Course Code and Title: GEMA2 – Mathematics in the Modern World

Lesson Number: Lesson 12 (Week 14)

Topic: Simplex Method

https://www.amazon.com/Simplex-Method-Linear-Programming-Mathematics-
Introduction:
Simplex method, standard technique in linear programming for solving an optimization problem,
typically one involving a function and several constraints expressed as inequalities. The inequalities
define a polygonal region (see polygon), and the solution is typically at one of the vertices. The simplex
method is a systematic procedure for testing the vertices as possible solutions.
Learning Objectives:
At the end of this lesson, you should be able to:
 Discover the optimal solution of an optimization problem through slack variables, tableaus, and
pivot variables using simplex method;
 Show accuracy and diligence in doing one’s work; and
 Solve linear programming models using simplex method.

Pre – Assessment:
Multiple Choice: Choose the letter of the best answer. Write your answer on the sheet provided.
1. A company manufactures two products X and Y. Each product has to be processed in
three departments: welding, assembly and painting. Each unit of X spends 2 hours in the
welding department, 3 hours in assembly and 1 hour in painting. The corresponding times
for a unit of Y are 3, 2 and 1 hours respectively. The employee hours available in a month are
1,500 for the welding department, 1,500 in assembly and 550 in painting. The contribution to
profits are $100 for product X and $120 for product Y.
What is the objective function (Z) to be maximised in this linear programming problem
(where Z is total profit in $s)?
A. Z = 120X + 100Y
B. Z = 100X + 120Y
C. Z = 2X + 3Y
D. Z = 1500X + 1500Y

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2. SIMPLEX uses artificial variables in order to______________.

A. find a basic feasible solution C. include them in the optimal solution

B. facilitate the modelling of the problem D. None of the above

3. In a Simplex table, the pivot row is computed by ________.

A. dividing every number in the pivot row by the corresponding number in the profit row.
B. dividing every number in the profit row by the pivot number.
C. dividing every number in the pivot row by the pivot number.
D. dividing every number in the net profit row by the corresponding number in the gross profit
row.
4. If, when we are using a Simplex table to solve a maximization problem, we find that the ratios for
determining the pivot row are all negative, then we know that the solution is ______.
A. unbounded B. infeasible C. degenerate D. optimal
5. In converting a less-than-or-equal constraint for use in a simplex table, we must add
A. a surplus variable C. both a surplus and a slack variable
B. a slack variable D. an artificial variable

Lesson Presentation:
Linear Programming: Simplex Method
Another way to solve a linear programming problem is the use of simplex method. Unlike the
graphical method, we can extend to more than two unknown (or decision variables). We shall only take
the case where the objective is to maximize, and all constraints contain the “ less than or equal to”
symbol (≤)

The Linear Programming Problem

Here is the initial problem that we had.

Maximize P = 40x1 + 30x2

Subject to: x1 + 2x2 ≤ 16

x1 + x2 ≤ 9

3x1 + 2x2 ≤ 24

x1 , x2 ≥ 0

The Initial System

The initial system is found by converting the ≤ constraints into = constraints by adding a slack
variable.

This the same step we took in the table method.

Maximize P = 40x1 + 30x2

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Subject to: x1 + 2x2 + s1 = 16

x1 + x2 + s2 = 9

3x1 + 2x2 + s3 = 24

x1 , x2 , s1 , s2 , s3 ≥ 0

The Initial Tableau

Tableaus are fancy names for matrices. What we do now is convert the system of linear
equations into matrices. There is one additional trick here, though ... we move all of the variables to the
left hand side, so the objective function becomes -40x1 - 30x2 + P = 0. We also put the objective
function last in the tableau and put an augmentation line above it to separate it from the constraints.

x1 x2 s1 s2 s3 P rhs

1 2 1 0 00 16

1 1 0 1 00 9

3 2 0 0 10 24

-40 -30 0 0 0 1 0

Basic and Non-Basic Variables

There will be a basic variable for each row of the tableau and the objective function is always
basic in the bottom row.

Each variable corresponds to a column in the tableau. If the column is cleared out and has only
one non-zero element in it, then that variable is a basic variable. If a column is not cleared out and has
more than one non-zero element in it, that variable is non-basic and the value of that variable is zero.

The values of all non-basic variables (columns with more than one number in them) are zero. In
this tableau, that would be x1 and x2.

The values of the basic variables are found by reading the solution from the matrix that results by
deleting out the non-basic columns.

s1 s2 s3 P rhs

1 0 00 16 s1 = 16

0 1 00 9 s2 = 9

0 0 10 24 s3 = 24

0 0 01 0 P= 0

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Let's summarize what we have here.

Basic Non-Basic

s1=16, s2=9, s3=24, P=0 x1=0, x2=0

Tying the Tableau into the Table

Let's remind ourselves of the results we had from the table method.

Pt x1 x2 s1 s2 s3 Feasible? P = 40x1 + 30x2

A 0 0 16 9 24 yes 0

B 0 8 0 1 16 yes 240

C 0 9 -2 0 6 no N/A

D 0 12 -8 -3 0 no N/A

E 16 0 0 -7 -24 no N/A

F 9 0 7 0 -3 no N/A

G 8 0 8 1 0 yes 320

H 2 7 0 0 15 yes 290

I 4 6 0 -1 0 no N/A

J 6 3 4 0 0 yes 330

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 If you compare the values obtained from reading the table, you will see that we're at
point A where x1 = 0 and x2 = 0.

Identifying Basic Variables for Each Row

Each row of the tableau will have one variable that is basic for that row. Which variable that is
can be determined fairly easily without having to delete the columns that correspond to non-basic
variables.

For the columns that are cleared out and have only one non-zero entry in them, you go down the
column until you find the non-zero entry. Each column will have it's non-zero element in a different row.
The variable in that column will be the basic variable for the row with the non-zero element.

That's a little confusing, so maybe this will help.

 The s1 column is cleared except for the first row. Therefore s1 is the basic variable in the first
row.
 The s2 column is cleared except for the second row. Therefore s 2 is the basic variable in the
second row.
 The s3 column is cleared except for the third row. Therefore s 3 is the basic variable in the third
row.
 The P column is cleared except for the bottom row. Therefore P is the basic variable in the
bottom row.

Basic x1 x2 s1 s2 s3 P rhs

s1 1 2 1 0 0 0 16

s2 1 1 0 1 0 0 9

s3 3 2 0 0 1 0 24

P -40 -30 0 0 0 1 0

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The Simplex Method

We have seen that we are at the intersection of the lines x 1 = 0 and x2 = 0. This is the origin and
the two non-basic variables are x1 and x2. To move around the feasible region, we need to move off of
one of the lines x1 = 0 or x2 = 0 and onto one of the lines s1 = 0, s2 = 0, or s3 = 0. The question is which
direction should we move?

