MATHEMATICS

OF INVESTMENT
By: MICHAEL T. LUMAWIG
EXAMPLE
Finding the Term of Ordinary Annuity
39
QUESTION
: Irene is setting up a fund of ₱60,000 to purchase a computer. If she deposits
₱12,000 in a bank every end of the quarter, which pays an interest of 12%
compounded quarterly, how long will it take her to raise the desired amount?

SOLUTION
GIVEN: :
Fa = A
A = ₱12,000
P.I.= quarterly 60,000 = 12,000
r = 12% n = 4.728
f=4 n = f•t
Fa = ₱60,000 t = n/f
t=? t = 4.728/4
t = 1.182 years
EXAMPLE
Finding the Interest Rate of Ordinary Annuity
40
QUESTION
: The present value of ordinary annuity of ₱293,076 every end of 6 months for
5 years is ₱2,500,000. Find the nominal rate compounded semi-annually.

SOLUTION
GIVEN:
:
Pa = A
P.I. = semi-annually
t = 5 years 2,500,000 = 293,076
r=? i = 0.030
f=2
i = r/f
Pa = ₱2,500,000
r = f•i
A = ₱293,076 r = 2(0.030)
r = 0.06 or 6%
EXAMPLE
Finding the Amount of ANNUITY DUE
41
QUESTION
:
Mae deposited ₱10,000 every beginning of the quarter for 1 year at 12% compounded
quarterly. Determine the amount at the end of the term.
SOLUTION
:
CASH FLOW
DIAGRAM:
Fa =10,000(1 + )4 + 10,000(1 + )3
₱10,000
₱10,000
+ 10,000(1 + )2 + 10,000(1 + )1
₱10,000
₱10,000 Fa = ₱43,091.36

0 1 2 3 4 Fa = A (1+i)
QUARTER

Fa =10,000 (1+0.12/4)
Fa = ₱43,091.36
EXAMPLE
Finding the Present value of ANNUITY DUE
42
QUESTION
: Mae deposited ₱10,000 every beginning of the quarter for 1 year at 12%
compounded quarterly. Determine the present value of the ordinary annuity.

SOLUTION
:
CASH FLOW
DIAGRAM:
Pa = 10,000 + 10,000(1 + )-1
₱10,000
₱10,000 + 10,000(1 + )-2 + 10,000(1 + )-3
₱10,000 Pa = ₱38,286.11
₱10,000

0 1 2 3 4 Pa =A (1+i)
QUARTER

Pa = 10000 (1+0.12/4)
Pa = ₱38,286.11