MODULE WEEK NO.

Pamantasan ng Lungsod ng Maynila

Gen. Luna corner Muralla St., Intramuros, Manila
Philippines 1002
(+63 2) 8 643-2500

College/Department
COURSE CODE: Mathematics of Investment
Semester of A.Y. 2020-2021

Introduction

This module emphasizes the need for open communication and clarity between the students and
the subject instructor so both can lay out their expectations, clarify areas that needs to be addressed
right from the start. As a conducive environment is brought about, the module also introduces the
students to the nature and importance of the subject, as well as orient them on the elementary topics
of the subject.
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Rationale

The purpose of this module is to prepare the students in understanding the simplest to complex
mathematical procedures, including its business sense.

Intended Learning Outcomes

A. Explain the Basic Concept of Simple Interest

B. Differentiate Actual and Approximate Time and Exact and Ordinary interest
C. Explain the method of Banker’s rule
D. Use the Simple Interest formula to calculate Interest, Interest Rate, Time and Dates
E. Use the Simple Interest and Simple Discount formula to calculate the Present and Future
values of Investments and Loans problems
F. Identify the details of Promissory Note
Activity

1. Discussion of course guide and course syllabus.

2. Getting to know each other. Brief introduction of the professor and students, expectations
with the course and to the professor.
3. Presentation of Module Week 1 and Chapter End Activities.

Discussion

Engage:

1. As a student, why do you need to know interest?

2. Why is it important to know the terms and conditions of the lender and lendee?

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Explore:

Question:

Examine the details of the promissory note. Given the sample above, is it possible to compute the
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interest? If yes? If not? What are the missing components of the note?

Explain:

1.1 The Basic Concept of Simple Interest

Zorilla et. al (2015). Interest refers to the amount paid for the use of money. The individual or entity
that lends money is known as the lender and the one who borrows money is referred to as the lendee.

The amount of interest is denoted as I and it is dependent on three factors:

1. Principal (P) – refers to the sum of money invested, deposited or borrowed.

2. Rate of interest (r) – refers to the percentage of the principal per year and is generally
express in the terms of percent.
3. Time (t) - refers to the length of time between the date the loan is made and the date the loan
becomes payable to the lender. Time is usually expressed in years. When time is given in
months, then the number of months is divided by 12.

Sirug W. (2014). Simple Interest is calculated only on the original principal amount and is paid at
the end of the loan period.

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Chen J. (2020). Simple Interest is a quick and easy method of calculating the interest charge on a
loan. Simple interest is determined by multiplying the daily interest rate by the principal by the
number of days that elapse between payments.

The following variables will be used in solving simple interest:

𝑰 = 𝑷𝒓𝒕 Equation 1.1

𝑰
𝑷= Equation 1.2
𝒓𝒕
𝑰
𝒓= Equation 1.3
𝑷𝒕
𝑰
𝒕= Equation 1.4
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𝑷𝒓
𝑭=𝑷+𝑰 Equation 1.5
𝑭 = 𝑷 (𝟏 + 𝒓𝒕) Equation 1.6

1.2 Determining the Time Period

A. Actual and Approximate Time

1. Actual time – refers to exact number of days between two days. It is obtained by counting the
number of days of each month within the period of the transaction except the origin date.

Table 1.1
The Number of Days in Each Month
Month No. of Days Month No. of Days
January 31 July 31
February 28 August 31
March 31 September 30
April 30 October 31
May 31 November 30
June 30 December 31

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2. Approximate time – refers to the assumption that each month has 30 days. The number of
days is obtained therefore by counting each day of each month within the period of the
transaction except the origin date.

The loan date is the first day of a loan and due date or maturity date is the last day of the loan.
When these two dates are known, the number of days of the loan can be calculated by using
the days in each month as reflected by Table 1.1
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Example: Determine the actual and approximate time from March 15, 2009 to September 20, 2009.

Solution:
Month Actual Approximate
March 16 15
April 30 30
May 31 30
June 30 30
July 31 30
August 31 30
September 20 20
Total 189 185

Actual time is 189 days while Approximate time is 185 days.

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B. Exact and Ordinary Interest

When the term of the investment is not given in years. The term given is sometimes stated in days or
months.
If the time is given in months, then the number of months is divided by 12. But when the term is
express in days we use exact and ordinary interest.
1. Exact Interest (Ie) – used when interest is computed on the basis of 365 days a year or 366
days in a leap year.
2. Ordinary Interest (Io) – used when interest is computed on the basis of an assumed 30- day
month or 360-day year.
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Example: What amount should be paid on January 15, 2019 for a loan of Php 16,000 made on July
7, 2018 at 8% simple interest?

a. Ordinary interest using actual time

b. Ordinary interest using approximate time
c. Exact interest using actual time
d. Exact interest using approximate time

Given: P = Php 16,000 r = 8% or 0.08

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First we determine the approximate and actual time of the term.

