Mathematics INVESTMENT Revised Edition 6, oe cS oe Ta oft Be Apy\a) pores . yee _ Sapa Zenon R. Abao Jose B. MaribbayTable of Contents —_— CHAPTER © CHAPTER ‘HAPTER Simple Interest Concept of Simple Interest Accumulated Value and Present Value Exact and Ordinary Interest Time Between Two Dates Simple Discount 0.0.00... The Concept of Simple Discount... Promissory Notes... Exercises... Compound Interest . The Concept of Compound Interest Finding the Compound Amount and Interest Using the Formula Finding the Present Value at Compound Interes' Compound Amount at a Fraction of a Period ... Present Value at a Fraction of a Period Finding the Interest Finding the Time .. . Nominal Rate and Effective Rate . Comparison of Two Rates ..... Equation of Value. Varying Interest ecco. Continuous Compounding Exercises Mathematics of Annu Introdugtion oc Annuity Terms ...sessseseseesee Amount of an Ordinary Annuity vofan Ordinary Annu y on He Payment, R of an Ordinary Annuit = Mtcrest Rate of an Ordinary Annuity " 2 Term of an Ordinary Annuity 3 Amount and F jue of an Annuity Due re The Amount of an Anny Ds 7 The Present Value of an Annuity Due 99 Deferred Annuities 101 Perpetuities 10s, Exercises Annuities: General Case. i, Introduction Pi f ) Seas ersion Periods Equivalent Ra A Devise for Co! General Case: Red -ral Case: Formulas putation tion Procedure CHAPTER Amortization and Sinking Fund Amortization sree Introduction and Definition of Terms Amortization of a Debt... The Amortization Schedule . Finding the Outstanding Principal Sinking Fund ..0.0.. Introduction and Definition of Terms The Sinking Fund Schedule EXCICISCS cece ssesecestiseee CHAPTER Bonds... “ Introduction and Definition of Terms Valuation of Bonds... The Redemption Value and Coupon Payment . The Value of a Bond Based on the General Method . The Value of a Bond on the Premium Method. The Value of a Bond Based on the Discount Method Current Yield Exercises,187 Mathematics of Depreciation “187 Depreciation 188 Method of Averages or Straight Line Method 191 ‘The Declining Balance Method 193, Double Declining Balance Method .... 195 Sum of the Years’ Method ... 199 Exercises .. 203 261 Index of Tables BibliographyCHAPTER SIMPLE INTEREST simple Interest We shall now consider one of the most important concepts in business and economics: tne concept of interest. Interest considerations sometimes play a vita I role in the success of usiness enterprises of all sizes. Individual’s skills in the application of interest would usually result in a sound personal or business decision. Borrowing money is one of the common practices in order to buy a house and lot, a car or appliance, to pay tuition fees and other reasons. This activity is beneficial to the lender (borrowee) and at the same time to the le ndee (borrower). The borrower gets what he needs with the borrowed money because he could use this for business which could later earn him profit. The lender, on the other hand, gets money from the money he lends because the money earns an interest Majority of the business firms around us, if not all, borrow money frequently. They need funds to expand their on-going business to purchase equipments, add new products or take advantage of special price on needed merchandise Individuals borrow money to finance car, to settle overdue obligations, to put up a new business and so on. The price for the use of money is called interest. Generally, interest can be classified in three categories: simple interest, simple discount, and compound interest. vc individual or entity that money is referred to as ple Intere: paid for the nder and the crest inn 1.4 The Concept of Sim Interest refers to the am use of money. T joney is known as the vane who borrows render's viewpoimt | sney paid or owed for the use of money edit cooperative, from financing institution yom where such loans are obtained, unt charged for the use of money, Jendee. From the I from aer But regardless as fi nicrest in the amo jerest. IN Joans from banks, People can obtain or froma private individual of fF borrowers are expected to pay | ount of interest depends on the borre following factors: jwed. The bigger the principal, the bigger is The arm is the sum of mon t. care kept eonsta principal that is veveet if the principal and time are KePt constant th of time from the origin date to the maturity date and is i given in months, then the number of months is divided @) ate and ti Princ the interest if th Rate (r) — is the percent of the paid for the loan. The bigger the rate the bigger is the in! refers to the | Term (1) essed in unit year, When ‘The interest which is computed on a principal just on d the formula is is called simple interest, an (1) are unknown, then: If the principal (P), rate (r) and time 1 1 = andt= > Pt Pr expr by 12, ce for the whole term of the loan EXAMPLES. What is the interest on a P30,000 loan for 18 months at an interest rate of 12%? 1 Given. Pp = P30,000 r = 12%o0r.12 18 t = 18 months or 2 years = 1.5 years Solution’ | = Prt = (P30,000)(.12)(1.5) = P5400 v2. Pagan oPez borrowed P200,000 from his company. If he paid an interest of 1000 for one and a half years, what is the rate of interest? Given’ P= 200,000 1 = P37,s00 1 = 15 years Solutions py = __ 37,500 200,000 (1.5) = 125 or 12.5% IMiss Pat Trillo paid an interest of P3,000 for a loan obtained at 9% per annum for eight months, what is the original loan? ; 8 Given: I P3,000 T= 9% t= 8 months or D year 1 Solutions P = — nt 3,000 - 8 = (09 * ¢ (2) = P50,000 Mrs. Paredes obtained a loan of P50,000 from the SSS. If the total interest of the Joan was P19,500 at 9.75% per year, how long was the loan? Given. P = P50,000 I = P19,s00 T = 9.75% or .0975 I Solutions t= 19,500 (50,000) (.0975) = 4 yearsue and Present value J at the end of the term. w, 1.2 Accumulated val st lend action, the incerest 18M rest Lending (Fans tT ye principal plus the interest earned is calleq Ina simple 10 call thin the single-payment cera THE S00 ahs the se Pay ee ea vac or fueure VAIN In symbols: the amount or the accumulat ed or future value is the accurnu F the principal Where: the interest Prt, then we have Ifwe replace I by the new formula: By factoring, we hav EXAMPLES 1. Joenard borrowed 20,000 from a bank that charged 12% simy i 2% ple interest joan plus the interest paid in one lump sum at the end of 3 years will be oy nc? Given; P= P20,000 r = 12%or.12 t = 3 years Solution: | = Prt = P20,000(.12)(3) = P7,200 0b) In computing the amount paid, we have, F = P+ = P20,8333.33 + P5,000 = 25,833.33 If we divide both sides of the equation F = P(1 + rt) by the expression (1 + 11), we have, pe + len The principal P in the equation is also called the present value. 