THE

MATHEMATICS
OF
FINANCE

Instructor: Ms. Patricia Rose B. Baguinon

 LEARNING OUTCOMES
1. Solve problems involving Simple and Compound Interest.
2. Identify the different types of annuities.
3. Solve problems involving credit cards and consumer loans.
4. Define Stocks and Bonds, Home Ownership, and Mutual Funds.
5. Solve problems involving stocks and bonds, home ownership, and mutual funds.
6. Use mathematical concepts and tools in finance.
7. Support the use of mathematics of finance in various aspects and endeavors in
life.
 TOPICS COVERED
1. Simple and Compound Interest
2. Annuities, Credits Cards, and Consumer Loans
3. Stocks, Bonds, and Mutual Funds
 REVIEW LESSON: PERCENT
The word “percent” can be translated as “per hundred.” It means hundredths,
1
or per hundred. That is, 1% = 100.

For example,
The International Mass Retail Association reported that 20% of
adults plan to buy Valentine’s Day cards next year. Of those who plan
to buy them, 36% of women and 26% of men plan to buy romantic
cards.
This tells us that 20 out of every 100 adults plan to buy a card. Also
26 out of 100 men who buy a card will choose a romantic one, and 36
out of 100 women will do so.
 REVIEW LESSON: PERCENT
The word “percent” can be translated as “per hundred.” It means hundredths, or per hundred. That is,
1
1% = 100.

Percent Conversions
To work with percents in calculations, we will need to convert it to either decimal or
fractional form. But to interpret the answers to calculations, we will want to convert it back
into percents.
In order to change a percent to a decimal, drop the % sign and move the decimal point two
places to the left.
 REVIEW LESSON: PERCENT
Changing Percents to Decimals
Change each percent to decimal.

PERCENT FORM DECIMAL FORM

84% 0.84
5% 0.05
37.5% 0.375
172% 1.72
62.5% 0.625
 REVIEW LESSON: PERCENT
Changing Percents to Fractions
Change each percent to fraction. Simplify the answer.

PERCENT FORM FRACTION FORM

21ൗ
84% 25

5% 1ൗ
20
3ൗ
37.5% 8

172% 43ൗ
25

62.5% 5ൗ
8
 REVIEW LESSON: PERCENT
Changing Decimals to Percent
Change each decimal to percent.

DECIMAL FORM PERCENT FORM

0.74 74%
1.327 132.7%
5.463 546.3%
0.974 97.4%
0.04 4%
 REVIEW LESSON: PERCENT
Changing Fractions to Percent
Change each fraction to percent.

FRACTION FORM PERCENT FORM

7ൗ 87.5%
8
3ൗ 75%
4
5ൗ 83.33%
6
1 1Τ2 150%
5ൗ
16 31.25%
 REVIEW LESSON: PERCENT
Problems Involving Percents
The most common calculation involving percents involve finding a percentage of some quantity. To
understand how to do so, consider this example. You probably know that 50% of 10 is 5. Let’s rewrite
that statement:
When writing a percentage statement in
50% of 10 is 5 symbols, the word “of” becomes multiplication,
and the word “is” becomes an equal sign.
0.5×10=5
Example:
In a class of 66 students, 32% got a B in the 1st exam. How many students got a B?
Solution:
First, we write 32% in decimal form, as 0.32. The question is “What is 32% of 66?” which we translate
into symbols: 32% of 66 is ___... 0.32×66=21.12.
Answer:
We can’t have 0.12 students, so we interpret the answer as 21 students got a B.
 REVIEW LESSON: PERCENT
Problems Involving Percents
Try this!
In another section of the same course, 19% of the 54 students got a B. How many students got a B?
Answer: 10 students got a B.

Try these on your own:

1. Express the following as percent: a. 0.63, b. 0.87, c. 0.0872
2. For a certain year, 19% of all the books were self-help books. If a bookstore sold 12,782 books,
about how many were self-help books?
3. If the commission for selling a 52-inch high-definition television set is 8%, find the commission on a
television set that costs Php 82,499.00
 INTEREST
Interest is a fee paid for the use of money.
For example, if you borrow money from a bank to
buy a car, you must not only pay back the amount
of money that you borrowed, but also an
additional amount, called the interest, for the use
of bank’s money.

On the other hand, if you deposit money in a

savings account, the bank will pay you interest
for saving money since it will be using your
money to provide for loans, mortgages, etc. to
people who are borrowing money.
 SIMPLE INTEREST
In order to compute simple interest, we will need three pieces of information:
the principal, the rate, and the time.

