THE MATHEMATICS

OF FINANCE
If you are born poor it’s not your
mistake, but if you die poor it’s your
mistake.
–Bill Gates
Learning Outcomes
At the end of this lesson, you are
expected to:
1. Apply the different concepts of
mathematics of finance in making wise
decisions related to personal finance;
and
2. Support the use of mathematics in
financial aspects and endeavors in life.
 SIMPLE INTEREST
Formula
I = PRT
Objective:
Solve for one of the variables in the formula for simple
interest:

I=PRT.
 I = PRT

 I = interest earned (amount of money the

bank pays you)
 P = Principal amount invested or
borrowed.
 R = Interest Rate usually given as a

percent (must changed to decimal before

plugging it into formula)
 T = Time (must be measured in years) or
converted to years by dividing by 12 months
Converting
 Change
Answers
% to decimal

1)
1)12%
.12 Move 2 places
2)
2)5%
.05 to left & drop % sign
3)
3)2.025
½%
4)
4)8.5%
.085

 Change from decimal to %

5).098
5) 9.8%
6).455
6) 45.5%
Move 2 places
to right & add % sign
I = PRT
Solve for one of variables:

 Solving for other

I variables
 Plug in what
numbers
you for
know.
P, R, & T.
 Then multiply
Multiply the numbers that are on same
side then divide by that answer.
1. A savings account is set up so that the simple interest earned on the
investment is moved into a separate account at the end of each year. If
an investment of P5,000 is invested at 4.5%, what is the total simple
interest accumulated in the checking account after 2 years.

I = PRT  Interest paid by

I= (5,000) (.045) (2) bank is unknown
I=PhP450  Principal (invested)
 Rate changed to
decimal
 Time is 2 years
 Multiply
2. A savings account is set up so that the simple interest earned on the
investment is moved into a separate account at the end of each year. If
an investment of P7,000 is invested at 7.5%, what is the total simple
interest accumulated in the checking account after 3 years.

I = PRT  Interest paid by bank

I= (7,000) (.075) (3) is unknown
I=Php1575  Principal (invested)
 Rate changed to
decimal
 Time is 3 years
 Multiply
3. When invested at an annual interest rate of 6% an account
earned P180.00 of simple interest in one year. How much
money was originally invested in account?

I=
 Interest
PRT paid by bank
180=
 Principal (invested)
P (.06) (1) is unknown
180
 Rate
= .06P
changed to decimal
.06
 Time.06
is 1 year
Php3,000
 Multiply = P
 Divide
4. When invested at an annual interest rate of 7% an account
earned P581.00 of simple interest in one year. How much
money was originally invested in account?

I=
 Interest
PRT paid by bank
581=
 Principal (invested)
P (.07) (1) is unknown
581
 Rate
= .07P
changed to decimal
.07
 Time.07
is 1 year
Php8,300
Multiply =P
 Divide
5.A savings account is set up so that the simple interest earned on
the investment is moved into a separate account at the end of each
year. If an investment of P7,000 accumulate P910 of interest in the
account after 2 years, what was the annual simple interest rate on
the savings account?

I = PRT  Interest paid by bank

910= (7,000) (R)(2)  Principal (invested)
910 = (7,000)(2)R  Rate is unknown
910 = 14,000 R  Time is 2 years
14,000 14,000  Regroup & Multiply
0.065 = R  Divide
6.5% = R  Change to %
6.A savings account is set up so that the simple interest earned on
the investment is moved into a separate account at the end of each
year. If an investment of P2,000 accumulate P360 of interest in the
account after 4 years, what was the annual simple interest rate on
the savings account?

I = PRT  Interest paid by bank

360=(2,000) (R)(4)  Principal (invested)
360 = (2,000)(4)R  Rate is unknown
360 = 8,000 R  Time is 4 years
8,000 8,000  Regroup & Multiply
0.045 = R  Divide
4.5% = R  Change to %
7. Sylvia bought a 6-month P1900 certificate of deposit. At the end
of 6 months, she received a P209 simple interest. What rate of
interest did the certificate pay?