6. The accumulated value paid on a loan is P72,000.00. If the loan was for 3 years at 9% simple interest, how much was the original loan? Compute the total amount of interest Given’ F = P72,000.00 1 = 3 years T = 9% or 09 a) To determine the original loan, we shall apply the equation. F P= — l+n 72,000 1+ (093) P56,692.91 b) To determine the amount of interest earned, we have, F< P+] I =F-B P72,000 — P56,692.91 P 15,307.09Thus, Fos pat 20,000 + P7,200 27,200 The alternative solution: Given Solution r F = Paw P20,000 [1 + (.12)(3)) = P20,000 (1.36) P27,200 At what rate is P4S,000 be invested in order to have P46,800 in 6 months’? F = P46,800 P = P45,000 = 6 months = .5 years I ~ Pt F-P = “py (from F = P+ I, then 1= F - P) P46,800 ~ P45,000 ~ —P45,0000.5) 08 or 8% 3. For how long must P45,000 be invested at 8% simple interest rate in order to have P46,800? Given: Solution: F = 46,800 P = P45,000 r = 8%or.08 I ‘Pr F-P | (since I= F ~ P) Pr 46,800 — P45,000 ~ —— P45,000(.08) = .5 or 6 months 0unt of P12,800.00 in a savings bank (hat E66 © S% interest hsaccount at the end of 8 years assuming peter deposited an amo Id he have 4 for & years, How much woul that no withdrawals were made? Given: P= P12,800.00 r or 065 ‘ Irwe use equation F =P +1, then the amount of interest shall be computed, first. Hence, 1 = Prt = (12,800%.065)(8) = P6.656.00 To compute for F, we have, F F+t = P12,800 + P6,656 P 19,456.00 If we use equation, F = P+n) P12,800 [1 + (.065)(8)] P 19,456.00 5. Mario Sandoval paid an interest of P5,000.00 on a loan for 3 years at 8% simple interest. Compute the value of: a) the original loan b) the amount Mario paid at the end of 3 years T= 8% or 08 t=3 years Given: 1 = P5,000.00 a) To compute for the original loan, we shall use the equation. p= 7 5.000 us, P= (0.083) = P20.833.33 07. Determine the present value of an cumulated to P48,609. 99 in 6 years of 6% simple interest Given F P48,000.00 ' 6 years ' 6% oF 06 Solution To solve the present value, we have, F lent 48,600 1+ (.06)(6) P = P35.735.29 1.3 Exact and Ordinary Interest It was noted in the previous discussion that the period t shall always be expressed in years. If tis given in months, then the number of months shall be divided by 12. For example, if (= 3 months, then ¢ equals 3/12 = 0.25 year. In some instances, however, time is measured in days, We have two approaches on how to compute the amount of interest in this case a) Exact interest — is used when interest is computed on the basis of 365 days a year or 366 days in leap year. We shall use the symbol I, to indicate exact interest b) Ordinary interest — is used when interest is computed on the basis of an assumed 30-day/month or 360-day year, We shall use I, to mean ordinary interest In any of the two methods discussed above, the time is expressed as a fraction of a year with the number of days in the term of the loan as the numerator and 360 or 365 as the denominator. In practice, however, the ordinary interest is generally used. Hence, we will be using ordinary interest, unless otherwise specified. EXAMPLES: 1. An amount of P28,100.00 was invested at 7% simple interest for 100 days, Compute the value of the: a) exact interest b) ordinary interest Given: P = P28,100.00 t 7% or .07 t = 100 daysSolution 4) The exact interest shall be computed as follows Leos Prt (P28,100)(.07)(100/365) 538.90 b)_ The denominator in ordinary interest is 360, Hence, Ino Prt (P28,100)(,07)(100/360) P546,39 Ms. Jane Salvador deposited an amount of P12,800.00 in a time deposit account at 8% simple interest for 150 days. Find: a) exact interest b)_ the accumulated value at the end of the term Given: P = P12,800.00 r = 8% or 08 = 150 365 Solution: a) The exact interest is: 150 le = (12,800)(.08)! 365 = P420.82 b) The accumulated value at the end of the term shall be: F = P+, P12,800 + P420.82 = P13,220.821.4 Time Between Two Dates mputed when the number of days is Biven However, mevan be determined in (wo ways 5 per of days between two days. It is obtained th within the period of the transaction .d to obtain the number of days Exact and ordinary interests are co when dates are given, the number of d a) Actual time exact num! by counting t each mont except the origin date Iso be use! between two given dates: b) Approximate time - refers 10 the asst senpher of days is obtained therefore by countin, the period of the transaction except the origin date. refers to the he number of days o Table | can a umption that each month bas 30 days. The g each day of each month within EXAMPL 1. Determine the actual 3013 using the two methods. time and approximate time from April 11, 2013 to August 16, Solution. 3). Using the actual time of counting the number of days, we have April (30 ~ 11) = 19 May 31 June 30 July = 31 ‘August 16 ‘Actual number of days = 127 Alternative Solution: Using Table | August 16 228 Aprill 11 — 101 127 days b) To determine the approximate time, we have April (30-11) 19 May 30 June 30 July = 30 August =. 16 ‘Actual number of days = 125 Alternative Solution: To find the approximate tim e 1¢, first express At basis of months starting from January 1. pgsas August 18 onthe August 16, 2013 8 16 April 11, 2013 -4 45 The time is 4(30)+5 = 120+5 = 125 days8 with transactions where origin and maturity dates are given, We mputing the period t. These four possibilities are: When d have four possible ways of « Actual time 1, Actual time 3, Approximate time 360 360 9, Actual 4, Approximate time 465 365 An amount of 2,300.00 was invested at 8% simple interest on May 25, 2013. How much shall be the amount of interest earned on October 12, 2013 using four methods of computing period ¢. Solution’ We shall determine frst the number of days: [ Month Actual time Approximate Time May (31 ~ 25) 6 (30~25)=5 30 June July August ‘September 30 30 October ID 12 l Total 140 137 Alternative Solution: Approximate Time: October 12 — Approximate no. of days October 12 May 25 4(30) +1 = 120+1 Hence, at 8% simple interest, we have: a) Actual time, ordinary interest (Banker's Rule) 1 = Pr ud = 2,300(.08)| 565 = P71.56 0b) Actual time, exact interest 1 = Pa 140 2,300( 0x) i) P70.58 ©) Approximate time, ordinary interest Tt = Prt 137 2,300(.08)| 555 ‘ P70.02 d) Approximate time, exact interest 1 = Prt (12 = 2,300(.08) 365 = P69.06 Notice that of the four possibilities, “actual time, ordinary interest” method In this yields the highest interest. This method is known as the “Banker's Rule” d, the “Banker's Rule” shall be used. text, unless otherwise spec On August 25, 2013, Miss Lani Santos deposited the amount of P15,800.00 in a bank that pays 6.5% simple interest. Compute the accumulated value on December 8, 2013, using the a) Banker’s Rule b) Approximate time, exact interest P = P15,800.00 r= 6.5% or .065 Given: Counting the number of days, we have Actual time 6 (31 — 25) ‘Approximate Time 5 (30 ~ 25) September October a) Using the Banker’s Rule, we have F = (1+rt) 105 = 1+ 0.065) — 1.00 + (2) = P16,099.54 0Usi b) Using approximate time, exact interest, we have Fe G+n 15800 6 oes 3) 365 = P16,089.8 " 4, The owner of a variety g rate. Tha loan iz te Be sete borrowed P30,000 from a bank at 12% simple interest in 210 days in a si h will the owner Pay the bank when the loan falls due? Uee ie cartier tenia Given’ P= P39.909 T = 12% t = 210 days Solution: Exact Interest (I) po( anbeatow) 365 = P30,000(.12 (3 ,000(.12)| 365 = P2,071.23 5, What is the ordinary interest on the loan in example 4? Solution: Exact Interest (Ig) = pe Sumbecet on) 360 : ey = P30,000(.12)| 565 = P2,100.00 1.5 Simple Discount In the previous section, we discussed the concept of simple interest. In simple interest, the amount of interest is computed based on the principal and is usually paid at the end of the period together with the principal. In some instances, however, the amount of interest is deducted in advance and is computed based on the maturity value. This type of interest is known as simple discount or discount 1.5.1 The Concept of Simple Discount The term discount refers to the amount deducted from maturity value of an obligation. The price of using money is, therefore, deducted in advance. In this case, the borrower pays the original sum of money borrowed at the end of the term at a specified discount rate. Thus, the amount F due at the end of the term t is charged an interest in advance at simple discount rate d. As a formula, the amount of discount also denoted by I, as in the case of a simple interest, is given by: 1 = Fat Equation 1.5.1 0The formula for Kd and by employing simple algebra), ' Equation 13.2 4 Equation 15.4 ' Equation 15.4 EXAMPLES: nt will be collected in advance from a loan of P15,000.00 for discount rate is 8%? 