MATHEMATICS

OF INVESTMENT
CBMEC 1
Academic Year: 2022-2023
First Semester

Prepared by:
JANE A. ATENDIDO, LPT, MBA, CSE
 Lesson 9
ANNUITY DUE
You will calculate appropriate
unknown values using annuity due.
 ANNUITY DUE
An annuity due is a
repeating payment that is
made at the beginning of
each period.
 Ordinary Annuity vs.
Annuity Due
Ordinary Annuity
Timeline 0 1 2 3 4

Payment PMT PMT PMT PMT

Annuity Due
Timeline 0 1 2 3 4

Payment PMT PMT PMT PMT

Ordinary Annuity:
Formula
n
1+i −1
FVn =PMT
i
 Annuity Due:
Formula
n
1+i −1
FV =PMT (1+i)
n (due) i

Note: Just remember to include the (𝟏 + 𝒊) in your calculations if you

are solving the annuity due.
 Annuity Due:
Formula
1− 1+i −n
PVdue =PMT (1+i)
i

Note: Just remember to include the (𝟏 + 𝒊) in your calculations if you

are solving the annuity due.
Formula for periodic payment (PMT)

i 1
PMT=PVdue −n
1−(1+i) 1+i
Formula for outstanding liability (k)

− n−k
1− 1+i
PV =PMT (1+i)
k(due) i
 EXAMPLE 1
An investment of Php5,000 is made at the beginning of each
month for 3 years. If the interest is 12% compounded monthly,
how much will the investment be worth at the end of the
term?

Given:
PMT =Php5,000 r = 12%
t =3 m =12
n = 36 i =0.12/12 = 0.01
SOLUTION:
n
1+i −1
FV =PMT 1+i
n (due) i
1+0.01 36 −1
FV =5,000 1+0.01
n (due) 0.01

FV =Php217,538.24
n (due)
Ordinary Annuity

FVn =215,384.39

Annuity Due

FV =Php217,538.24
n (due)

Higher yield
 EXAMPLE 2
Mr. Rio borrows Php300,000 from RAS Bank Inc. for the
renovation of his office. The bank charges a 6% interest
compounded quarterly. He repays the loan by regular
payments at the beginning of every 3 months. If the loan is to
be paid in 4 years,

1) How much are his quarterly payments?

2) What would be his outstanding liability after the 10th
payment?

Given: PVdue = Php300,000 r = 6%

t = 4 years m=4
i = 0.06/4 = 0.015 n = 4x4 = 16
a.To solve for the regular payment,
i 1
PMT=PVdue −n 1+i
1− 1+i
0.015 1
PMT=300,000
−16 1+0.015
1− 1+0.015

PMT=Php20,915.79

300,000((0.015÷(1.015^(-16))(1÷(1+0.015))
b. To solve for the outstanding liability after (k)
10th payment,
− n−k
1− 1+i
PV =PMT (1+i)
10(due) i
− 16−10
1− 1+0.015
PV10 due = 20,915.79 1+0.015
0.015
PV =Php120,948.57
10(due)

20,915.79 ((1-(1.015)^(-6))÷(0.015)(1.015)
 EXAMPLE 3
A mortgage of Php500,000 is to be paid by monthly
payments over a period of 3 years. If the rate of interest is 1 %
per month,
(a)how much is the monthly payment if made at the
beginning of each month?
(b)how much is the outstanding liability after the 20th
payment?

Given: PVdue = Php500,000 r = 12%

t = 3 years m = 12
i = 1% = 0.01 n = 12x3 =36
a.To solve for the monthly payment,
i 1
PMT=PVdue −n 1+i
1− 1+i
0.01 1
PMT=500,000
−36 1+0.01
1− 1+0.01

PMT=Php 16,442.73

500,000((0.01÷(1.01^(-36))(1÷(1+0.01))
b. To solve for the outstanding liability after the
20th payment
− n−k
1− 1+i
PV =PMT (1+i)
20(due) i
− 36−20
1− 1+0.01
PV20 due =16,442.73 1+0.01
0.01
PV =Php 244,422.01
20(due)

16,442.73((1-(1.01)^(-16))÷(0.01)(1.01)
 Lesson 10
DEFERRED
ANNUITY
You will solve the appropriate
unknown values using deferred
annuity.
 Deferred Annuity
A deferred annuity is an
annuity whose term does
not begin until the
expiration of a specified
time.
 DEFERRED ANNUITY
1− 1+i −n
PVd =PMT(1+i)−d
i
1− 1+i −n
PMT=PVd (1+i) d
i
Present Value of Deferred Annuity
Timeline PMT PMT PMT PMT PMT