Interest (I) is the fee charged for the use of money.

Principal (P) is the amount of money borrowed or placed into a savings account.

Rate (r) is the percent of the principal paid for having money loaned, or earned for investing money.
Unless indicated otherwise, rates are given as a percent for a term of 1 year.

Time (t) or term is the length of time that the money is being borrowed or invested. When the rate is
given as percent per year, time has to be written in years.

Future value (A) is the amount of the loan or investment plus the interest paid or earned.
 SIMPLE INTEREST
The basic formulas for computing simple interest user principal, rate, and time as follows:

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 × 𝑟𝑎𝑡𝑒 × 𝑡𝑖𝑚𝑒: 𝑰 = 𝑷𝒓𝒕

𝐹𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒 = 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡: 𝑨 = 𝑷 + 𝑰 𝑜𝑟 𝑨 = 𝑷(𝟏 + 𝒓𝒕)

 SIMPLE INTEREST
Example:
Find the simple interest on a loan of Php 3,600.00 for 3 years at a rate of 8% per year.
Solution:
𝐼 = 𝑃𝑟𝑡
= (3,600)(0.08)(3)
= 864
Final Answer: The interest on the loan is Php 864.00.

Try this one:

Find the simple interest on a Php 12,000.00 loan for 5 years at 7%.
𝑃 = 12,000
𝑟 = 7% = 0.07
𝑡=5
Final Answer: The interest on the loan is Php 4,200.00
 SIMPLE INTEREST
Example:
Find the future value on a loan of Php 3,600.00 for 3 years at a rate of 8% per year.
Solution: A = 𝑃 + 𝐼 𝐴 = 𝑃 1 + 𝑟𝑡
= 3,600 + 864 = 3,600[1 + (0.08)(3)]
= 4,464 = 4,464

Final Answer: The total amount of money to be paid back is Php 4,464.00
Try this one:
Find the future value on a Php 12,000.00 loan for 5 years at 7%.
𝑃 = 12,000
𝑟 = 7% = 0.07
𝑡=5
𝐼 = 4,200
Final Answer: The total amount of money to be paid back is Php 16,200.00.
 SIMPLE INTEREST
Computing for Simple Interest for a Term in Months
Since rates are typically given in terms of percent per year, when the time of a loan or
investment is given in months, we need to divide it by 12 to convert to years.

Try this one:

Marta needs some quick cash for books at the beginning of semester, so she borrows Php
6,000.00 at 5% interest for 2 months. How much interest will she pay?
Solution:
𝑃 = 6,000
𝑟 = 5% = 0.05
2
𝑡=
12

Final Answer: The interest on the loan is Php 50.00.

 SIMPLE INTEREST
Computing Monthly Payments
Often, a simple interest loan is paid off in a monthly installments. To find the monthly
payment, divide the future value of the loan by the number of months in the term of the loan.

Example:
Alana borrowed Php 5,000.00 at 3% simple interest for 1 1/2 years to repair her bike. Find the
interest, future value, and the monthly payment.
 SIMPLE INTEREST
Computing Monthly Payments Solution:
Often, a simple interest loan is
paid off in a monthly installments. To MONTHLY
INTEREST FUTURE VALUE
find the monthly payment, divide the PAYMENT
future value of the loan by the number 𝐼 = 𝑃𝑟𝑡 𝐴=𝑃+𝐼 Divide the future
of months in the term of the loan. 1 = 5,000 + 225 value of the loan by
= (5,000)(3%)(1 )
2 = 5,225 the no. of months.
Example: = 225 1
1 2 years = 18
Alana borrowed Php 5,000.00 at 3% Final Answer:
months
simple interest for 1 1/2 years to repair Final Answer: The total amount of
5,225 ÷ 18
her bike. Find the interest, future value, The interest on the money to be paid
= 290.28
and the monthly payment. loan is back is Final Answer:
Php 225.00. Php 5,225.00. The monthly
payment is
Php 290.28.
 SIMPLE INTEREST
Computing Monthly Payments
Try this one:
A restaurant took out a loan for Php 50,000.00. The simple interest rate was 6.5%, and the term of loan
was 3 years. Find the interest, future value, and monthly payment.
Solution:
𝑃 = 50,000
𝑟 = 6.5% = 0.065
𝑡 = 3 𝑦𝑒𝑎𝑟𝑠 = 36 𝑚𝑜𝑛𝑡ℎ𝑠
Final Answers:
Interest: The interest on the loan is Php 9,750.00.
Future Value: The total amount of money to be paid back is Php 59,750.00.
Monthly Payment: The monthly payment is Php 1,659.72
 SIMPLE INTEREST
Finding the Principal, Rate, and Time
In addition to finding the interest and future value for a loan or investment, we can find the
principal, the rate, and the time period by substituting into the formula 𝐼 = 𝑃𝑟𝑡 and solving for the
unknown.