1 How mueh 2 years ifth Given F = P15,000.00 d= 8% t= 2 years Solution. ‘owed is interpreted as the future value of the loan Notice that the amount borr jence, o solve for I, we shall use Equation 1.5.1. H I = Fat 15,000(.08)(2) = P2,400.00 On June 11, 2012, Mr, Suarez borrowed P6,000.00 from a credit union and was charged P410.00 for the loan. If interest was deducted in advance, what was the discount rate? Assume that the loan shall be paid on December 20 of the same year. Given: F = P6,000.00 1 = P410.00 Solution: Using the Banker's Rule, we can determine the term of the loan. Thus, June (30-11) 19 July 31 August 31 September 30 October 31 November 30 December 20 Total number of days 192Hence, 192 360 To solve for the discount rate, we shall use Equation 6.9 ads oh Ft 410 - (6.000 2 360 = 128125 oF 12.81% Mr. Bean uueye borrowed a certain amount from a cooperative and was charged 72,000.00 deducted in advance. Ifthe discount rate is 12% for 6 months, how much is the amount of loan 1 = P2,000.00 t =6 months or 0.5 Given: 12% or 12 Solution To solve for the amount of the loan, we shall use Equation 1.5.2. Thus, I a 2,000 (12)(.05) P33.333.33 F = Recall that in Equation 1.2.1, we have the formula: F = P+! But by Equation 1.5.1, I = Sdt. If we substitute Equation 1.5.1 to Equation 1.2.1, we shall have F = P+ Fdt To solve for P, P = F-Fdt P = F(l-dt) Equation 1.5.5 0The value P is the amount received by ne borrower at the beginning of the term, We shall call this value proceeds, Th< value of the proceeds is equivalent 4 the concept of principal or present value ‘of the loan. However, for purposes op larity, we shall use Pr to indicate the present value at simple discount, The phrase see count” means to get the value OF DE proceeds. : th 4. Determine the proceeds of P18,500.00 for 2 years and 6 months at 10% simple discount. Given; F = P18,500.00 d= 10% = 2.5 years Solution: To solve for Pr, we shall use Equation 1.5.5. Hence, Pr= F(1-dt) 18,5000[1 ~ -10(2-5)] 13,875.00 5. Find the proceeds and the amount of discount on P3,000.00 due at the end of 2 years at 8% simple discount. Given: _ F = P3,000.00 1=2 years d=8% Solution: To solve for the proceeds, we have Pr= F(l-dt) = 3,000[1 — (.08(2)] 2,520.00 To compute the amount of discount, we shall use Equation 1 5.1 or E 1.2.1. Thus, if we use Equation 1.2.1, we have 'quation F = P+I I = F-P 3,000 - 2520 = P480.00Promissory Notes 1.6 . Generally, in borrowing and lending money transactions, the lender usually requires the debtor £0 518M A written agreement that specifies the following features: ° Mrakin date ~ refers to the date when the note was drawn B). Ba ‘ Gate ~ refers to the date when the note is to be paid. Oo tacae atte ~ the present value of the note d) Maturity value — the accumulated value of the note. Such agreement is usually called a promissory note. Promissory notes are of two kinds a) Non-interest bearing notes b) Simple interest bearing notes ' For renee bearing notes, the value is equal to the maturity value, In the case oot tie reat eae notes. however, maturity value is equal to the face value plus the amount of interest earned. Usually, ordinary simple interest is used in computing the maturity value. EXAMPLES 1, Letus consider the Promissory notes below. 10,000.00 Intramuros, Manila November 6, 2013 Ninety days after date, 1 promise to pay ten thousand pesos to the order of Gerry Sandoval payable at Bank of the Philippine Islands. Signed: Arturo Alcazar The above promissory note is presumed to be non-interest Bearing note. If there is an amount of interest in this transaction, it is already presumed that such interest was already collected in advance, Hence, the maturity value is equal to 10,000.00 2. Consider the promissory note below: P25,000 Intramuros, Manila November 6, 2013 One hundred twenty five days after the date, the undersigned promises to pay to the order of Mr. Gerry Sandoval, twenty five thousand pesos at 6% simple interest per annum. « Signed: Arturo Alcazarfan say that the maturity date shall be 125 days f ‘om the above note, we can say that ron echoes 3013. The maturity value shall be equal to P25,000.00 plus the amoyi, of interest at 6% per annum. Hence, 125 1 25,000(.06) ao) 520.83 F =Pt+l = p25,000 + P520.83 = P25,520.83 Promissory notes can be sold to another person, to a bank or to any business establishment. Selling of such promissory notes can be done before the maturity date. The purchaser discounts the maturity value of the note. from the maturity date back to the date when the note was sold. Discounting promissory notes, therefore, requires two basic steps: First, the maturity value is first computed using the face value, the simple interest rate and the term of the note. Second, the maturity value is discounted for the remaining period at simple discount rate. The proceeds is the amount received by the seller of the note. 3, Mr. Johnny Santos owns a P12,500.00 note at 6% simple interest dated September 6, 2013. The term of the note is 150 days. Fifty days after September 6, 2013, he sold the note to the Philippine National Bank at 8% discount. Compute the following: a) the maturity value o. ine note b) the proceeds Solution: a) To compute for the maturity value, we have F = P(l+n) = 250) + oo) | | ! | | 1 ' | ! | | | ' | \ | ' | | | | | | | | | | | | | | | | | | 360 | = P12,812.50 b) The term of the discount is 150 — 50 = 100 days. Hence, the proceeds shall be Pr= F(1-dt) . 1291250[! ut) = P12,527.78 So, Mr. Johnny Santos will receive an amount of P12,57.78 fi 57. from PN! 150 days from September 6, 2013. _Exercise 1.1 SIMPLE INTEREST Name ——____————— Time __ Course/Year 1, Find the simple interest on each loan? a. P25,000 at 4% for 3 years. P18,000 at 11% for 1% years P8,750 at 6 14% for 2 years. P17,000 at 814% for 4% years P7,200 at 10% for 6 months 11,000 at 7%% for 10 months P40,000 at 8% for 120 days h. P18,000 at 6 4% for 90 days 15,000 at 10% for 75 days P17,500 at 15% for 180 days.Compute the amount of | crest on the following loans a. P180,000.00 at 16% for 3 years b. P180,000 at 7 2/5% for 5 years ©. P106,200.00 at 8 4% for 2 years d. P25,130.00 at 8%% foe 9 months ©. P15S6,000.00 at 11% for 2 years and 7 months f. P180,260.00 at 18% for 5 years and 3 months Determine the missing item in each of the following problems PRINCIPAL RATE a. P3,600.00 3.5% b. P8,250.00 6.2% c. P5,820.00 d. P10,600.00 e. : 10.5% fi =———— 4.5% g- P5,630.00 3.8% h. P12,655.00 6.25% TIME 9 months 1 year & 3 months 8 years 5 years & 4 months 5 months 2 years & 3 months INTEREST 5,820.00 2,500.00 1,360.50 686.21 580.21 1,350.60Exercise 1.2 ‘SIMPLE INTEREST Name Score Course/Year time Date Solve the following problems. Show all pertinent solu ons. 1, Mr Johnny Santos borrowed P25,100.00 for 3 years at 12% interest. How much was the amount charged for the use of money? 