BASIC BUSINESS

MATHEMATICS
SECOND QUARTER
By: Mara Joy G. Pacheco
LESSON 1
ILLUSTRATING SIMPLE
AND
COMPOUND INTEREST
DEFINITION OF TERMS:
LENDER or CREDITOR BORROWER or DEBTOR

◦ Person or institution who invests the ◦ Person or institution who owes the
money or makes the funds available. money or avails of the funds from the
lender.
ORIGIN or LOAN DATE REPAYMENT DATE or MATURITY
◦ Date on which money is received by DATE
the borrower. ◦ Date on which the money borrowed or
loan is to be completely repaid.
TIME or TERM(t) PRINCIPAL (P)
◦ Amount of time in years the money is ◦ The amount of money borrowed or
borrowed or invested; length of time invested on the origin date.
between the origin and maturity dates.
RATE (r) INTEREST (I)
◦ Annual rate, usually in percent, ◦ Amount paid or earned for the use of
charged by the lender, or rate of money.
increase of the investment.
INTEREST SIMPLE INTEREST (I)
◦ Amount paid or earned for the use of ◦ Interest that is computed on the
money. principal and then added to it.
COMPOUND INTEREST MATURITY VALUE OR FUTURE
◦ Interest is computed on the principal VALUE
and also on the accumulated past ◦ Amount after t years that the lender
interests. receives from the borrower on the
maturity date.
Example:
Suppose you won 10, 000 pesos and you plan
to invest it for 5 years. A cooperative group
offers 2 % simple interest rate per year. A
bank offers 2 % compounded annually. Which
will you choose and why?
LESSON 2

SIMPLE INTEREST
ANNUAL SIMPLE INTEREST
Is = Prt
Is = simple interest
P = principal, or the amount invested or
borrowed
r = simple interest rate
t = term or time in years
Example 1:
A bank offers 0.25% annual simple
interest rate for a particular deposit.
How much interest will be earned if 1
million pesos is deposited in this
savings account for 1 year?
Example 2:
How much interest is charged when
P 50, 000 is borrowed for 9 months at
an annual interest rate of 10%?
Example 3:
Complete the table below by finding the unknown.
Principal Rate(r) Time (t) Interest
(P) (Is)
(a) 2.5 % 4 1, 500
36, 000 (b) 1.5 4, 860
250, 000 0.5 % (c) 275
500, 000 12.5 % 10 (d)
Example 4:
When invested at an annual interest
rate of 7 %, the amount earned
P 11, 200 of simple interest in two
years. How much money was originally
invested?
Example 5 :
If an entrepreneur applies for a loan
amounting to P 500, 000 in a bank, the
simple interest of which is P 157, 000
for 3 years, what interest rate is being
charged?
Example 6:
How long will a principal earn an
interest equal to half of it at 5 % simple
interest?
MATURITY (FUTURE VALUE)
F = P + Is
Where F = maturity (future) value
P = principal
Is = simple interest
MATURITY (FUTURE) VALUE
F = P (1 + rt)
Where F = maturity (future) value
P = principal
r = interest rate
t = term/time in years
Example 7:
Find the maturity value if 1 million
pesos is deposited in a bank at an
annual simple interest rate of 0.25 %
after (a) 1 year (b) 5 years?
Example 8:
How much money will you have after 4
years and 3 months if you deposited
P 10, 000 in a bank that pays 0.5%
simple interest?
Example 9:
At what simple interest rate per annum
will P 1 become P 2 in 2 years?
Example 10:
How much should you invest at the
simple interest of 7.5 % in order to
have P 300, 000 in 2 years?
LESSON 3

COMPOUND INTEREST
 COMPOUND INTEREST
Year (t) Principal = P Principal = P 100, 000
Interest rate = r, Interest rate = 5 %,
compounded annually compounded annually
Amount at the end of each year Amount at the end of the year
1 P x (1 + r) 100, 000 x 1.05 = 105, 000
2 P (1 + r) x (1 + r) = P (1 + r)² 105, 000 x 1.05 = 110, 250
3 P (1 + r)² x (1 + r) = P (1 + r)³ 110, 250 x 1.05 = 115, 762.50
4 P (1 + r)³ x (1 + r) = P (1 + r)4 115, 762.50 x 1.05 = 121, 550.63