Example:
The interest on a loan secured by a company was Php 2,500.00. The money was borrowed at 5%
simple interest for 2 years. Find the principal.
Solution:
𝐼 = 2,500, 𝑟 = 5% = 0.05, 𝑡 = 2, 𝑃 =?

𝐼 = 𝑃𝑟𝑡
2,500 = 𝑃(0.05)(2)
2,500
=𝑃
(0.05)(2) Final answer:
𝑃 = 25,000 The amount of loan is Php 25,000.00.
 SIMPLE INTEREST
Finding the Principal, Rate, and Time
In addition to finding the interest and future value for a loan or investment, we can find the
principal, the rate, and the time period by substituting into the formula 𝐼 = 𝑃𝑟𝑡 and solving for the
unknown.

Example:
A company invested Php 100,000.00 for 10 years and received Php 40,000.00 in simple interest.
What was the rate of investment paid?
Solution:
𝑃 = 100,000, 𝑡 = 10, 𝐼 = 40,000, 𝑟 =?
𝐼 = 𝑃𝑟𝑡
40,000 = (100,000)(r)(10)
40,000
=𝑟 Final answer:
(100,000)(10)
r = 0.04 = 4% Rate of investment paid is 4%
 SIMPLE INTEREST
Finding the Principal, Rate, and Time
In addition to finding the interest and future value for a loan or investment, we can find the
principal, the rate, and the time period by substituting into the formula 𝐼 = 𝑃𝑟𝑡 and solving for the
unknown.

Example:
Pam borrowed Php 4,500.00 at 8 3/4% to buy materials for her project. She had to pay Php 2,756.25
interest. Find the term of the loan.
Solution:
3
𝑃 = 4,500, 𝑟 = 8 % = 0.0875, 𝐼 = 2,756.25, 𝑡 =?
4

𝐼 = 𝑃𝑟𝑡
2,756.25 = (4,500)(0.0875)(t)
2,756.25
=𝑡
(4,500)(0.0875)
Final answer:
𝑡=7
The term of loan was 7 years.
 SIMPLE INTEREST
Finding the Principal, Rate, and Time

Try these:
1. Find the principal on a savings account that paid Php 76,500.00 in simple interest at 6% over 3
years.
Final Answer: The amount of loan is Php 425,000.00.

2. A pawn shop offers to finance a ring costing Php 7,500.00 at 4% simple interest. The total
interest charge will be Php 1,500.00. What is the term of the loan?
Final Answer: The term of loan was 5 years.

