = (2)(7/3) = 14/3 = 4 2/3
t = (1/3)/2 = 1/6
P = F(i+1) –n = 35,500(1.02)14/3 = Php32, 366.39

Check your understanding

1. Find the compound amount for Php35, 000 that has been invested at 5.5% compounded every end of 4
months for 2 ½ years.
2. Find the value of the capital that accumulated to Php38, 700 for 5.5 years at 3% compounded annually
Unknown Rate and Time
Unknown Rate Formula
𝐹
j=m [( ) 1/n – 1]
𝑃

Examples
Problem 10: What nominal rate compounded semiannually should the lender charge the debtor so that his
money of Php24,700 will accumulate to Php36,400 in 3.5 years’ time?

Solution: given: P = 24,700, F = 36,400, m = 2, t = 3.5

n = mt = 2(3.5) = 7
J = m [(F/P)1/n – 1]
= 2[(36,400/24,700)1/7 - 1]
= 0.1139
= 11.4%

Unknown Time Formula

𝐹
log
𝑡= 𝑃
mlog(1 + 𝑖)

Problem 11: Invested at 8% compounded bimonthly, how long will it take Php23, 750 accumulate to Php30,
500?
Solution: given: j = 0.08, P = 23,750, F = 30,500, m = 6
i = J/m = 0.08/6 = 1/75 = 0.0133
𝐹
log
𝑃
𝑡=
mlog(1+𝑖)
30,500
log23,750
=
6log 1.0133
= 3.48 years

Check your understanding

1. A student plans to save money in order to be able to buy a laptop computer that is projected to be
worth Php67, 500 two years from now. If he invests his money of Php20, 900 now, what interest
rate compounded monthly should apply so that he can raise the cost of the computer?

2. A teacher wants to invest his money of Php15, 000 at 8.5% compounded bimonthly. How long will
she wait before her money will accumulate to Php25, 600?

Chapter 3: Annuity
Annuity is the sequence of periodic payment of equal sums of money until the debt is fully paid. The
time between the dates of any two successive payments is called payment interval. The time from the
beginning of the first payment interval to the last payment interval is called the term of the annuity.
The annuity whose term begins immediately is called ordinary annuity while the annuity whose term
begins after certain period of time is called deferred annuity.
Present Value and Amount of Annuity
Working formulas for determining the annuity’s present value and accumulated amount.
Case 1: Periodic payment is given.
Let A denotes the present value of the annuity and S denotes the amount of the annuity. Then it can be
shown that the formulas for A and S are as follows:
𝑝[1−(1+𝑖)−𝑛 ] 𝑝[(1+𝑖)𝑛−1]
𝐴= And 𝑆=
𝑖 𝑖

Case 2: Either the annuity’s present value (A) or its accumulated amount (S) is given. Then
A  S(1 i)n and S  A(1 i)n
Where: p - periodic payment m – number of interest period in a year