0 1 2 3 d d+1 d+2 d+3 d+4 d+n

Deferment Period (d) n periods
No Payments payments are made
 EXAMPLE 1
David deposited a certain amount of money today and is
supposed to receive 30 annual payments of Php5,000 each.
However, the annuity will be delayed for 4 years from today
and the applicable rate of interest is 5%. Calculate the
amount of money deposited if the annuity payment is
supposed to be made at the end of each year.

Given: PMT=Php5,000 r=5% m=1

i =0.05 n =30 d=4
SOLUTION-1:
1− 1+i −n
PVd =PMT(1+i)−d
i
1− 1+0.05 −30
PVd =5,000(1+0.05 ) −4
0.05

PVd =Php63,234.77
 EXAMPLE 2
Let us now assume that all the conditions remain the same as
in Example 1 except that in this case the annuity payment is
supposed to be made at the beginning of each year.
Calculate the amount of money deposited today by David.

Given: PMT=Php5,000 r=5% m=1

i =0.05 n =30
d = tm−1 = 4(1)−1 = 3
SOLUTION-2:
1− 1+i −n
PVd =PMT(1+i)−d
i
1− 1+0.05 −30
PVd =5,000(1+0.05 ) −3
0.05

PVd =Php66,396.51
 EXAMPLE 3
Mr. Sanchez purchased a new car for Php800,000 and made
a 40% down payment. The rest will be paid in a monthly
installment for 3 years, the first of which will start at the end
of 1 year. If money is worth 6% compounded monthly,
(a)how much is the monthly installment,
(b)how much is the remaining liability after the 10th
payment?

Given: PVd = P800,000 (0.60) = Php480,000 r=6% m=12

i=0.06/12 = 0.005
t=3 years
n=3x12 = 36
d = 1(12)-1 = 11
(a)To solve for the monthly payment
d i
PMT=PVd 1+i
1− 1+i −n

11 0.005
PMT=480,000(1.005)
1−(1+0.005)−36

PMT=Php15,426.05

480,000×(1.005^(11)) ×(0.005÷(1-(1.005^(-36))))
(b) To solve for the remaining liability after the (k)
10th payment
− n−k
−d 1− 1+i
PVkd =PMT 1+i
i
1− 1+0.005 −(36−10)
PVkd =15,426.05(1+0.005) −11
0.005
PVkd =Php355,192.16
 Lesson 11
AMORTIZATION
You will prepare an amortization
schedule.
 Amortization
refers to the process of
paying off a debt through
scheduled, pre-determined
installments that include
principal and interest
 EXAMPLE
Joseph bought a handy cam worth Php36,999.00. The RAS
Photoshop charges interest on installment payment at 10%
compounded quarterly. If the handy cam is to be paid in 2
years,
(a) what must be the size of the quarterly payments?
(b) construct an amortization schedule,
(c) find the interest of the 4th payment, and
(d) find the outstanding principal after the 4th payment.

Given: PV =Php36,999 r =10% m=4

i =0.10/4 = 0.025 n =2 × 4 = 8
(a)To solve for the quarterly payment
i
PMT=PV
1− 1+i −n
0.025
PMT= 36,999
1− 1+0.025 −8

PMT=5,160.15
(b) To construct the amortization schedule
Outstanding
Payment on Repayment
Periodic Principal
Interest Principal
Period Payment 𝑂𝑃
𝑃𝑂𝐼 𝑅𝑃
𝑃𝑃 (𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑂𝑃
(𝑂𝑃 × 𝒊) (𝑃𝑃 − 𝑃𝑂𝐼)
− 𝑅𝑃)
0 P36,999.00
1 You may useP924.98
P5,160.15 the MS Excel for
P4,235.18 32,763.83
2 5,160.15 819.10 4,341.05 28,422.78
constructing/preparing
3 5,160.15 710.57
the amortization
4,449.58 23,973.20
4 5,160.15 schedule
599.33 4,560.82 19,412.38
5 5,160.15 485.31 4,674.84 14,737.54
6 5,160.15 368.44 4,791.12 9,945.83
7 5,160.15 248.65 4,911.50 5,034.33
8 5,160.15 125.86 5,034.29 0.00
Total P41,281.20 P4,282.20 P36,999.00
(c) The interest in the 4th payment is
lk =PMT 1− 1 + i −(n−k+1)