2, Mrs. Lani Dy borrowed P 15,820.00 at 6% simple interest. She was charged an amount of P1,260,00 as interest. Compute the duration of the loan. 3. If the money is worth 12.5%, then how much shall be the principal if it will earn an interest of P5,500.00 in 3 years and 6 months?4. For how long will an» ant of P16,200,00 be invested at 3.5% to 6 P1,200.007 ‘ Nam Cou Sol 5. At what interest rate will an investment of P50,000.00 carn an interest of P 10,062.50 in 1 year and 9 months? 6. Mr. Salcedo invested an amount of P18,360.00 at 12.5%. How much shall be his interest earnings after 5 years and 2 months?Exercise 1.3 \ SIMPLE INTEREST \ Name Score ourse/Year Roun Time Date Accumulated Amount Interest 1. PS,000 2. P4,000 3 4. P7,500 P3,200 P9,000 | aemonne 5% 9 months. 6% P25,000 6. P16,000 2% years 7 12% 120 days P2,000 P30,000 8. P18,000 150 days P1,500 9. P25,000 P27,000 8 months P16,000 2. Determine the missing item/s in each of the following. ACCUMULATED PRINCIPAL RATE TIME INTEREST AMOUNT a. P12,000.00 3.5% 3.5 years b. P4,625.00 4.25% 5 years & 9 months atts Fs ic: 6.0% 9months P650.00 SS d. —_____ 8.5% 4 years and 5 months P1,280.21 e. P500.00 2.85% st P1,000.00 f. P22,658.00 __s 6 years paces P33,260.00 g. P5,688.00 3 months pacity P6,612.30 h. 4.83% P1,350.00 P8,693.00 ©Martin deposited an amount of P32,600.00 hs? How much shalll be the interest earnings? meee § 4 A.amount of P2,500.00 was doubled after 7 years and 6 months. Compute the fort my ‘Name b. Solv ©. accumulated value 5 What amount shall be deposited in a bank today to accumulate P50,000.00 att er 5 year and 10 months? Assume money is worth at 8%? ° 6. Inhow many years will an investment of P25,000.00 accumulate to P45,000,00 if money is worth 4.5% simple interest? 7. Ms. Lorela Yap borrowed an amount of P15,600.00 from a ban! k that charges 12.5%, How much shall be paid to the bank after: a. 1 year and 10 months? b. 8 years and 3 months? 8. If money is worth 11.5% per annum, for how long will an investment of P20,000.00 accumulate to P38,000.00? 9. Father projected that he will need P350,000.00 12 years from now. How much shall be invested today if money is worth 8.5% per annum?Name —__ Course/Year Solve the following 1, Anamount of P1 amount of intere: a, exact interest 1.4 bj ‘SIMPLE INTEREST : - es Score = Time _ Date Problems. Show all pertinent solutions 5.600.00 was invested at 8% ‘Stand accumulated value u imple interest for 115 days. Compute the sing: b. ordinary interest3. Using exact interest at 12%, determine the present value of an investment that accurnulay, to P21, 700.00 after 285 days? ea Name Cour Solv 4. Miss Elsie Herrera borrowed an amount of P18,820.00 from a bank that charges 12% per annum, How much should be paid to the bank after 325 days? Use ordinary interes, 5. Mr. Rey Marquez deposited an amount of P15,775.00 in a bank that offers 4.5% rate a. per annum. How much shall be the interest of the investment after 100 days using exact interest b. ordinary interestExercise 1.5 SIMPLE INTEREST \ Name —____ Score —_______ Course/Year —__ Time Date —___ Solve the following problems. Show all pertinent solutions : I. a 1 Determine the number of days from March 28 to November 16 of the same year using: a. actual time b. approximate time 2. Miss Helen Sandoval invested an amount of P20,600.00 on June 28, 2013 at 6% per annum. Compute the amount of interest earned on December 12, 2013, using: a. actual time, ordinary interest b. approximate time, ordinary interest 01.0% oy An / “Copy©. actual time, exact interest ‘Name Cours d. approximate time, exact interest solve 11 3. On January 25, 2013, Mr. Winston Ramos borrowed an amount of P25,600.00 from a bank that charges 14% per annum. On October 18 of the same year, he decided to settle his accounts. How much did Mr. Ramos pay on October 18, 2013? 4. On October 12, 2012, Ms. Jaemie Rieyes deposited an amount of P30,800 to PNB at 6.5% per annum. Using the four methods of computing simple interest, how much will be the accumulated value on April 1, 2013? 5. On, April 28, 2013, Mr. Santos borrowed P 180,000.00 from a bank that charges 12 3/ 5% simple interest. How much will he pay the bank if he will decide to pay the bank 298 days later? Determine when that date will be.Exercise 1.6 SIMPLE DIScouNT Name — Score Course/Vear - Time Date Solve the following problems \ ‘ 1. Determine the missing valu in ench of the Following: Fr a t 1 Pr a, P8,560.00 15% 5% 125 days — 3 — 8.25% 100days ee P 28,250.00 H 7 120 days aa P16,650.00 e. peneoond 1 year P750.00 f P20, 10 5 months 950.00 1 At 8% simple discount, find the value today of: a. P15,500.00 in 3 months. b. 18,800.00 in 100 days, c. P38,600 in 2 years, Ms. Jenny Landicho borrowed 55,000.00 from a bank that charges 12% simple discount. If Miss Landicho agreed to Pay her accounts 5 months from today, what sum did she receive from the bank? 4. Find the simple discount on the following? a. P17,700.00 for 45 days at 9% simple discount b. P11,8200.00 for 90 days at 8% simple discount2 ©. P25,600.00 for 6 months at 105 % simple discount d. 15,250 for 2 years at 7%4% simple discount each of the borrowers who requested: \ \ \ \ \ \ \ \ P18,200.00 for 30 days, A bank charges 10% simple discount on short term loans. Find the Proceeds received by | | b. P12,625 for 60 days. ¢. P12,700.00 for 5 months. d. P28,900.00 from August 25 to November 10 of the same year. Ge P45,120.00 from March 6, 2012 to February 11 of the following year. * 6. Mr. Rene dela Cruz borrowed a certain amount from the bank that charges 8% simple discount. If he received P39,700.00, how much was the amount borrowed? ‘Name Cour SolyExercise 1.7 PROMISSORY NOTE Name —____ a _ Score —___ Course/Year a Time Date _____ HOCCEMS re, — = _ = Solve the following problems. Show all pertinent solutions, |. 4 60-day non-interest bearing note worth of P12,000.00 dated April 11, 2013 was discounted on May 25, 29] 3 at 5%. Compute the proceeds. 2. A 125-day note worth of Pi 0,600.00 at 6% simple interest was dated July 12, 2013. If thenote was discounted 7% simple interest on August 25, 2013 find the following: a. maturity value of note b. the proceeds 3. A 160-day note dated January 16, 2012 has a {ace value of P3,850.00 at 5% simle interest. If the note was discounted on March 28, 2013 at 7% simple discount, determine the: a. term of discount b. the proceeds 4. Mr. Robert Alba was granted a loan of P3,200.00 froma bank for 7 months. He received 8,000.00 on the loan. Find the following: Simpl, a. the simple discount b. the discount rateJe dated April 1, 2018. Sixty days after saiq ple discount. If the face value of the note j, . determine the following 7 b maturity value ©. the date the note was discounted 4. the proceeds 6. Mar borrowed P17,600 for 2 years at 7% simple interest rate. What was the interest paid? 7. What interest will be charged on a loan of P150,000 for 120 days at an interest rate of 1 75%? 