j –interest rate per year t – term of annuity in years

i -interest rate for a payment interval n - total number of payment intervals

i = j/m n = mt
Examples:
Problem 1: The realtor appearing in the picture at the right is selling a house and lot that requires payment
of Php25, 500 at the end of every month for 10 years. If the payment includes interest of 12% compounded
monthly, find a) the cash value of the house and lot and b) the worth of the house and lot, just after the last
payment.
Solutions: Given: p = 25, 500, j = 0.12, m = 12, t = 10, i = 0.12/12 = 0.01,
n = 12(10) = 120
25,000(1−1.01−120
a. 𝐴 = =Php1, 777, 363.31
0.01
The present value of the annuity of Php1, 777, 363.31 is the cash value (or cash price) of the house
and lot.
25,500(1.01120−1)
b. 𝑆 = = 𝑃ℎ𝑝5, 865, 986.58
0.01
Problem 2. (With down payment). A vehicle buyer agrees to pay Php300, 000 as down payment and Php25,
000 every end of each month for 3 years to discharge his debt. If money is worth 6% compounded monthly
a) how much does the buyer pay if he opts to pay in full the present price of the vehicle and b) how much
is the worth of the vehicle if the agreement is to be pursued?
Solutions:
a) The present value of the vehicle is its cash price which is composed of the down payment and the
present value of the annuity that is formed with the given interest rate. From the problem, p =
Php25, 000; j = 0.06; m = 12; t = 3. Thus, i = 0.06/12 = 0.005; n = 12(3) = 36.
A = down payment + present value of the annuity that is formed
25,000(1−1.005−36)
= 300, 000 +
0.005
= Php1, 121,775.41
b) The worth of the vehicle at the end of the term is the sum of the future value of the cash paid at the
beginning and the amount of the annuity that is formed.
25,000(1.00536−1)
S = 300,000(1.005)36 + = 𝑃ℎ𝑝1, 342,406.8
0.005
Problem 3. (With remaining liability after some payments have been made ). In order to finance his college
studies, a student borrowed money from a bank that charges interest of 8% compounded quarterly. If the
student is required to pay Php1, 500 at the end of each 4 months for 4 years, how much is a) the amount
borrowed by the student, b) the remaining unpaid amount just after the 6th payment is made.
Solutions:
a. The amount borrowed is the present value of the 4-year term annuity of Php1500 payable quarterly.
From the data, p = 1500; j = 0.08; m = 4, t = 4; hence, I = 0.02 and n = 16.
1500 (1 − 1.02−16 )
𝐴= = 𝑃ℎ𝑝20, 366.564
0.02
b. The balance amount just after the 6th payment is the present value of the last 10 payments that
have remained unpaid.
1500 (1 − 1.02−10 )
𝐴= = 𝑃ℎ𝑝13, 473.88
0.02
Problem 4. (With payment failure for some periods of time ). A man issued a check as down payment for
the purchase of a residential lot and agrees to pay Php4000 every end of 4 months for 6 years. After making
the first three payments, he stopped paying for the next two years. At the end of the third year, he decided
to make a single payment of his liability to complete the purchase of the lot. How much more money should
he pay if interest is 9% compounded every end of 4 months?
Solution
The total amount that he should pay includes the accumulated value of the 6 unpaid installments
and the present value of the payments yet to be made for the remainder of the term. From the problem, p
= 4000; m = 3; j = 0.09; t = 6; thus, i = 0.03 and n = 18.
Let B be the total balance amount to be paid immediately on a single installment. Then
4000(1.036 − 1) 4000(1 − 1.03−9 )
𝐵= + = 𝑃ℎ𝑝57, 018.08
0.03 0.03
Check your understanding
1. As payment to an amount borrowed with interest at 6% compounded semiannually, a student
promised to pay Php500 every end of each 6 months for 3 years. Find a) the amount borrowed, b)
the amount remaining to be paid after making the third payment, and c) the worth of the money
borrowed at the end of the third year.
2. Pedro paid Php500, 000 as down payment for the purchase of a car and agrees to pay Php30, 000
every end of a month for 3 years. After paying for one year, he stopped paying for the next two years.
At the end of the third year, he decided to make a single payment of his liability to complete the
purchase. How much more money should he pay if interest is 9% compounded monthly?
Unknown Periodic Payment
Working formulas
1. When the value of A is given
𝐴𝑖
𝑝=
1 − (1 + 𝑖)−𝑛
2. When the value of S is given
𝑆𝑖
𝑝=
(1 + 𝑖)𝑛 − 1
Where: p – periodic payment i – interest rate per payment Period
A – Present value of the annuity
S – Amount of the annuity
n – Total number of payment periods
Examples
Problem 1: The prevailing average cash price of medium size and brand new refrigerators that are being
sold at the super mart in La Trinidad, Benguet, is Php15, 000. These refrigerators can be bought on
installment basis lasting from 32 six months to at most three years. For an installment lasting for two years,
the average interest charge is 6% compounded monthly. How much is the monthly installment lasting for
two years is required to purchase these kinds of refrigerator?
Solution
The cash price of Php15000 is the present value of all future monthly payments at 6% effective (or
annual) interest during the term of the annuity. Thus, A = 15,000; j = 0.06; m = 12; t= 2. Also, i = j/m=
.06/12 = 0.005; n = mt = 12(2) = 24.
15,000(0.005)
𝑝= = 664.81
1 − 1.005 −24

