SAMPLE INTEREST - SIMPLE INTEREST VS.

DIMINISHING BALANCE

BANK A
INTEREST BALANCE PRINCIPAL PAYMENT
1000000
1 55,000 800,000 200000
2 55,000 600,000 200000
3 55,000 400,000 200000
4 55,000 200,000 200000
5 55,000 0 200000
275,000
 Financing Bank
t A B BANK B
5 5.50% 7.50% INTEREST

1.00 1 75000
2 60000
3 45000
4 30000
275,000.00 5 15000
225,000
Add-on expenses 250,000
475,000
BALANCE PRINCIPAL PAYMENT
1,000,000
800,000 200000
600,000 200000
400,000 200000
200,000 200000
0 200000
1,000,000
EXAMPLE FOR UNKNOWN TIME IN ANNUITIES

1 Sebastian dreams of buying a car worth PHP 990,855. He wonders when he wo

if he saves money. If he can only deposit PHP 45,000 at the end of every 3 mon
pays 4% compounded quarterly, when whould he be able to buy his dream car?

Given: S = 990,855; R=45,000: m=4; j=0.04

Required: t

Solution: Solve for i

i = j/m = 0.04/4 = 0.01

Solve for t using equation. Substitute the values of S, R, I, and m

i = j/m = 0.04/4 = 0.01

t = log (1 + Si/R
m log (1+i)

log (1 + 990,855 (.01)

t = 45,000
4 log 1.01

t = 5

Answer: It would take 5 years for Sebastian to buy his dream car worth PHP

2 Mrs. Gina Joaquin needs a fund of PHP 900,000 to expand her house. To provid
place PHP 10,000 at the end of each month in an investment that pays 16% com
a. When will the fund accumulate to at least PHP 900,000?
b. How many full investments of PHP 10,000 are required?
c. How much must be added to the accumulated investment on the last month
PHP 900,000 needed for the expansion of the house?
d. How much must be added to the last regular deposit of PHP 10,000 to compl
PHP 900,000 on that date?

Given: S= PHP 900,000; R= PHP 10,000; m = 12; j= 0.16

Required: a. t
b. Number of full investments of PHP 10,000
c. The amount of money that must be deposited on the last month
PHP 900,000 needed for the repair of the house.
d. The amount of money that must be added to the last regular dep
the PHP 900,000 on that date.

Solution: Solving for i gives you i = 0.16/12 = 0.04/3.

a. Use equation

b. n = mt
= 12 (4.96)

c. The amount of money that must be added on the 60th month to

the PHP 900,000 needed for the repair of the house is computed us
equation of values. For a clearer understanding of the problem, stu
diagram below.
First, determine how much money is in the fund at the end of 59 pe
be computed using the formula for Sk:

Sk = R (( 1 + i)^k - 1)
i

S59 = 10,000 (( 1 + .04/3)^59 - 1)

.04/3

S59 = 888,508.38

Next, find the amount needed to complete the PHP 900,000 on the
Let x be this amount.
S59 (1 + .04/3) + x = PHP 900,000
PHP 888,508.38 (1 + .04/3) + x = PHP 900,000
PHP 900,355.16 + x = PHP 900,000
x = -PHP 355.16

d. You can compute the amount of money that must be added to th

deposit to complete the PHP 900,000 on that date using equation o
 x= PHP 900,000 - PHP 888,508.38
x= PHP 11,491.62

Answer: a. The fund will contain at least PHP 900,000 at the end of 5 ye
b. The integral part of n is 59. This mean that 59 full investme
PHP 10,000 are required. The 60th deposit, if necessary, is
than PHP 10,000.
c. Since the value of x is negative, it means that Mrs. Joaquin d
need to add any amount at the end of the 60th month to co
the PHP 900,000 needed for the repair of the house. The in
alone for the last period in sufficient to cover the difference
is an excess of PHP 355.16, in fact.
d. The amount PHP 11,491.62 must be added to the last regula
of PHP 10,000 and the end of 59 months to compete the PH
on that date.

3 How long will it take to discharge a loan of PHP 400,000 at 10% compounded s
if payment of PHP 78,806.99 is required at the end of every 6 mont
Given: A = PHP 400,000; R = PHP 78,806.99; m = 2; j =.10
Required: t
Solution: Solve for i.
i = j/m = .10/2 = .05
 Solve for t. Substitute the values of A, R, m and I in the equation.

t = log (1 - Ai/R)
m log (1 + i)

t = log (1 - PHP 400,000 (.05)

78,806.99
2 log (1.05)

t=3
Answer: It will take 3 years to discharge a debt of PHP 400,000.

