MODULE WEEK NO.

2
Pamantasan ng Lungsod ng Maynila
Gen. Luna corner Muralla St., Intramuros, Manila
Philippines 1002
(+63 2) 8 643-2500

College/Department
COURSE CODE: Mathematics of Investment
Semester of A.Y. 2020-2021

Introduction

This module focuses on the alternative approach to simple interest, known as simple discount. It
has its own distinct features and can actually be used in further finance-related topics such as
present values and future values of investment and loan instruments.

Rationale

The purpose of this module is to prepare the students in understanding the basic concept in investment
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and loan valuation, in comparison with another fundamental tool called simple interest.

Intended Learning Outcomes

A. Explain the Basic Concept of Simple Discount

B. Use the Simple Discount formula to calculate Interest, Interest Rate, Time and Dates
C. Use the Simple Discount formula to calculate the Present and Future values of Investments
and Loans problems

Activity

1. Continuation of Week Module 1.

2. Quiz No. 1
3. Presentation of Module Week 2 and Chapter activities.

Discussion

Engage:
1. Why short-term business loans has a high annual percentage rate than long-term loans?
2. What is the advantage of loans to business owners?

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Explain:

2.1 The Basic Concept of Simple Discount

Zorilla et. al (2015). Simple discount or discount refers to the amount deducted from the maturity
value of an obligation. The price of using money is therefore deducted in advance.

In this case the borrower pays the original sum of money borrowed at the end of the term at a
specified discount rate. Thus, the amount F maturity value at the end of the term t is charged an
interest in advance at simple discount rate d. The amount of money the borrowers received is called
the P proceeds.
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The following variables will be used in solving simple discount:

𝑫 = 𝑭𝒅𝒕 Equation 2.1

𝑫
𝑭= Equation 2.2
𝒅𝒕
𝑫
𝒅= Equation 2.3
𝑭𝒕
𝑫
𝒕= Equation 2.4
𝑭𝒅
𝑷=𝑭−𝑫 Equation 2.5
𝑷 = 𝑭 (𝟏 − 𝒅𝒕) Equation 2.6

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2.2 Computing the Bank Discount

In this section we will used the Equation 2.1 in computing simple discount

Simple Discount D = Fdt

Where:

D = bank discount

F = maturity value or face value

d = rate of discount

t = time period (term)

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Example 1: A bank loan for Php 15,000 is discounted at 10% for 3 years. How much is the
interest?

Solution: Given: F = Php 15,000 d = 10% or 0.10 t = 3 years

D = Fdt
= 15,000 (0.10) (3)
= Php 4,500

The borrower will receive Php 4,500.

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Example 2: Heidi needs Php 50,000 for 180 days and applied to her bank for a loan. When the
bank was satisfied that the loan would repay as promised, it made the loan at a discount rate
of 8%. How much is deducted from Php 50,000?

Solution: Given: F = Php 50,000 d = 8% or 0.08 t = 180 days

D = Fdt
= 50,000 (0.08) (180/360)
= Php 2,000

Heidi will receive Php 2,000 from the bank.

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2.3 Computing the Proceeds

In this section we will used the Equation 2.6 in computing of the proceeds in a discounting note.

Zorilla et. al (2015) said that the value of P is the amount receive by the borrower at the beginning
of the term. We shall call this Proceeds. The value of the Proceeds is equivalent to the concept of
Principal or present value of the loan. However, for the purpose of clarity, we shall use Pr to
indicate the present value at simple discount. The phrase “to discount” means to get the value of the
proceeds.
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Proceeds 𝑷 = 𝑭 (𝟏 − 𝒅𝒕)

Where:

P = proceeds

F = maturity value or face value

d = rate of discount

t = time period (term)

Example: Landbank is currently charging a 15% discount rate. Find the proceeds on a Php
20,000 note for 60 days.

Solution: Given: F = Php 20,000 d = 15% or 0.15 t = 60 days

Pr = F (1 - dt)
= 20,000 [1 - (0.15) (60/360)]
= 20,000 (1 – 0.025)

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 MODULE WEEK NO.2
= 20,000 (0.975)
= Php 19,500

The note will have proceeds of Php 19,500

2.4 Computing the Maturity Value or Face Value

In this section we will used the Equation 2.2 in computing the maturity value of a note.
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𝑫
Maturity Value or Face Value 𝑭=
𝒅𝒕

Where:

F = maturity value or face value

D = bank discount

d = rate of discount

t = time period (term)

Example: A discount of Php 500 is charged for an 80-day loan. If the discount rate is 20%,
how much must be repaid at maturity?