Problem 2: After graduating from high school, a student decided to work for 3 years in a furniture shop to
earn money to finance his 2-year college studies. He projected that after 3 years, his intended course would
cost him approximately Php30, 000. How much money must he deposit at the end of each 3 months to a
saving account that charges interest at 8% compounded quarterly in order to accumulate the fund?
Solution
The amount of Php30, 000 is the total worth of his quarterly payments at the given interest rate for
3 years. So, S = 30,000; j=0.08; m = 4; t = 3. Consequently, i = .08/4 = 0.02; n=4(3) = 12.
30,000(0.02)
𝑝= = 2236.79
(1.02)12 − 1
Check your understanding
1.In order to accumulate a fund that is sufficient to purchase a laptop worth approximately Php50,000 18
months from now, a student plans to deposit part of her monthly allowance to a saving account with a
private bank that offers interest at 3% compounded monthly. How much should she deposit to generate
the fund at the end of the 18th month?
4. Five years ago, the cash price of 1 square meter of residential lot near Benguet State University is
Php500. What semiannual payment is required for the purchase of a lot for a period that ends now since 5
years ago if the current prevailing price of the same lot is Php3000 per square meter and if money is worth
8% compounded semiannually?

Unknown Interest Rate

Working formula
1 −1
𝑆 𝐴
1. 𝑖 = ( )𝑛 − 1 or 𝑖 = ( )𝑛 − 1
𝐴 𝑆

1 −1
𝑆 𝐴
2. 𝑗 = 𝑚[( )𝑛 − 1] or 𝑗 = 𝑚[( ) 𝑛 − 1] or j=mi
𝐴 𝑆

Where, as usual:
A - Present value of the annuity m – number of interest conversions
S - Final amount in a year
i - Interest rate per conversion period n – total number of periods in the life term of the annuity
j - Nominal rate
Examples
Problem 1: At what interest rate compounded semiannually will the annuity’s present value of Php10, 000
accumulate to Php20, 000 by semiannual payments of money for 5 years?
Solution. Given: A = 10,000; S = 20,000; m = 2; t=5
20,000 1
𝑖=( )10 − 1 = 0.07177 𝑜𝑟 7.18%
10,000
j = 2(0.07177) = 0.1435 = 14.35%
Problem 2: What nominal rate compounded semiannually was used to determine the property’s cash price
of Php8, 000 that would be worth Php14, 500 after 3 years.
Solution. Given: A = 8,000, S = 14,500 , m = 2, t=3
n = mt = (2)(3) = 6 yrs
1 1
𝑆 14,500
𝑗 = 𝑚[( )𝑛 − 1]= 2[( )6 − 1] = 0.2083928457 𝑜𝑟 20.84%
𝐴 8,000
Check your understanding
1. What interest rate compounded semiannually will a deposit of Php50, 000 be sufficient to sustain a
withdrawal of Php3500 every end of 6 months for 5 years.
2. In generating a fund of Php100, 000 that will be used to finance a college studies, a parent agrees to
deposit to an account with a saving bank Php4, 000 every end of 3 months for 4 years. What nominal
rate compounded quarterly is required to accumulate the given amount at the end of the term?

