Module

(Semi Finals)

MATH 1
{Mathematics in The Modern
World}
1st Sem., AY 2023-2024
 MODULE 3
MATHEMATICS IN THE MODERN WORLD
In everyday life, people must strive to be intelligent in decision-making especially when it involves money. Many
people with a lot of money today have learned early on how to maximise the use of their wealth by investing their
money. Knowing how to secure one's financial well-being is one of the most important things to learn in life. No
matter how much or how little money you earn, it is important that you know the basics of saving, investing, and
grabbing opportunities for the security of your future.

In this chapter, you shall explore the different possibilities of dealing with money.

THE NATURE OF FINANCIAL MANAGEMENT

UNIT LESSONS:
Unit 1.1. Interest
Unit 1.2. Simple Interest
Unit 1.3. Compound Interest
Unit 1.4. Simple Annuity

SPECIFIC OBJECTIVES:
At the end of this unit, you are expected to:
a. calculate simple interest and compound interest;
b.calculate finance charges;
c. determine the present value of an annuity due

A. INTEREST

Ms. Theodosia Rodriguez is 25 years old, and is a new teacher. She wants to prepare for her future. She invests
her first salary of P-30,000.00 in a trust fund that pays 5 1/2% interest, compounded quarterly. She plans to retire
at age 60. How much money will she have on her retirement?

When someone deposits money in a bank, invests money in an investment house, or lends money to someone,
he or she earns additional money from the amount deposited, invested, or borrowed, after a certain period of
time. This is called interest.

In the problem above, the amount of P30,000 is the principal value of the investment, 5 1/2 % is called the
interest rate, and quarterly is called the conversion period.

Interest is defined as the cost of borrowing money. Interest is commonly calculated using one of two methods:
simple interest calculation, or compound interest calculation. Some investment agencies define interest as:

1. The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.
2. The amount of ownership a stockholder has in a company, usually expressed as a percentage.
 Simple and compound interests are basic financial concepts. Being thoroughly familiar with these terms will
help you make better decisions when taking out a loan or making investments, which may save you a lot of money
in the long run.

SIMPLE INTEREST

Simple interest is interest paid on the original principal only. The formula for calculating the simple interest is:

Interest = Principal × Interest Rate × Term of the loan

I = Prt

Where P is the principal amount invested or borrowed,

r is the interest rate, and
t is the time the money will be used or invested.

The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today
is called the future value. If the asset or cash has a simple interest levied on it, the future value is calculated using
the equation:
FV= Original investment × [1 + (investment rate × number of years)]

The formula I = Prt is used when the time is expressed in number of years. When the time is expressed in number
of months, then multiply the number of months divided by 12. When the time is expressed in number of days,
there are two ways of calculating the interest, namely: Ordinary interest and exact interest. For ordinary interest,
the number of days is divided by 360, while for exact interest, the number of days is divided by 365. Unless
otherwise specified in a problem, the ordinary interest applies.

Example 1
Grace borrowed ₱ 5,000 with a simple interest rate of 2.5%. She will use the money for 3 years and 7 months.
How much interest will Grace pay at the end of this period?

Solution:
Using the equation, I = Prt
=5,000(.025) (43/12)
= ₱ 447.92.
Example 2
Joyce went to a bank to borrow ₱ 100,000 for a gadget she wanted to buy. The bank charges
a simple interest of 5% and Joyce will repay this loan for a period of 3 years. How much interest
does she have to pay?

Solution:
Using the equation, I = Prt, and substituting values, this equation becomes
I =100,000(0.05) (3 years)
= ₱ 15,000.
Principal of ₱ 100,000 + Interest of ₱ 15,000)
So at the end of three years, Joyce has to return ₱ 115,000 to the bank,
 (Principal of ₱ 100,000 + Interest of ₱ 15,000)
Or have this solution:
using the formula; FV = Original investment × [1 + (investment rate × number of years)]
= 100,000 x [ 1 + 0.05 x 3 ]
= 100,000 x [ 1 + 0.15 ]
= 100,000 x 1.15
FV = ₱115,000

Activity 1, Answer the following;

1. How much interest is earned in 5 years on 3,000 pesos invested at an interest rate of
9% per year.

2. Sherly got ₱ 1,200.00 loan for 2 years. She paid ₱90.00 in interest. What was the
interest rate?

3. If you invest ₱ 1,000.00 in a saving account at a 3% annual interest rate, what is the
total value of the account after 10 years?