2 8. By paying a P4,000 bill at once, a merchant can save P400. How much would he gain by borrowing the P4,000 for 30 days at 10% to pay the bill? 9. To take advantage of a special sale of an office cabinet, Mr. Cruz needed to borrow P70,000 for 180 days. If the interest rate was 11%, how much interest will be charged? 10. A retailer can get a special reduction of P1,000 in price by paying cash for childrens’ dresses. To do so, she has to borrow P50,000 for 8 months at 10% interest. a. Find the amount of interest she has to pay. b. How much can she actually save by borrowing the money. ©CHAPTER COMPOUND INTEREST 2.1 The Concept of Compound Interest Finding simple interest is constant throughout the investment term. Whenever a simple interest is added to the principal at regular intervals, and the sum becomes the new principal, the interest is said to be compounded. It means that in compound interest, the interest earned at the end of the term is automatically reinvested to earn more interest. For example, most savings account pay compounded interest every three months or quarterly. A certain principal invested for one year in a savings account will earn simple interest for the first three months. The interest earned will be added to the original principal to have a new principal. The interest for the next months will be computed based on the new principal and the added interest, until it reaches one year. Therefore, adding interest to principal gives more interest. Interest may be compounded annually, semi-annually (twice a year), quarterly (4 times a year), monthly (12 times a year). At the end of the term, the final amount is called the compound amount, while the compound interest is the difference between the compound amount and the original principal. 0EXAMPLES. ly for 3 years, 1. IF P2,000.00 is invested at an interest rate at 8% compounded annual find the compound amount and interest. Solution Original principal 2,000.00 Interest in the first year (2,000)(.08)(1) = P160.00 New principal at the end 2,000 + 160 = P2,160.00 of one year is Interest in the second year = (2,160)(.08)(1) = P172.80 Principal at the end of 2 years = 2,160 + 172.80 = P2,332 80 Interest in the 3" year = (2,332.80)(.08)(1) = P186.62 = 186.62 + P2,332.80 = P2,519.42 Principal at the end of three years 19.42 and the compound efore the compound amount in 3 years is P2,5 - interes! 2,519.42 ~ P2,000.00 =" P519.42 2. Find the compound and interest if P5,000.00 is invested at 10% compounded semi- annually for 2 years. Solution: Compounded semi-annually means the interest earned in 6 months is added n additional interest for the next 6 months. to the principal to ear the interest rate per 6 months Since the interest is compounded semi-annually, 2=5% is 10% Original Principal P5,000.00 Interest in the 1*'6 months (P5,000)(.05) P250.00 New principal at the end of % year is P5,000.00 + P250.00 P5,250.00 Interest in the second half of the year is 262.50 P5,250(.05)Principal at the end of one year is PS,250.00 + P262.50 P5,512.50 Interest in the 3" 6-month period is, (PS,512.50.05) 275.62 Principal at the end of 1% years is P5,512.50 + P275.62 PS5,788.12 Interest in the last 6 months is (P5,788.12)(.05) P289.41 Compound amount in 2 years is PS5,788.12 + P289.41 6,077.53 Compound interest rate is 6,077.53 ~ P5,000.00 P 1,077.53 2.2 Finding the Compound Amount and Interest using the Formula Most of the time, interest is compounded into the principal more than once a year. The time between two successive conversions of interest is known as the conversion or interest riod. The number of conversion periods at a certain time is called frequency of conversion and is usually denoted by m. The stated rate of interest is called the nominal rate denoted byj The rate of interest for each conversion period is denoted by i. Therefore, annual rate j sy i-—— a frequency of conversion Equation On the other hand, the number of conversion periods in the term is denoted by n; hence, n = (time in years)(frequency of conversion) n=txm Equation 2.2.2 EXAMPLE: If money is invested at 8% compounded quarterly for 3 years, — the interest period is 3 months $ — frequency of conversion is m = 4 — the nominal rate is j = 8% 0The interest rate for each period is ij m B% 4 = % The (otal number of conversion periods in the term is n= x m. Hence, n= 34) n=12 Examples of Nominal Rates Frequency of | Conversion Interest Rate One (No. of conversion | per Period | Conversion periods in 1 year) 1=j/m Period 1. 8% compounded Annually t 8% 1 year 2. 15% compounded 2 7.50% 6 months | semi-annually 3.12% compounded quarterly 4 3% 3 months 4.8% compounded monthly 12 { 23% 1 month 5.24% compounded 2 12% 6 months [semi-annually =] To derive the compound amount formula: FORMULA | The original principal invested P Tate of interest 1 compound amount of P F ) Number of conversion periods N Original principal is P Interest in the first period Pi New principal at the end of a period is P+ Pi P(I+ i) Interest in the second period is P(I + i)I [ Patii New principal at the end of 2 periods is PU +i) + pl + ii P(1+ i) (1 + i) PCL + iPIn this case, the number of conversion period is 2, the exponent of (1 + i). But if the number of conversion period is n, then the compound amount is the original principal times (1+ i)%. Thus, we have the compound amount formula Where: P = original principal compound amount or accumulated value of P at the end of n periods nominal rate of interest (annual rate) frequency f conversion i interest rate per period = j/m t term of investment in years total number of conversion periods in the investment term (tm) z= In the compound amount formula, the factor (1 + i)" is called accumulation factor. Note: i= and n= t when interest is compounded annually. EXAMPLE: 1, Find the accumulated value of P3,000.00 in 4 years if it is invested at 12% compounded quarterly. Given: P= 3,000.00 1 = 4years j 12% or .12 n = txm=4(4) = 16 periods m = 4(compounded quarterly) j _ 12% Solution: i = ~ 3% = 03 m4 Using the formula below to find F, F = P(iti" 3,000(1 + .03)"* = P4,814.12 OThe value of (1+ 0.1)'* can be obtained using a scientific ealeulator or by thy use of Table I When using the calculator, a) Press 1103 1.08 b) Press QS) and 16 (5) (4) P3,000 (5) Caloulator display shows PA,814.12 — the answer are rounded off to the nearest centavo. Using Table I, we have, n 2% 21% 24% 3% | Fe PO +i) P3000(1 + .03)'* : P3,000(1.6047064) 3 = P4814.12 3 S ——— 1.604706 t 2. Find the compound amount and the compound interest on P10,000.00 for 9+ years at 6% compounded quarterly. Given: P = P10,000.00 j 6% or .06 m= 4 t = 9.25 years n = txm=37 F = putiy = P10,000(1 + 015)” = P10,000(1.015)"” P10,000(1.7347766) = P17,347.77- the compound amount 1 = F-P P17,347.77 ~ P10,000.00 7,347.77 - the compound interestrincipal 7 offers ow. Mr Cruz off am 8 Mr. Reyes PA0,500.00 a simple interest at the rate of 5% after 3 years. Mr. Reyes insists om © e compounded quarterly. Who benefits from the offer? By how much Sofutwon ° they Offer of Mr Cruz Offer of Mr. Reyes roe pen hoe Pe ip . P30,500[1 4(.05)(3)) 30,5001 + 0125) P 30,500 (1.15) P30,500( 1.0125)! 