MODULE 4

Mathematics of Finance

A. Introduction
Mathematics of finance applies the concept of Mathematics in other field like
economics and in other sciences. This remind students once more that Mathematics
does not only take place within the four walls in the classroom but more so in real life
situations.

B. Objectives:

At the end of the module, students are expected to:

1. Calculate the accumulated interest, principal or the
maturity value in problems involving simple interest
2. Calculate the present value and final amount of
annuities.
3. Determine the amount of periodic payments in annuity
problems.
4. Solve the equivalent cash price of an annuity.
5. Apply the concept of annuity to solve business
problems.
6. Differentiated amortization and sinking funds.
7. Calculated the periodic payment, original amount of
the loan, and the interest paid in an amortization
problem.
8. Constructed an amortization and sinking fund schedule
9. Solve for the amount and final payment in a sinking
funds schedule.
10. Calculate the periodic table deposit, interest and the
amount in fund in a sinking fund problem.
11. Solve for the amortization and sinking fund problems
in real life situation.

C. Pre-Test Evaluation:
Solve the following problems.
1. Find the interest and amount on P15,000 at 6 ¼% simple interest for 10 months?
2.If a principal of P1,250 earns interest of P172 in 2 years and 9 months, what interest
rate ?
3.A principal earns interest of P196 in 3 years and 6 months at a simple interest rate of 6
½ %. Find the principal invested?
4. How long will it take for P8000 to earn P2400, if it is invested at 6 ½% simple interest?
5. Determine the maturity value of P10,800 invested at 9.5% compounded
semiannually for 3 ½ years?
6. Find the compound amount and compound interest on P10000 at 12% compounded
semiannually?
7.How much interest would P8500 earn for 80 days at 4 2/3% ?
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 8.Find the time necessary to yield P30 on P450 at simple interest?
9.Mr. Cruz borrowed P1, 250 and repaid it 5 years later, if money earns interest at 8%
compounded quarterly, how much did she pay?
10. A debt of 10000 is to be amortized by 6 equal semiannually payment with interest
at 6% compounded semiannually. Find the periodic payment and construct an
amortization schedule?

D. Learning Contents:

1. Interest

When people need to secure funds for some purposes, one of the ways they
usually resort to is borrowing. On the other, the person or institution which lends the
money would also wish to get something in return for the use of the money. The person
who borrows money for any purpose is a debtor or maker, and the person or institution
which loans the money is the lender.
In simple interest, only the money originally barrowed bears interest. The
amount originally borrowed is called principal. The principal is the number of pesos on
which interest is calculated. The percent of interest is called rate, and the period of loan
is called time. The time or term is the number of units expressed in days, months, or
years for which the money is barrowed to repay the loans. The money borrowed plus
the interest it bears is called the interest.

In solving interest problems we have the formulas to follow:

Interest = Principal x Rate x time
I = Prt
P=I
rt
r=I
Pt
t=I
Pr
Where: I – interest, P – principal, r – rate ( in percent or fraction), t – time ( in year)
Amount = Principal + Interest
F=P+I
Or F = P + Prt
F = P (1 + rt)
Where: F – amount, P – principal, r- rate, t – time

Example problems:
1. A man borrowed P3000 from the bank at the rate of 8% a year. What is the interest if it
will paid after two years?
Given: P = P3,000, r = 8%, t = 2 yrs

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Solution:
I = Prt
I = P3000 (8%) (2)
I = P3000 (.08) (2)
I = P480---answer
2. Mr. Reyes secured a loan of P5000 from a bank which charged him, 12% interest for 3
months. How much interest did he pay? What is the amount paid to the bank?
Given: P = P5000, r = 12% (convert 12% to decimal: 0.12), t = 3 months (change 3 months to
year: 3/12)
Solution: I = Prt
I= P5000 (.12) (3/12)
I = P150 ---answer
F=P+1
F = P5000 + P150
F = P5150---answer

3. What is the interest rate of P3500 loan if at the end of two years, the amount is P4000?
The loan bears a simple interest.

Solution:

F = P +1
I=F–P
I = P4000 –P 3500 = P500
r = I/ Pt = P500 = 0.07 = 7%--answer
3500 (2)

Exercises:

Solve the following problems.