I=PRT  Interest paid by

209=1900(R) (6/12) bank
 Principal
209=(1900)(6/12)R
(invested)
209= 950R  Rate is unknown
950 950  Time is 6 months
0.22 = R
(divide by 12)
22% = R  Regroup & Multiply

 Divide

 Change to %
8.A savings account is set up so that
the simple interest earned on the
investment is moved into a separate
account at the end of each year. If
an investment of P2,000
accumulated P360 of interest in the
account with a 4.5% interest rate,
how long was the investment made?
I= PRT
360 = (2,000) (.045) T
360 = 90 T
360 = 90 T
90 90
The Banker’s Rule

The Banker’s rule treats every month like it has 30

days, so it uses 360 days in a year. They claim that the
computations are easier to do.
 For example, on a $5,000 loan at 8% on 90
days, the interest would be:
 I=Prt
 =($5,000)(0.08)(90/365)
 =$98.63
 Using the Banker’s rule
 I=Prt
 =($5,000)(0.08)(90/360)
 =$100.00
Example:

Find the simple interest on a $1,800 loan at 6%

for 120 days. Use the Banker’s rule.
 Solution:
 P= $1,800 r= 6% = 0.06 t=120/360
 I= Prt
 =($1,800)(0.06)(120/360)
 =$36
 The interest using the Banker’s rule is $36.
FINDING THE TRUE RATE
OF A DISCOUNTED LOAN
Example:
A student obtained a 2 year $4,000 loan for college
tuition. The rate was 9% simple interest and the loan was a
discounted loan.

 A. Find the discount

 B. Find the amount of money the student received
 C. Find the true interest rate
 D. Discuss whether this seems like a deceptive practice.
Solution:
 A. The discount is the total interest of the loan.
 P=$4,000 r=9%= 0.09 t=2 years
 I=Prt
 =($4,000)(0.09)(2)
 =$720
 The discount is $720.
Solution:
 B. The student received $4,000 - $720 = $3,280.
 C. The true interest rate is calculated by finding the rate on a
$3,280 loan with $720 interest.
 I=Prt
 $720=($3,280)r(2)
 $720=$6,560r
 r= $720/$6,560
 =0.1098 (rounded)
 The true interest rate is approximately 10.98%
Solution:

 D. If you’re being quoted a loan at 9% and the actual

percentage you’re paying is almost 11% that surely
qualifies as a deceptive lending practice. Buyer beware.
I = PRT

P = I/RT

R = I/PT

T = I/PR
INTEREST
Interest is the cost for the use of money.
When you deposit money in a bank, it will
earn interest but when you borrow money
from a bank, you will pay interest.

The amount deposited in a bank or

borrowed from a bank is called the principal,
the percent used to determine the amount
of interest is called the interest rate, and the
duration of deposit or loan is called the time.
 SIMPLE INTEREST
 The interest paid on the original principal is called
simple interest, and the unit of time is usually
expressed as annual interest rates. This means that we
will assume the interest rate to be annual unless
specified. When the duration of a loan is less than a
year, the t shall have a value of a fraction of a year. For
example, the interest rate of a loan payable in 2 years is
2.5%, the value of t shall be 2 while a loan that is due in
nine months with an interest rate of 1.7% shall
 have a t value of . A daily/monthly interest rate shall
 have a daily/monthly unit of time. For instance, a two-
year loan of Php 2,500 bears an interest rate of 0.05%
monthly. In this example, the t shall have a value of 24
since there are 24 months in two years.
SIMPLE INTEREST FORMULA