Picking the Pivot Column

Think about the objective function P = 40x 1 + 30x2. For every unit we move in the x1 direction, we
gain 40 in the objective function. For every unit we move in the x2 direction, we gain 30 in the objective
function. Think of it as for each step you move to the right (the x 1 direction), you gain $40, and for each
step you take up (the x2 direction), you gain $30.

Which would you rather do? Hopefully your answer is to gain $40 for each step you move. If it
isn't you're not going to comprehend the simplex method very well.

Now, think about how that 40 is represented in the objective function of the tableau. When we
placed the objective function into the tableau, we moved the decision variables and their coefficients to
the left hand side and made them negative. Therefore, the most negative number in the bottom row
corresponds to the most positive coefficient in the objective function and indicates the direction we
should head.

The pivot column is the column with the most negative number in its bottom row. If there are no
negatives in the bottom row, stop, you are done.

A positive value in the bottom row of the tableau would correspond to a negative coefficient in
the objective function, which means heading in that direction would actually decrease the value of the
objective. That's not what we want to do if we want a maximum value, so we stop when there are no
more negatives in the bottom row of the objective function.

We are moving off of the line corresponding to the non-basic variable in the pivot column. That

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means that variable is exiting the set of basic variables and becoming non-basic.

Place an arrow under the pivot column.

Picking the Pivot Row

Now that we have a direction picked, we need to determine how far we should move in that
direction. Remember, we're at point A right now and we're moving in the x 1 direction or to the right. That
means that we can move to points E (16,0), F (9,0) , or G (8,0).

 Point E is at (16,0) and is the intersection of lines x 2 = 0 and s1 = 0. x1 would become basic and
s1 would become non-basic. The value of x1 would change from x1 = 0 to x1 = 16 if we move to
point E.
 Point F is at (9,0) and is the intersection of lines x 2 = 0 and s2 = 0. x1 would become basic and
s2 would become non-basic. The value of x1 would change from x1 = 0 to x1 = 9 if we move to
point F.
 Point G is at (8,0) and is the intersection of lines x 2 = 0 and s3 = 0. x1 would become basic and
s3 would become non-basic. The value of x1 would change from x1 = 0 to x1 = 8 if we move to
point G.

Let's see how we can find out that information from the tableau. Remember, we're trying to do this
without having to use the graph at all.

Form the ratios between the non-negative entries in the right hand side and the positive entries in the
pivot column for each of the problem constraints. Do not find the ratio for the objective function. Do not
find the ratio if the element in the pivot column is negative or zero, but do find the ratio if the right hand
side is zero.

Basic x1 x2 s1 s2 s3 P rhs ratio

s1 1 2 1 0 0 0 16 16/1 = 16

s2 1 1 0 1 0 0 9 9/1 = 9

s3 3 2 0 0 1 0 24 24/3 = 8

P -40 -30 0 0 0 1 0

Would you look at those ratios? 16, 9, and 8. And better yet, the 16 is associated with the row
where s1 is basic, the 9 is associated with the row where s 2 is basic, and the 8 is associated with the row
where s3 is basic.

That means that we can tell how much the change in x1 will be by looking at the ratio. We can
also tell which line we'll be moving to by looking at the variable that is basic for that row.

Which row should we pick? Your first thought might be that since we're gaining $40 for every unit
we move, we should move as many units as we can. If we move 8 units, we gain $40×8 = 320, if we

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move 9 units, we gain $40×9 = 360, and if we move 16 units, we gain $40×16 = 640. There is one very
big problem with that line of reasoning, however. If we move any more than 8, we're leaving the feasible
region. Therefore, we have to move the smallest distance possible to stay within the feasible region.

The pivot row is the row that has the smallest non-negative ratio. If no non-negative ratios
can be found, stop, the problem doesn't have a solution.

If one of the ratios is 0, that qualifies as a non-negative value. Use it.

Place an arrow next to the smallest ratio to indicate the pivot row.

Basic x1 x2 s1 s2 s3 P rhs ratio

s1 1 2 1 0 0 0 16 16/1 = 16

s2 1 1 0 1 0 0 9 9/1 = 9

s3 3 2 0 0 1 0 24 24/3 = 8 ←

P -40 -30 0 0 0 1 0

The variable that is basic for the pivot row will be exiting the set of basics. It will be replaced by
the variable from the pivot column, which is entering the set of basic variables.

The intersection of the pivot row and the pivot column is called the pivot element. Circle it.

Things We Can Tell Before Pivoting

We know the following things.

 The objective function increases 40 for every unit we move in the x1 direction and we're moving
8 units. That means that the objective function will increase by 40×8 = 320. Since it's 0 right now,
it will become 320.
 The x1 variable is going to replace the s3 as the basic variable in the third row. The other rows
will retain their basic variables.
 The pivot column will become cleared except for the pivot element, which will become a 1.
 The pivot row will not change except by division to make the pivot element a 1. In this case, we'll
divide everything by 3.
 The increase in x1 will be 8.
 Graphically, we will be at point G, which is where x2 and s3 are non-basic.
 The s1, s2, and P columns will remain cleared with their basic rows remaining the same.

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 Basic x1 x2 s1 s2 s3 P rhs

s1 0 1 0 0

s2 0 0 1 0

x1 1 2/3 0 0 1/3 0 8

P 0 0 0 1 320

Pivot!

Use row operations to clear the pivot column. That is, when you are done, the only entry in the
pivot column will be the element in the 3rd row where the pivot was.

Basic x1 x2 s1 s2 s3 P rhs

s1 0 4/3 1 0 -1/3 0 8

s2 0 1/3 0 1 -1/3 0 1

x1 1 2/3 0 0 1/3 0 8

P 0 -10/3 0 0 40/3 1 320

Interpret the New Tableau

This time, the x2 and s3 columns are not cleared out, so they are non-basic and their value is 0.
x1 is basic in the third row and its value is 8. s1 is basic in the first row and its value is 8. s 2 is basic in the
second row and its value is 1.

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 Basic Non-Basic

x1=8, s1=8, s2=1, P=320 x2=0, s3=0

Compare this with the table we had earlier and you'll see that we are indeed at point G.

Pt x1 x2 s1 s2 s3 Feasible? P = 40x1 + 30x2

G 8 0 8 1 0 yes 320

Repeating the Process

As long as there are negatives in the bottom row, the objective function can still be increased in
value by moving to a new point.

If you look at the objective function, you will notice that there is only one negative value, the -10/3 in the
x2 column. That means that by moving up (in the x 2 direction), we can increase the value of the
objective function. We will be moving off of the x 2 = 0 line, which means that we'll be moving along the
s3 = 0 line. Wherever we end up, the x 2 will take the place of that basic variable. If we were to move in
the s3 direction, the move would hurt us.

How far can we move?

 We can move to point J, which it is (6,3), so the increase in x2 would be 3. That point is at the
intersection of lines s3 = 0 and s1 = 0, so s1 would become non-basic and be replaced by x2 as
basic.
 We could move to point I, which is at (5,6), so the increase in x 2 would be 6. That point is at the
intersection of lines s3 = 0 and s2 = 0, so s2 would become non-basic and be replaced by x2 as
basic.
 We could move to point D, which is at point (0,12), so the increase in x 2 would be 12. That point
is at the intersection of lines s3 = 0 and x1 = 0, so x1 would become non-basic and be replaced
by x2 as basic.

Notice that when we form the ratios between the non-negative elements on the right hand side and
the positive elements in the pivot row, we get 6 when we move to s 1 = 0 (point I), 3 when we move to
s2 = 0 (point J), and 12 when we move to x1= 0 (point D). We once again choose the smallest ratio to
make sure we stay in the feasible region.

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 Basic x1 x2 s1 s2 s3 P rhs ratio

s1 0 4/3 1 0 -1/3 0 8 8/(4/3) = 6

s2 0 1/3 0 1 -1/3 0 1 1/(1/3) = 3 ←

x1 1 2/3 0 0 1/3 0 8 8/(2/3) = 12

P 0 -10/3 0 0 40/3 1 320

Things We Can Tell Before Pivoting

We know the following things.

 The objective function increases 10/3 for every unit we move in the x 2 direction and we're
moving 3 units. That means that the objective function will increase by (10/3)×3 = 10. Since it's
320 right now, it will become 330.
 The x2 variable is going to replace the s2 as the basic variable in the second row. The other rows
will retain their basic variables.
 The pivot column will become cleared except for the pivot element, which will become a 1.
 The pivot row will not change except by multiplication to make the pivot element a 1. In this
case, we'll multiply everything by 3.
 The increase in x2 will be 3.
 Graphically, we will be at point J, which is where s2 and s3 are non-basic.
 The s1, x1, and P columns will remain cleared with their basic rows remaining the same.

Basic x1 x2 s1 s2 s3 P rhs

s1 0 0 1 0

x2 0 1 0 3 -1 0 3

x1 1 0 0 0

P 0 0 0 1 330

Pivot

Okay, now we'll actually pivot and find the rest of the information.

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 Basic x1 x2 s1 s2 s3 P rhs

s1 0 0 1 -4 1 0 4

x2 0 1 0 3 -1 0 3

x1 1 0 0 -2 1 0 6

P 0 0 0 10 10 1 330

Interpret the New Tableau

This time, the s2 and s3 columns are not cleared out, so they are non-basic and their value is 0.
x1 is basic in the third row and its value is 6. s 1 is basic in the first row and its value is 4. x 2 is basic in the
second row and its value is 3.

Basic Non-Basic

x1 = 6, x2 = 3, s1 = 4, P=330 s2=0, s3=0

Compare this with the table we had earlier and you'll see that we are indeed at point J.

Pt x1 x2 s1 s2 s3 Feasible? P = 40x1 + 30x2

J 6 3 4 0 0 yes 330

We're Done!

Since there are no negatives in the bottom row, moving to another point would lower the value of
the objective function, not raise it. Since we're trying to maximize the value of the objective function, that

12
would be counter-productive. We stop, we're done.

The solution

The maximum value of P is 330 when x1 = 6 and x2 = 3. The values of the slack variables are
s1 = 4, s2 = 0, and s3 = 0.
Summary:
This lesson is about simplex method of linear programming and how they are illustrated in real life. You
learned to:
 Find the optimal solution of an optimization problem through slack variables, tableaus, and pivot
variables using simplex method; and
 Solve linear programming models using simplex method.

Activity/Evaluation:

DO THIS

A. Find the optimal solution for this model: Write your complete solution on a separate sheet of
paper. (10 points each)
1. Maximize: Z = 100x + 80y 2. Maximize: Z = 200x - 350y

Subject to: x ≤ 20 Subject to: 4x + 3y ≤ 24

y = ≤ 40 y–x ≤ 4
x + y ≤ 60 x, y ≥ 0
x ≥ 0, y ≥ 0
Reinforcement:
A. For additional learnings, click the link and watch the video about:
Simplex Method
https://www.youtube.com/watch?v=vVzjXpwW2xI
https://www.youtube.com/watch?v=XK26I9eoSl8

https://www.youtube.com/watch?v=rzRZLGD_aeE
References:
Tolentino, Aurora Rosali P., Ramos, Ronel A., “Mathematics in the Modern World” Commission
on Higher Education

Dugopolshi, Mark (2009). Algebra for College Students. Mc Graw – Hill, USA

https://www.britannica.com/topic/simplex-method

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Course Code and Title: GEMA2 – Mathematics in the Modern World
Lesson Number: Lesson 13 (Week 15)
Topic: Simple and Compound Interest

https://www.examsbook.com/simple-interest-and-compound-interest-problems-and-solutions

Introduction:

Interest may be defined as the charge for using the borrowed money. It is an expense for the
person who borrows money and income for the person who lends money. Interest is charged
on principal amount at a certain rate for a certain period. For example, 10% per year, 4% per quarter or
2% per month etc. Principal amount means the amount of money that is originally borrowed from an
individual or a financial institution. It does not include interest. In practice, the interest is charged using
one of two methods. These are:

1. simple interest method; and

2. compound interest method

Simple interest method:

Under this method, the interest is charged only on the amount originally lent (principal amount) to the
borrower. Interest is not charged on any accumulated interest under this method. Simple interest is
usually charged on short-term borrowings.

Compound interest method:

Compounding of interest is very common. Under this method, the interest is charged on principal plus
any accumulated interest. The amount of interest for a period is added to the amount of principal to
compute the interest for next period. In other words, the interest is reinvested to earn more interest.
The interest may be compounded monthly, quarterly, semiannually or annually. Consider the following
example to understand the whole procedure of compounding.
Learning Objectives:
At the end of this lesson, you should be able to:
 Illustrate simple and compound interest;
 Compute interest, maturity value, and present value in simple and compound interest
environment;
 Appreciate the importance of Simple and Compound Interest in daily life that can

14
 contribute self – discipline and orderliness; and
 Solve problems involving simple and compound interest.
Pre – Assessment:
Multiple Choice: Choose the letter of the best answer. Write your answer on the sheet provided.
1. The simple interest formula is I = Prt. What does the t represent?
A. Principal amount C. Time
B. Interest D. Percent Rate
2. Emilio borrows $1200 from a bank with 8% simple interest per year. How much will he have
to pay back total in 2 years?

A. $150 C. $1350
B. $192 D. $1392
3. The simple interest formula is I = Prt. The P represents the principal. The principal is _____.
A. the amount of money borrowed or deposited
B. the percent interest for his year
C. the amount taxed
D. the amount the bank owes you for being a customer at their bank
4. What is the principal for a loan that has an earned interest of $3500 with an annual rate of
10% for 5 years?
A. $7,000 C. $6,500
B. $5,000 D. $3750
5. I = Prt, where r represents the rate. Rates must be converted into ____ before multiplying.
A. fractions C. mixed numbers
B. decimals D. percents
Lesson Presentation:

Simple and Compound Interest

Definition of terms
 Lender or creditor – person (or institution) who invests the money or makes the fund
available.
 Borrower or debtor – person (or institution) who owes the money or avails of the funds from
the lender.
 Origin or loan date – date on which money is received by the borrower.
 Repayment date or maturity date – date on which money borrowed or loan is to be
completely repaid.
 Time or term(t) – amount of time in years the money is borrowed or invested; length of time
between the origin and maturity dates.
 Principal (P) – amount of money borrowed or invested on the origin date.
 Rate(r) – annual rate, usually in percent, charged by the lender, or rate of increase of the
investment.
 Interest(I) – amount paid or earned for the use of money.
 Simple Interest(Is) – interest that is computed on the principal and then added to it.
 Compound Interest(Ic) – interest is computed on the principal and also on the accumulated
past interests.
 Maturity value or future value(F) – amount after t years; that the lender receives from the

15
 borrower on the maturity date.
Interest is defined as the cost of borrowing money, and depending on how it is calculated, can
be classified as simple interest or compound interest.

Simple interest is calculated on the principal, or original, amount of a loan. Compound interest
is calculated on the principal amount and also on the accumulated interest of previous periods, and can
thus be regarded as “interest on interest.

There can be a big difference in the amount of interest payable on a loan if interest is calculated
on a compound rather than simple basis. On the positive side, the magic of compounding can work to
your advantage when it comes to your investments and can be a potent factor in wealth creation.

While simple and compound interest are basic financial concepts, becoming thoroughly familiar
with them will help you make better decisions when taking out a loan or making investments, which
may save you thousands of dollars over the long term.

Basic Practical Examples

Simple Interest

The formula for calculating simple interest is:

Simple Interest = Principal x Interest Rate x Term of the loan

=Pxixn

Thus, if simple interest is charged at 5% on a $10,000 loan that is taken out for a three-year
period, the total amount of interest payable by the borrower is calculated as: $10,000 x 0.05 x 3 =
$1,500.

Interest on this loan is payable at $500 annually, or $1,500 over the three-year loan term.

Annual Simple Interest

Is = Prt

Where Is = simple interest

P = principal

r = rate

t = term or time, in years

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Example: 1. A bank offers 0.25% annual simple interest rate for a particular deposit. How much
interest will be earned if 1 million pesos is deposited in this savings account for 1 year?

Solution:

Given: Is = ?

P = 1, 000, 000

r = 0. 25% = 0.0025

t = 1 year

Find: Is

Is = Prt

= (1, 000, 000) (0.0025) (1)

= 2, 500

Answer: The interest earned is Php2, 500.

2. How much interest is charged when Php50, 000 is borrowed for 9 months at an annual
simple interest rate of 10%?
Solution:
Given: P = 50, 000
r = 10% = 0.10
t = 9/12 year = 0.75 year
Find: Is
Note:
When the term is expressed in months (M), it should be converted to years by t = M/12

Is = Prt
= (50,000) (0.10) (9/12)
= (50,000) (0.10) (0.75)
Is = 3,750
Answer: The simple interest charge is Php3,750.

3. When invested at an annual interest rate of 7%, an amount earned Php11, 200 of simple
interest in 2 years. How much money was originally invested?

Solution:
Given:
r = 7% = 0.07
t = 2 years

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 Is = 11, 200
Find: P
IS 11,200
P 
rt 0.07 2

P  80,000

Answer: The amount invested is Php80, 000.

4. If an entrepreneur applies for aloan amounting to Php500, 000 in a bank. The simple
interest of which is Php157, 500 for 3 years, what interest rate is being charged?
Solution:
Given: P = 500, 000
t = 3 years
Is = 157, 500
Find: r

IS 157,500
P 
Pt 500,0003

r  0.105  10.5%
Answer: The bank charged an annual simple interest rate of 10.5%

5. How long will a principal earn an interest equal to half of it at 5% simple interest?
Solution:
Given: P
r = 5% = 0.05
1
Is = P  0.5P
2
Find: t

IS 0.5P
t 
Pr P 0.5

t  10 years

Answer: it will take 10 years for a principal to earn half of its value at 5% simple annual interest
rate.

Maturity (Future) Value

Many persons or institutions are interested to know the amount that a lender will give to the
borrower on the maturity date. For instance, you maybe interested to know the total amount of money
in a saving account after t years at an interest rate r. This amount is called the maturity value or future

18
value F.

Maturity (Future) Value

F = P + Is

where F = Maturity (Future) Value

P = principal

Is = simple interest

Substituting Is by Prt gives

F = P + Prt

F = P (1 + rt )

Maturity (Future) Value

F = P (1 + rt )

Where F = Maturity (Future) Value

P = principal

r = interest

t = term / time in years

Example: Find the maturity value if 1 million pesos is deposited in a bank at an annual
simple interest rate of 0.25% after (a) 1 year and (b) 5 years?

Solution: Given: P = 1, 000, 000 r = 0.25% = 0.0025

Find: a. maturity or future value F after 1 year

b. maturity or future value F after 5 year

a. When t = 1, the simple interest is given by

Method 1:

Is = Prt

= (1, 000, 000) (0.0025) (1)

19
 = 2, 500

The maturity or future value is given by F = P + Is

F = (1, 000, 000) + 2, 500

F = 1, 002, 500

Method 2: To directly solve the future value F,

F = P (1 + rt )

F = (1, 000, 000) (1 + 0.0025 (1))

F = 1, 002, 500

Answer: The future or maturity value after 1 year is Php1, 002, 500.

b. When t = 5,
Method 1:
Is = Prt
= (1, 000, 000) (0.0025) (5)
= 12, 500

F = P + Is

= (1, 000, 000) + 12, 500

= 1, 012, 500

Method 2:

F = P (1 + rt )

F = (1, 000, 000) (1 + 0.0025 (5))

F = 1, 012, 500

Answer: The future or maturity value after 5 years is Php1, 012, 500.