745,075.00 P30,500¢1 160754518) 35,403.01 The creditor, Mr. Reyes benefited from his own offer by P328.01 2.3 Finding the Present Value at Compound Interest The present value of an amount due in n interest periods is the value A, which is invested at # given rate. P can be derived from the compound amount formula: PCL + i)" P(I+i)” / = ———> dividing both sides (1 + i)" aol. (+i)? Equation 2.3.4 = F(1 +i)" Equation 2.3.5 The factor (1 + i)” is called the discount factor. “To discount an amount S due inn periods” means to find its present value at n periods before S is due. EXAMPLES: 1. Find the present value of P8,500.00 due in 5 years if money is worth 12% compounded semi-annually. Given: F = P8,500.00 t = S years a * 012 n = txm=5(2)= 10 periodsFind p=? pe raeie PS,500 (1 + .06)° PS_500(.5583947760) Using Table HT P4,746.36 calculator by following the steps The value of P can be obtained using a scient 1. Press | +06 >. Press YQ +/- &) (x) 8,500 Display shows P4,746.36 rounded off to nearest centavo. A 60-square meter house and lot is purchased on installment, The buyer makes a P110,400,00 downpayment and owes a balance of P257,600.00 payable in 5 years, Jd lot cash value if money is worth 16% compounded quarterly Find the hous 3 Solution. Cash value = downpayment + present value of the installment payment Downpayment = P110,400.00 Installment payment = °257,600.00 in 5 years txm=(5(4) = 20 F = P257,600.00 n j= 16% or 16 P sa+ m = 4(quarterly) = 257,600(1 + 04)” t S years = P117,565.28 fw 2c m 4 Cash value = P110,400.00 + P117,565.28 = P227,965.28 To find P using the calculator. 1, Press 1 + .04 (x) 257,600 ) 2. Press (¥9) 2 +/- 3. Display shows P117,565.28 (answers rounded off to the nearest centavo.)2.4 Compound Amount at a Fraction of a Period the for P= Pp ; , en ue F = PCL + i), nis assumed to be an integer. If n is a fraction, one metho computing the compound amount is to assume compound interest throughout the term. However, in practice, simple interest is assumed over the final fractional part of @ period. Steps in computing F where nis a fraction: a) Find thee given time. b) Accumulate the result in the period) at simple mPound amount at the end of the largest number of whole periods in the first step for the remaining time (which is less than a interest, nominal rate. EXAMPLE: |. Find the compound amount of P10,000.00 if invested for 4 years and 9 months at 16% compounded semi-annually assuming simple interest over the final fractional part ‘ Given’ P= 10,000.00 t= & J = 16% or 16 n= t-m= 2(43) m= i= = .08 = (2) _ 5 or 94 periods Find: F=2 Solution Time diagram showing two steps: 7 ir 1 = 3 months 0 1 a 2 ‘ °The largest number of whole period is 9 (or 4 years and 6 months), Th, re Step | compound amount F, of P10,000,00 at the end of 9 periods is F= pati)’ 10,000(1 + .08)" P19,990.0463 Step 2. The remaining time is 3 months, Accumulate 3 months at 16% simple interes, Pe Rtn i 3 19,990.0463) ! + (16) 45 20,789.65 Note: (1+ .08)’ can be found using Table 1 of the scientific calculator. (1 + .08)’ = 1999004627 2.5 Present Value at a Fraction of a Period esent value at a fraction of a period. Steps in computing the pr od by one. Using this new period, discount F, I, Increase the number of whole peri a) means, add a few months to compute the fractional period b) Accumulate the result in the first step at simple interest, at nominal rate for the number of months added in (a). EXAMPLES: ‘ 1. Find the present value of P4,000.00 due in 5 years and 4 months at 12% compounded quarterly. Given: F_ = P4,000.00 n =tem m= 4 = (54)(4) i = 204 periods 1 = Sh years Step 1. The given term contains 21 whole periods. Adding one period results to 22 periods (or add 2 months to the given term). Discount 4,000.00 for 22 periods (or for 5 years and 6 months) and obtain value P,. F(I + i)* = 4,000(1 + .03)” = P2,087.57Step 2 Accumulate PL for 2 months at 12 rest to find the actual present P Plava ny 2,087.57 [1 .12(2 2,129.32 Time Diagram Showing Two Steps 12 2 months 2 Note: (1 + 03) = 0,5218925 can be found using Table III or the scientific calculator, 2.6 Finding the Interest From the compound amount formula F = P(1 + i)", the interest rate (j) ean be determined if F, P and n are given, EXAMPLES: 1, At what nominal rate compounded se annually will P50,000.00 accumulate P65,000.00 in 12 years? Given. F = P65,000.00 n= 24 P = PS0,000.00 j = im 12 years j = 2t since m=2 3 Bi. Solution: (using calculator) Formula: F = P(1+i)* ee oe mes - then j = 2(,010991815) 000 peels = .02198363 iy Ds = +i" = S500 2.20% 13 (i+ iy i = 0.010991815O10991815) 1 0,010991815 pea ‘ i Note. Yo find (1.3) " = 010991815 Press 1.3 YJ (L) (able) 24) 1010991815 Alternative Solution P (1 +1)" derive the formula for i Using F Pe Pp(l+ie b ara" Fi, (#} Lei Fy 7 i= (p) 1 Equation 2.6.1 To solve for the annual interest rate j, use Equation 6.6 pata. If we cross multiply, we have j-ixm Equation 2.6.2 Solution: (Era but j = ixm (.010991815)(2) = 2.20% = 0.010991815990,00 in five 0 P2, 2. At what rate compounded quarterly, will P1,250.00 amount '0 P years? Gwen P= P 1,250.00 m=4 F = 2,900.00 n = 20 t= 5 years Find: j mula; i= (Eh For) (p)*-1 1.042976202 — 1 042976202 j = ixm 4(.042976202) = 17.1% 2.7 Finding the Time We can easily solve a problem where time is unknown by using logarithms or by interpolation. EXAMPLES: How long will it take P6,500.00 to become P9,800.00 if invested at 8% compounded quarterly? Given: F = P9,800.00 P = P6,500.00 To find t, we have: n = txm t=? Therefore, = 7Substituting the valv in the formula F = PC +)", we have 6,500(1 + .02)" 9,800 jy 9,800 (1+ 02)" = 6,500 1.507692 1.02)" Taking the logarithms of both sides, Jog( 1.02)" = log 1.507692 nlog 1.02. = log 1.507692 _ 0.17831263 nm * (0,008600171 n= 20.73361448 n _ 20.73361448 but t = 4 = 4 1 = 5.18 years Alternate solution (using Table III). F = P+) ‘ 9,800 = 6,500(1 + .02)° = 2,800 (1+ .02)" = 6500 (1+ .02)" = 1.507692 By Interpolation in Table II, I for the approximate value of n. Using four decimal places, we find (1 + 02)" = 1.4859 and (1 + .02)" = 1.5157 which are nearest to 1.507692. Therefore, n falls between 20 and 21, We tabulate the values below showing the difference by two entries 21 1.5157 0 1.5077 a- 2of_ 1 0.0218 | 0.0298 20 1.4859oe Solving for n, by forming the ratio of the differences, we have, 1 n— 20 0298(n ~ 20) n~20 0298 021% 0218 0218 0298 0.73 1543624 0.73 1543624 4 20 20.731543624 n _ 20731543624 4 4 = 5.18 years 2. How long will it take for P6,000.00 to become P11,300.00 at 6% compounded semi- annually? Given Find: Solution. P = P6,000.00 j 06 F 11,300 (1 + 0.03)" = (1 + 0.3)" n log 1.03 n n F = P11,300.00 2 i = 03 n= tm t = 92 = P(1 +i)" = 6,000(1 + 0.3)" 11,300 6,000 5 = 1.883333333 = log 1.883333333 log 1.883333333 log 1.03 0.274927193 0.012837224 = 21.41640537 n_ 21,41640537 =i" 2. = 10.71 years (approximately) @2.8 Nominal Rate and Effective Rate ‘Two annual rates of interest with different conversion periods are said to be equivalen, if they earn the same compound amounts for the