COMPOUND INTEREST

Compound interest is calculated on the principal amount and also on the accumulated interest of previous
periods, and can thus be regarded as "interest on interest." This compounding effect can make a big difference in
the amount of interest payable on a loan if compared to interest computed using the simple method. Compound
interest is the interest earned not only on the original principal but also on all interest earned previously. In other
words, at the end of each year, the interest earned is added to the original amount and the money is reinvested.

The formula for calculating the amount of money accumulated after n years, including interest is

Where; P is the principal amount (the initial amount you borrow or deposit),
r is the annual rate of interest (in decimal),
t is the number of years the amount is deposited or borrowed for, and
n is the number of times the interest is compounded per year.

In the formula for calculating the accumulated money after investing a principal for a certain period of time, it is
important to know the number of times interest will be earned if compound interest is applied. When calculating
compound interest, the number of compounding periods makes a significant difference. The basic rule is that th
higher the number of compounding periods, the greater the amount of compound interest. The following table
gives this information.
Example 1
Russell invested ₱ 50,000 in a bank that pays 8% compounded quarterly for 5 years. How much is his
money in the bank after 5 years?

Solution:
Using the formula, A= P(1+ r/n)nt , and substituting values will result in

A = 50,000 (1+ 0.08/4)4(5) and will yield

A = 50,000 (1.02)20
A = 74,297.37.

This means that the interest earned during the period of 5 years is
74,297.37 - 50,000 = 24,297.37.
Example 2
Deposit the principal amount of ₱10,000 into a savings account that pays interest at the rate
of 5%. What is the amount in the account after 1 year if the account is:
a. compounded annually
b. compounded semi-annually
c. compounded quarterly
d.compounded monthly
e. Which is advantageous to the investor?
Solution:
a. compounded annually
A = P (1+ r/n)nt ,
A = 10,000 (1+ 0.05/1)1
₱10,500

b. compounded semi-annually
A = P (1+ r/n)nt ,
A = 10,000 (1+ 0.05/2)2
₱10,506.25

c. compounded quarterly
A = P (1+ r/n)nt ,
A = 10,000 (1+ 0.05/4)4
₱10,509.45

d. compounded monthly
 A = P (1+ r/n)nt ,
A = 10,000 (1+ 0.05/12)12
₱10,511.62

e. The interest rate compounded monthly gives the highest interest for the same period of time.

Activity 2, Answer the following;

1. You borrow a money for ₱ 6,500 appliances. The bank loans you the money at 7.25%
compounded annually and would like you to pay off the said loan in 5 years. How much is your
total payoff?

2. Calculate the compound interest for a ₱1,000 investment under the following conditions;
Interest rate : 5%
Investment period : 10 years
Compunding : Monthly

3. Calculate the compound interest for a ₱3,000 investment under the following conditions;
Interest rate : 2.5%
Investment period : 5 years
Compunding : Semi-annually

SIMPLE ANNUITIES

It is very common for people to make regular financial transactions at equal intervals of time, for example,
regular deposits into an account or fund. Other examples include regular payments on a loan or mortgage,
monthly house rentals, annual premiums on insurance policies, installment payment when buying a car or a
house, and for senior citizens, monthly retirement benefits. These are called annuities.

An annuity refers to such regular equal deposits/payments made at equal time intervals. It is an investment
tool that allows money to grow and, at the end of the annuity period, will pay a certain amount of income.
The word annuity comes from the medieval Latin word "annuitas," meaning yearly or year.