3. If you invest Php 8,000.00 for 30 months and receive Php 1,000.00 in simple interest, what is
the rate?
Final Answer: The interest paid on the investment was 5%.
 SIMPLE INTEREST
Practice Exercises:
1. Jane had to borrow Php 120,000.00 over the course of 4 years to complete her
education. The interest is 4,046.40. Find the rate.
2. Fred started a small business and borrowed Php 20,000.00 for a year to get business
up and running. The interest is Php 2,500.00. Find the rate.
3. A businessman paid back a total of Php 150,000.00 on a 6-month loan at 12%. Find
the principal.
4. A store-owner borrowed Php 4,500.00 at 9 1/2%. He paid Php 1,282.50 in interest.
Find the term of the loan.
5. Bing has savings Php 223,600.00 which earned 9 3/4% interest for 5 years. Find the
interest.
 COMPOUND INTEREST
If you think about simple interest over a long
period of time, it doesn’t sound like a great deal
for the investor. Suppose you put Php 10,000.00
into an account that pays 5% simple interest,
and you keep it untouched for 30 years. Each
year, you’re getting 5% of Php 10,000.00 in
interest. But for all that time, the bank could
have been Increasing your money through loans
and investments,
and they’re still
paying interest
only on the original This is where compound interest comes into
amount. play. It seems more fair for the bank to pay
interest on the actual value of the account
each year, not just the original amount.
 COMPOUND INTEREST
When interest is computed on the principal Formula:
and any previously earned interest, it is called 𝒓 𝒏𝒕
compound interest.
𝑨 = 𝑷(𝟏 + )
𝒏
Compound interest is different from simple Where:
interest, where interest is not added to the 𝐴 = amount (Principal + Interest)
principal while calculating interest over the 𝑃 = principal
next period. 𝑟 = rate of interest
It finds its usage in most of the transactions 𝑛 = no. of times interest is compounded per
in the banking and finance sectors and other year
areas. Some of its applications are: 𝑡 = time (in years)
• Increase or decrease in population
• The growth of bacteria
• Rise or Depreciation in the value of an item
 COMPOUND INTEREST
Example:
Suppose that Php 5,000.00 is invested for 3 years at 8%.
a. Find the amount of simple interest.
b. Find the compound interest if interest is calculated once per year.
Solution:
a. Using the formula 𝐼 = 𝑃𝑟𝑡 with 𝑃 = 5,000, 𝑟 = 0.08, and 𝑡 = 3, we get
𝐼 = (5,000)(0.08)(3)
𝐼 = 1,200
Final Answer: The simple interest over 3 years is Php 1,200.00.
b.
First year: For the first year, we have 𝑃 = 5,000, 𝑟 = 0.08, and 𝑡 = 1, we get
𝐼1 = (5,000)(0.08)(1) = 400
Answer: The interest for the 1st year is Php 400.00.
 COMPOUND INTEREST
Example:
Suppose that Php 5,000.00 is invested for 3 years at 8%.
b. Find the compound interest if interest is calculated once per year.
Solution:
Second year: At the beginning of the second year, the account now contains Php
5,400.00, so we use this as the principal for the second year. The rate and time
remain the same.
𝐼2 = (5,400)(0.08)(1) = 432
Answer: The interest for the 2nd year is Php 432.00.
Third year: The principal is now Php 5,400.00 + Php 432.00 = Php 5,832.00.
𝐼3 = (5,832)(0.08)(1) = 466.56
Answer: The interest for the 3rd year is Php 466.56.
Final Answer: The total interest for three years is
Php 400.00 + Php 432.00 + Php 466.56 = Php 1,298.56
This is almost a hundred pesos more than with simple interest.
 COMPOUND INTEREST
Formulas: To compute for the interest,
To compute for the future value, 𝐈=𝑨−𝑷
𝒓 Where:
𝑨 = 𝑷(𝟏 + 𝒏) 𝒏𝒕
𝐼 = compound interest
Where: 𝐴 = amount
𝐴 = amount (Principal + Interest) 𝑃 = principal
𝑃 = principal
𝑟 = rate of interest
𝑛 = no. of times interest is compounded per year
𝑡 = time (in years)
In the previous example, let’s compute for the future value:
0.08 (1)(3)
𝐴 = 5,000(1 + )
1
𝑨 = 𝟔, 𝟐𝟗𝟖. 𝟓𝟔
 COMPOUND INTEREST
Try this:
For an investment of Php 100,000.00 at 6% interest for 4 years,
a. find the amount of simple interest; and
b. find the compound interest if interest is calculated once per year.
Solution:
a. 𝑃 = 100,000, 𝑟 = 0.06, 𝑎𝑛𝑑 𝑡 = 4
Final Answer: The simple interest over 4 years is Php 24,000.00

b. Final Answer: The compound interest is Php 26,247.70

 COMPOUND INTEREST
Try this:
For an investment of Php 100,000.00 at 6% interest for 4 years,
b. find the compound interest if interest is calculated once per year.
Solution 1: Solution 2:
𝑟 𝑛𝑡 𝐼1 = (100,000)(0.06)(1)
𝐴 = 𝑃(1 + ) 𝐼1 = 6,000
𝑛
0.06 (1)(4) 𝐼2 = (106,000)(0.06)(1)
𝐴 = 100,000(1 + ) 𝐼2 = 6,360
1
𝐴 = 126,247.70
𝐼3 = (112,360)(0.06)(1)
𝐼3 = 6,741.60
𝐼 = 𝐴−𝑃
𝐼 = 126,247.70 − 100,000 𝐼4 = 119,101.60 (0.06)(1)
𝐼 = 26,247.70 𝐼4 = 7,146.096

𝑇𝐼 = 6,000 + 6,360 + 6,741.60 + 7,146.096

𝑇𝐼 = 26,247.70
Final Answer: The compound interest is Php 26,247.70
 COMPOUND INTEREST

• When an interest is calculated once each year, we say that it is compounded yearly.