5 P (1 + r)4 x (1 + r) = P (1 + r)5 121, 550.63 x 1.05 = 127, 628.16

Maturity (Future) Value and
Compound Interest
F = P (1 +r)t
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 I is given by I = F - P

c c
Example 1:
Find the maturity value and the
compound interest if P 10, 000 is
compounded annually at an interest
rate of 2% in 5 years.
Example 2:
Find the maturity value and interest if
P 50, 000 is invested at 5%
compounded annually for 8 years.
Example 3:
Suppose your father deposited in your bank
account P 10, 000 at an annual interest
rate of 0.5% compounded yearly when you
graduate from kindergarten and did not get
the amount until you finish Grade 12. How
much will you have in your bank account
after 12 years?
Present Value P at Compound
Interest
𝐹
P= 𝑡 = F (1 + r)-t
1+𝑟

where
P = principal or present value
F = maturity (future) value at the end of the term
r = interest rate
t = term/time in years
Example 4:
What is the present value of P50, 000
due in 7 years if money is worth 10%
compounded annually?
Example 5:
How much money should a student
place in a bank that pays 1.1%
compounded annually so that he will
have P 200, 000 after 6 years?
Lesson 4
Compounding More than
Once a Year
Example 1:
Given a principal of P 10, 000, which of the
following options will yield greater interest after 5
years:
OPTION A: Earn an annual interest rate of 2% at
the end of the year, or
OPTION B: Earn an annual interest rate of 2% in
two portions – 1% after 6 months, and 1 % after
another 6 months?
Definition of terms:
Frequency of conversion (m) – number of conversion
periods in one year.
Conversion or interest period – time between successive
conversions of interest
Total number of conversion periods n
n = mt = (frequency of conversion) x (time in years)
Nominal rate (i(m)) – annual rate of interest
Rate (j) of interest for each conversion period
𝑖 (𝑚) 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
j= =
𝑚 𝑓𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 𝑜𝑓 𝑐𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛
Examples of nominal rates and the corresponding frequencies of conversion and interest
rate for each period
Nominal rate (i(m)) Frequency of Rate (j) of interest One Conversion
conversion (m) for each conversion period
period

2% compounded 1 0.02
= 0.02 = 2 % 1 year
1
annually; i(1) = 0.02

2% compounded semi- 2 0.02

= 0.01 = 1 % 6 months
2
annually; i(2) = 0.02

2% compounded 4 0.02
= 0.005 = 0.5 % 3 months
4
quarterly; i(4) = 0.02

2% compounded 12 0.02
= 0.0016 = 0.16 % 1 month
12
monthly; i(12) = 0.02

2% compounded 365 0.02

= 0.00005 1 day
365
daily; i(365) = 0.02
Maturity Value, Compounding m
times a year
𝑖 (𝑚) mt
F = P (1 + )
𝑚
where
F = maturity (future) value
P = principal

𝑖 (𝑚) = nominal rate of interest (annual rate)

m = frequency of conversion
t = term/time in years
Example 2:
Find the maturity value and interest if
P 10, 000 is deposited in a bank at 2%
compounded quarterly for 5 years.
Example 3:
Find the maturity value and interest if
P 10, 000 is deposited in a bank at 2%
compounded monthly for 5 years.
Example 4:
Cris borrows P 50, 000 and promises to
pay the principal and interest at 12%
compounded monthly. How much must
he repay after 6 years?
Present Value P at Compound
Interest
𝐹
P= 𝑖 𝑚
𝑚𝑡
1+
𝑚
where
F = maturity (future) value
P = principal
(𝑚) = nominal rate of interest (annual rate)
𝑖
m = frequency of conversion
t = term/time in years
Example 5:
Find the present value of P 50, 000 due
in 4 years if money is invested at 12 %
compounded semi-annually?
Example 6:
What is the present value of P 25, 000
due in 2 years and 6 months if money
is worth 10% compounded quarterly?
Lesson 5

Finding Interest Rate and

Time in Compound Interest
Finding the Number of Periods n,
for Compound Interest
Using the formula for maturity value F, present value P, and
interest rate j,
F = P (1 + j)n
Then
log F = log (1 + j )n = n log (1 + j)

Thus,
𝐥𝐨𝐠 𝑭
n=
𝐥𝐨𝐠(𝟏+𝒋)
Example 1:
How long will it take P 1, 000 to
earn P 300 if the interest is 12%
compounded semi-annually?
Finding the Interest Rate j, per
Conversion Period
Using the formula for maturity value F, present
value P, and interest rate j,
F = P (1 + j)n
𝒏
Then 𝑭=1+j
𝒏
Thus, j = 𝑭-1
𝒊(𝒎)
Using j = then 𝒊(𝒎) = mj
𝒎
Example 2:
At what nominal rate compounded
semi-annually will P 10, 000
accumulate to P 15, 000 in 10
years?
Definition of terms:
Equivalent rates – two annual rates with different
conversion periods that will earn the same maturity
value for the same time/term.
Nominal rate – annual interest rate (may be
compounded more than once a year)
Effective rate – rate when compounded annually will
give the same compound each year with the nominal
rate; denoted by 𝒊𝟏
Example 3:
What effective rate is equivalent to
10% compounded quarterly?
 Example 4:
Complete the table by computing for the rates
equivalent to the following nominal rates. Round off
your answer to six decimal places.
Given Interest Rate Equivalent Interest Rate
12% compounded monthly ______ compounded annually

8% compounded semi-annually ______ compounded quarterly

12% compounded monthly ______ compounded semi-annually