Compound Interest

The formula for calculating compound interest in a year is:

Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal

20
amount at present (or Present Value)

= [P (1 + i)n] – P

= P [(1 + i)n – 1]

Where P = Principal, i = annual interest rate in percentage terms, and n = number of compounding
periods for a year.

Continuing with the above example, what would be the amount of interest if it is charged on a
compound basis? In this case, it would be: $10,000 [(1 + 0.05) 3 – 1] = $10,000 [1.157625 – 1] =
$1,576.25.

While the total interest payable over the three-year period of this loan is $1,576.25, unlike
simple interest, the interest amount is not the same for all three years because compound interest also
takes into consideration accumulated interest of previous periods. Interest payable at the end of each
year is shown in the table below.

Maturity (Future) Value and Compound Interest

F = P (1 + r)t

Where F = Maturity (Future) Value at the end of the term

P = principal or present value

r = interest rate

t = term / time in years

The compound interest Icis given by

Ic = F – P

Example: 1. Find the maturity value and the compound interest if Php10, 000 is
compounded annually at an interest rate of 2% in 5 years.

Solution

Given: P = 10,000

r = 2% = 0.02

21
 t = 5 years

Find: a. maturity value F b. compound interest

Solution: a. F = P (1 + r)t b. Ic = F – P

= (10, 000) (1 + 0.02)5 = 11, 040.81 – 10, 000

= 11, 040.081 = 1, 040.81

Answer: The future value F is 11, 040.081 and the compound interest is 1, 040.81.

6. Find the maturity value and interest if Php50,000 is invested at 5% compounded annually
for 8 years.
Solution:
Given: P = 50, 000
r = 5% = 0.05
t = 8 years
Find: a. maturity value, F
b. compound interest, Ic
Solution:
F  P1  r 
t
a.
F  50,0001  0.05
8

F  73,872.77
Ic  F  P
b. I c  73,872.77  50000
I c  23,872.77
Answer: The maturity value F is Php73,872.77 and the compound interest is Php 23,
872.77

7. Suppose your father deposited in your bank account Php10, 000 at an annual interest rate
of 0.5% compounded yearly when you graduate from kindergarten and did not get the
amount until you finish grade 12. How much will you have in your bank account after 12
years?
Solution:
P  10,000
r  0.5  0.005
Given:
t  12 years

Find: F

The future value F is calculated by

22
 F  P1  r 
t

F  10,0001  0.005
12

F  10,616.78
Answer: The amount will become Php10,616.77 after 12 years.

Present Value P at Compound Interest

 F 1  r 
F t
P
1  r t

Where F = Maturity (Future) Value at the end of the term

P = principal or present value

r = interest rate

t = term / time in years

Example: 1. What is the present value of 50, 000 due in 7 years if money is worth 10%
compounded annually?

Solution: Given: F = 50, 000

r = 10% = 0.1

t = 7 years

Find: P

The present value P can be obtained by

F
P
1  r t
50,000
P
1  0.17
P  25,657.91

Answer: The present value is Php25, 657.91.

2. How much money should a student place in a time deposit in a bank that pays 1.1 % compounded

23
annually so that he will have Php200, 000 after 6 years?

Solution:

F  200,000
Given: r  1.1%  0.011
t  6 years

Find: P

The present value can be obtained by

F
P
1  r t
200,000
P
1  0.0116
P  187,293.65

Answer: The student should deposit Php 187,293.65 in the bank.

Summary:
This lesson is about Simple and Compound Interest and how they are illustrated in real life. You
learned to:

 illustrate simple and compound interest;

 compute interest, maturity value, and present value in simple and compound interest
environment;
 solve problems involving simple and compound interest.

Simple interest is calculated on the principal, or original, amount of a loan. Compound interest
is calculated on the principal amount and also on the accumulated interest of previous periods, and can
thus be regarded as “interest on interest.

Compound Interest = Total amount of Principal and Interest in future (or Future Value) less
Principal amount at present (or Present Value)

Activity/Evaluation:

Solve the following problems on simple and compound interest. Write your complete solution
on a separate sheet of paper. (5 points each)
1. What are the amounts of interest and maturity value of a loan for Php150, 000 at 6 ½%
simple interest for 3 years?
2. At what simple interest rate per annum will Php25, 000 accumulate to Php33, 000 in 5
years?

24
 3. How long will Php40, 000 amount to Php51, 200 if the simple interest rate is at 12% per
annum?
4. In order to have Php200, 000 in 3 years, how much should you invest if the simple interest
is 5.5%
5. Mark Alexis deposited Php20, 000 in a bank that pays 0.5% simple interest. How much will
be her money after 6 years?
6. What are the amounts of interest and maturity value of a loan for Php20,000 at 6 %
compound interest for 3 years?

Reinforcement:
B. For additional learnings, click the link and watch the video about:
1. Simple and Compound Interest
https://www.youtube.com/watch?v=7gla0G0svfM
https://www.youtube.com/watch?v=B3IdfBcXrLA

2. Finding Maturity Value and Compound Interest (Compounded Annually)

https://www.youtube.com/watch?v=cOZNQKCP5sI
3. Future Value/Maturity Value for Simple Interest
https://www.youtube.com/watch?v=TSz4XfpO24w
4. Present Value for Simple Interest
https://www.youtube.com/watch?v=NCQfhmlwl-8
5. How to Calculate Present Value For Compound Interest
https://www.youtube.com/watch?v=Iu8exO0pUHs

References:
Versoza, Dhebbie Marie B., (2016). “General Mathematics”, Commission on Higher Education
Augmann, Richard, Abad , Edmundo, et al. “Mathematics in the Modern World”. Rex
Bookstore, Incorporated
https://www.accountingformanagement.org/simple-and-compound-interest/

25
Course Code and Title: GEMA2 – Mathematics in the Modern World
Lesson Number: Lesson 14 (Week 16)
Topic CREDIT CARDS AND CONSUMER LOANS

http://www.qlmeb.com/credit-cards-and-or-consumer-loans-borrow-money-here/
Introduction:

A credit card and a consumer loan are two different ways of borrowing money and they provide
different benefits. Which of the two is best suited for you depends on your need and purchasing
pattern.

A consumer loan is a good alternative to a credit card if you want predictability with your
monthly expenses. A consumer loan provides a set plan for your monthly down payments which gives
many a sense of security. You can arrive back from a vacation paid with a consumer loans and not
expect any surprises. You will simply start paying back a pre decided amount each month.

A credit card provides a lot more flexibility in that you can decided how much you want to
borrow and how much you want to pay back every month. As long as you stay within your credit limit
you have the freedom to decided how much you want to borrow and how much to pay back each
month. However, flexibility can tempt some to spend beyond their means. A credit card is therefore
more demanding since you need to be in charge of your own spending and what you owe.