In the computation of simple interest, we

will use the formula I = Prt where

I – is the amount of interest

P – is the principal amount
r – the rate of interest that must be
expressed in decimal
t – is the time
Example: You have deposited Php 5,000
in a Savings Bank on January 1, 2016
with an interest rate of 3% and have
withdrawn it on January 1, 2017.
Calculate the simple interest.
Solution: Calculate the interest
I= Prt
I= (Php 5,000)(0.03)(1)
I= Php 150
Example: A loan of Php3,000 bears an interest
rate of 2% per month. If the loan shall be paid in
4 months, how much is the interest?
Solution: In this example, Php 3,000 is the
principal amount (P), 2% is the interest rate (r),
and the time (t) is 4 since the interest rate is
monthly.
Calculate the interest.
I= Prt
I= (Php 3,000)(0.02)(4)
I= Php 240
 Example: Your savings deposit of Php 7,000 earns a
simple interest of 5%. How much is the interest for 9
months?
Solution: Here, Php7,000 is the Principal (p), 5% is
the
interest rate (r), and the time (t) is . It is since the
interest rate is annual, and the duration of the savings
is 9 months.
Calculate the interest
I= Prt
I= (Php 7,000)(0.05)( )
I= Php 262.50
The time shall be measured in the same period
as the interest rate. Now if the interest rate is
annual and the time is in days, we need to
express the time as a fractional part of a year.
We can use either the exact method or the
ordinary method.
 In exact method,

while in ordinary method,

In most business, ordinary method is used unless

otherwise stated.
MATURITY OR FUTURE VALUE
 The maturity or future value is the sum of the
principal and the interest. The formula is A=P+I. If
we substitute Prt to I, we will have A= P+Prt or
A = P(1+rt).
 Example: A cooperative released a Php 9,000-
emergency loan to Ana with a simple interest of
4.5%. If she intends to pay it in 2 years, what
amount will she pay back to the cooperative?
 Solution: to compute for the amount she will pay
back after 2 years,
A=P+Prt
A=Php 9,000+(Php 9,000)(0.045)(2)
A=Php 9,000+Php 810
PRESENT VALUE
 The interest on loans may be deducted in advance
from the principal amount, so if a borrower applies for
a loan of Php 10,000, he will receive an amount of
less than Php 10,000 since the interest is deducted
from the principal loan before it is released to him,
the borrower.

 For example, if you borrow Php 10,000 from a credit

cooperative that charges 4% simple interest deducted
in advance, the interest would be Php 400 for a year.
Out of your Php 10,000 loan application, you will
receive Php 9,600. This is called present value (S) of
the loan. The formula for present value is S = P – I. If
we substitute Prt to I, then S = P(1 – rt)
Kleah wants to apply for a loan to buy a laptop worth
P25,000. The Youth Cooperative lends money to
students at 8% per year for 2 years but deducts the
interest outrightly. How much loan should Kleah apply
for to buy the laptop?
Solution: In this example, the interest is
deducted in advance. This means that
Kleah should apply for a loan of more than
what she needs now. We will calculate the
principal amount. The Php 25,000 is the
present value, the interest of 8%, and the
time is 2 years. The formula is S = P(1- rt).
Php 25,000 = P(1-(.08)(2))
Php 25,000 = P(1- 0.16)
Php 25,000 = P(0.84)
=P
 P = Php 29, 761. 90
 Kleah should apply for a loan of Php29,
761. 90 for her to receive Php 25,000
which she needs to buy a laptop.
Exercises: Write your solutions on yellow pad paper first, then
answer the exercises in ACTIVITY M- SIMPLE INTEREST.

1. Ryan deposited ₱2,000 in a savings account at the interest rate

of 4% per year. How much simple interest will he earn in 5 years?
A. ₱800 B. ₱1,000 C. ₱450 D. ₱400

2. Garcia borrowed ₱4,000 from his cousin Susan at the rate of 8%

per annum. He repaid the amount after two years. How much did
he repay?
A. ₱640 B. ₱6,640 C. ₱4,640 D. ₱3,360

3. Tracy put ₱3,500 into an investment yielding 4.5% annual

interest. She left the money for 8 years. How much interest does
she get in those 8 years?
A. ₱1,260 B. ₱P4,760 C. ₱2,240 D. ₱1,860