Solution: Given: D = Php 500 d = 20% or 0.20 t = 80 days

𝑫
𝑭=
𝒅𝒕
500
=
0.20(80/360)
500
= 0.044

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 MODULE WEEK NO.2

= Php 11,250

The loan must be repaid by Php 11,250

2.5 Computing the Discount Rate

In this section we will used the Equation 2.3 in computing the discount rate.
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𝑫
Discount rate 𝒅=
𝑭𝒕

Where:

d = rate of discount

D = bank discount

F = maturity value or face value

t = time period (term)

Example: On June 11, 2020, Hazel Santos borrowed Php 5,200, 192-day note at Metrobank
and was charged Php 410 for the loan.

Solution: Given: F = Php 5,200 D = 410 t = 192 days

𝑫
𝒅=
𝑭𝒕
410
=
5,200 (192/360)

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 MODULE WEEK NO.2
410
= 2,773.33
= .1478 or 14.78%

The discount rate of the loan was 14.78%

2.6 Computing the Time

In this section we will used the Equation 2.4 in computing the time in a simple discount transaction.
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𝑫
Time 𝒕=
𝑭𝒅

Where:

t = time period (term)

D = bank discount

F = maturity value or face value

d = rate of discount

Example 1: Denise signs a Php 5,500 discount note. BPI charges 18% discount rate and the
proceeds are Php 3,500. Find the time of the note.

Solution: Given: F = Php 5,500 P = 3,500 d = 18% or 0.18

Note that we cannot used Equation 2.4 directly because D is unknown therefore, we need to
represent D as F-P in order to solve for the time as shown in the computation below.

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 MODULE WEEK NO.2
𝑫 𝑭−𝑷
𝒕= 𝒕=
𝑭𝒅 𝑭𝒅

5,500−3,500
=
5,500 (0.18)

2,000
= 990
= 2.02 or 2 years

The note will end in 2 years.

Example 2: A note having a face value of Php 20,000 was discounted at 10%. If the discount
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was Php 1000, find the term of the loan.

Solution: Given: F = Php 20,000 d = 10% or 0.10 D = 1,000

𝑫
𝒕=
𝑭𝒅
1,000
=
20,000 (0.10)
1,000
=
2,000

= 0.50 years or 180 days

The note will end in 180 days.

2.7 Promissory Notes

Zorilla et. al (2015). A promissory note can be sold to another person, to a bank or to any business
establishment. Selling of such promissory notes can be done before the maturity date. The
purchasers discount the maturity value of the note from the maturity date back to the date the note
was sold. Discounting promissory notes, therefore, requires two basic steps:

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 MODULE WEEK NO.2

First, the maturity value is first computed using the face value, the simple interest rate, and the terms
of the note.

Second, the maturity is discounted for the remaining period at simple discount rate. The proceeds is
the amount received by the seller of the note.

Example 1: Mr. Mejia owns a Php 12,500 note at 6% simple interest dated at Sept. 6, 2019.
The term of the note is 150 days. Fifty days after Sept. 6, he sold the note to BDO at 8%
discount. Compute the following:

A. Maturity value of the note

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B. Proceeds

Solution: Given: P = Php 12,500 r = 6% or 0.06 t = 150 days

A. F = P (1+ rt)

= 12,500 [1 + 0.6 (150/360)]

= 12,812.50

F = Php 12,812.50 d = 8% or 0.08 t = 100 days

B. Pr = F (1- dt)

= 12,812.50 [1 - 0.8 (100/360)]

= 12,527.78

Mr. Mejia will receive an amount of Php 12,527.78 from BDO 150 days from Sept. 6, 2019.

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Exercise

Modified True or False. Write TRUE if the stamen is correct and change the identified word if
False.

1. __________________ Simple discount refers to the amount deducted from the maturity value of
an obligation.

2. __________________ The amount of money the borrowers received is called the Future Value.

3. __________________ The loan amount in simple interest is Face Value while Proceeds in Simple
Discount.
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4 - 5. _______________ A simple discount is computed on the principal value while simple interest
is computed on the maturity value.

Assessment

Elaborate:

Computations:

1. Find the simple discount of Php 8,300 due at the end of 2 years at 7% simple discount.

Solution:

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2. Find the proceeds on Php 10,000 due at the end of 3 years at 10% simple discount.

Solution:

3. Find the amount of the loan for 7 years at 6% simple discount rate if its proceeds are Php 20,000.

Solution:
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4. Find the simple discount rate if Bella borrowed Php 2,300, 11 months note and was charged Php
500 for the loan.

Solution:

5. How long will Php 25,000 accumulate to Php 29,000 if the discount rate is 5%?

Solution:

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Reflection

Evaluate:
In obtaining a loan, which is a better approach between simple discount and simple interest? From
the perspective of:

A: Lender
B: Lendee

Resources and Additional Resources

• Sirug, W. (2014). Mathematics of Investment. Mindshapers Co. Inc.

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• Zorilla et al. (2013). Business Mathematics and Mathematics of Investment. Grandbooks

Publishing.

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