1. Jess borrowed P12,500 from a bank at 9 ½ % simple interest for 3 years and 6 months.
How much did Jess pay back the bank?
2. A man purchased a lot for P45, 000 and sold 2 years later for P80, 000. At what rate did
his money earn?
3. Felipe gives a check of P15400 to a friend in settlement of a loan at 4% interest on it for
10 months. How much had he borrowed?
4. A businessman charges his client P27,500 on a loan of P158,000 for 2 years and 3
months. What simple interest rate is he using?
5. Three months after borrowing money, David pays on interest of P2700. How much did
he borrow if the simple interest rate is 5 ½% ?
6. Gina loans P87,000 at 4 3/8% simple interest, how long will it take her to get P5100
interest?
7. Determine the present value of a 4-month , 13 ½% simple interest loan if its amount is
P31,350?

II. Compound Interest

When interest is compounded, it means that the interest on the principal during an
interest period is added to the principal to form a new principal for the next interest period.
Thus the interest during the interest period also bears interest during the next interest period.

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 Nominal Interest and Nominal Rate. The interest on a principal for one year is called
nominal interest and the rate of interest for one year is called nominal rate.
a. Interest period- is the period of time that the principal bears interest. Interest may be
compounded annually, semi annually, quarterly, monthly or even daily.
When interest is compounded annually, there in only one period a year. If the rate of
interest is 24%, the interest is computed on the basis of 24% for every interest period of one
year.
When the interest is compounded semi-annually, the nominal rate is divided by two
because there is two period in one year. So if the nominal rate is 24%, the semi-annual rate is
12% (24%/2).
When interest is compounded quarterly, there are 4 quarters in one year, and so there
are 4 interest period. The nominal rate is divided by 4. If the nominal rate is 24%, the quarter
rate is 6% (24%/4).
Compound interest is paid on the original principal and on the accumulated past
interest. The original principal plus the compound interest is called compound amount. It is
presented by letter F.
When the interest is compounded monthly, therefore 12 periods a year because there
are 12 months a year so if the nominal rate is 24%, the monthly rate is 24%/12 equal 2%

Formula to solve for Compound Amount:

F = P (1 + i)n or F = P ( 1 + j )mt
m

Where:
F = Compound amount
P= principal
i = interest per interest period
n = total number of interest periods
Formula to solve for Compound Interest:

I = F–P
Where:
I = interest
F = Compound amount
P = principal

Interest Compounded made Compounding Period per Year

Compounded
Annually Every year 1

Semi-annually Every 6 months 2

Quarterly Every three months 4

Bi-monthly Every after two months 6

Monthly Every month 12

Semi-monthly Every after two 24

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 weeks

Daily Everyday 365 or 360

Examples:
1. Find the compound amount and interest of P54,600 if it is invested at 8%
compounded quarterly for 5 years and 6 months?
Given: P= P54,600, r = 8% or 0.08, t = 5 .5 yrs.

Required: F – compound amount and I- interest

Solution:
i = r/4 = .08/4 = 0.02
n= 4t = 4x 5.5 = 22
F = P( 1 + i)n = P54,600( 1 + 0.02)22= P84,410.49 ( amount at the end of 5 yrs and 6
mon)
I = F – P = P84,410.49 - P54,000 = P29,810.49 - interest

2. Anna invested P210,000 in a time deposit account at 7.5% compounded

semi-annually. How much is the value of the fund if it is withdrawn after
2 years and 3 months?
Given: P = P120,000, r = 7.5%, t = 2 yrs. and 3 months = 2 + 3/12 =
2.25

Solution:
i = 0.075/2 = 0.0375 , n = 2(2.25) = 4.5
F= P120,000(1.0375)4.5 = P141621.02 --answer
3. What will be the maturity value of P12,000 invested for 4 years at 15%
compounded quarterly?
Given: P12,000, t = 4 yrs. r= 15%
Solution:
i= .15/4 = 0.0375 , n = 4(4) = 16
F = P12,000(1.0375)16
F = P21,626.73

Exercises:

1. Mario borrows P47,500 with interest at 18% compounded monthly. How much should
he pay after 3 years to pay off his debt?
2. Gina Rocas deposited P2, 600 in a saving bank. The bank gives 7 ½% compounded
annually. How much will her deposit amount in 2 years?
3. If P1, 800 deposited at 8% compounded quarterly, how much interest will it earn in one
year?
4. Mr Rogers barrowed a certain amount at 12% compounded semiannually for three
years. He paid P28, 370.38 at the end of the loan period. What was the origin amount
borrowed?
5. Find the interest rate for each period and the nominal rate when P20000 is loaned with
interest compounded semiannually for two years and the compound amount is

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 P25, 249.54 ?
6. Find the total number of interest periods (n), when P20, 000 is loaned at 12% interest
compounded semiannually and the compound amount is P25, 249.54?