Unknown Time of Annuity

Working Formula
When S is given When A is given
𝑆𝑖 𝐴𝑖
log( 𝑝 +1) log(1− 𝑝 )
𝑡= 𝑡=
𝑚 log(1+𝑖) 𝑚 log(1+𝑖)
Where
S – Amount of the annuity p – payment amount
A – Present value of the annuity m – number of periods in a year
Examples
Problem 1: In an investment venture worth 12% compounded monthly, a freshman college IT student plans
to build a capital of Php50, 000 that he hopes will be sufficient to buy a computer unit that will enable him
to start an IT-related business sometime after graduation by depositing to a cooperative credit business
Php500 every end of a month as long as necessary until the target amount will have been accumulated.
How long will it take the fund to be generated? How much is the final amount left to be paid after the last
Php500 will have been paid?
Solution
50,000(0.01)
log ( + 1)
500
𝑡= = 5.805 𝑦𝑒𝑎𝑟𝑠
12 log(1.01)

For the total number of payments:

n = mt = 12(5.805) = 69.66
 In computing the final payment after the last Php500 will have been paid, accumulate the value of
the annuity, S, using the formula in computing final amount with simple interest. Here, the time, t, is the
year equivalent of the fractional value of n, and r is, as usual, the interest rate per year. Thus,
S = 500(1.0169 – 1)/0.01 = 49344.72, r = 12% = 0.12, and t = 0.66/12 = 0.055.
Final payment = Srt = 49344.72(0.12) (0.055) = Php325.68

Problem 2: In acquiring a laptop with a cash price of Php40, 000, a student agrees to pay a monthly
installment of Php500. If the interest is pegged at 3% compounded monthly, how long will he be able to
fully pay the worth of his debt? How much is the final payment?
Solution
The type of annuity illustrated in the problem is that of a diminishing annuity where the present value is
to be diminished by a sequence of payments. Therefore, the second formula should be used to compute
for the time of annuity termination.
40,000(0.0025)
log(1− 500
)
𝑡=
12 log(1.0025)
= 7.4474 𝑦𝑒𝑎𝑟𝑠, and n = mt = 12(7.4474) = 89.37
Thus the annuity will terminate in 7.4474 years or after 90 payments with the last payment
amount less than the regular amount of Php500.
The final payment will be computed similarly as above. Thus
Final payment = Srt = 49769.803(0.03)(0.031) = Php46.286

Check your understanding

1. A group of 4 students plan to put up a computer shop that requires a capital of Php260, 000. They
agreed that each will deposit Php2, 000 at the end of every month to an account in a bank. If the
bank offered an interest rate of 4% compounded monthly, then how long will they be depositing
before they can raise the amount? If they extend their paying time by 4 years more, how much is the
reduction in their individual deposit?

2. In order to raise fund worth Php10, 000,000, a man started depositing Php50, 000 at the end of
every month in a bank that offers interest rate of 16% compounded monthly. After two years of
depositing, the man felt he could hardly sustain his monthly deposit so he reduced it to Php20, 000.
With the new deposit, how much more time is added from the time it would have taken him to raise
the target amount had he maintain his original deposit?

Annuity Due
An annuity due is an annuity whose payment happens immediately or at the beginning of each payment
period.
Working Formula
Let A be the annuity’s present value and S its value at the end of the term. Then
𝑝(1+𝑖)[1−(1+𝑖)−𝑛] 𝐴𝑖
𝐴= and thus, 𝑝 = (1+𝑖)[1−(1+𝑖)−𝑛
𝑖 ]

𝑝(1+𝑖)[(1+𝑖)𝑛 −1] 𝑆𝑖
𝑆= and thus, 𝑝 = (1+𝑖)[(1+𝑖)𝑛
𝑖 −1]

Examples
Problem 1: Find the present value of an annuity of Php100 payable at the beginning of each 3 months for 2
years if interest is pegged at 8% compounded quarterly?
Solution: The present value of the annuity due is the sum of the first payment and the present value of the
ordinary annuity consisting of 7 (or n-1) future payments. Thus
100(1.02)[1−(1.02)−8 ]
𝐴= =Php747.20
0.02

