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Consumer Mathematics: Gwendolyn Tadeo

This document provides an overview of key concepts in consumer mathematics, including definitions of important terms like principal, interest rate, and future value. It then discusses simple and compound interest, using formulas to calculate interest and future values. The document also covers equations of values, annuities (ordinary, annuity due, deferred), and formulas for calculating present and future values of annuities. Examples are provided throughout to demonstrate applications of the concepts and formulas.

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109 views14 pages

Consumer Mathematics: Gwendolyn Tadeo

This document provides an overview of key concepts in consumer mathematics, including definitions of important terms like principal, interest rate, and future value. It then discusses simple and compound interest, using formulas to calculate interest and future values. The document also covers equations of values, annuities (ordinary, annuity due, deferred), and formulas for calculating present and future values of annuities. Examples are provided throughout to demonstrate applications of the concepts and formulas.

Uploaded by

proximus
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Consumer Mathematics

Gwendolyn Tadeo

Saint Louis University

October 22, 2019

Gwendolyn Tadeo Consumer Mathematics


Important Terms

Denition
The amount deposited in a bank or borrowed from a bank is called the
principal.
From investor's viewpoint, interest is the income from an invested
amount at given rate for a given time.
From the debtor's viewpoint, interest is the money paid for the use of
the borrowed money.
The percent used to determine the amount of interest is called the
interest rate.
The future value or the maturity value, is the nal amount of the
amount the borrower or debtor would pay back the lender or investor.

Gwendolyn Tadeo Consumer Mathematics


Simple Interest
Simple interest is usually associated with loans and investments which
are short term in nature.
=⇒ It is computed entirely on the original principal.
=⇒ Interest is charged as a percentage of the principal for a denite
period of time.
=⇒ Rates are stated in a yearly basis unless otherwise specied.

Formula
The Simple Interest formula:
I = Prt
where
I = Simple Interest
P = Principal
r = interest rate per period of time
t = Time in years between the date the loan is made and the date it
matures or becomes repayable to the lender.

Gwendolyn Tadeo Consumer Mathematics


The future value or maturity value F is the amount the borrower or the
debtor would pay back to the lender or investor.
Formula
F =P +I
F = P + Prt
F = P (1 + rt )

Exercise
1. An interest of P360 was paid on a P6000 simple-interest loan at the
end of 6 months. What was the rate of interest charged? 12%
2. How many years are needed for P5,700 to accumulate to P6,555 at
3.5% simple interest? 4.2857 years
3. P7,000 is deposited to an account paying 5% simple interest. How
much is in the account after 5 years and 9 months? P9012.50
4. What principal will accumulate to P135,000 in 2 years at 15% simple
interest? P103,846.1538

Gwendolyn Tadeo Consumer Mathematics


Compound Interest
Compound Interest is the sum by which the original principal has been
increased by the end of the contract.
The total accumulated amount at the end of the period which is the
original principal plus the compound interest is called the compound
amount.
Formula
F = P (1 + i )n where i = mj and n = mt .
F = P (1 + mj )mt
where:
P → Principal
F → Compound Amount or Future Amount
i → Periodic rate
n → Number of conversion periods for the whole term
m → Number of conversion periods per year,
m = {1, 2, 4, 12}
t → Time or term of investment expressed in years
j → Nominal rate of interest per year
Gwendolyn Tadeo Consumer Mathematics
Exercises on Compound Interest

Exercise
1. Accumulate P60,500 for 4 years and 6 months at 5.5% compounded
semi-annually. P77,231
2. If money can be invested at 3.5% compounded quarterly, nd the
present value of P60,500 due at the end of 2 year and 3 months.
P55,937.60
3. In how many months will P55,000 accumulate to P73,000 at 10%
compounded monthly? 34.1165 ≈ 35
4. At what interest rate in order for a principal of P9,500 to accumulate
to P15,000 in 2 years compounded semi-annually. 0.2419

Gwendolyn Tadeo Consumer Mathematics


Equation of Values

A sum of money have dierent values at dierent times.


Its value increases when money is allowed to accumulate at some future
date while its value decreases when money is allowed to be discounted at
some earlier dates.
Denition
An equation of values is a mathematical statement stating that a sum
of one set of values on a certain comparison date is equal to the sum of
another set of values on the same comparison date.