III. Ordinary Simple Annuity

An annuity is a series of equal payments at regular intervals. Clearly, a

significant portion of both personal and business expenditures and receipts
form annuities.
A large number of personal and business transactions involved a series
of equal regular payment. Examples are payments of insurances premiums,
leases, mortgages, pensions, personal loans, rent, salary, term loans, etc.

The following variables will be in our mathematical treatment of

ordinary simple annuity:
S = future value of an n-payment ordinary simple annuity
A = present value of an n-payment ordinary simple annuity
R = size of each annuity payment
j = nominal interest rate
t= time period (term) of the loan or investment
n= number of payments in the annuity
i = interest rate per compounding period

Ordinary Simple Annuity Formula:

Formula to solve for the present value:

A = R [ 1 - ( 1+ i) – n]
i
Formula to solve for the amount or future value:

S = R [ ( 1 + i )n - 1]
i

Examples in Solving for the amount or future value:

1. Cecilia has been contributing P460 at the end of each quarter for the past 18 quarters to
a savings plan that earns 9% compounder quarterly. What amount will she accumulate if
she continue with the plan for another year?
Given: R = P460, j or r = 9%, n = 18 + 1 yrs (4) = 22 periods

Solutions:

Solve for i: i= .09/4 = .0225

S = R [ ( 1 + i )n - 1] = P460 [ (1+ 0.0225)22 - 1 ] = P12,911.12---answer

i 0.0225
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 2. Marlon spends P850 per month on cigarettes. If he stops smoking and invests the rate
amount in a plan paying 15% compounded monthly, how much will he have after 4
years?
Given : R = P850, r = 15%, t = 4 yrs

Solution:
Solve for i: i = .15/12 = 0.0125, n= 4(12) = 48
S = R [ ( 1 + i )n - 1] = P850 [ (1+ 0.0125)48 - 1 ] = P55,444.13---answer
I 0.0125

Exercises:

1. Anne decides to save P2700 at the end of every 6 months, which is the amount paid into
her retirement plan by the company where he work. If he choose an investment fund
that guarantees 8% per year compounded semiannually, how much will she have in 10
years?
2. At birth of his grandson, Mr. Cruz commits to help pay his college education. He decides
to make deposit of P10,400 at the end of each three months into an account for 12
years. Find the amount of annuity assuming 10% compounded quarterly?

III. Computing for the Present Value of an Annuity

The present value A of an ordinary simple annuity will be the sum of the present values,
at the beginning of the first payment interval, of all the individual payments in the annuity.

Examples:

1. Determine the present value on July 7 of P6,800 paid at the end of each subsequent
calendar quarter for 7 years if money is worth 6% compounded quarterly.
Given: R = P6,800, r = 6% = 0.06, t = 7 years
Solution:
i = r/4 = 0.06/4 = 0.015, n= 4t = 4(7) = 28
Formula to solve for the present value:

A = R [ 1 - ( 1+ i) – n] = P6,800 [ 1 - (1.015)-28 ] = P154,541.67

i 0.015
2. Tony bought a piece of land with a down payment of P200,000 and P7,500 every end of
three months for 5 yrs., at 8% compounded quarterly. Determine the cash equivalent of
the lot.
Given: down payment = P200,000 ; R = P7,500, t = 5yrs, r = 8%
Solution:
i= .08/4 = 0.02, n =5(4) = 20
Cash Equivalent = Down payment + A

= P200,000 + P7500 [ 1 - ( 1.02) – 20]

0.02
Cash Equivalent = P322,635.75

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 3. FCU hires a new dean, the contract states that the new dean w FCU will works for 10
years, then he will receive a retirement benefit of P80,000 at the end of each quarter
period for 5 years. Find the lump sum FCU will deposit today to satisfy the requirement
contract if fund can be invested at 12% compounded quarterly?
Given: R = P80,000, r = 12%, t=5 yrs

Solution:

First is to find the present value of annuity:

n= 4t = 4(5) = 20

i = r/4 = 0.12/4 = 0.03

A = R [ 1 - ( 1+ i) – n] = P80,000 [ 1 - ( 1.03) – 20] = P1,190,197.99

0.03 0.03

FCU needs P1,190,197.99 to satisfy the retirement benefits.