lk =5,160.15 1− 1 + 0.025 −(8−4+1) =599.33

 (d) To find the outstanding principal after the 4th
payment
1− 1+i − n−k
PVk =𝑷𝑴𝑻
i
− 8−4
1− 1+0.025
PV4 =5160.15 =19,412.35
0.025
 Lesson 12
PERPETUITY
You will solve the appropriate
unknown values using perpetuity.
 Perpetuity
a stream of cash flow
payments continues
indefinitely or is an annuity
that has no end.
PV of Simple Ordinary Perpetuity

R r
A= , i=
i m
PV of Simple Perpetuity Due

R R
A=R+ or A= (1+i)
i i
PV of Simple Deferred Perpetuity

R 1−(1+i)−d R 1
A= −R or A=
i i i (1+i)d
 EXAMPLE 1
If money is worth 12% compounded quarterly, find the
present value
a) of a perpetuity of Php9,000 payable quarterly
b) of an annuity of Php9,000 payable quarterly for 20 years

Given: R=Php9,000 r=12% m=4 t=20 years i=0.12/4=

0.03
(a) PV of a perpetuity of php9,000 payable quarterly
R 9,000
A= = =Php300,000
i 0.03
(b) To solve for annuity for 20 years
1−(1+0.03)−80
PV=9,000 =Php271,806.87
0.03
 EXAMPLE 2
If money is worth 5%, find the present value of a perpetuity if
Php2,000 is payable at the beginning of the year.

Given: R=Php2,000 i=0.05

R 2,000
A=R+ =2,000+ =Php42,000
i 0.05

R 2,000
Or A= 1+i = 1+0.05 =Php42,000
i 0.05
 EXAMPLE 3
If money is worth 8%, compounded quarterly, find the
present value of a sequence of payments of Php2,000 each,
a) at the end of 3 months forever;
b) at the beginning of each 3 months forever.

Given: R=Php2,000 i=0.02 m=4 r=8%

R 2,000
A= = =Php100,000
i 0.02

R 2,000
A=R+ =2,000+ =Php102,000
i 0.02
 EXAMPLE 4
If money is worth 10%, obtain the present value of a
perpetuity of Php1,000 per year payable annually, with the
first payment due at the end of 6 years.
Given: R=Php1,000 i=0.1 m=1 r=10% d=tm−1=6(1)−1=5

−5
R 1−(1+i)−d 1,000 1− 1+0.1
A= −R = A= −1,000 =Php6,209.21
i i 0.1 0.1

R 1 1000 1
A= = A= =Php6,209.21
i (1+i)d 0.01 (1+0.01)5
You will prepare a sinking fund schedule.
SINKING FUND
 EXAMPLE 1
In discharging its debt, Quitain Corporation foresees the need
to have P500,000 at the end of 2 years. To provide for this
amount, the corporation will create a sinking fund by
investing equal deposits at the end of each month at 6%
interest compounded monthly.

a) Find the monthly deposit.

b) Determine the amount of the fund after 1 year.
c) Determine the interest to be earned on the 12th deposit.

Given: FV=500,000 t=2 years r=6% m=12

n = 2 x 12 =24 i = 0.06/12 = 0.005
(a)To find for the monthly deposit

i 0.005
PMT=FV n = 500,000
1+i −1 1+0.005 24 −1

PMT=500,000 (0.03932061)

PMT=Php19,660.31
500,000×(0.005÷(1.005^(24)-1))
(b) To find the amount of the fund after 1 year

k 12
1+i −1 1+0.005 −1
FVk =PMT =19,660.31
i 0.005
FV12 =19,660.31(12.33556237)

FV12 = Php242,520.98

19,660.31×((1.005^(12)-1) ÷0.005)
(c) To find the interest to be earned on the 12th
deposit

Ik =PMT 1+i k−1 −1

I12 = 19,660.31 1+0.005 12−1 −1

I12 =P1,108.76

19,660.31×((1.005^(12-1)) −1)
Sinking Fund Schedule
Sinking Fund Schedule cont.
1 1

for paying off

existing debts
 Lesson 13
Any question?
You will solve the bond price and construct an investment
schedule.
BONDS
BONDS
 Bonds can be issued and traded at
different values relative to their face
value, resulting in three scenarios:
 Bond Certificate

A bond certificate is a legal

document describing the
indebtedness of a borrower
and the terms under which
that indebtedness will be
paid back to the investor.

