The Mathematics

of Finance
 Simple and Compound Interest
Interest is the amount paid for the use of money. It is also paid for the
money borrowed from a bank. The memory deposited or borrowed is
called the principal (P), the money paid for its use is called interest (I),
and how much is to be paid per P100 is called the rate (r) including the
time (t) involved usually given in years.

Simple Interest
It is the interest that does not become part of the principal. The
formula is I = Prt or A = P(1 + rt) where P is the Principal amount of
money to be invested at an Interest Rate r% per period for t, Number of
Time Periods.

Example 1. A 2-year loan of $500 is made with 4% simple interest. Find

the interest earned.
Solution:

Always take a moment to identify the values given in the problem.

Here are given:

Time is 2 years: t=2

Initial amount is Php500: P=500
The rate is 4%. Write this as a decimal: r=0.04
Now apply the formula:
I = Prt =500(0.04)(2) =40

Example 2. A business takes out a simple interest loan of Php10,000 at a rate

of 7.5%. What is the total amount the business will repay if the loan is for 8
years?
Solution:

The total amount they will repay is the future value, A. We are also given
that:
t=8
r=0.075
P=10000
Using the simple interest formula for future value:

A=P(1+rt)=10000(1+0.075(8))=Php 16000.
Compound Interest
It is the interest that the sum becomes the new principal amount. The
formula for annual compound interest, including principal sum, is:
A = P (1 + r/n)

Where:

A = the future value of the investment/loan, including interest

P = the principal investment amount (the initial deposit or loan amount)
r = the annual interest rate (decimal)
n = the numbers of times that interest is compounded per year
t = the number of years the money is invested or borrowed for
Example 1. If an amount of $5,000 is deposited into a savings account at an
annual interest rate of 5%, compounded monthly, the value of the investment
after 10 years.

This can be calculated as flows:

Solution:
Given: P = 5000, r = 5/100 = 0.05 (decimal), n = 12, t =10.
If we plug those figures into the formula, we get the following ( note that ^
indicates 'to the power of'):

A = 500 (1 + 0.05 / 12)[(¹²)¹º] = 8235.05.

So, the investment balance after 10 years is $8,235.05.

The theories and concepts on simple and compound interest are applicable in
business transactions when people are in to credit and loans. The charging of
interest may vary according to the terms and conditions specified and agreed
by both parties. The following are some of the transactions where type of
interest is applied.

Credit Cards and Consumer Loans

According to Latoya Irby (2019), a credit card is plastic card that lets you access
the credit limit your credit card issuer gives you. A credit limit is like a load.
However, instead of giving you the full loan in cash, the bank lets you take a
much of the credit as you want at a time and allows you to reuse the loan over
and over as long as you pay what you've borrowed.
Janet Berry-Johnson (2019) discussed that APR (annual percentage rate) is one of
the key factors you should consider when shopping for a credit card. finding the
lowest rate available to you means comparing offers and card terms carefully.
Here's what you should look for:
Introductory/promotional APR - Many cards offer an introductory APR,
usually 0 percent on balance transfers or purchases for anywhere from a few
months to a year. This can be super helpful, but make sure you read the terms
and conditions and pay off your balance before the APR jumps up its regular
rate.
Regular APR - After the introductory period, most cards offer a rangeof
variable APRs depending on your credithworthiness. Generally speaking, the
lower end of the APR range is reserved for comsumers with good excellent
credit. On the other side of the token, the higher APRs are for consumers at the
lower end of eligible credit scores. Yor actual rate will be determined by the
issuer when you apply, but looking at you credit scores before applying may
give you a better idea of what to expect.
 Cash Advance APR - Banks and issuers typically charge a higher rate for
cash advances, and interest accrues the moment you take the advance - sorry, no
grace period here. For this reason, we recommended avoiding credit card cash
advances whenever possible.

Penalty APR - if you miss a payment, the credit card company may raise
your rate in addition to charging you a late fee. Talk about adding insult to
injury.
Consumer loan means a secured or unsecured loan given to customers for
person, family, or household purposes, or for consumable items such as a car,
boat, manufactured home, home equity loan, home equity line of credit,
signature loan and signature line of credit, and recreational vehicle. It's is
usually given on the basis of borrower's integrity and ability to pay. It is also
called consumer lending, consumer credit , or retail lending. In general, the
higher your credit score, the lower the rate will be.
Individuals with excellent credit, which is defined as any FICO credit score
between 720 and 850, should expect to find rates at about 10% to 12%, and
many of these individuals may even qualify for lower rates. Lender's interest
rates on unsecured personal loans typically range between 5% and 36%.

Consumer loans must comply with the consumer protection regulation and
they are monitored by government regulatory agencies. Consumer loan does
not include mortgage loans used for home purchases and commercial loans.