Problem 2: What amount can be generated at the end of the term in an investment that requires payment
of Php2000 at the beginning of each 3 months for 2.5 years if interest is 10% compounded quarterly?
Solution: The value of S is the accumulated value of an ordinary annuity consisting of n + 1 payment periods
minus the value of the last payment which have not been made. Thus
2000 (1.025) [(1.025)10 − 1]
𝑆= = 𝑃ℎ𝑝3, 269.71
0.025

Check your understanding

1. A graduating student who availed of a loan about 4 years ago, with interest at 3% compounded
bimonthly, is now making his final payment of Php400. If he has been paying at the beginning of
every 2 months for 4 years, how much was his original loan? If the student was allowed to make a
single payment of his loan at the beginning of the last payment interval, how much will he pay?

2. How much money to be paid at the beginning of each 3 months for 3 years will be sufficient to
discharge a debt of Php100, 000 if interest is pegged at 12% compounded quarterly?

Deferred Annuity
A deferred annuity is an annuity whose term begins after the lapse of a specified time. The present
value of this type of annuity is the sum of the present values of all future payments computed from present
time onward minus the present value of the supposed payments for the duration of the period of
deferment.
Working Formula

Let d be the number of payment interval deferred and n the number of interval where
actual payments occurred. Then
𝑝(1 + 𝑖)−𝑑 [1 − (1 + 𝑖)−𝑛 ]
𝐴=
𝑖
𝐴𝑖 𝐴(1+𝑖 )𝑑+𝑛
And thus, 𝑝 = or 𝑝= 𝑖
(1+𝑖)−𝑑 [1−(1+𝑖)−𝑛] (1+𝑖)𝑛 −1

Examples
Problem1: Five years ago, a student loaned an amount that he used to finance his Engineering studies.
Today, he is being asked to start to payback by paying Php500 at the end of each month for 6 years, starting
on the first month of the 6th year onward. If the payments include interest of 3% compounded monthly,
how much money was borrowed?
Solution: The amount borrowed 5 years ago is the sum of the present values, at that time, of the monthly
payment of Ph500 for the span of 11 years (or 132 payments) from the date the loan was granted up to the
time it will be fully paid minus the sum of the present values of the supposed payments for the duration of
the deferment period which is 5 years (or 60 payment intervals). Thus
500(1.0025)−60 [1 − (1.0025)−72 ]
𝐴= = 𝑃ℎ𝑝28, 329.85
0.0025
Problem 2: A student who has approved “Income Generating Project” proposal by a financial institution
was granted a loan of Php20, 000 payable in 11 equal quarterly payments, and bearing interest at 1%
compounded quarterly. If he is given a privilege of making the first payment at the end of the second
quarter of the second year, how much is his quarterly payment?
Solution: The period of deferment consisted of 5 payment intervals the last of which is the first quarter of
the second year. The actual quarterly payments start at the end of the second quarter of the second year
and continued onward for a sequence of 12 payments. Thus, using either formula above,
20,000(0.0025)5+12 (0.0025)
𝑝= = 𝑃ℎ𝑝1, 715.15 or
(1.0025)12−1

20,000(0.0025)
𝑝= = 𝑃ℎ𝑝1, 715.53
(1.0025)−5[−1(1.0025)−12 ]

Check your understanding

1. A retiring teacher is offered two modes of getting his pension. The first mode is to get a lump sum of
Php500, 000 while the second is to get a cash of Php100, 000 and to receive Php5, 500 monthly within the
next 20 years the first of which is to be released at the end of the first month of the third year. If money is
worth 3% compounded monthly, which mode is favorable to the pensioner?
2. Find the periodic payment that would be sufficient to pay a debt of Php50, 000 with interest at 4%
compounded quarterly and payable in 10 equal quarterly payments if the first payment is due at the end
of a) first quarter of the third year, and b) first quarter of the fourth year?