4. Jerry invested ₱1,500 in an account that paid him 8.25% simple

interest, what will the balance of his account be after 6 years?
A. ₱742.50 B. ₱2,242.50 C. ₱2,150 D.
₱3,256.55
6. Mr. Peterson wrote a check of ₱7,820 to pay off a loan, which was
given to him at a rate of 5% simple interest for 3 years. How much
money did he borrow originally?
A. ₱5,400 B. ₱6,800 C. ₱3, 240 D. ₱14,620

7. If ₱3,840 is invested in an account at 5% annual simple interest,

how long will it take the account balance to grow to ₱4,800?
A. 12 years B. 6 years C. 5 years D. 8 years

8. Principal (p)= ₱1500, Rate (r)= 7%, Time (t)= 8 years. Calculate
the interest.
A. ₱840 B. ₱1,200 `C. ₱2,340 D. ₱660

9. Jack deposited ₱1,400 in his bank account. After 3 years, the

account is worth ₱1,694. Find the simple interest rate the account
earned.
A. 5% B. 8% C. 7.25% D. 7%

10. Principal (P)= ₱360, Interest = ₱17.55, Time = 9 months.

Calculate the interest rate.
B. 6% B. 7.65 C. 6.5% D. 5.5%
COMPOUND
INTEREST
Objectives:
At the end of the lesson:
a) The learner is able to compute interest,
maturity value, and present value in
compound interest environment, and
b) Solve problems involving compound interest.
What is Compound Interest?
Compound
Interest
Compound interest refers to the phenomenon
whereby the interest associated with a bank account,
loan, or investment increases exponentially—rather than
linearly—over time. The key to understanding the
concept is the word “compound.”
Maturity (Future
Value) Formula:
F= P
Where:
P = principal or present value
F= maturity (future) value at the end of the term
r= interest rate
t= term/time in years
The compound interest is given by
 Example:
Find the maturity value and the compound interest if P10,000 is
compounded annually at an interest rate of 2% in 5 years.
Given:
P= 10,000 r= 2% or 0.02 t=5 years

Find:
(a) Maturity value F
(b) Compound interest Ic
Solution:
(a)
F= (10,000)
F= 11,040.81

(b)
Ic=11,040.81-10,000
Ic=1,040.81

Answer: The future value F is P11,040.81 and the compound

interest is P1,040.81
 Example:
Find the maturity value and the compound interest if P50,000 is
invested at 5% compounded annually for 8 years.
Given:
P= 50,000 r=5% or 0.05 t=8 years

Find:
(a) Maturity value F
(b) Compound interest Ic
Solution:
(a) F= P
F= (50,000)
F= 73,872.77

(b) Ic = F-P
Ic= 73,872.77 -50,000
Ic=23,872.77

Answer: The future value F is P 73,872.77 and the compound

interest is P 23,872.77
Present Value P at
Compound Interest
Where:
P is the principal or present value.
F is the maturity (future) value at the end of the term.
r is the interest rate
t is the term or time in years
 Example:
What is the present value of P50,000 due in 7 years if money is
worth 10% compounded annually?
Given:
F= 50,000 r=10% or 0.1 t=7 years

Find:
(a) Present value P
Solution:

Answer: The present value is P25,657.91

Compounding More than
Once a Year
 Formula:

Where:
F is the future value (principal + interest).
r is the yearly interest rate in decimal point.
n is the number of times per year the interest is compounded.
t is the term of the investment in years.
 Example:
Find the maturity value and interest if P10,000 is deposited in a
bank at 2% compounded quarterly for 5 years.
Given:
P= 10,000 r = 2% or 0.02 t = 5 years n=4

Find:
(a) Maturity value F
(b) Compound interest Ic
 Solution:

Answer: The future value F is P11,048.96 and the compound interest is

P1,048.96
Present Value P at Compound Interest

Where:
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term/time in years
n is the number of times per year the interest is
compounded
 Example:
Find the present value of ₱50,000 due in 4 years if
money is invested at 12% compounded semi-annually.