4 A car has a cash value of PHP 575.000. Mr. Juan Mendoza agrees to pay PHP 15
end of each month for as long as necessary, with a smaller payment 1 month aft
last regular payment. If the prevailing interest rate is 24% compounded month
he make the last regular payment?

Given: CP = A = PHP 575,000; R = PHP 15,000; j =.24; m = 12

Required: n
Solution: Solving for I gives you I = j/m = .24/12 = .02
Next, determine the value of n using equation:

n= log (1 - Ai/R)
log (1 + i)

= log (1 - 575,000 (.02)

15,000
log (1.02)
= 73.49
nders when he would be able to buy it
nd of every 3 months in a fund that
buy his dream car?

f S, R, I, and m

am car worth PHP 990,855

r house. To provide for this, she will

that pays 16% compounded monthly.
on the last month to complete the

P 10,000 to complete the

on the last month to complete the

he last regular deposit to complete

= log ( 1 + 900,000 (.04/3)

10,000
12 log ( 1 + .04/3)

= 4.96

he 60th month to complete

se is computed using the
f the problem, study the
at the end of 59 periods. This can

HP 900,000 on the 60th month.

ust be added to the last regular

e using equation of values.
 at the end of 5 years.
t 59 full investments of
it, if necessary, is less

hat Mrs. Joaquin does not

60th month to complete
the house. The interest
ver the difference and there

d to the last regular deposit

o compete the PHP 900,000

% compounded semi-annually
nd of every 6 months?
n the equation.

ees to pay PHP 15,000 at the

yment 1 month after the
mpounded monthly when will
EXAMPLE FOR UNKNOWN TIME IN ANNUITIES

1 If deposits of PHP 500 made at the end of each month for 4 years
accumulate to PHP 25,465.60, find the rate at which money accumulates
monthly.

Given: S = PHP 25,465.60; R = PHP 500: m = 12; t = 4

Required: j
Soution: First solve for the value of n.
n = tm (4)(12) = 48
To solve for j, first compute the value of i
(n^2 - 1)^1^2 - 6(n -1) I +12 (1 - nR/S) = 0
((48)^2 - 1) i^2 - 6(48-1) i + 12(1 - (48)(500) = 0
25,465.60
2303i^2 - 282i +.69 = 0
a = 2,303
b = -282
c = .69
Using the quadratic equation:

i = 282 ± square root of 282^2 - 4(2303)(.69

2 (2,303)
i = 282 ± 270.49532
4,606
Solve for the two possible values of i
i = 282 + 270.59532 = 0.11995 = 0.12
4606
i = 282 - 270.59532 = .002498 = .0025
4606
Two values of i are obtained in the preceding computation. One o
 To determine which one is correct, verify by finding the value of S.
To check:
When i = 0.12, S = 500 ((1.12)^48 - 1) /.12 = PHP 995,794.14
This is not the required amount. Thus, reject i = 0.12.

When i = 0.0025, S = 500 ((1.0025)^48 - 1) /.0025 = PHP 25,465.6

This is the required amount. Hence, i=0.0025

Lastly, solve for j using theh correct value of i.

j = (12)(0.0025) = 0.03

Answer: The rate at which the given amount of money accumulates month

2 At what interest rate payable quarterly will payments of PHP 6,000 at the end
of every 3 months for 2 years and 3 months, discharge a loan of PHP 50,000,
principal and interest included?

Given: A = PHP 50,000; R= PHP 6,000; m = 4; t = 2.25

Required: j
Soution: Solving for n gives n = tm = (2.25)(4) = 9
Now find the value of i so you can solve for j afterward.
(n^2 - 1)^1^2 + 6(n +1) I +12 (1 - nR/A) = 0
((9)^2 - 1) i^2 + 6(9 + 1) i + 12(1 - 9(6,000) = 0
50,000
80i^2 - 60i +.96 =0

a = 80
b = 60
c = .96
Using the quadratic equation:

i
 i = -60 ± square root of 60^2 - 4(80)(-.96)
2 (80)
i =

Find the two possible values of i.

i = -60 + 62.51 = 0.0157

160

i = -60 - 62.51 = -0.7656875

160
To solve for j, use the equation j = mi

j= (4)(.0157)
j= 0.0628
Answer: The loan will be discharged at an interest rate of 6.28% compound
accumulates

82^2 - 4(2303)(.69)

0.11995 = 0.12

.002498 = .0025

omputation. One of these isnextraneous.

ding the value of S.

P 995,794.14

25 = PHP 25,465.60

ccumulates monthly is 3%.

6,000 at the end

n of PHP 50,000,
0^2 - 4(80)(-.96)

Two values of i are obtained in the preceding computation. One

is the positive and the other is negative. Obviously, the correct
answer is the positive value of i since in reality, there is no negative
-0.7656875 interest rate.

f 6.28% compounded quarterly.