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Module-4_Lesson-4.2 (2)

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12 views

Module-4_Lesson-4.2 (2)

yhijerdtgtgyhrsdtrsyg

Uploaded by

roniancris.caboboy
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Mathematics in
Finance
OBJECTIVES

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


1. Explain the difference between simple and
compound interest, and
2. Solve problems involving simple and compound
interest.
Think about it!
✓ Did you already borrow a money from someone
or from a lending firm?
✓ Did you already lend a money to someone?
✓ Are there interests involved?
✓ If there is, how did you compute it?
Simple Interest
Definition

If an amount P is borrowed or lent for a time t at an


interest rate of r per time period, then the simple
interest is given by
𝑰 = 𝑷𝒓𝒕
𝑰 → simple interest amount
𝑷 → principal amount
𝒓 → simple interest rate per time period
𝒕 → time period
Simple Interest
Formula
❑ If the amount of simple interest (𝑰) is missing
𝑰 = 𝑷𝒓𝒕
❑ If the principal amount is missing
𝑰 Memorize
𝑷=
𝒓𝒕
❑ If the simple interest rate is missing 𝑰
𝑰 𝑃 𝑟 𝑡
𝒓=
𝑷𝒕
❑ If the time period is missing
𝑰
𝒕=
𝒓𝒕
Simple Interest
Formula
❑ Maturity Value
o The accumulated amount to be paid or
received at the maturity date.
𝑨=𝑷+𝑰
Simple Interest
Example 1
❑ To buy furniture for a new apartment, Pamela
Shipley borrowed $5000 at 8% simple interest for
11 months. How much interest will she pay?
❑ Given:
❑ Solution:

❑ Therefore, the interest to be paid will be $366.67.


Simple Interest
Example 2
❑ What is the maturity value of a loan of $2,500 to
be repaid in 8 months with interest of 4.3 % per
annum.
❑ Given:
❑ Solution:

❑ Therefore, the maturity value will be $2,571.67.


Simple Interest
Example 3
❑ Alicia Rinke wants to borrow $8,000 from Robyn
Martin. She is willing to pay back $8,180 in 6
months. What will be the interest rate?
❑ Given:
❑ Solution:

❑ Therefore, the simple interest rate is 4.5% per


year.
Simple Interest
Example 4
❑ Johnny invested an amount of P15,000 at 5%
simple interest rate per annum. When will his
capital become P20, 000?
❑ Given:
❑ Solution:

❑ Therefore, his capital will become P20,000 after


6 years and 8 months.
Simple Interest
Example 5
❑ Cardo earned an interest of P 2,000 for 9 months
at 15% annual simple interest rate. What was his
capital?
❑ Given:
❑ Solution:

❑ Therefore, his capital was approximately


P17, 777.78
Compound Interest
Definition

If an amount P is borrowed or lent for a time t at an


annual interest rate of r compounded per time
period in a year, then the compound amount is
given by
𝑨=𝑷 𝟏+𝒊 𝒏
𝑨 → compund amount
𝑷 → principal amount
𝒊 → annual interest divided by conversion period
𝒏 → year times the conversion period
Compound Interest
Conversion Period
Conversion Period Conversion Coefficient
Annual 1
Semi-annual 2
Quarterly 4
Bi-monthly 6
Monthly 12
Compound Interest
Formula
❑ If the principal amount is missing.
𝑨
𝑷= 𝒏
𝟏+𝒊
❑ If the compound interest is missing
𝒏 𝑨
𝒓=𝒎 −𝟏
𝑷

❑ If the time period is missing


𝑨
𝟏 𝒍𝒐𝒈 𝑷
𝒕= ∙
𝒎 𝒍𝒐𝒈 𝟏 + 𝒊
Compound Interest
Example 6
❑ Suppose $1,000 is deposited for 6 years in an
account paying 4.25% per year compounded
annually. Find the compound amount.
❑ Given:
❑ Solution:

𝒏
𝑨=𝑷 𝟏+𝒊

❑ Therefore, the compound amount will be


approximately $1,283.68.
Compound Interest
Example 6
❑ Suppose $1,000 is deposited for 6 years in an
account paying 4.25% per year compounded
annually. Find the compound amount.
❑ Given:
❑ Solution:

6 1
𝒏 = 1,000 1 + 0.0425 6
𝑨=𝑷 𝟏+𝒊 = 1,000 1.0425
1
= 1,2836.68
❑ Therefore, the compound amount will be
approximately $1,283.68.
Compound Interest
Example 6
❑ Suppose $1,000 is deposited for 6 years in an
account paying 4.25% per year compounded
annually. Find the interest.
❑ Given:
❑ Solution:

❑ Therefore, the compound interest will be


approximately $283.68.
Compound Interest
Example 7
❑ Find the amount of interest earned by a deposit
of $2,450 for 6.5 years at 5.25% interest rate
compounded quarterly.
❑ Given:
❑ Solution:

❑ Therefore, the compound interest will be


approximately $988.78.
Compound Interest
Example 8
❑ Suppose Susan invested $5,000 in a savings account
that paid quarterly interest. After 6 years the money had
accumulated to $6539.96. What was the annual interest
rate?
❑ Given:
❑ Solution:

𝒏 𝑨
𝒓=𝒎 −𝟏
𝑷

❑ Therefore, the annual interest rate is 4.5%.


Compound Interest
Example 9
❑ Stacey must pay a lump sum of $6000 in 5 years. What
amount deposited today at 6.2% compounded annually
will amount to $6000 in 5 years?
❑ Given:
❑ Solution:

𝑨
𝑷= 𝒏
𝟏+𝒊

❑ Therefore, the amount to be deposited today must be


approximately $4,441.49.
Compound Interest
Example 10
❑ Gina invested an amount of P 10,000. If the annual
interest rate is 6% compounded monthly, when will she
gain a compound interest amount of P1,966.81?
❑ Given:
❑ Solution:

𝑨
𝟏 𝒍𝒐𝒈 𝑷
𝒕= ∙
𝒎 𝒍𝒐𝒈 𝟏 + 𝒊

❑ Therefore, she will gain a compound interest amount of


P1,966.81 in approximately 3 years.
Simple and Compound Interest

Q&A

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