Summed up a consumer loan is the best choice for large purchases that you plan to pay down
over a longer period of time, while a credit card is best for smaller purchases that can be paid back
relatively quic

About consumer loans:

 Good for someone who wants to borrow a one-time amount that you pay back following a set
down payment plan. A consumer loan provides structure and predictability in your finances and
you know exactly how much you need to pay back each month.

26
  Lower interest than credit card debt.
 A consumer loan enables you to refinance smaller and more expensive loans.

About credit cards:

 Good for someone who prefers flexibility as it gives you the opportunity to borrow as you go as
long as you stay within your credit limit provided.
 Offers a no interest period between 30 and 52 days
 You decided how much you want to pay within a certain time frame
 The card may give you additional benefits such as bonuses and discounts in stores,
restaurants, online and other partner benefits

Most often a credit card includes travel and cancellation insurance.

Learning Objectives:
At the end of this lesson, you should be able to:
 Illustrate credit cards and consumer loans;
 Distinguish between credit cards and consumer loans;
 Appreciate the importance of Credit Cards and Consumer
Loans in daily life that can contribute self – discipline and
orderliness; and
 Solve problems on consumer loans
Pre – Assessment:
Multiple Choice: Choose the letter of the best answer. Write your answer on the sheet provided.
1. A significant benefit associated with using a credit card is that ____________.

A. you have the right to return any merchandise purchased with a credit card
within 30 days of the purchase.
B. you can easily incur debt at attractive interest rates.
C. your losses are limited to $50 if the card is lost or stolen.
D. you do not have the right to return any merchandise purchased with a credit
card within 30 days of the purchase.

2. Which is the correct description for a credit card?

A. Allows us to borrow money at a cheap rate.
B. Allows us to pay for goods immediately.
C. Defers payment indefinitely provided you maintain interest payments.
D. Defers payment for one month only.

3. ________allows you to purchase something right now that you are unable to
pay for upfront. You have to borrow money from a lender and pay it back.
A. Credit B. interest C. principal amount D. capital

4. If a house is sold for Php2, 000, 000 and the bank requires 10% down

27
payment, find the amount of the mortgage.

A. Php1, 800, 000 C. Php18, 000

B. Php180, 000 D. Php1, 800

5. Credit allows you to______________.

A. purchase an item right now and pay for it right now.
B. pay for an item right now, but receive it later.
C. purchase an item right now and pay for it later.
D. receive an item right now and never pay for it.

Lesson Presentation:
Basic Concepts of Loans

Definition of terms

 Business Loan – Money lent specifically for a business purpose. It may be used to start a
business or to have a business expansion
 Consumer Loan – money lent to an individual for personal o family purpose
 Collateral – assets used to secure the loan. It may be real – estate or other investments
 Term of the Loan – time to pay the entire loan

Consumer loans are loans given to individuals for personal or family purpose. Consumer
loans may require a collateral. The collateral may be real estate or other investments.
Consumer loans do not usually require a guarantor. For consumer loans, the bank or the
lending institution may require a credit report, bank statements, and income tax return, and if
the lendee is employed, a certificate of employment and employee pay slips.

Types of Consumer Loans

Mortgages: Used by consumers to finance the purchase of a house

Credit cards: Used by consumers to finance everyday purchases

Auto loans: Used by consumers to finance the purchase of a vehicle

Student loans: Used by consumers to finance education

28
 Personal loans: Used by consumers for personal purposes

CREDIT CARD

- It is a payment card issued to users (cardholders) to enable the cardholder to

pay a merchant for goods and services based on the cardholder’s promise to the
card issuer to pay them for the amounts to be paid plus the other agreed
charges.
The card issuer (usually a bank) creates a revolving account and grants a line of credit to the
cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash
advance.
Credit cards combine payment services with extensions of credit. It requires the balance to be
repaid in full each month.
Credit card includes: balance transfers, low interest, cash back, reward points, travel and hotel
points, retail rewards, gas points, and airline miles.
There are four types of credit cards, namely:

 Rewards – people who pay their bills each month gets 1% - 2% pay out
 Low interest you usually carry a balance or already have credit card
 Balance transfer debt and often come hand in hand
 Secured – those with bad or no credit requiring to post collateral when opening
an account usually equals or more than your credit card.

Solving Problems On Business and Consumer Loans (Amortization and

Mortgage)

Example:
1. Mr. Garcia borrowed Php1, 000, 000 for the expansion of his business. The effective
rate of interest is 7%. The loan is to be repaid in full after 1 year. How much is to be paid
after 1 year?
Solution:
Given: P = 1, 000, 000
j = 0.07
n=1
Find: F
F = P (1+ j)n = 1, 000, 000 (1 + 0.07) = 1, 070, 000
An amount of Php1, 070, 000 must be paid after 1 year.

2. A person borrowed Php1, 200, 000 for the purchase of a car. If his monthly payment is
Php31, 000 on a 5 – year mortgage, find the total amount of interest.
Solution:
Given: P = 1,200,000
Monthly payment = 31,000
Find: Total Interest
The total amount paid is given by

29
 31,000012months5 years 
Total Amount =
1,860,000
Thus, the total interest is the difference between the total amount paid and the amount
of the mortgage:

 1,860,000  1,200,000
Total Interest
 660,000
The mortgage amount is Php2, 400, 000.
3. If a house is sold for Php3, 000, 000 and the bank requires 20% down payment, find the
amount of the mortgage.
Solution:

 downpaymentrate cashprice 
Down Payment  0.203,000,000
 600,000

 cashprice   downpayment 
Amount of the Loan  3,000,000  600,000
 2,400,000

The mortgage amount is Php2, 400, 000.

Summary:

CREDIT CARD
- It is a payment card issued to users (cardholders) to enable the cardholder to
pay a merchant for goods and services based on the cardholder’s promise to the
card issuer to pay them for the amounts to be paid plus the other agreed
charges.
The card issuer (usually a bank) creates a revolving account and grants a line of credit to the
cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash
advance.
Credit cards combine payment services with extensions of credit. It requires the balance to be
repaid in full each month.
Credit card includes: balance transfers, low interest, cash back, reward points, travel and hotel
points, retail rewards, gas points, and airline miles.
There are four types of credit cards, namely:

30
  Rewards – people who pay their bills each month gets 1% - 2% pay out
 Low interest you usually carry a balance or already have credit card
 Balance transfer debt and often come hand in hand
 Secured – those with bad or no credit requiring to post collateral when opening
an account usually equals or more than your credit card.
CONSUMER LOANS
Consumer loans – an amount of money lent to an individual (usually on a non-secured basis)
for personal, family, or household purposes.

Consumer loans are monitored by government regulatory agencies for their compliance with
consumer protection regulations such as the Truth Lending Act. Consumer loans are also called
consumer credit or consumer lending.

