Lesson 4.

2
MATHEMATICS
OF
FINANCE
 LEARNING OUTCOMES:

At the end of this lesson, students will be able to:

❖ Calculate the maturity value, principal amount, and interest rate in simple
and compound interest.
❖ Calculate the time it takes for the principal to raise in simple and compound
interest.
❖ Differentiate simple from compound interest.
❖ Calculate problems that involve simple and compound interest.
❖ Solve real-world problem applications involving simple and compound
interest.
The following terms will be used in
the discussion:

1. Principal- the amount received by the debtor

2. Time/Term- number of unit of time for which the
interest is computed
3. Rate of Interest- the fractional part of the principal that
is paid on the loan.
The following terms will be used in
the discussion:

4. Final amount or maturity value- the sum of the

principal and interest, which is accumulated at a certain time.
5. Lender- a person who invests the money or makes the
funds available
6. Debtor- the person who borrows money for any purpose.
 SIMPLE INTEREST

Interest is the payment made by a person or

entity for the use of borrowed money.

Money can be from a loan or an investment.

When only the principal bears the interest for the
entire term is called a simple interest.
 SIMPLE INTEREST

Computed using the formula:

𝐼 = 𝑃𝑟𝑡
Where; I is the interest
P is the principal or present value
𝑟 is the rate
t is the time
Example 1:
1. A bank offers a 0.25% annual simple interest rate for a
particular deposit. How much interest earned if 1 million pesos is
deposited in this savings account for one year?
Solution:
Given: 𝑃 =₱ 1 000 000.00; 𝑟 = 0.25% = 0.0025; 𝑡 = 1 year
𝐼 = 𝑃𝑟𝑡
𝐼 = (1 000 000)(0.0025)(1)
𝐼 = 2 500
Thus, the interest earned is ₱ 2 500.00
Example 2:
2. Find the interest of a ₱ 43 450.00 investment at a 6.5%
interest rate for 1 ½ year.
Solution:
Given: 𝑃 =₱ 43 450.00; 𝑟 = 6.5% = 0.065; 𝑡 = 1.5 years
𝐼 = 𝑃𝑟𝑡
𝐼 = (43 450)(0.065)(1.5)
𝐼 = 4 236.38
Thus, the interest earned in the investment is ₱ 4 236.38
 Ordinary Simple Interest
Ordinary simple interest (𝐼𝑜 ) is a type of interest that uses 360
days as the equivalent number of days in a year or 30 days
each month.

𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝐼 = Pr
360
 Exact Simple Interest
Exact simple interest (𝐼𝑒 ) is an interest computed based on
the exact number of days in a year, 365 days, or 366 days
for leap year.

𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝐼 = Pr
365
Knuckle mnemonic
 Example 1:
Find the ordinary interest of P18,000 loan at 7%
interest rate for 225 days.
 Example 1:
Find the ordinary interest of P18,000 loan at 7%
interest rate for 225 days.
Solution:
225
Given: 𝑃 =₱ 18,000; 𝑟 = 7% = 0.07; 𝑡 = 360
𝐼 = 𝑃𝑟𝑡
225
𝐼 = 18,000 0.07
360
𝐼 = 787.5
Thus, the ordinary interest is ₱ 787.5
Example 2:

On May 30, 2019, a businessman loan ₱ 45 000 in the bank

to expand his restaurant. The businessman agreed to pay
the amount at a 6% rate on August 10, 2019. How much is
the ordinary simple interest to be paid?
Solution:

Compute for the time (t): Compute for the interest (I)
May 31: 1 day Given: 𝑃 =₱ 45,000; 𝑟 = 6% = 0.06;
72
June 1-30: 30 days 𝑡= 360
July 1-31: 31 days 𝐼 = 𝑃𝑟𝑡
August 1-10: 10 days 72
𝐼 = 45,000 0.06
Total no. of days: 72 days 360
𝐼 = 540

Thus, the ordinary simple interest to be paid is ₱ 540.00

Example 3:
Find the exact interest of a P29, 300 investment at 5%
interest rate for 125 days.
Example 3:
Find the exact interest of a P29, 300 investment at 5%
interest rate for 125 days.
Solution:
125
Given: 𝑃 =₱ 29,300; 𝑟 = 5% = 0.05; 𝑡 =
365
𝐼 = 𝑃𝑟𝑡
125
𝐼 = 29,300 0.05
365
𝐼 = 501.71
Thus, the exact simple interest earned in the investment is ₱ 501.71
Example 4:

Mr. X borrowed ₱ 13 500.00 from his aunt last December

25, 2019. He promised that he would pay at 8% interest
on March 14, 2020. Determine the exact simple interest
to be paid by Mr. X.
Solution:

Compute for the time (t): Compute for the interest (I)
December 25 – 31: 6 days Given: 𝑃 =₱ 13,500; 𝑟 = 8% = 0.08;
80
January 1-31: 31 days 𝑡= 365
February 1-29: 29 days 𝐼 = 𝑃𝑟𝑡
March 1-14: 14 days 80
𝐼 = 13, 500 0.08
Total no. of days: 80 days 365
𝐼 = 236.71

Thus, Mr. X will pay with the interest of ₱236.71

 SIMPLE INTEREST

Computing the Maturity Value

Computed Using the formula: F = P + I or F = P(1 + rt)
Example:
1. Find the maturity value of a loan of a
P28,000.00 made for two years at 8.51% simple
interest.
Solution:

Formula: 𝐅 = 𝐏 + 𝐈 or 𝐅 = 𝐏(𝟏 + 𝐫𝐭)

Given: 𝑃 =₱ 28,000; 𝑟 = 8.51% = 0.0851; 𝑡 = 2 𝑦𝑒𝑎𝑟𝑠
Using 𝐹 = 𝑃 + 𝐼 Using 𝐹 = 𝑃(1 + 𝑟𝑡)
𝐼 = 𝑃𝑟𝑡 𝐹 = 28,000 1 + 0.0851 2
𝐼 = 28,000 0.0851 2 𝐹 = 28, 000(1.1702)
𝐼 = 4, 765.6 𝑭 = 𝟑𝟐, 𝟕𝟔𝟓. 𝟔
𝐹 = 𝑃 + 𝐼 = 28,000 + 4,765.6
𝑭 = 𝟑𝟐, 𝟕𝟔𝟓. 𝟔 Thus, the maturity value after 2 years is
₱32,765.6
 SIMPLE INTEREST
Computing the Principal Amount
𝐼
Computed Using the formula: P = 𝑟𝑡
Example:
1. An online seller borrows a certain amount
of money at 8% simple interest for three months.
Determine the principal/original amount that
results in interest amounting to P500.00.
Solution:

Given: I =₱ 500.00; 𝑟 = 8% = 0.08; 𝑡 = 3 𝑚𝑜𝑛𝑡ℎ𝑠

𝐼
Formula: P = 𝑟𝑡
500
𝑃=
3
.08 12
500
𝑃=
0.02
𝑃 = 25, 000
Thus, the principal amount is ₱ 25, 000.
 SIMPLE INTEREST
Computing the Simple Interest Rate
𝐼 𝐹−𝑃
Computed Using the formula: r = 𝑃𝑡
or r = 𝑃𝑡
Example:
1. A loan of ₱ 170 500.00 was charged ₱ 10 500.00
for 2.5 years. What was the simple interest rate
applied to the loan?
Solution:

Given: P =₱ 170, 500; I =10, 500; 𝑡 = 2.5 𝑦𝑒𝑎𝑟𝑠

𝐼
Formula: r =
𝑃𝑡
10, 500
𝑟=
170, 500 2.5
10, 500
𝑟=
425, 000
𝑟 = 0.0247
Thus, approximately 2.47% was applied to the loan.
 SIMPLE INTEREST
Computing the Time
𝐼
Computed Using the formula: t = 𝑃𝑟
Example:
1. The interest earned on an P8,000.00 deposit
is P1,250.00. How long was the term if interest is
5% simple interest?
Solution:

Given: P =₱ 8, 000; I =1, 250 ; r = 5% = 0.05

𝑰
Formula: 𝐭 =
𝑷𝒓
1, 250
𝑡=
8,000 0.05
1,250
t= 400
t= 3.125
Thus, the amount is invested for 3.125 years.
 COMPOUND INTEREST

Compound interest refers to the sum of interests

accumulates over a period of time. The interest
earns an interest every compounding period.
 COMPOUND INTEREST

The process of finding a compound amount (or

maturity/future value) when a present value is
known is called compounding.
 COMPOUND INTEREST

Compound amount is the accumulated value

of the principal and all interest amounts of
prior periods.
 COMPOUND INTEREST
Compound amount is written as:
𝑛
𝐶 = 𝑃(1 + 𝑖)
Where; C is the compound amount
P is the principal or present value
𝑖 is the interest rate per period,
expressed as a decimal
n is the total number of compounding
periods
 COMPOUND INTEREST

Example:
Ms. Cañete deposited an amount of P35,000 in a
savings bank account. How much she saved at the end
of 4 years if money was compounded at 4%.
a. Annually c. Quarterly
b. Semi-annually d. Monthly
Given: P =₱ 35, 000; r = 4% = 0.04; 𝑡 = 4 𝑦𝑒𝑎𝑟𝑠

a. Annually: b. Semi-annually:
𝐶 = 𝑃(1 + 𝑖)𝑛 𝐶 = 𝑃(1 + 𝑖)𝑛
0.04 0.04
where 𝑖 = ;𝑛=4 1 =4 where 𝑖 = 2 = 0.02; 𝑛 = 4 2 = 8
1
𝐶 = 35, 000 1 + 0.04 4 𝐶 = 35, 000 1 + 0.02 8
𝐶 = 35, 000 1.04 4 𝐶 = 35, 000 1.02 8
𝑪 = 𝟒𝟎, 𝟗𝟒𝟓. 𝟎𝟓 𝑪 = 𝟒𝟏, 𝟎𝟎𝟖. 𝟎𝟕

Therefore, the amount becomes Therefore, the amount becomes

approximately ₱40, 945.05 after 4 approximately ₱𝟒𝟏, 𝟎𝟎𝟖. 𝟎𝟖 after 4
years compounded annually. years compounded semi-annually.
Given: P =₱ 35, 000; r = 4% = 0.04; 𝑡 = 4 𝑦𝑒𝑎𝑟𝑠

c. Quarterly: d. Monthly:
𝐶 = 𝑃(1 + 𝑖)𝑛 𝐶 = 𝑃(1 + 𝑖)𝑛
0.04 0.04
where 𝑖 = = 0.01; 𝑛 = 4 4 = 16 where 𝑖 = 12 ; 𝑛 = 4 12 = 48
4
48
𝐶 = 35, 000 1 + 0.01 16 0.04
𝐶 = 35, 000 1.01 16 𝐶 = 35, 000 1 +
12
𝑪 = 𝟒𝟏, 𝟎𝟒𝟎. 𝟐𝟓 𝑪 = 𝟒𝟏, 𝟎𝟔𝟏. 𝟗𝟓

Therefore, the amount becomes Therefore, the amount becomes

approximately ₱𝟒𝟏, 𝟎𝟒𝟎. 𝟐𝟓 after approximately ₱𝟒𝟏, 𝟎𝟔𝟏. 𝟗𝟓 after 4
4 years compounded quarterly. years compounded monthly.
 COMPOUND INTEREST
Computing the Principal Amount (P)
𝐶
Computed Using the formula: P =
(1+𝑖)𝑛
Example:
A father wants to give his son ₱ 100 000.00 when he
turns 21 years old. How much will he invest in the bank
at 4% interest compounded semi-annually if his son 13
years old now?
Solution:
Given: C =₱ 100, 000; r = 4% = 0.04; 𝑡 = 8 𝑦𝑒𝑎𝑟𝑠
0.04
Compounded semi-annually: 𝑖 = 2 = 0.02; 𝑛 = 8 2 = 16
𝑪
Formula: 𝐏 =
(𝟏+𝒊)𝒏
100, 000
𝑃=
1 + 0.02 16
100, 000
𝑃=
1.02 16
𝑃 = 72, 844.58
Therefore, the father must invest ₱ 72 844.58 in the bank.
 COMPOUND INTEREST
Computing the Interest Rate
1
𝐶 𝑛
Computed Using the formula: 𝑖 =
𝑃
−1
Example:
At what periodic rate, compounded quarterly,
will P17,000.00 become P32,250.00 at the end
of 12 years.
Solution:
Given: 𝑃 =17,000.00; C =₱ 32,250.00; 𝑡 = 12 𝑦𝑒𝑎𝑟𝑠
Compounded quarterly: 𝑛 = 12 4 = 48
𝟏
𝑪 𝒏
Formula: 𝒊 =
𝑷
−𝟏
1
32, 250 48
𝑖= −1
17, 000
1
129 48
𝑖= −1
68
𝑖 = 0.01342905173
Thus, the periodic rate is approximately 1.34%