The entity that issues a

bond certificate is referred
to as the issuer.
https://i.pinimg.com/originals/a1/21/a9/a121a99909c04daf4c05b0436618d2e2.jpg
Why do people buy bonds?
Why issue bonds?
Book Value of a Bond
Formula to find the Bond Price:
Example #1
Solution-Example #1

4,000×((1-(1+0.03^(-5))÷0.03)+(200,000÷(1+0.03^5))
 Example 1 (Discount Bonds)
Interest on
Interest on Discount Change in the Book
Period Book Value at
Bond Amortized Value
Yield Rate
IBVY IB DA=BVY-IB Previous CBV+DA
190,840.59
1 5,725.22 4,000.00 1,725.22 192,565.81
2 5,776.97 4,000.00 1,776.97 194,342.78
3 5,830.28 4,000.00 1,830.28 196,173.07
4 5,885.19 4,000.00 1,885.19 198,058.26
5 5,941.75 4,000.00 1,941.75 200,000.00
Total 29,159.42 20,000.00 9,159.42
Table 1: Amortizing Bond Discount (below par)
The book value at the beginning of any period is simply the price at which the bond must be bought to
yield the investor’s rate.
You will solve depreciation using the straight-line method.
DEPRECIATION
Three Main Inputs Required To
Calculate Depreciation
Three Main Inputs Required To
Calculate Depreciation
Three Commonly Used Methods
To Calculate Depreciation
Straight-Line Depreciation
Method
Straight-Line Depreciation
Method
Example #1
Depreciation Table Using Straight-line Method
Book Value Annual Net Book Value
Year
(Beginning Year) Depreciation (End Year)
1 ₱ 100,000.00 ₱ 8,000.00 ₱ 92,000.00
2 92,000.00 8,000.00 84,000.00
3 84,000.00 8,000.00 76,000.00
4 76,000.00 8,000.00 68,000.00
5 68,000.00 8,000.00 60,000.00
6 60,000.00 8,000.00 52,000.00
7 52,000.00 8,000.00 44,000.00
8 44,000.00 8,000.00 36,000.00
9 36,000.00 8,000.00 28,000.00
10 ₱ 28,000.00 8,000.00 ₱ 20,000.00
Unit of Production Method
Unit of Production Method
Example #2
 Lesson 15
Any question?
You will solve depreciation using the declining balance method..
Double-Declining method
When is the Double Declining
Method used?
 How to Calculate Double
Declining Balance Depreciation
 How to Calculate Double
Declining Balance Depreciation
The formula

SLD% = Straight-line depreciation percent

BB = book value at the beginning of the accounting period
 EXAMPLE 1
On April 1, 2012, company X purchased equipment for 100,000.
This is expected to have 5 useful life years. The salvage value
is 14,000. Company X considers depreciation expense for the
nearest whole month. Calculate the depreciation expenses
using a declining balance method until its useful life.

Useful life = 5
SLD%= 1/5 = 0.2 or 20% per year
Depreciation rate = 20% × 2 = 40% per year
 EXAMPLE 1
Depreciation for the year 2012
= 100,000 × 40% × 9/12 = 30,000

Depreciation for the year 2013

= (100,000−30,000) × 40% ×12/12 = 28,000

Depreciation for the year 2014

= (100,000−30,000− 28,000)× 40% ×1 = 16,800
Depreciation table (accelerated depreciation
method) is shown below:
Book Value Depreciation Depreciation Net Book Value
Year
(Beginning) Rate Expense (End of the Year)
100,000×0.4×(9÷12)
2012 ₱ 100,000.00 40% ₱ 30,000.00 ₱ 70,000.00
2013 70,000.00 40% 28,000.00 42,000.00
2014 42,000.00 40% 16,800.00 25,200.00
2015 25,200.00 40% 10,080.00 15,120.00
2016 ₱ 15,120.00 40% 1,120.00 ₱ 14,000.00

Depreciation for 2016 is 1,120 to keep the book value the same as salvage value.
15,120 – 14,000 = 1,120 (At this point, the depreciation should stop.)
Quiz: In 1 whole pad, compute for the following investment
opportunity. Show the given, solution and final answer.