Examples of these are: auto loans, student loans, personal loans or consumer lending, credit
cards, home equity lines of credit, refinances, consumer credit retail lending, and mortgages. It does
not include mortgages loans used for home purchases and commercial loans.

Activity/Evaluation:
Solve the following problems. Write your complete solution on a separate sheet of paper. (5points
each)
1. A loan of Php200,000 is to be repaid in full after 3 years. If the interest rate is 8% per annum.
How much should be paid after 3 years?
2. For a purchase of a house and lot worth Php 3, 800,000, the bank requires 20% downpayment,
find the mortgaged amount.
3. A car dealer offers a 15% down payment for the purchase a car. How much is the mortgaged
amount if the cash value of the car is 1, 500, 000?
4. If a condiminium is purchased for Php5, 700, 000 and the bank requires 30% down payment,
how much is the mortgaged amount?
5. A family obtained a php1, 000, 000 mortgage. If the monthly payment is Php38, 000 for four
years, how much is the total interest paid?
Reinforcement:
C. For additional learnings, click the link and watch the video about:

CREDIT CARDS AND CONSUMER LOANS

https://www.youtube.com/watch?v=vY6Z48-yo7c

References:

Versoza, Dhebbie Marie B., (2016). “General Mathematics”, Commission on Higher Education
Augmann, Richard, Abad , Edmundo, et al. “Mathematics in the Modern World”. Rex
Bookstore, Incorporated

https://www.entercard.com/consumer-info/credit-card-or-consumer-loan/

31
Course Code and Title: GEMA2 – Mathematics in the Modern World
Lesson Number: Lesson 15 (Week 17)
Topic Stocks and Bonds

https://money.cnn.com/2016/06/29/retirement/retirement-bonds/index.html
Introduction:
Stocks and bonds represent two different ways for an entity to raise money to fund or expand their
operations. When a company issues stock, it is selling a piece of itself in exchange for cash.
When an entity issues a bond, it is issuing debt with the agreement to pay interest for the use of the
money.
Learning Objectives:
At the end of this lesson, you should be able to:
2. Illustrate stocks and bonds;
3. Distinguish between stocks and bonds;
4. Appreciate the importance of Stocks and Bonds in daily life that can contribute self –
discipline and orderliness; and
5. Solve problems on stocks and bonds

Pre – Assessment:
Multiple Choice: Choose the letter of the best answer. Write your answer on the sheet provided.
1. Why would someone buy a bond instead of a stock?

A. It is a less risky investment

B. It can yield a higher return on investment
C. To have ownership in a company
D. To receive dividend payments

2. A bond's interest rate is also called its ______________.

A. par value B. coupon rate C. face value D. principal

32
3. What is a bond?
A. It is known as a fixed-income security, is a debt instrument created for the purpose of raising
capital.
B. It is an amount of money lent to an individual (usually on a non-secured basis) for personal,
family, or household purposes.
C. represent an ownership interest in a corporation.
D. combine payment services with extensions of credit.

4. All of the following are reasons to buy bonds except ______________.

A. bonds may outperform the stock market during certain periods of time.
B. bonds generally have outperformed the stock market over the last 100 years.
C. bonds pay out interest at set intervals, allowing people to live off the income.
D. investing in bonds may generate less tax liability than investing in stocks.

5. A certain financial instituition declared a ₱50,000,000 dividend for the common stocks. If there are
total of ₱800,000 shares of common stock, how much is the dividend per share?
A. 62. 5 B. 72. 5 C. 82. 5 D. 92. 5
Lesson Presentation:

Stocks and Bonds

Stocks are simply shares of individual companies. Here’s how it works: say a company has
made it through its start-up phase and has become successful. The owners wish to expand, but they
are unable to do so solely through the income they earn through their operations. As a result, they can
turn to the financial markets for additional financing. One way to do this is to split the company up into
“shares,” and then sell a portion of these shares on the open market in a process known as an “initial
public offering,” or IPO. A person who buys Stock, is therefore buying an actual share of the company,
which makes him or her a part owner – however small. This is why Stock is also referred to as “equity.”

Bonds, on the other hand, represent debt. A government, corporation, or other entity that
needs to raise cash borrows money in the public market and subsequently pays interest on that loan to
investors.

Each bond has a certain par value (say, $1000) and pays a coupon to investors. For instance, a
$1000 bond with a 4% coupon would pay $20 to the investor twice a year ($40 annually) until it
matures. Upon maturity, the investor is returned the full amount of his or her original principal except
for the rare occasion when a bond defaults (i.e., the issuer is unable to make the payment).

The Difference Between Stocks and Bonds for Investors

Since each share of stock represents an ownership stake in a company – meaning the owner
shares in the profits and losses of the company - someone who invests in the stock can benefit if the
company performs very well and its value increases over time. At the same time, he or she runs the
risk that the company could perform poorly and the stock could go down – or, in the worst-case
scenario (bankruptcy) – disappear altogether.

Individual stocks and the overall stock market tend to be on the riskier end of the investment
spectrum in terms of their volatility and the risk that the investor could lose money in the short term.

33
However, they also tend to provide superior long-term returns. Stocks are therefore favored by those
with a long-term investment horizon and a tolerance for short-term risk.

Bonds lack the powerful long-term return potential of stocks, but they are preferred by investors
for whom income is a priority. Also, bonds are less risky than stocks. While their prices fluctuate in the
market – sometimes quite substantially in the case of higher-risk market segments - the vast majority of
bonds tend to pay back the full amount of principal at maturity, and there is much less risk of loss than
there is with stocks.

Many people invest in both stocks and bonds in order to diversify. Deciding on the appropriate
mix of stocks and bonds in your portfolio is a function of your time horizon, tolerance for risk, and
investment objectives.

Definition of terms in relation to stocks

 Stocks – share in the ownership of the company
 Dividend – share in the company’s profit
 Dividend Per Share – ratio of the dividends to the number of shares
 Stock Market – a place where stocks can be bought or sold. The stock market in the
Phillipines is governed by the Phillippine Stock Exchange (PSE)
 Market Value – the current price of a stock at which it can be solved.
 Stock Yield Ratio – ratio of the annual dividend per share and the market value per
share. Also called current stock yield.
 Par Value – the per share amount as stated on the company certificate. Unlike market
value, it is determined by the company and remains stable over time.

Examples:

1. A certain financial instituition declared a ₱30,000,000 dividend for the common stocks. If there
are total of ₱700,000 shares of common stock, how much is the dividend per share?
Given:
Total Dividend = ₱30,000,000
Total Shares = ₱700, 000

Find: Dividend per Share

TotalDividend

TotalShares
Dividend per Share 30,000,000

700,000
 42.86

2. A certain corporation declared a 3 % dividend on a stock with a par value of ₱500.

Mrs. Lingan owns 200 shares of stock with a par value of ₱500. How much is the dividend she
received?