Value of Annuity on Arbitrary Date Beyond the Term for Payments at the Beginning and at the End of an
Interval
The value of the annuity on a date beyond its term for payments occurring at the ends of the
intervals is the accumulated value of an ordinary annuity with term that ends on that date minus the
accumulated value of the annuity that has no actual payments. The value of the annuity on a date beyond
its term for payments occurring at the beginnings of the intervals is the accumulated value of the annuity
due at the end of the term by k intervals beyond the term.
Working Formula
Let k be the arbitrary number of intervals falling beyond the term, and n the total number of intervals
in the term. Then
Case 1: Value of the annuity on arbitrary date, k, beyond the term for payments occurring at the e nds
of the intervals.
𝑝(1+𝑖)𝑘 [(1+𝑖)𝑛−1] 𝑆𝑖
𝑆= and 𝑝=
𝑖 (1+𝑖)𝑘 [(1+𝑖)𝑛 −1]

Case 2: Value of the annuity on arbitrary date, k, beyond the term for payments occurring at the
beginnings of the intervals.
𝑝(1+𝑖)𝑘+1[(1+𝑖)𝑛 −1] 𝑆𝑖
𝑆 and 𝑝=
𝑖 (1+𝑖)𝑘+1 [(1+𝑖)𝑛 −1]

Examples
Problem 1: A student decided to build a capital that will enable him to start a business after he will graduate
4 years from today by depositing in a bank Php400 every end of each month for 4 years. If interest is set at
24% compounded monthly, how much is the accumulated value of his money at the end of 5 years?
Solution
The accumulated value of the money at the end of 5 years is the value of the ordinary annuity with 60
payment intervals minus the value of the annuity with 12 payment intervals. The subtraction of the value
of the annuity with 12 payments is justified by the fact that there were no actual payments made on these
intervals.
𝑝(1+𝑖)𝑘 [(1+𝑖)𝑛−1] 400(1.02)12[(1.02)48−1]
𝑆= = = 𝑃ℎ𝑝40, 255.78
𝑖 0.02

Problem 2: If deposit is made at the beginning of each payment interval in problem 1, what is the value of
the money at the end of 5 years?
Solution
The accumulated value of the money at the end of 5 years is the value that will result when the amount of
the annuity due at the end of 4 years is accumulated by one more year (or 12 intervals). This situation is
accounted in the formula below:
400(1.02)13 [(1.02)48−1]
𝑆= = 𝑃ℎ𝑝41, 060.90
0.02

Problem 3: In building a capital of Php80, 000 at the end of 6 years, a graduating student deposited
Php10, 000 4 years ago and will be depositing equal amount of money at the end of every 2 months for the
fifth year. How much is the periodic payment if interest is set at 10% compounded bimonthly?
Solution
The amount of periodic payment can be determined from the equation of values that may be formed at the
end of the fifth year which is the end of the term of the annuity. The values to be equated are the discounted
value of the amount at the end of 6 years by k intervals and the sum of the accumulated value of the annuity
with n payment intervals and accumulated amount of the cash paid with m-k intervals before the start of
the term of the annuity. This situation is encapsulated in the formula below:
𝑆−𝐶(𝑖+1)𝑚
𝑝= 𝑖
(1+𝑖)𝑘 [(1+𝑖)𝑛 −1
Where: S – amount at the end of the final period (time at D)
C – Cash paid at the beginning of investment (time at A)
m – Total number of intervals within the whole duration of investment (between A and D)
k – Number of intervals beyond the end of the term of the annuity (between C and D)
n – Total number of payment intervals of the annuity (between B and C)
Thus,
80,000−10,000(1.05)36
𝑝= 0.05 = 𝑃ℎ𝑝1, 800.24
(1.05)6[(1.05)24−1
Check your understanding
1. A student who availed of the government’s “study now pay later” program has been receiving
allowance of Php2, 500 every end of each month for 4 years ending today on agreement that he will
payback by a single installment at the end of 3 years from today. If money is worth 3% compounded
monthly, how much must he pay?
2. A student who has planned to generate fund has been depositing to his account in a credit
cooperative store Php250 at the beginning of each 2 months for 3 years. If interest is set at 6%
compounded bimonthly, how much money will have been generated at the end of 5 years?