Given: F = 50,000 r = 12% = 0.12 t = 4 years

n=2

Find: P
Answer: The present value at Compound Interest is ₱
Finding Time in Compound
Interest
Example:
If you want to save $5,000 before buying your first
new car, and you have $3,000 right now to invest at a 3%
interest compounded monthly, how long will you have to
wait?
Given: F = $5,000 r = 3% = 0.03 n = 12

Find: t
 Answer: Better figure out a way to
save more money unless you’re
okay with waiting for 17 years.

Solution:
t=
t = 12
t
What Is an Effective Annual Interest Rate?

An effective annual interest rate is the real return on

a savings account or any interest-paying investment
when the effects of compounding over time are taken
into account. It also reflects the real percentage rate
owed in interest on a loan, a credit card, or any other
debt.
 Finding Effective Interest Rate

Example:
Find the effective interest rate when the stated rate is 4%
and the interest is compounded weekly, then describe what your
result means.

Let r = 0.04 (rate is 4%) and n = 52 (compounded weekly) and

then substitute into the formula.
The effective rate is 4.08%. This
tells us that an account at 4%
compounded weekly will earn the
same amount of interest in 1 year
as a simple interest account at
4.08%
Comparing the Effective Rate of Two
Investments

Example:
Which savings account is a better investment: 6.2%
compounded daily or 6.25% compounded semiannually?
 Find the effective rates of both account and compare
them

6.2% daily 6.25% semiannually

r = 0.062, n = 365 r = 0.0625, n = 2

The 6.2% daily investment has a slightly better effective rate than 6.25%
semiannually.
 ACTIVITY N – COMPOUND
INTEREST
COMPOUND INTEREST 4.
The principal that amounts to PhP 4913 in 3 years at 6¹/₄
(use yellow pad paper, % per annum compound interest, compounded annually,
copy the problem, show the is ___.
(a) PhP 3096
solution) (b) PhP 4076
(c) PhP 4085
(d) PhP 4096
1. The compound interest on PhP 50000
at 8 % per annum for 2 years, 5.
compounded annually, is ___. If the simple interest on a sum of money at 5% per
(a) PhP 8000 annum for 3 years is PhP 1200, then the compound
(b) PhP 8250 interest on the same sum for the same period at the
(c) PhP 8350 same rate will be ___.
(d) PhP 8640 (a) PhP 1225
(b) PhP 1236
2. At what rate per cent per annum will a (c) PhP 1248
sum of PhP 7500 amount to PhP 8427 in (d) PhP 1261
2 years, compounded annually?
(a) 4 % 6.
(b) 5 % A certain sum of money gives PhP 510 as compound
(c) 6 % interest 12¹/₂ % per annum for 2 years. Find the simple
(d) 8 % interest on the same sum of money at the same rate for
3. Ben deposits PhP 30000 in a bank at the same period of time.
7% per annum compound interest for a (a) PhP 400
certain time is PhP 4347. The time is __. (b) PhP 450
(a) 2 years (c) PhP 460
(b) 2¹/₂ years (d) PhP 480
(c) 3 years
(d) 4 years
7. 9.
On a sum of PhP 15000 for 2 years, if You lend out PhP5500 at 10%
the difference between compound compounded monthly. If the
interest and simple interest is PhP 96. debt is repaid in 18 months,
Find the rate of interest per cent per what is the total owed at the
annum. time of repayment?
(a) 6 a) PhP 2,145.16
(b) 8 b) PhP 3,875.34
(c) 10 c) PhP 6, 386.12
(d) 12 d) PhP 3,586.11

8. 10.
What principal will amount to PhP What principal will amount to
1750 if invested at 3% interest PhP 2000 if invested at 4%
compounded quarterly for 5 years? interest compounded semi-
a) PhP 1507.08 annually for 5 years?
b) PhP 2,143 e) PhP 1,640.70
c) PhP 4,549.75 f) PhP 1,287.54
d) PhP 2, 156 g) PhP 1, 534
h) PhP 1, 489