Solution:
Given: Dividend Percentage = 3%
Par Value = ₱500

34
 Number of Shares = 200

Find: Dividend

The dividend per share is ₱500 × 0.03 = ₱15. Since there are 300 shares. The total dividend is
₱15/share × 200 shares = ₱3, 000.

In summary,

Dividend = Dividend Percentage × Par Value × Number of Shares

= 0.03(500)(200)

= 3, 000

Thus, the dividend is ₱3, 000.

Definition of Terms in relation to Bonds

 Bond – interest – bearing security which promises to pay

(1) A stated amount of money on the maturity date, and

(2) Regular interest payment called coupons.

 Coupon – periodic interest payment that the bondholder receives during the time between
purchase date and maturity date, usually received semi annually
 Coupon Rate – the rate per coupon payment period; denoted by r
 Price of a Bond – the price of the bond at purchase time; denoted by P
 Par Value or Face Value – the amount payable on the maturity date; denoted by F

If P = F, the bond is purchased at par

If P < F, the bond is purchased at a discount

If P > F, the bond is purchased at premium

 Term (or Tenor) of a Bond – fixed period of time (in years) at which the bond is redeemable as
stated in the bond certificate; number of years from time to purchase to maturity date.
 Fair Price of a Bond – present value of all cash inflows to the bondholder.

EXAMPLES:

1. Determine the amount of the semi - annual coupon for a bond with a face value of ₱300, 000
that pays 10%, payable semi – annually for its coupons.

Given: Face Value F = ₱300, 000

35
 Coupon Rate r = 10%

Find: Amount of the Semi – annual Coupon

Annual coupon amount : 300,000(0.10) = 30, 000

Semi – annual coupon amount: 30, 000(1/2) = 15, 000

Thus, the amount of the semi – annual coupon is ₱15, 000.

The coupon rate is used only for computing the coupon amount, usually paid semi annually. It is
not the rate at which money grows. Instead current market coonditionsare reflected by the
market rate, and is used to compute the present value of future payments.

2. Suppose that a bond has a face value of ₱100,000 and its maturity date is 10 years from now.
The coupon rate is 5% payable semi – annually. Find the fair price of this bond, assuming that
the annual market rate is 4%.

Given: Face Value F = ₱100, 000

Couppon Rate r = 5%

Time to Maturity = 10 years

Number of Periods = 2(10) = 20

Market Rate = 4%

Find: Fair Price of the Bond

Amount of semi – annual coupon: 100,000 (0.05/2) = 2, 500

The bondholder receives 20 payments of ₱2,500 each, and ₱100, 000 at t = 10.

Present value of ₱100, 000:

F 100,000
P   67,556.42
1  j  1  0.0410
n

Present value of ₱100, 000:

Convert 4% to equivalent semi – annual rate:

36
 2  2
 
1  0.04  1  i 
1

 2 
i 2 
 0.019804
2

Thus,

1  1  j  1  1  0.019804
n 20
PR  2,500  40,956.01 , and
j 0.019804

Pr ice  67,556.42  40,956.01  108,512.43

Thus, a price of ₱108, 512.14 is equivalent to all future payments, assuming an annual market rate of
4%.
Summary:
STOCKS and BONDS

Stocks or shares of stock, represent an ownership interest in a corporation. Bonds are a form of
long-term debt in which the issuing corporation promises to pay the principal amount at a specific date.
Stocks pay dividends to the owners only if the corporation declares a dividend. Stocks are
ownership stakes, while bonds are debt.
Bonds, like a stock, a bond is a type of investment, but unlike a stock, a bond has a definite, but
not necessarily fixed, yield. Some bonds have a feature which gives the borrower an option to pay off
the principal of the bond before its maturity, the date when the bond is due to be redeemed.
Bonds, also known as a fixed-income security, is a debt instrument created for the purpose of
raising capital. They are loan agreements between the bond issuer and an investor, in which a bond
issuer is obligated to Stocks and bonds represent two different ways for an entity to raise money to
fund or expand their operations. When a company issues stock, it is selling a piece of itself in
exchange for cash.
With a stock, in a very short period of time, your money could double quickly, or it could be
worth almost nothing. Contrast that with a mutual fund which owns hundreds of stocks.
Types of stocks are common stocks and preferred stocks divided into non-participating and
participating stocks.
Types of bonds are: Government bonds, municipal bonds, corporate bonds, and Zero-coupon
bonds or accrual bonds.

Activity/Evaluation:

Tell whether the following is a characteristics of stocks or bonds. Write your answers on a
separate sheet of paper. (1 point each)

1. A form of equity financing or raising money by allowing investors to be part owners of the
company.

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 2. A form of debt financing, or raising money by borrowing from investors.
3. Investors are guaranteed interest payments and a return of their money at the maturity date.
4. Investors can earn if the security prices increase, but they can lose money if the security prices
decrease or worse, if the company goes bankrupt.
5. It can be appopriate for retirees (because of the guaranteed fixed income) or for those who
need the money soon.
6. Lower risk but lower yield.
7. Higher risk but with possibility of higher returns.
8. Investors are guaranteed interest payments and a return of their money at the maturity date.
9. A form of debt financing or raising money by borrowing from the investors.
10. A form of finnacing or raising money by allowing investors to be part owners of the company.

Reinforcement:
D. For additional learnings, click the link and watch the video about:

Stocks and Bonds

https://www.youtube.com/watch?v=rs1md3e4aYU

https://www.youtube.com/watch?v=vUZbb8SN9b0

E. Answer the following problems completely. Write your complete solution on a separate
sheet of paper. (5 points each)

1. A food corporation declared a dividend of ₱25, 000, 000 for its common stock. Suppose
there are 180, 000 shares of common stock, how much is the dividend per share?
2. A certain financial institution declared ₱57 dividend per share for its common stock. The
market value of the stock is ₱198. Determine the stock yield ratio.
3. A certain land developer declared a dividend of ₱28 per share for the common stock. If the
common stock closes at ₱99, how large is the stock yield ratio this investment?
4. Determine the amount of a semi – annual coupon paid for a 3% bond with a face value of
₱80, 000 which matures after 15 years.
5. A ₱45, 000 bond is redeemable at ₱550, 000 after 5 years. Coupons are given at 5%
convertible semi – annually. Find the amount of the semi annual coupon.

References:

Versoza, Dhebbie Marie B., (2016). “General Mathematics”, Commission on Higher Education
Augmann, Richard, Abad , Edmundo, et al. “Mathematics in the Modern World”. Rex
Bookstore, Incorporated

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