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Name:________________________________________________________________________________Date:____________Score:________

Direction: Read and understand the question carefully. Choose the best answer then write the
corresponding letter on the space provided before the number.

_____1. Any business activity that generates income.

a. Interest c. Investment
b. Annuity d. Discount
_____2. How much is the ordinary interest of 8% on Php10, 000 at the end of 71 days.
a. 157.78 c. 156.78
b. 155.62 d. 158.78
_____3. How much is the exact interest of 8% on Php10, 000 at the end of 71 days.
a.157.78 c. 156.78
b.155.62 d. 158.78
_____4. What is the actual time between March 25, 2009 and June 13, 2010?
a. 445 days c. 438 days
b. 446 days d. 439 days
_____5. What is the approximate time between March 25, 2009 and June 13, 2010?
a. 445 days c. 438 days
b. 446 days d. 439 days
_____6. It increasing the value of an initial amount through a business activity.
a. Accumulation c. Discount
b. Interest d. Simple Interest
_____7. If Php250, 000 is invested at 4% for 3 years, find the total amount that is expected to be realized at
the end of the investment.
a.Php260, 000 c. Php280, 000
b. Php360, 000 d. Php348, 000
_____8. If Php300, 000 is invested at 4% for 4 years, find the total amount that is expected to be realized at
the end of the investment.
a.Php260, 000 c. Php280, 000
b. Php360, 000 d. Php348, 000
_____9. If the price (F) of a LED TV is Php12, 000 and this amount is discounted to a new price of Php10,
000, then what is its discounted amount?
a.Php2, 000 c. Php4, 000
b. Php3, 000 d. Php5, 000
_____10. What is the discounted amount of a washing machine if its price (F) is Php8, 000 and this amount
is discounted to a new price of Php6, 000?
a.Php2, 000 c. Php4, 000
b. Php3, 000 d. Php5, 000
_____11. What sum is generated if an amount of Php45, 000 is discounted at 5% for 5 months?
a. Php45, 062.5 c. Php46, 062.5
b. Php44, 062.5 d.Php47, 062.5
_____12. A promissory note with face value of Php75, 200, dated March 6, 2008, due in 70 days, bears
interest at 6% and discounted for sale at 5% on April 20, 2008. What proceeds was generated from the
sale?
a. Php74, 337 c. Php75, 337.69
b. Php73, 337.6 d. Php76, 337.69
_____13. Find the compound interest to be earned if a capital of Php30, 000 is invested for 5 years at 5%
compounded quarterly.
a. Php35, 460.12 c. Php38, 460.12
b. Php36, 460.12 d. Php37, 460.12
_____14. Find the compound interest to be earned if a capital of Php50, 00 is invested for 3 years at 5%
compounded quarterly.
a. Php56, 036.74 c. Php56, 036.73
b. Php58, 036.75 d. Php58, 036.73
_____15. What is the effective rate corresponding to the nominal rate of 10% compounded quarterly?
a.10.38% c. 9.38%
b.11.38% d. 10.18%
_____16. What is the effective rate corresponding to the nominal rate of 10% compounded bimonthly?
a.10.43% c. 11.38%
b.10.38% d. 11.43%
_____17. What nominal rate compounded quarterly is required to yield a 6% effective rate?
a.10.38% c. 5.67%
b.6.87% d. 5.87%
_____18. What nominal rate compounded bimonthly that is equivalent to 10% compounded quarterly?
a.9.86% c. 10. 86%
b.9.96% d. 9. 76%
_____19. If a capital of Php40, 000 is invested at 5% compounded quarterly for 22months, find the
approximate compound amount at the end of the term.
a. Php43, 813.26 c. Php44, 813.26
b.Php42, 813.26 d. Php44, 814.26
_____20. It is the sequence of periodic payment of equal sums of money until the debt is fully paid.
a. annuity c. deposit
b. payment interval d. interest