Month Actual Approximate

July 24 23
August 31 30
September 30 30
October 31 30
November 30 30
December 31 30
January 15 15
Total 192 188
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a. Ordinary interest using Actual Time

t = 192 days
F = P (1 + rt)
= 16,000 [ 1 + (0.08) (192/360)]
= 16,000 (1 + 0.04266666667)
= 16, 000 (1.042666667)
= Php 16,682.66667 or Php 16,682.67

b. Ordinary interest using Approximate Time

t = 188 days
F = P (1 + rt)
= 16,000 [ 1 + (0.08) (188/360) ]
= 16,000 (1 + 0.04177777778)
= 16, 000 (1.041777778)
= Php 16,668.44444 or Php 16,668.44

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c. Exact interest using Actual Time

t = 192 days
F = P (1 + rt)
= 16,000 [ 1 + (0.08) (192/365) ]
= 16,000 (1 + 0.042082192)
= 16, 000 (1. 042082192)
= Php 16,673.31507 or Php 16,673.32

d. Exact interest using Approximate Time

t = 188 days
F = P (1 + rt)
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= 16,000 [ 1 + (0.08) (188/365) ]

= 16,000 (1 + 0.04120547945)
= 16, 000 (1. 041205479)
= Php 16,659.28767 or Php 16,659.29

1.3 Computing the Simple Interest

In this section we will used the Equation 1.1 in computing simple interest.

Simple Interest I = Prt

Where:

I = amount of interest paid or received

P = principal amount of the loan or investment

r = annual rate of interest

t = time period (term) of the loan or investment

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Example 1: Donna deposited Php 2,000 in Landbank for 5 years at a simple interest rate of
6%.

Solution: Given: P = Php 2,000 r = 6% or 0.06 t = 5 years

I = Prt
= 2,000 (0.06) (5)
= Php 600
The principal will earn an interest of Php 600.00

Example 2: Esther borrowed Php 5,200 in Landbank charging 12% per annum for a period of
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6 years and 6 months? How much interest will she pay at the end of the term?

Solution: Given: P = Php 5,200 r = 12% or 0.12 t = 6.5 years

I = Prt
= 5,200 (0.12) (6.5)
= Php 4,056
The principal will earn interest of Php 4,056.00

1.4 Computing the Principal Amount

In this section we will used the Equation 1.2 in computing the value of principal amount.

𝑰
Principal Amount 𝑷=
𝒓𝒕

Where:

P = principal amount of the loan or investment

I = amount of interest paid or received

r = annual rate of interest

t = time period (term) of the loan or investment

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Example: Ms. Angel Moratalla paid an interest of Php 2,800 on a loan for 2 years at 9.5%.
How much was the original loan?

Solution: Given: I = Php 2,800 r = 9.5% or 0.095 t = 2 years

𝑰
𝑷=
𝒓𝒕
2,800
=
0.095(2)

= Php 14,736.84

The original amount borrowed was Php 14,736.84

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1.5 Computing the Maturity Value

Zorilla et. al (2015). Accumulated value or future value is the total amount of money at the end of
the period. It is equal to the sum of the principal and the interest earned.

Chen J. (2020) Maturity date is the date on which the principal amount of a loan, note, bond or other
debt instrument becomes due. The maturity date also refers to the termination date (due date) on
which an installment loan must be paid back in full.

In this section we will used the Equation 1.1, Equation 1.5, and Equation 1.6 in computing the future
value.

Future Value 𝑭 = 𝑷 (𝟏 + 𝒓𝒕) or 𝑭 = 𝑷 + 𝑰

Where:

F = maturity value of the loan or investment

P = principal amount of the loan or investment

I = amount of interest paid or received

r = annual rate of interest

t = time period (term) of the loan or investment

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Example: Cha deposited an amount of Php 12,800 in a savings bank that gives 6.5% simple
interest for 8 years. How much would she have in her account at the end of 8 years assuming
that no withdrawals were made?

Solution: Given: P = Php 12,800 r = 6.5% or 0.065 t = 8 years

In this example we will used Equation 1.5 (𝐹 = 𝑃 + 𝐼), hence I is missing in our given so we will
determine first the I using Equation 1.1 (𝐼 = 𝑃𝑟𝑡).

I = Prt
= 12,800 (0.065) (8)
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= Php 6,656

Then we can compute for the F using Equation 1.5

F=P+I
= 12,800 + 6,656
= 19,456

If we use Equation 1.6, then

F = P (1 + rt)
= 12,800 [1 + (0.065) (8)]
= 12,800 (1.52)
= 19,456

Cha will have Php 19,456 at the end of 8 years.

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1.6 Computing the Simple Interest Rate

In this section we will used the Equation 1.3 in computing the value simple interest rate.