They can meet this liability today by depositing the present value P1,190,197.99 given 12%
compounded quarterly over 10 years.

Using the present value formula of the compound interest

P = F(1+ i)-n

Given: F = P1,190,197.99, t = 10 years

Solution:

i = .12/4 = 0.03, n = 4(10) = 40

P = P1,190,197.99 ( 1.03)-40 = P364,863.34

A lump sum of P364,863.34 deposited today will grow P1,190,197.99

4. Tony bought a piece of land with a down payment of P200,000 and P7,500 every end of
three months for 5 yrs., at 8% compounded quarterly. Determine the cash equivalent of
the lot.
Given: down payment = P200,000 ; R = P7,500, t = 5yrs, r = 8%
Solution:
i= .08/4 = 0.02, n =5(4) = 20
Cash Equivalent = Down payment + A

= P200,000 + P7500 [ 1 - ( 1.02) – 20]

.02

Cash Equivalent = P322,635.75

Exercises:

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 1. Determine the present value of an annuity of P950 every end of six months for two
years and 6 months if money is worth 9 1/8 % converted semiannually.
2. Mr. Ramos has decided to make semiannually payments of P7,800 at the end of
every 6 months for 8 yrs into an investment that he thinks will yield 7%
compounded semiannually, what lump sum deposit today will result to the same
future value?

IV. Computing the Periodic Payment of an Ordinary Simple Annuity

Formula:
R = Si
(1+i)n – 1
R = Ai
1- (1+i) - n
Examples:

1. To accumulate P85,250, Amy Antonis needs to place equal deposits at the end of every 3
months in a fund which earns at 18% compounded quarterly. If the first deposit is made on
March 28, 2014 and last on March 28, 2020, how much should each deposit be?

Solution:
Given: S = P85,250 , r = 18% , t = 6 yrs, n = 6x4 + 1 = 25, i = 18/4 = 0.045
R = Si=P85,250 (.045)
(1+i)n – 1 (1.045)25 - 1
R = P1,912.93

2. Arnold sold a piece of property for P1,300,000. A down payment of P500,000 was made and
the remainder was to be repaid in equal quarter installments, the first due 3 months after the
date of sale. The interest was 15% compounded quarterly, and the dept was to be amortized in
7 years.
a. What quarterly payment is required?
b. What will be the total amount of payment?
c. How much interest will be paid?
d. What is the total cost of the property?

Solution:
Given : Cash Value = P1,300,000 , Down payment = P500,000, r = 15%, t= 7 yrs, n= 7(4) = 28, I =
0.15/4 = 0.0375
Present Value = Cash Value – Down Payment = P1,300,000 – P500,000 = P800,000
a. Periodic Payment

R = Ai= P800,000(0.0375) =P46,636.32

1- (1+i) - n 1 – (1.0375)-28
The debt will be paid off in 7 years by quarter installment of P46,636.32

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 b. Total Payments = Periodic Payment x No. of payments
= P46,636.32 X 28 = P 1,305,816.96
c. Interest = Total Periodic Payments – Original Loan
= P 1,305,816.96 - P800,000
= P505,816.96

d. Total Cost = Down Payment + Total Periodic Payments

= P500,000 + P 1,305,816.96
= P1,805,816.96

Exercises:
1. John wishes to pay off a debt of P310,000 in 3 years. What regular payment
would he need to make every quarter, at 18% interest compounded quarterly?
2. Joana needs to accumulate P650,000 in 2 years to meet future needs. What
regular payment would she need to make at the end of each month, at 12%
interest compounded monthly?
E. Formative Test:

I. Solve the following problems:

1. A teacher borrowed P3, 900 from the school cooperative at 7 2/3% interests for 10 mos.
How much did the teacher pay back at the end of 10 months?
2. If Nelly borrowed P12, 500 for 10 months at 12%, how much interest would she have to
pay?
3. Dianne borrowed P10,000 from Bong’s Financing Company at 6 ½% simple interest for
215 days. How much did Dianne pay back the company at the end of the term?
4. Gina loans P87,000 at 4 3/8% simple interest, how long will it take her to get P5100
interest?
5. A credit union has issued a 3-year loan of P50,000 at a rate of 10%. What amount will be
repaid at the end of third year?
6. At what rate in simple interest must I invest my P12,000 in order to earn an interest of
P600 for 8 months?
7. Carmen borrowed P25,000 for 1 ½ years and paid P2000 interest. What was the
simple interest rate?
8. Edward needs P20,000 to buy office furniture for his new office in Emperial. He wants
to limit the interest he will pay when he borrows the amount in a bank to P1,100 only. If
the bank charges 11% interest, after how long must Edward pay his obligation?
9. Find the maturity value on a P50,000 loan at 14 ¼ % for 7 months?
10. At the end of 2 years, P36,000 in interest was paid on an 18% simple interest loan. How
much was borrowed?
11. How much must be invested today in order to have P15,500 available in 2 years if
money is worth 12% simple interest?
12. How much should Mr. Bueno deposit now in the bank that pays 5 % simple interest in
order to have P24,300 in 2 years?