Stocks, Bonds, and Mutual Funds

From Brittney Castro (2013), a stock is ownership is a company. When you
buy a stock, you buy a piece of the company. So if the company does well, you
do well. Congruently, if the company tanks, your stock tanks. Just like bonds,
there are many types of stocks because there are many different types of
companies out there. Large company stocks (large cap), mid cap stock, small
cap stock, international stock, emerging stock, tech stock.
The best way to describe a bond is to think of it like a loan. You loan your
money tot he government or a company, and in return they pay you interest for
the term of that loan. Typically, bonds are considered conservative types of
investment because you can choose the length and term of the bond and know
exactly how much money you will get back at the end of the term or
"maturity.“ There are many types of bonds, government bonds, corporate
bonds, short-term bonds, long-term bonds, municipal and inflation protected
bonds, etc. For example, the trader in the country was referring to the March 12
auction of reissued five year T-bonds, where the bureau of the Treasury raised
P15 billion as planned from the securities with a remaining life of your four
years and 10 months. The bonds fetched an average rate of 4.132%.
Mutual Funds represent another way to invest in stocks, bond, or
cash alternatives. You can think of mutual fund like a basket of stocks
or bonds. Basically, your money is pooled, along with the money of
other investors, into a fund, which then invests in certain securities
according to a stated investment strategy. The fund is managed by a
fund manager who reports to a board of directors. Let's assume you
wish to invest P100,000 in a Mutual Fund. You checked and saw that
the mutual fund's NAVPS (Net Asset Value per Share) price is
currently P1.75. Given the NAVPS value, if you invest,P100,000 you
will receive 57,142 shares of this mutual fund, computed as follows:
P100,000 divided by P1.75 = 57,142 shares x P1.75 NAVPS = p99,998.50
Home Ownership
Owner-occupancy or home-ownership (wikipedia) is a form of housing
tenure where a person, called the owner-occupier, owner-occupancy, or home
owner, owns the home in which he/she lives. This home can be house,
apartment, condominium, or a housing cooperative. In addition to providing
housing, owner-occupancy also functions as a real estate investment. Owner-
occupancy or home ownership is a form of housing tenure where the person,
called the owner-occupier, owner-occupant, or home owner, owns the home
in which he/she lives. This home can be house, apartment, condominium, or a
housing cooperative. In addition to providing housing, owner-occupancy also
functions as a real estate investment. For example, basically, the key rates of
Bangko Sentral ng Pilipinas influence housing loan interest rates in the
Philippines, Currently, the Base Lending Rate is recorded at 6% which means
your interest will be 3.5% on a (BLR-2.5%) loan.
John Forbes Nash Jr. (June
13,1928- May 23, 2015) was an
American mathematician who made
fundamental contributions to game
theory, differential geometry, and the
study of partial differential
equations. Nash's work has provided
insight into the factors that govern
chance and decision-making inside
complex systems found in everyday
life.
His theories are widely used in economics. Serving as a Senior Research
Mathematician at Princeton University during the later part of his life, he
shared the 1994 Nobel Memorial Prize in Economic Sciences with game
theorists Reinhard Selten and John Harsanyi. In 2015, he also, he also
shared the Abel Prize with Louis Nirenberg for his work on nonlinear
partial differential equations.
John Nash is the only person to be awarded both the Nobel Memorial
Prize in Economic Sciences and the Abel Prize.
In 1959, Nash showing clear signs of mental illness, and spent
several years at psychiatric hospitals being treated for paranoid
schizophrenia. After 1970, his condition slowly improved,
allowing him to return to academic work by the mid-1980s. His
struggles with his illness and his recovery became the basis for
Sylvia Nasar's biography, A Beautiful Mind, as well as a film of
the same namestarrings Russell Crowe as Nash.

On May 23,2015, Ansh and his wife Alicia were killed in a car
crash while riding in a taxi in the New Jersey Turnpike
Nash did groundbreaking work in the area of real algebraic geometry:
• Nash John Forbes (1952). "Real algebraic manifolds". Annals of
Mathematics. 56 (3); 405-21. doi:10.2307/1969649. JSTOR 1969649. MR
0050928. See "Proc. Internal. Congr. Math". AMS. 1952: 516-7.

His work in mathematics includes the Nash embedding theorem, which

shows that every abstract Riemannian manifold can be isometrically
realized as a submanifold of Euclidean space. He also made significant
contributions to the theory of nonlinear parabolic partial differential
equations and to singularity theory.
Mikhail Leonidovich Gromov writes about Nash's work:
Nash was solving classical mathematical problems, difficult problems,
something that nobody else was able to do, not even to imagine how to do
it. ... But what Nash discovered in the course of his constructions of isometric
embedding's is far from 'classical' - it is something that brings about a
dramatic alteration of our understanding of the basic logic of analysis and
differential geometry. Judging from the classical perspective, what Nash has
achieved in his papers is as impossible as the story of his life... His work on
isometric immersions... opened a new world of mathematics that stretches in
front of our eyes in yet unknown directions and still waits to be explored.
THANK YOU !