𝑰
Interest Rate 𝒓=
𝑷𝒕

Where:
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r = annual rate of interest

I = amount of interest paid or received

P = principal amount of the loan or investment

t = time period (term) of the loan or investment

Example: An interest of Php 11,300 was charged on a loan of Php 22,600 for 5 years and 3
months. What simple annual rate of interest was charged on the loan.

Solution: Given: I = Php 11,300 P = Php 22,600 t = 5 years and 3 months or 5.25 years
𝑰
𝒓=
𝑷𝒕
11,300
=
22,600(5.25)

= 0.0952 or 9.52%

An interest rate of 9.52% was charged on the loan.

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1.7 Computing the Time

In this section we will used the Equation 1.7 in computing the time period in a simple interest rate.

𝑰
Time 𝒕=
𝑷𝒓

Where:

t = time period (term) of the loan or investment

I = amount of interest paid or received

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P = principal amount of the loan or investment

r = annual rate of interest

Example: Leya borrowed Php 5,000 from a bank charging 12% simple interest. If she paid the
amount of interest equivalent to Php 1,200, how long did she use the money?

Solution: Given: P = Php 5,000 I = Php 1,200 r = 12% or 0.12

𝑰
𝒕=
𝑷𝒓
1,200
=
5,000 (0.12)

= 2 years

1.8 Promissory Notes

Barone A. (2020). A promissory note is a financial instrument/legal document that contains a written
promise by one party (the note's issuer or maker) to pay another party (the note's payee) a definite
sum of money, either on demand or at a specified future date.

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A promissory note typically contains the following details:

1. Maker or payer – the person borrowing the money
2. Payee – the person who loaned the money and will receive the payment
3. Issue date – refers to the date on which the note was written or made and the date from
which interest, if any is computed on this date.
4. Maturity date – refers to the date on which the note will end
5. Term – time period or length of the time
6. Face value – the present value of the note
7. Maturity Value – the accumulated value of the note

Kinds of Promissory Notes

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1. Non – interest bearing notes – face value is equal to the maturity value
2. Simple interest bearing note – maturity value is equal to the face value plus the amount
of interest earned.

Example 1: Non- interest bearing note

The above promissory note is considered as 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 advanced. Hence
the maturity value is Php 150,000

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Example 2: Simple Interest bearing note

From the above note, we can say that the maturity date shall be in 200 days January 13, 2009. The
maturity value shall be equal to Php 150,000 plus the amount of interest at 6% per annum.
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Hence,
I = Prt and F=P+I
= (150,000) (.06) (200/360) = 150,000 + 5,000
= 5,000 = Php 155,000

Exercise

Create a promissory note using your own design with the following details below:
A. Payer – Nicki Minaj
B. Payee – Ariana Grande
C. Issue Date – January 20, 2020
D. Maturity Date – July 3, 2020
E. Determine the Term
F. Face Value – Php 50,000
G. Interest – 11%

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Assessment

Elaborate:

I. Identification:

1. __________________ It is a kind of promissory note that the maturity value is equal to the face
value plus the amount of interest earned.

2. __________________ Refers to the date on which the note was written or made and the date from
which interest, if any is computed on this date.

3. __________________ Used when interest is computed on the basis of an assumed 30- day month
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or 360-day year.

4. __________________ Refers to the percentage of the principal per year and is generally express
in the terms of percent.

5. __________________ It is a quick and easy method of calculating the interest charge on a loan.
Simple interest is determined by multiplying the daily interest rate by the principal by the number of
days that elapse between payments.

II. Computations:

1. Determine the exact and ordinary interest on Php 9,250 at 10% from February 14, 2019 to May 14,
2019 of the same year using actual and approximate time.

Solution:

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2. Find the simple interest on Php 20,000 at 6% simple interest for 4 years.

Solution:

3. Find the principal if the simple interest is Php 6,500 with the rate of 9% for 4 years.

Solution:

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4. Find the future value if Sofia have deposited Php 80,000 for 2 years and 9 months at 10% simple
interest

Solution:
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5. Find the rate if the simple interest on Php 5,000 is Php 500 after 9 months.

Solution:

6. Find the time to accumulate an interest of Php 12,000 when Php 35,000 is invested at 12% simple
interest.

Solution:

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Reflection

Evaluate:
In your own opinion which is more ethically acceptable: The use of ordinary interest or exact
interest? Justify your answer.

Resources and Additional Resources

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• Sirug, W. (2014). Mathematics of Investment. Mindshapers Co. Inc.

• Zorilla et al. (2013). Business Mathematics and Mathematics of Investment. Grandbooks
Publishing
• Chen, J. (2020, Apr 14). Simple Interest. Retrieved from
https://www.investopedia.com/terms/s/simple_interest.asp
• Chen, J. (2020, Mar 5). Maturity Date. Retrieved from
https://www.investopedia.com/terms/m/maturitydate.asp
• Kagan, J. (2020, Jun 5). Accumulated Value. Retrieved from
https://www.investopedia.com/terms/a/accumulated-value.asp

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