II. Find solutions of the following problems.

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 1. Olivia Abao has P5, 600. She wants to find out how much her money would
become in 4 years at 3% compounded monthly. How much would be the
compound interest?
2. A father put P15, 000 into a saving account at the birth of his son. If the account
credits interest at 6% compounded semiannually, how much will it contain
when the son is 18 years old?
3. Mr. Ignacio borrowed P10, 000 at 8% compounded semiannually. At the end of
the loan period, Mr. Ignacio paid back P11, 698.58 find the number of interest
periods and the number of years.
4. A businessman borrowed P50, 000 from a bank. The interest was compounded
semiannually for three years. At the end of the loan period, the businessman
paid back P63, 265. 95. What was the nominal rate?
5. An amount of P20, 00 borrowed at 12% compounded semiannually. At the end
of the loan periods, P28, 370. 38 were paid back. What was the number of
interest periods and the number of years?
6. Mr. Cruz borrowed P1,250 and repaid it 5 years later, if money earns interest at
8% compounded quarterly, how much did she pay?
7. Lina Marquez invested P15, 000 for her child at the moment of birth, if interest
rate was 10% compounded quarterly, how much will the investment be when
the child reaches 15 years of age?
8. A two year loan with interest at 85 was compounded quarterly. The compound
amount was P23, 433.19. Find the compound interest and the origin principal?
III. Solve for the following problems. Please show your solutions.
1. A deposit of P350 will be invested at 5 ½% compounded quarterly, for 2 years. Find the
amount at the end of the term?
2. The sum of P3500 will be needed at the end of 3 years. If money can be invested at 5%
compounded semiannually, find the periodic payment?
3. Suppose P5,000 is invested at the end of six month for 2 years and that 9% interest is
paid compounded semi-annually. How much will be the account after 2 years?
4. Find the amount and present value of P750 ordinary annuity payable monthly for 3 yrs if
money is worth 9% interest compounded monthly.
5. A personal computer is for sale at P14,800 down and the balance at P1,875 per month
for 2 yrs. What is the cash price of the computer if interest is at 1% per month?
6. A laptop cost P64,000. It is purchased with a down payment of P12,800 and 24 monthly
payments. If money is worth 12% compounded monthly payments?
7. What periodic payment is needed to be paid every quarter for 5 years to discharge a
loan of P140,000 at 10% interest converted quarterly?
8. What equal sum should Mr. Cruz invest at the end of each month in a fund that earns
6% compounded monthly if he wishes to have P1,800,000 in 2 years?
9. Monthly payment of P800 each are used to settle a loan for 8 months at 8%
compounded monthly. Find the present value of the loan?
10. A loan of P8000 to be paid with equal payments for two years with interest rate of 4%
compounded quarterly. Find the quarterly payment?

F. References:

1. Baltazar, Ragaso and Evangelista, Mathematics in the Modern World; C & E

Publishing, Inc. (2018)

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 2. Earnhart & Adina, Mathematics in the Modern World, C & E Publishing, Inc.
(2018)
3. Zenon R. Abao, Business Mathematics, JFS Publishing Services, Manila,
Philippines, 2017
4. Sirug, Winston S. Mathematics of Investment. Minshapers CO.,INC., (2014)
5. Capitulo,F.M. & Cruz,C.U. Mathematics of Investment, National Book Store Inc.,
Second Edition
6. Paguio, D. Mathematics of Investment. Malabon Manila: Jimczyville Publications
(2014)
7. Caras, M. Mathematics in Business 4th ed. Sta. Cruz, Manila: Bookstore Publishing
(2013)
8. Oridina,N. Mathematics of Investment (2011)
9. Sirug, Winston S. Math of Investment. Minshapers CO.,INC., (2010)
10. Capitulo, F. & Cruz, C. Mathematics of Investment, National Book Store (second
edition)Arce,

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