• In many cases, interest is computed at more frequent intervals than that. It can be
compounded semi-annually (twice a year), quarterly (4 times a year), monthly (12
times a year), or even daily (every day; 365 days)
 COMPOUND INTEREST
Example:
Find the interest on Php 7,000.00 compounded quarterly at 3% for 5 years.
Solution:
𝑃 = 7,000, 𝑟 = 0.03, 𝑛 = 4, 𝑡 = 5
𝑟
𝐴 = 𝑃(1 + ) 𝑛𝑡
𝑛
0.03 (4)(5)
𝐴 = 7,000(1 + )
4
0.03 20
𝐴 = 7,000(1 + )
4
𝐴 = 8,128.29

To find the interest,

𝐼 =𝐴−𝑃
𝐼 = 8,128.29 − 7,000
𝐼 = 1,128.29
Final Answer: The interest is Php 1,128.29.
 COMPOUND INTEREST
Example:
Find the interest on Php 7,000.00 compounded daily at 3% for 5 years. Assume a 365-day year.
Solution:
𝑃 = 7,000, 𝑟 = 0.03, 𝑛 = 365, 𝑡 = 5
𝑟
𝐴 = 𝑃(1 + ) 𝑛𝑡
𝑛
0.03 (365)(5)
𝐴 = 7,000(1 + )
365
0.03 1,825
𝐴 = 7,000(1 + )
365
𝐴 = 8,132.79

To find the interest,

𝐼 =𝐴−𝑃
𝐼 = 8,132.79 − 7,000
𝐼 = 1,132.79
Final Answer: The interest is Php 1,132.79.
 COMPOUND INTEREST
Example:
Find the interest on Php 7,000.00 compounded semi-annually at 3% for 5 years. Solution:
𝑃 = 7,000, 𝑟 = 0.03, 𝑛 = 2, 𝑡 = 5
𝑟
𝐴 = 𝑃(1 + ) 𝑛𝑡
𝑛
0.03 (2)(5)
𝐴 = 7,000(1 + )
2
0.03 10
𝐴 = 7,000(1 + )
2
𝐴 = 8,123.79

To find the interest,

𝐼 =𝐴−𝑃
𝐼 = 8,123.79 − 7,000
𝐼 = 1,123.79
Final Answer: The interest is Php 1,123.79.
 COMPOUND INTEREST
Example:
Find the interest on Php 7,000.00 compounded monthly at 3% for 5 years.
Solution:
𝑃 = 7,000, 𝑟 = 0.03, 𝑛 = 12, 𝑡 = 5
𝑟
𝐴 = 𝑃(1 + ) 𝑛𝑡
𝑛
0.03 (12)(5)
𝐴 = 7,000(1 + )
12
0.03 60
𝐴 = 7,000(1 + )
12
𝐴 = 8,131.32

To find the interest,

𝐼 =𝐴−𝑃
𝐼 = 8,131.32 − 7,000
𝐼 = 1,131.32
Final Answer: The interest is Php 1,131.32.
 COMPOUND INTEREST
Try these:
1. Find the interest on Php 600.00 compounded semi-annually at 4.5% for 6 years.
𝑃 = 600, 𝑛 = 2, 𝑟 = 0.045, 𝑡 = 6
Final Answer: The interest is Php 183.63.
 COMPOUND INTEREST
Try these:
2. Find the future value of an interest on Php 50,000.00 compounded annually at 7% for 3
years.
𝑃 = 50,000, 𝑛 = 1, 𝑟 = 0.07, 𝑡 = 3
Final Answer: The future value is Php 61,252.15.
 COMPOUND INTEREST
Try these:
3. Find the interest on Php 10,000 compounded quarterly at 5% for 8 years.
𝑃 = 10,000, 𝑛 = 4, 𝑟 = 0.05, 𝑡 = 8
Final Answer: The interest is Php 4,881.31.
 COMPOUND INTEREST
Practice Exercise:
1. A couple decides to set aside Php 5,000.00 in a savings account for a second honeymoon
trip. It is compounded quarterly for 10 years at 9%. Find the amount of money they will
have in 10 years.
2. In order to pay for college, the parents of a child invest Php 20,000.00 in a bond that pays
8% interest compounded semi-annually. How much money will there be in 18 years?
3. A 25-year old plans to retire at age 50. She decided to invest an inheritance of Php
60,000.00 at 7% interest compounded semi-annually. How much will she have at age 50?
1
4. To pay for new machinery in 5 years, a company owner invests Php 10,000.00 at 7 2 %
compounded annually. How much money will be available in 5 years?