In short, an annuity is a specified amount of money that is paid during specific intervals. The amount depends
on the type of annuity and amount of funds you make available. An annuity is often a major part of retirement
income streams, providing dependable income. You can receive a set of monthly amount for the rest of your
life if that is how you wish your annuity to be set up.

An annuity that is paid at the end of each term is called an ordinary annuity. If the annuity is paid at the
beginning of the term, it is called annuity due.
B.1. The Present Value of an Ordinary Annuity

The formula to use when calculating the present value of an ordinary annuity is:

where A is the present value of an ordinary annuity,

R is the amount of each periodic payment,
r is the rate per period or payment, and
n is the number of periods or payments.

A very good example of an ordinary annuity is a loan from a bank or from any lending instinution. The bank or the
lending institution gives the borrower a lump sum (at present) and the payments are made periodically in equal
installments.

Example 1
Miller likes to invest in annuity that will pay him ₱5,000 at the end of each month for 5 years after his retirement.
What is the present value of the annuity if the prevailing interest rate is 12% per year?

Solution:
Since Miller wants that payment be made at the end of each month, this is an ordinary annuity. Substituting values
to the formula, will result in

A = 224,775.19

Thus, Miller has to invest ₱224,775.19 now so that he will get ₱ 5,000 at the end of each month for 5 years
later.

Example 2
A four-year ordinary annuity has a present value of ₱10,000. If the interest rate is 5% per annum, how much is the
amount of the annuity payment?
Solution:
The details given are: A = 10,000,
r = 0.05/1 = 0.05 per year,
n=5
Substituting these values into the formula gives

Calculating for R yields

R = ₱2,309.75

B.2. The Future Value of an Ordinary Annuity

When regular payments are made and a lump sum is paid at the end of the period, this lump sum is called the
future value of an annuity. For example, if you deposit an amount in a bank every month for a year at a certain
interest rate, and you want your money at the end of the year, the total amount at the end of the year (your
monthly deposit plus the interests) is called the future value. In business, this is called a sinking fund. It is used to
save for expenses that will be incurred in the future. This is shown in the following diagram.

The future value of an ordinary annuity is the value of all equal payments accumulated at the end of the term.
The equation is

Where F is the future value of the ordinary annuity,

R is the periodic payment,
r is the interest rate, and
n is the number of payments.

Example 1
Winnie makes it a habit to deposit ₱ 1,000 into a bank account every month for 5 years. The account pays 4%
interest rate compounded quarterly. How much is her savings at the end of 5 years, assuming she does not
withdraw anything during that period?
Solution
The details given are: R = 1,000
r = 0.04/4 = 0.01 per quarter and
n = 20
Substituting these values into the formula,

This results in

Simplifying, it yields

F = 22,019.00

So Winnie will have ₱22,019.00 at the end of 5 years.

Example 2
Myrna is 50 years old now. She plans to retire at age 65, which is 15 years from now. She wants to
have half a million pesos at the end of her retirement. An investment company offered her a portfolio
that will give her an interest rate of 8% per annum. Assuming ordinary annuity, how much does she have
to pay per month so that she will be a half-millionaire when she retires?

Solution:
The details given are: F = 500,000
r = 0.08/12
n = 12 x 15 = 180

Solve for the periodic payment R using the formula

This formula can be manipulated to get

Substituting these values into the formula

Simplifying this equation yields R = 1,444.93

So, Myrna has to invest ₱1,444.93 per month for 15 years, or deposit that amount every month
180 times.
Activity 3, Answer the following;

1. Claire wants to take a nice vacation trip, so she begins setting aside ₱250 per month. If she
deposits this money on the first of each month in a savings account that pays 6% interest
compounded monthly, how much will she have at the end of 10 months?

2. In 18 years you would like to have ₱50,000 saved for your child's college education. At 6%
annual interest, compounded monthly, what monthly deposit must be made to accomplish this
goal?

3. Find the future value of an ordinary annuity with a term of 25 years, payment period is monthly
with payment size of $50. Annual interest is 6%.