MATHEMATICS

OF
FINANCE
Prepared by:
Ma. Nelia B. Abiera-Soriano, MAEd
Mark – Mark Selling
up down Price

Original
Cost Discount
Price
 Interest
- is an amount paid from the borrowed money.
 Simple Interest

I =Prt

P =I/rt r=I/Pt t=I/Pr

I = Prt
Given:
P = Php1,000.00
r = 6%
t = 4 ½ years

Answer:
Php 270.00
P = I/rt
Given:
I = Php 1,500
r = 3.02%
t = 23 months

Answer:
Php 25, 914.20
r = I/Pt
Given:
I = Php 1,000
P = Php 15,000
t = 2 years

Answer:
0.0333
3.33%
t = I/Pr
Given:

I = Php 1,500
P = Php 10,000
r=8½%

Answer:
t = 1 year, 9 months, 5 days
Ordinary Interest
360 Days

12 months x 30 days =
Exact Interest
365 Days

31 January March May July August October December = 217

28 February = 28
30 April June September November = 120
Interest between Dates
Actual Number of Days

Approximate Number of Days

Approximate Number of Days
March 3, 1990 – Sept 15, 1990

March 27 1990 9 15
April 30 1990 3 3
May 30 0 6 12
June 30 6 x 30 = 180
July 30 12
August 30 = 192 days
September 15 = 192 days
Actual Number of Days
March 3, 1990 – Sept 15, 1990

March 28 September 15 = 258

April 30 March 3 = 62
May 31
June 30 = 196 days
July 31
August 31
September 15
= 196 days
Dec 13, 2010 – Feb 21, 2011
November 16, 1999 – April 1, 2000
 4 Types of Interest
Ordinary Interest , using Actual Number of Days ( Bankers Rule)
Io = Pr Actual/360
Ordinary Interest, using Approximate Number of Days
Io = Pr Approx/360
Exact Interest, using Actual Number of Days
Ie =Pr Actual/365
Exact Interest, using Approximate Number of days
Ie= Pr Aprrox/365
P = Php 50,000
r = 1 ¾%
t = January 2, 2008 – May 1, 2008
 Final Amount
F=P+I

F = P ( 1 + rt )
Compound Amount

S = P ( 1 + i )𝑛

𝑗 𝑡𝑚
S = P (1+ )
𝑚
Number of conversions: m

◦Annually: m = 1, converted once a year

◦Semi annually: m = 2, converted twice a year
◦Quarterly: m = 4, converted four times in a year
◦Monthly: m = 12, converted twelve times in a
year
S=
P = Php 10,000
j = 2.08%
m= 4
t = 1 yr

n=
i=

S =Php 10, 209. 63

Present Value

P = S ( 1 + i ) −𝑛

𝑗 −𝑡𝑚
P = S (1+ )
𝑚
P=
S = Php 50,000.00
j = .99%
m=2
t = 40 months

n= tm
40/12 x 2
20/3

P =Php 48, 380. 87

 Annuity

-a series of equal payments made at regular intervals of time.

An annuity is a sequence of equal payments made at equal
intervals.
The amount of each payment is referred to as the
regular payment, denoted by R.
Interest rate at 3% per annum

Simple interest Compound interest Annuity

Regular deposit 10,000
Principal 10,000 10,000 per year
Year 1 300 300 300
Year 2 300 309 609
Year 3 300 318.27 927.27
Year 4 300 327.81 1255.09
Year 5 300 337.65 1592.72
Total Interest eaned 1500 1592.73 4684.08
Maturity Value 11,500 11,593 54684.08
 Classification of Annuity

Annuity Certain – is an annuity whose term is fixed, the term start and
on definite date.
Contingent Annuity – is one whose term depends on some uncertain
events.
Perpetuity – is an annuity whose payments last forever.

Simple Annuity – is an annuity whose payment intervals are the same as

the interest period.
 THREE KINDS OF ANNUITY

Ordinary Annuity – is an annuity whose payments are made at the end

of each payment interval.

Annuity Due – is an annuity whose payments are made at the beginning

of each payment interval.

Deferred Annuity – is an annuity whose forst payment will be at some

future date.
◦ Amount of an Annuity: F
◦ Sum of all periodic payments made at the end of each term plus all accumulated compound
interest
𝑗 𝑡𝑚
1+ −1
𝑚
◦ F=𝑅∗ 𝑗
𝑚

◦ Present Value of an Annuity: P

◦ Sum of all periodic payments discounted to the present time. It is also the value of the annuity at
the beginning of the term
𝑗 −𝑡𝑚
1− 1+
◦ P= 𝑅 ∗ 𝑚
𝑗
𝑚

◦ Regular Payment: R
𝑃
𝑅= −𝑡𝑚
𝑗
1− 1+
𝑚
𝑗
𝑚
Example:
Ten thousand pesos is deposited annually for 5 years with an annual interest rate of
3%, how much will be in the fund at the end 5 years?

𝑗 𝑡𝑚
1+ −1
F= 𝑅 𝑚
𝑗
𝑚

0.03 1×5
1+ 1 −1
F= 10,000 0.03
1

= ₱53,091.36
𝐼 =𝐹−𝑃
= 53091.36 − 10000 ∗ 5
= 𝑃ℎ𝑝 3 091.36
Example: A smartphone is purchased with a down payment of ₱1,000 and the
balance will be paid at ₱1,075.83 a month for 1 year. What is its cash price if he
interest rate is 6% compounded monthly?

Cash price = down payment + P

−𝑡𝑚
𝑗
1− 1+
𝑚
𝑃=𝑅
𝑗
𝑚

0.06 −1×12
1− 1+ 12
P= 1,075.83 0.06 = ₱12,500
12
cp = 1 000 + 12 500 = ₱13 500
Example: Find the monthly amortization for a ₱150,000 debt
which is to be repaid in 2 years at 7% interest compounded
monthly.
𝑃
𝑅=
𝑗 −𝑡𝑚
1− 1+
𝑚
𝑗
𝑚
150,000
= −2𝑥12
0.07
1 − 1 + 12
0.07
12

𝑅 = ₱ 6,715.89
 AMORTIZATION

Amortization is the process of settling a loan

(principal and interests) into a series of fixed
payments over time.

𝑃
𝑅= 𝑗 −𝑡∗𝑚
1− 1+𝑚
𝑗
𝑚
Example:
A housewife buys a pair of earrings worth P20 000. She pays P5 000 and the
balance on semi annual installments for 2 years. If the interest rate is 4 ½%, find the
semi-annual payment.
𝑃 =? , 𝑐𝑎𝑠ℎ 𝑝𝑟𝑖𝑐𝑒 = 𝑑𝑜𝑤𝑛 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 + 𝑃; 𝑃 = 𝑐𝑝 − 𝑑𝑝
𝑃
𝑅=
𝑗 −𝑡∗𝑚
1− 1+
𝑚
𝑗
𝑚
20 000 − 5 000
=
0.045 −2∗2
1− 1+
2
0.045
2
𝑅 = 𝑃3 963.28
Amortization Schedule

N=tm R i=j/m Repayment=R-i OB

0 15000

15000*(.045/2) 3963.284-337.5 15000-3625.784

1 3963.284 =337.500 =3625.784 =11374.216

2 3963.284 255.920 3707.364 7666.852

3 3963.284 172.504 3790.780 3876.072

4 3963.284 87.212 3876.072 0.000