Math Economics

simple interest • F = future worth

• F=P+I • P = Principal or Present

worth
• I=P r t

• r = rate (simple interest)

• bankers days = 360 per year
• ordinary days = 365
• leap years = 366 • t = time in years… …
• compound interest • interest rate – 12%
• years of investment – 6
• F = P(1+i)n

• compounded annually
• An Engineer construct a house and sell it on
monthly installments of P25,000 and it will be
fully paid in 7 years. If the rate of interest is
12% compounded monthly, what is the
equivalent cash price of the house in
thousand of pesos?

• ans. 1, 416, 211.00

• given

• A = 25, 000 monthly

• n = 7yrs. x 12m0ns. n = 84mons.
• i = 12% / 12mons. = 0.015

• required P w/ respect to ordinary annuity

A [ ( 1 + i )n – 1]
P=
( 1 + i )n i
 0 1 2 3 4 5 82 83 84

A A A A A A A A

P
25, 000 [ ( 1 + 0.01)84 - 1 )]
P=
( 1 + 0.01)84 (o.01)

input Calculator !
ans. P = 1, 416, 211.32
 0 1 2 3 4 5 82 83 84

A A A A A A A A

A [ ( 1 + i )n – 1] F
F=
i
25, 000 [ ( 1 + 0.01)84 - 1 )]
F=
0.01
Calculator!
F = 3, 266, 806.86
 rechecking
F = P ( 1 + i )n

3, 266, 806.86 = P (1 + o.o1)84

P = 1, 416, 211. 32
 Problem 2

Compound Interest
Ordinary annuity
 A Geodetic Engineer wants to provide his newly born
son a lump sum of one million pesos when he starts
college at the end of 17 yrs. To achieve this, he deposits
at the end of every month a certain amount in a fund
that pays an interest rate of 12% compounded
monthly. How much is the monthly deposit.

Required is (A) amortization w/ respect to Ordinary

Annuity.

A [ ( 1 + i )n – 1]
F=
i
 Given
• n = compounded monthly for 17 years
n = (12mos./yr )(17 yrs)
n = 204 mos.

• F = 1, 000, 000 = future worth

• i = (12%)/(12mos.)
• i = 0.01
 0 1 2 3 4 5 202 203 204

A A A A A A A A

F = 1 000 000
A[(1+i )n –1]
F =
i
1 000 000 = A [(1 + 0.01) 204 - 1
0.01

Calculator !
ans:
A = 1512.15
• The following terms of payment for an annuity are as follows:

• Periodic Payment = 20 000 = A

• Payment interval = 1 month =
• Interest rate = 18% compounded monthly = 0.18/12 = 0.015
• Terms 15 yrs. = 15 x 12 = 180 yrs.

• What is the Present Worth of all payments if it is paid at the end of each
month.
– Ans : 1, 241, 911.25

• What is the difference between the sums of an annuity due and an

ordinary annuity on these payments.
– Ans : 271, 687.35

• What is the difference bet the present values of an annuity due and an
ordinary annuity on these payments.
– Ans : 18, 628.67
0 1 2 3 4 5 178 179 180

A A A A A A A A = 20, 000

P = A [ ( 1+ i )n - 1]
( 1+ i )n ( i )

P = 20, 000 [( 1 + 0.015)180 – 1]

( 1 + 0.015)180 (0.015)

Ans :
P = 1, 241, 911.246
 What is the difference between the sums of an annuity due and an ordinary annuity
on these payments.
Ans : 271, 687.35

0 1 2 3 4 5 178 179 180

A = 20, 000
A A A A A A A

Ordinary Annuity F = A [ ( 1 + i )n - 1]
i

0 1 2 3 4 5 178 179 180

A A A A A A A A = 20, 000
A [ ( 1 + i )n - 1] = F1
Annuity Due i F2 = P(1+i)n
• Ordinary Annuity • Annuity Due
• F = A[(1+i)n – 1] • F = P(1+i)n
i
• F = 18, 112, 490.25 (1+0,015)1
• F = 18, 384, 177.60 ann. due.
• F = 20000[(1+0.015)180 –1]
0.015 • “Note that n = 1 bec. there is no
succeeding date…. after 180
months…”
• F = 18, 112, 490.25 ord. ann.
• Ann. Due. - Ord. Ann. = difference
• “Future worth in Ord. Ann. will become
Present Worth with respect to Ann.
Due.” • = 18, 384, 177.60 - 18, 112, 490.25
• = 271, 687.35
 0 1 2 3 4 5 178 179 180

A A A A A A A A = 20, 000

P = A[(1+i)n - 1]
(1+i)n - (i)
Ordinary Annuity

0 1 2 3 4 5 178 179 180

A A A A A A A = 20, 000

P = A[(1+i)n - 1]
(1+i)n - (i)
Annuity Due
ordinary annuity
P = 20, 000[(1+0.015)180 – 1]
(1+0.015)180 (0.015)
P = 1, 242, 911.246
annuity due

P1 = 20, 000[(1+0.015)179 – 1]
(1+0.015)179 (0.015)
P1 = 1, 240, 539.915
P = P1 + A = 1, 240, 539.915 + 20, 000
P = 1, 260, 539.915
Pann _due - Pord_annuity = difference

18, 628. 669 = difference

ans: