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Unit 4 Sure

This document discusses key concepts in mathematics of finance including simple interest, compound interest, stocks, bonds, dividends, and bond coupons. It provides formulas for calculating simple interest, compound interest earned over multiple time periods, stock dividends based on par value and number of shares, and semi-annual bond coupons based on face value and interest rate. Examples are included to demonstrate calculating interest, dividends, and bond coupons.

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Samuel Goyo
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30 views3 pages

Unit 4 Sure

This document discusses key concepts in mathematics of finance including simple interest, compound interest, stocks, bonds, dividends, and bond coupons. It provides formulas for calculating simple interest, compound interest earned over multiple time periods, stock dividends based on par value and number of shares, and semi-annual bond coupons based on face value and interest rate. Examples are included to demonstrate calculating interest, dividends, and bond coupons.

Uploaded by

Samuel Goyo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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UNIT 4.

MATHEMATICS OF FINANCE

SIMPLE AND COMPOUND INTEREST


➢ One of the reasons why we really have to deposits our money in the bank in
order to have interest. Why interest? Because when someone deposit his
money in a savings bank, the bank will pay him a small amount for the use
of his money. This amount is called an interest. If the interest is calculated
once a year, then the interest is called simple interest. If the interest is
computed or calculated more than once per year, then it is called compound
interest
Important thing
Interest (1) – Amount of money earned for using another’s money over
a period of time
Principal (P) – Amount of money deposited, invested or borrowed.
Rate (r) – Percent added to the principal amount borrowed or invested.
Time (t) length of time the money has been borrowed or deposited.
Future value (FV) – Amount of the loan or investment plus the interest
paid or earned.

Formula
Interest = Principal x Rate x Time Prt

Example
Last January I open an account in Land Bank where the money earns
1.2% interest per year. If I have P30,000.00 in my account, how much
interest will the money earn in one year? Solution P = 30,000,00
R = 1.2% T=1 year I=?
Using the interest formula, we have
I-Prt 30,000.00 (1.2%) (1), I = PHP 360, so the amount of interest in one
year is P 360.00.

Compound Interest Formula


➢ In solving compound interest problems is almost the same in solving an
exponential equation, because the compound interest formula is an example
of exponential equation, the future value is the basic model for the
exponential growth and sometimes we cannot do a way that there are
problems in compound interest using a logarithmic form especially when we
are solving for the time.
In solving compound interest, the first thing that we can do is just to look the
necessary given information and solve what is missing variable.
Example
Suppose my initial deposit in the bank is P2,000.00 invested for 3 years at
8%.
a. How much is the amount of my money in the bank after 3 years using
simple interest
b. Find the compound interest and my money in the bank if interest is
calculated once per year.
Solution: a
1 PRT, 12,000 (0.08) (3years), I=P 320.00
Therefore, the amount of my money in the bank after 3 years using simple
interest is P2000,00 + P480.00 – P2,480.
Solution: b
At the start 2,000
After one year. P2000+ P 2,000 (0.08) P2,160 for the 1st year interest
After second year P2,160 + P2,160 (0.08) = P 2,332.80 for the 2nd year
interest
After 3 years P2,332.80 + P 2,332.80 (0.08) = P2,519.42 for the 3rd year
Interest
Therefore, the amount of my money in the bank after 3 years is P2,519.42.

STOCK AND BONDS

Stocks –Companies might generate funds for their growth by releasing stocks,
which represent ownership in the company. Stockholders can be seen as partial
owners, and there are two main types of stocks: common stock and preferred stock.
Bonds– Bonds are interest-yielding securities that commit to paying a specified
amount upon maturity, as indicated in the bond certificate. Unlike stockholders,
those holding bonds act as lenders to the institution, whether it’s a government or a
private company.

EXAMPLE. The San Jose corporation declared a 4% dividend on a stock with a


par value of P600. Dr. Masinop owns 200 shares of stock with a par value of P600.
How much is the dividend she received?

Solution.
Dividend percentage 4% Par value P600 Number of share 200
Dividend Dividend – Par value x dividend percentage x Number of shares The
dividend per share is P600 X 0.04 PHP24. Since, there are 200 shares, the total
dividend is P24/share x 200 shares is P4,800
Answer. Therefore, the dividend is PHP4,800.
Different terms in relation to bonds

Bond
❖ Interest-bearing security which promises to pay (1) a stated
amount of money on the maturity date, and on the maturity
date, and (2) regular interest payments called coupons.

Coupon
❖ periodic interest payment that the bondholder receives
during the time between purchase date and maturity date;
usually received semi- annually.

EXAMPLE.
Determine the amount of the semi-annual coupon for a bond
with a face value of P300,000 that pays 10%, payable semi-
annually for its coupons.

Solution. Given: Face Value F P300,000, Coupon rate r = 10%


Find: Amount of the Semiannual coupon

Annual coupon amount: 300,000(0.10) = 30,000


Semiannual coupon amount: 30,000(1/2) 15,000
Thus the amount of the semiannual coupon is P15,000.

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