same time EXAMPLE: The compound amount of P1,000,00 invested in one year 1) at 12% compounded semi-annually is P1,000.00(1 + .06) = P1.123.60 b) at 12.36% compounded annually is P1,000.00 (1 + .1236) = P1,123.60 Therefore, 12% compounded semi-annually is equivalent to 12.36% compoundeq annually. Nominal rate is the rate wherein the interest is compounded more often than once q year. The effective rate is the rate that, when compounded annually, produces the same Zompound amount each year as the nominal rate (j) compounded (m) times a year. In the above example, 12% is a nominal rate while 12.36 is an effective rate ) Let us derive the effective rate formula. Let: _u, be the effective rate P, the principal invested at two investment rates The compound amount of P at the effective rate u at the end of one year Is: FORMULA F, = P(1+ uy” in one year, at the nominal rate j compounded m times i Since the two compounded amounts are equal (F, = F,), then by substitution. The compound amount of a year is: ws Pig P(1 +u) p(i++) Dividing both sides by P,Solving for u, we have; oi (1+4) =i Equation 2.8.1 If the nominal rate j is compounded annually, then, u =j. EXAMPLES: |. Find the effective rate equivalent to 15% compounded quarterly. Given: j 15 m=4 Find: 2 iy Solution: yw = (1+) 4 = (I+ By" = (1+ .0375)4 1 = 1.158650415 ~ | = .158650415 = 15.8% Thus, investing at 15.87% compounded annually is equivalent to investing 15% compounded quarterly. - What nominal rate compounded semi-annually is equivalent to 7% effective rate? Given) ou = 07 m=2 Finds j i Solution. ( ies Substituting m and u, we have: iy (1+4) = 1+.07 d 1 1+3 = (1+.07)7 145 = 1.034408 4 1.034408 - 1 j= 2(.034408) j = .0688161 j= 6.88% The value of (1.07)'* can be obtained by a scientific calculator.3. If P1,000.00 is invested, what rate compounded quarterly is equivalent to Igy, compounded semi-annually? Solution Investing P1,000.00 at 18% (m= 2) in one year will yicld the amount of: i F, = 1,000(1 +.09) 1 Investing of P1,000.00 at the rate j compounded quarterly in one year wit ‘ yield the amount of ‘ , = 1,000( 1+ 4) For the two rates to be equivalent, a principal must earn the same amount jn one year. Then, F, is By substitution, 1,000{1+ 5} = 1,000(1 + 097 i\' 2 (14 4 = (1+ .09/ ey = [40.0974 14 J = +009? 4 . i = 1.044030651 -1 7 = .044030651 j= 4(.044030651) j = .1761 j = 1761% Thus investing at 17.61% compounded quarterly is equivalent to investing at 18% compounded. semi-annually.2.9 Comparison of Two Rates Comparing two compound interest is generally import interest rates al any given period amount of 1 10 determine the On the part of the investor, he prefers a higher equivalent effective rate. Thus, knowing the effective rates of different compound interests would help one decide where he should invest his money This is also true to a debtor or lender since he will know how favorable ‘one compound interest is to another when confronted by several loan options. EXAMPLES 1. Which is better, to invest money at 8% compounded monthly or at 8% compounded semi-annually? Solution: The effective rate equivalent to 8% (m = 1 2)is: u, = (1+ 00666)" ~ 1 1.082913444 ~ | = 0,0082913444 The effective rate equivalent to 8% (m = 2) is: u, = (1 + .04y 1.0816 —1 0.0816 = 8.16% From the computation above, u, is greater than u, then it is better to invest at 8% compounded monthly than to invest at 8% compounded semi-annually. 2.10 Equation of Values The values of financial obligations maturing on different dates can be compared on one focal point or comparison date (common date) or CD. Thus, to compare these various obligations maturing on different dates, one can set up an equation. From a focal point or comparison date, the sum of one set of obligations is equal to the sum of the values of another set of obligations. This is called equation of values. Equation of value is a mathematical statement which shows that the two sets of values ‘onacommon point are equal. The values of the obligations or payments on a common point are obtained by either discounting or accumulating at compound interest. ‘An equation of value is set up to find the size of the payment(s) which could replace a set of obligations. ©‘eful; hence, it is advisable to make in solving an equation oy A time diagram is vers value. Itaids in visuali che problem Steps in setting-up an equation of value: Make a time diagram writing all the obligations (debts) above the line and th, a) payments below the line b) Choose a focal or comparison date (CD) at any point in time. It is advisable y, use a date on which an unknown payment occurs to simplify the computation, ‘ommon date by either discounting or accumulating ©) Bring all the values to t then set up an equation of value, This can be written as. Sum of the payments = Sum of the debts or obligations EXAMPLES. 1. Olive owes P5,000.00 due in 3 years, and P8,000.00 due in 7 years. She is alloweg to settle these obligations by a single payment on the 6" year. Find how much she has to pay on the 6" year if money is worth 14% compounded semi-annually. Solution: Let x = the single payment made on the 6" year Step I. Make a time diagram. Write down all the debts above the line and the payments below the line. Rate (14%, m = 2) Debts 100.00 CD P8,000.00 Years 1 2 3 4 5 6 7 8 ments, Step 2. Choose a comparison date (usually the payment date, to simplify computation). Hence, the 6" year is used as comparison date (CD). Oing or discounting. accumulat Step 3. Bring all vatues to the comparison date by e Write down the equation of value, which can be briefly stated as FORMULA All payments = All debts Debts Accumulated PS,000.00 for 3 years P,000.00 (1 + .07)° Discount P8,000 for 1 year: P8,000(1, + .07)? Payments X remains the same: x (1 + .07)° = x Therefore the equation of value is: = 5,000(1 + .07)* + 8,000(1 + .07)? 000(1.500730352) + 8,000(.873438728) 7,7053.651759 + 6,987,509826 = P14,491.16 Thus payment of P14,491.16 on the 6" year will equitably replace the two x x x x debts. Lhen owes P4,500.00 due in 2 years, and P6,000.00 due in 5 years. On the first year she agrees to pay P3,000.00 and another payment of the 4" year. How much is the payment of the 4" year if money is worth 16% compounded quarterly? Solution: Let x be the payment on the 4" year. Choose 4 years as CD. Rate: (16%, m= 4) P4,500 CD P§, {90 s 6 7 8 Years Payments P3,000\ DebtsPayments Bring the values to CD. Debts Accumulated P4,500.00 for 2 years: P4,500(1 + .04)* Discount P6,000.00 for | year: P6,000.0(1 + .04)* Payments Accumulate P3,000.00 for 3 years: P3,000.00(1 + .04)'* x remains the same: x (1 + .04)’ =x The equation of value is 3,000(1 + .04)!? + x = 4,500(1 + .04)* + 6,000(1 + .04)* 3,000(1.601032219) + x = 4,500(1.36856905) + 6,000(.854804191) P4,803.096656 + x = 6,158.560725 + 5.128.825146 x = P11,287.38587 ~ P4,803.096656 x = P6,484.29 What two equal payments at the end of 2 years and 5 years will equitably replace the following interest-bearing debts if money is worth 8% effective rate? ; a) P4,000.00 due in 3 years with accumulated interest from today at 10% compounded quarterly? b) 3,000.00 due in 7 years with accumulated interest from today at 9% compounded semi-annually? Solution. Let x be the equal payment on the 2" and 5 years. If a debt bears interest, compute first for the maturity on the due date. The maturity value of the first debt is; = P4,000.00(1.344888824) P4,000.00(1 + .025)!? P5,379.5553 "The maturity value of the second debt is: P3,000.00(1 + .045)"* = P3,000,00(1.851944922) 5, si Choose § years as CD Debts S\N Rate: 8%, m= 1 CL PSE 8 Payments NE Bring the values to CD using: Debis Accumulate P5,379.5553 for 2 years PS5,379.5553(1 + .08)? Discount P5,555.8348 for 2 years PS,555.8348(1 + .08)? Payments Accumulate x on th 2” year for 3 year: x(1 + .08) x on the 5® year remains the same: x (1 + .08)°=x The equation value is: 5,379.5553(1 + .08)2 + 5.555.8348(1 + .08)? x+(1+.08) x = X + 1.259712x = 5.379.5553(1.1664) + 5,555.8348(.8573388) 2.259712x = 6.274.713302 + 4,763.23274 2.259712x = 11,037.94604 x = P4,884,669393 x = P4,884.67 ©2.11 Varying interest There are times that the interest rates change during the term of the investment. In thi “ase, it 1s better to obtain first the previous rate before applying the new rate EXAMPLES. 1. Find the amount in 16 years if P5,000.00 is invested at 18% compounded semi. annually in the first 6 years, 15 % compounded semi-annually in the next 4 yeary and 18% compounded quarterly in the last 6 years, Years 18%, m= 2 @ 5,000.00 12 periods 6 P5,000.00( 1.09)? 15%, m=2 8 periods 10 P5,000(1.09)1.075)* 18%, m=4 24 periods 16 P5,000(1.09)'°(1.075)'(1.045)*4 The principal of PS,000.00 at an interest rate of 18% (m = 2) on the 6th year amount to: P5,000(1.09)'!? = PS,000(1.09)'? Accumulate this amount at 15% (m= 2) in 4 years: P5,000(1.09)%(1.075)*= amount at the end of 10 years The final amount on the 16th year is therefore obtained by accumulating the above amount at 18% (m = 4). F = 5,000(1.09)'(1.07)8(1.045)* * 5,000(2.812664782)( 1.783477826)(2.876013834) 72,135.102. P2,000.00 is invested for 10 years in a savings bank that gives 9% interest gompoundled quarterly inthe first 6 years and 10% compounded quarterly in the last 4 years. What is the amount at the end of 10 years? © Year P2,000 9%, m= 4 24 periods 6 Years P2,000(1.0225)* 10%, m=4 16 periods 10 10 Years P2,000(1.0225)"(1.025)'* The final amount on the 10th year is therefore obtained by accumulating the P2,000.00 as follows: F= 2,000(1.0225)*(1.025)'* '2,000(1.705766576)(1.484505621) 5,064.44 2.12 Contiuous Compounding Interest may also be compounded very frequently; weekly, daily or hourly. What happens when interest is converted very frequently, or the frequency of conversion becomes infinite? As frequency of conversion (m) increases, the compounded amount increases marginally. Frequent compounding thus will increase the interest, but only slightly. For this reason, depositors need not be attracted to banks advertising interest compounded daily unless they have considered other factors. Interest compounded very frequently is referred to as converted continuously. Atthe nominal rate j compounded continuously, the amount of a principal P invested for t years is: F=Pelt Equation 2.12.1 Solving for P, the present value of F due at the end of t years at the nominal rate j compounded continuously is: F _ Pel ef =e FE Pouor, P=Fet Equation 2.12.2 The hase ¢ is a constant whose value is approximately equal to 2.71828. EXAMPLES: 1. Find the amount of P3,000.00 at the end of wo years if the interest rate is 9% compounded: ©) monthly a) semi-annually d) continuously / b) quarterly Solution The amount at the end of 2 years at: is F = P3,000(1.045)‘ = P3,577.56 b) 9%, m= 4 is F = P3,000(1.0225)" = P3,584.49 ¢) 9%, m= 12 is F = P3,000(1.0075)"* = P3,589.24 d) 9% continuously is .09(2) a) 9%,m= = P3,000c% P3,000¢'* = P3,591.65 F 2. Find the present value of P8,000.00 due in 5 years at 8% converted continuously. Solution: P = Few = P8,000(2.71828) 0% P8,000(.0670320226) P5S,362.56 ae Inpractice, effective and nominal rates are used freq uently. Continuous compoundin, is seldom used. It is usually used as an approximation to interest converted very frequent! such as daily and weekly. =Exercise 2.1 COMPOUND INTEREST Name ————— — — = Score Course/Year—— —__ Time __ Date ——_— 1. Find the compound amou: i a 7 a! ate of 12% compounded. tt 44 interest if P12,000.00 is invested for 3 years at the # a. annually b. semi-annually c. quarterly 2. Find the compound amount and interest if P25,000.00 is invested for | year at the rate of 11.5% compounded: a. annually b. semi-annually©. quarterly 4. monthly 3. Find the compound amount if P15,000.00 is invested for 1 compounded: a. annually b. semi-annually ©. quarterly - ee 2. year at the rate of 9°%Exercise 2.2 COMPOUND AMOUNT AND COMPOUND INTEREST FORMULA Nani a Score —____— Course/Year a I a Dine a ods at the 1. Find the interest rate for each period and the total number of conversion periods at end of the indicated time, State also the conversion weed coy ee a, 8 years at 9% compounded semi-annually b. 12 years and 6 months at 10 % compounded monthly 10 years and 9 months at 10, 5% compounded quarterly 4. From April 1, 2012 to January 1, 2013 at 12% compounded quarterly e. From June 1, 2012 to June 1, 2013 at 14% compounded annually2. Find the compound amount and interest a. if P8,900.00 is invested at 13% compounded quarterly for 10 years b. if P17,800.00 is invested at 11.25% compounded monthly for 5 years ¢. if P27,600.00 is invested at 15% compounded semi-annually for 6 % years i | | | | | | | | ! | \ | | | | | | | | | | | | | | | | | 3. Find the compound interest due in 8 years if P28,200.00 is invested at 10% compounded quarterly.invested }0%% OF 4. Fina the compound interest in 9 years and 5 months if P17,920.00 is invest compounded monthly, 5, Find the accumulated value of P12,000,00 at the end of 5 years and 5 months at 8% compounded semi-annually. 6. Accumulate P8,000.00 for 5 years and 9 months at 10% compounded quarterly. 7. Accumulate P18,000.00 for 5% years at 15% compounded semi-annually.8. IFP25,000. 00 is dey vee 1S Ceposited at 12% for 4 year and6 amount if the interest rate is cony. senlantealy? eal ete ympoing erted semi-annually? monthly? quarterly? 9. On January 4, 2009, Lhen borrowed P: and the interest at 12% compounded se she repay? 24,000.00 and promised to pay the principa, mi-annually on July 4, 2014. How much wil] 10. Alex deposited P23,000.00 in a savings bank that pay interest at 814 % compounded semi-annually. How much money will he have after 5 years? 11. Rommel borrows P20,700,00 and promised to pay the principal and interest at 12.5% Compounded quarterly. How much will he pay after 3 years and 9 months? 12. Find the accumulated value of P20,500.00 at the end of 10 years and 7 months at 12% converted monthly,Exercise 2.3 PRESENT VALUE AND COMPOUND INTEREST Name as SUIS -—- course/Year G9 + Time __ Dito Find the present uarterly “alte of P30,700.00 due in 6 years if money is worth 12% compounded 2. ia 00 is invested in 4% years at 12% compounded monthly, find the present 3. For 5 years at 8% compounded annually, discount P28,000.00. 4, Discount P16,800.00 for 5 years and 6 months at 10% compounded semi-annually. How much must be invested today in a Savings account to realize P32,000.00 in 6 years if money earns at the rate of 8% compounded quarterly?