Consumer Mathematics

Borrowing: Loans and Loan repayment

Essential Mathematics for the Modern World
Rizaldi C. Nocon/Ederlina G. Nocon

Prepared by:
FERDINAND M TALLEDO
Part-Time Instructor
E-Claro Academy
Objectives
1. Define loan, annuity and amortization.
2. Comprehend on terminologies of borrowing money.
3. Solve problems involving loans and loan repayment.
4. Appreciate the importance of knowing the concept of Borrowing
money.
What is a loan?
- Loan is a debt provided by one entity(an individual or
an organization) to another entity at an interest rate.
- Loans can be repaid through one time or several
payments. There are also cases involving a
single/several debts being settled through sigle/several
payment(s).
One - time payment
- The face amount of a loan payable at once in
given rate and time is given by F = P(1 + rt).
- Where F is the face amount/value. The amount
borrowed plus its interest gained.
- Pis the principal amount borrowed
- R is the rate of simple interest
- T is the time or length of the amount to be paid.
One - time payment
- The face amount of a loan payable at once in give
rate and time is given by F = P.
- Where F is the face amount/value. The amount
borrowed plus its interest gained.
- P is the principal amount borrowed
- r is the rate of interest being compounded
- m is the number of times of compounding each year
- t is the time or length of the amount to be paid.
Several Regular Payments
- Annuity is a sequence of equal payments made
regularly or periodically.
- The amount of each payment is referred to as the
regular or periodic payment, denoted by R.
- When regular payment is given,
P=R
Several Regular Payments
- Amortization is a debt repayment scheme in
which the original amount borrowed is repaid by
making equal payments periodically
- When principal amount is given,
R=
Multiple Debts and/or Payments
- Many transactions involving money often require that a set of debts be
replaced with another set due at different times brought by unexpected
availability or non-availability of funds.
- The values of obligations originally quoted will likely be different from what are
expected under prevailing rates.
- To solve problems like this, equation of values is applied.
- Equation of values is a mathematical statement which says that the dated
values of two sets of amount are equal when brought to a particular point in
time. The point is referred to as the comparison date.
- In the context of borrowing, debts = payments and these sums are obtained by
either accumulating or discounting the debts incurred or the payments made
toward the comparison date.
Sample Problems: One - time payment
1. What is the maturity value of an P8,000 debt
payable in 2 years at 12% simple interest?

2. James borrows P700,000 and promises to pay

the principal and interest at 15% compounded
monthly. How much must he repay after 7 years?
Solution: One - time payment
1. What is the maturity value of an P8,000 debt payable in 2 years at 12%
simple interest?

F = P(1 + rt)
= 8,000(1 + (12.75%)(2))
= 8,000(1 + (0.1275)(2))
= 8,000(1 + 0.255)
= 8,000(1.255)
= 10,040

The maturity value is P10,040

Sample Problems: One - time payment
2. James borrows P700,000 and promises to pay the principal and
interest at 15% compounded monthly. How much must he repay after
7 years?
F=P
= 700,000(1 +
= 700,000(1 +
= 700,000(1 +
= 700,000(
= 700,000(2.839113)
= 1,987,379.10

He must repay P1,987,379.10

Sample Problems: Several Regular Payments
1. If a smartphone is purchased with down payment of
P1000 and the balance will be paid at P1,075.83 a month
for 1 year. What is its cash price if the interest rate is 6%
compounded monthly?
2. Find the monthly amortization for P150,000 debt which is
to be repaid in 2 years at 7% interest compounded
monthly.
3. A P65,000 loan at 12% interest compounded semi-annually
is to be amortized every 6 months for 3 years. Find the
semi-annual payments and construct amortization table.
Sample Problems: Several Regular Payments
1. If a smartphone is purchased with down payment of P1000 and the
balance will be paid at P1,075.83 a month for 1 year. What is its cash
price if the interest rate is 6% compounded monthly?
P=R

= 1,075.83

= 1,075.83

= 1,075.83
Sample Problems: Several Regular Payments
1. If a smartphone is purchased with down payment of P1000 and the balance will be paid at
P1,075.83 a month for 1 year. What is its cash price if the interest rate is 6% compounded
monthly?
P=R

= 1,075.83

= 1,075.83

= 1,075.83
= 12,500
Hence, the price is downpayment + P
thus, 1,000 + 12,500 = 13,500
the cash price of the smartphone is P13,500.
Sample Problems: Several Regular Payments
2. Find the monthly amortization for P150,000 debt which is to be
repaid in 2 years at 7% interest compounded monthly.
R=
=

= 6,715.92
Sample Problems: Several Regular Payments
3. A P65,000 loan at 12% interest compounded semi-annually is to be
amortized every 6 months for 3 years. Find the semi-annual payments
and construct amortization table.
R=
=
= P13,218.57

Next, Construct a table of amortization

Tabel of amortization for 6 periods
Period Periodic Payment Interest Payment Principal Repayment Outstanding Principal
0
1
2
3
4
5
6
Tabel of amortization for 6 periods
Period Periodic Payment Interest Payment Principal Repayment Outstanding Principal
0 65,000
1 13,218.57
2 13,218.57
3 13,218.57
4 13,218.57
5 13,218.57
6 13,218.57
Tabel of amortization for 6 periods
Period Periodic Payment Interest Payment Principal Repayment Outstanding Principal
0 65,000
1 13,218.57 3,900 9,318.57 55,681.43
2 13,218.57
3 13,218.57
4 13,218.57
5 13,218.57
6 13,218.57

65,000 *0.06 = 3,900 13,218.57 – 3,900 = 9, 318.57 65,000 – 9,318.57 = 55,681.43

Tabel of amortization for 6 periods
Period Periodic Payment Interest Payment Principal Repayment Outstanding Principal
0 65,000
1 13,218.57 9,318.57 9,318.57 55,681.43
2 13,218.57 3,340.89 9,877.68 45,803.75
3 13,218.57
4 13,218.57
5 13,218.57
6 13,218.57

55,681.43 *0.06 = 3,340.89 13,218.57 – 3,340.89 = 9, 877.68 55,681.43 – 9,877.68 = 45,803.75

Tabel of amortization for 6 periods
Period Periodic Payment Interest Payment Principal Repayment Outstanding Principal
0 65,000
1 13,218.57 9,318.57 9,318.57 55,681.43
2 13,218.57 3,340.89 9,877.68 45,803.75
3 13,218.57 2,748.22 10,470.35 35,333.40
4 13,218.57 2,120.00 11,098.57 24,234.83
5 13,218.57 1,454.09 11,764.48 12,470.35
6 13,218.57 748.22 12,470.35 0.000
EVALUATION
1. On march 20, 2016, Ellen borrowed P36,500 from Elmer. She promised to pay
the principal and 11.85% simple interest on November 15, 2017. How much did
Elmer received on the said date?
2. Susan lends P50,000 to Jane on October 1, 2016. She expects Jane to pay the
principal and simple interest at 9% to fully settle the debt on March 28, 2017.
What amount will Susan received?
3. Find the present value of P54,000 due in 3 years and 8 months if the money is
worth 12% compounded semi-annually.
4. A brand new pick-up truck was bought for P420,000 down payment and
monthly installments of P10,000 at the end of each month for 3 ½ years. What is
the cash price of the truck if the money is worth 18% compounded monthly?
5. A P2.3 M loan at 12% interest compounded quarterly is to be amortized every 3
months for 1 ½ years. Find the quarterly payment and construct an amortization
schedule.