Formula
At selected comparison date:
Sum of the values of old obligation = Sum of the values of new
obligations

Gwendolyn Tadeo Consumer Mathematics


Equation of Values

Procedure:
1 Represent the unknown/s in terms of x.

2 Construct the Time Diagram.

a. Locate the due amounts of the set of old obligations on the upper
part of the diagram.
b. Locate the due amounts of the set of new obligations or
payments on the lower part of the diagram.
3 Select the most convenient comparison date.

Draw arcs from each due amount of the old and new obligations, all
arcs pointing towards the comparison date.
4 Prepare an equation of values by adjusting the exponent of each

accumulation factor, (1 + i)n or discount factor (1 + i)−n , according


to the chosen comparison date.

Gwendolyn Tadeo Consumer Mathematics


Exercise
1. A debtor owes P20,000 at the end of two years and P50,000 at the
end of 8 years. If interest is at 7% eective rate, what single payment at
the end of 6 years would liquidate both debts?
2. A Honda Wave motorcycle was sold for a downpayment of P20,000
and equal payments of P10,000 each due at the end of each 3 month for
one year. If money is worth (8%, m = 4), what cash payment which is
payable now, is equivalent to these terms?
3. What three equal payments, the rst is due in two years, will discharge
an obligation of P10,000 due now when money is worth 10%? (Use the
end of 4 years as the comparison date.)
Verify that the equal payments will be the same using the present date as
the comparison date.

Gwendolyn Tadeo Consumer Mathematics


Annuity

Denition
Annuity refers to a sequence of equal payent made at equal interval of
time.
The denition identies the elements of annuity as follows:
1 Sequences or series of payments

2 Payments are of equal amount

3 Made at an equal interval of time

The concept of annuity applies on premiums of life insurance, periodic


payments on rentals, purchase of cars or houses, interest payment on
bonds or payment on household appliances purchased on installment.
The term of an annuity refers to the period of time from the beginning
of the rst payment interval up to the last payment interval.
The size or value of each payment is called periodic payment.
The time between successive periodic payments is called payment
interval.

Gwendolyn Tadeo Consumer Mathematics


Classication of Annuity

Denition
1 Ordinary annuity is annuity in which the periodic payments are
made at the end of payment intervals.
2 Annuity Due is an annuity in which the periodic payments are

made at the beginning of each payment interval.


3 Deferred Annuity is an annuity in which the rst periodic payment

is not made at the beginning nor at the end of the rst payment
interval but some later date.
Notations:
1 S = Amount of annuity

2 A = Present value of an anuity

3 R = Periodic payment

Gwendolyn Tadeo Consumer Mathematics


Formula

Ordinary Annuity :
   
(1+i)n −1 1−(1+i)−n
SO = R i ; AO = R i

SO AO
R=  R= 
(1+i)n −1 1−(1+i)−n
i i

SO = AO (1 + j mt
m)

Annuity Due :
   
SD = R(1 + i) (1+i)i −1 ; 1−(1+i)−n
n
AD = R(1 + i) i

Gwendolyn Tadeo Consumer Mathematics


Exercise
1. A house and lot is worth P2.2 million cash. A buyer pays 40% down
payment and the agrees to pay the balance by equal payments at the end
of each month for 10 years at the rate of 9% compounded monthly. How
much will be his monthly payment?
2. Polly purchased car. He paid P150,000 as down payment, and P5,500
payable at the beginning of each month for 48 months. If money is worth
12% compounded monthly, what is the equivalent cash price of the car?
3. A debtor would like to settle a debt due 10 years from today by paying
P10,100 every six months at the rate of 13 1/2% compounded
semi-annually. How much was the original debt.
4. An investment of P2,850 is made at the beginning of each month for
6 years and 7 months.How much will the investment be at the end of the
term, if interest is 8% compounded monthly?
5. A loan is to be amortized by equal payments at the end of each
quarter for 18 months. If interest is 10% compounded quarterly, nd the
periodic paymment and construct the amortization schedule.

Gwendolyn Tadeo Consumer Mathematics


Amortization of a Debt

When a debt is amortized by equal payment at equal intervals the debt


becomes the preent value of an annuity.
The present value of the annuity and periodic payment can be solved
using Ordinary Annuity.
Example
A loan of P40,000 is to be amortized by equal payments at the end of
each quarter for 18 months. If interest is 10% compounded quar-
terly, nd the periodic paymment and construct the amortization schedule.

Gwendolyn Tadeo Consumer Mathematics

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