PAMANTASAN NG CABUYAO

COLLEGE OF EDUCATION, ARTS AND SCIENCES

COURSE CODE: MAT101

COURSE TITLE: MATHEMATICS IN THE MODERN WORLD

COURSE A. Knowledge
INTENDED 1. Discuss and argue about the nature of mathematics, what it is, how its
LEARNING expressed, represented, and used.
OUTCOMES: 2. Use different types of reasoning to justify statements and arguments
made about mathematics and mathematical concepts.
3. Discuss the language and symbols of mathematics
B. Skills
4. Use a variety of statistical tools to process and manage numerical data;
5. Analyze codes and coding schemes used for identification, privacy, and
security purpose;
6. Use mathematics in other areas such as finance, voting, health and
medicine, business, environment, arts and design, and recreation.
C. Values
7. Appreciate the nature and uses of mathematics in everyday life.
8. Affirm honesty and integrity in the application of mathematics to
various human endeavours.

LEARNING
MATERIAL FOR
11
WEEK NUMBER:

I. TITLE: Module 7: Mathematics of Finance

Section 1: Simple Interest, Compound Interest, and Annuities
Section 2: Practical Applications of Interest Theory
II. OBJECTIVES: After this lesson, you are expected to:

1. calculate the accumulated interest

2. calculate the principal or the maturity value in problems involving
simple and compound interest
3. calculate the finance charges on credit card bills
4. calculate the monthly payments on consumer loans
5. calculate the stockholder’s dividend and yield, interest on bonds, and
the net asset value in a mutual fund
III. There are several lending companies operating in the Philippines. Many of them
INTRODUCTION: provide easy online applications with no collateral needed to avail for their loan
products. Bank, government institutions, cooperatives, and even private lenders
earn money from borrowers in the form of interest.
IV. CONTENTS:

SECTION 1: SIMPLE INTEREST, COMPOUND INTEREST, AND ANNUITIES

When a person borrows money from a lending company or a bank, he or she usually pays a fixed
rate of interest on the principal for using that money. The amount paid by the borrower is called interest
while the amount of money that I loaned is called the principal or the present value.

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COLLEGE OF EDUCATION, ARTS AND SCIENCES

SIMPLE INTEREST

The simple interest is given by

I = Prt

Where:
P – is the principal
r – is the interest rate per year
t – is the number of years.

If the number of days used is 360 days in a year, the interest is called ordinary simple interest. If it
uses 365 days in a year or 366 days for a leap year then the interest is called exact simple interest

The future value or maturity value is the total amount paid including the interest. This amount is
obtained by the formula

F=P+I
= P + Prt
= P( 1 + rt)

Example 1. An employee borrows P60,000 for 7 months at an interest rate of 12% per year. Find the
interest earned and the total amount he has to pay.

Solution:

The interest earned is

I = Prt =
( 60 , 000 )( 0. 12 ) ( )
7
12
=P 4 ,200

The total amount to be paid is

F = P(1 + rt) =
(
60 , 000 1+ ( 0 . 12 ) ( 127 ))=P 64 ,200
Example 2. The ordinary simple interest charged after 130 days on a loan of P10,200 is P575. Find the
interest rate.

Solution:

Use 360 days per year in computing for the ordinary simple interest. Thus,

I = Prt

575=10 , 200 ( r ) (130

360 )
r=. 156≈15 .6 %
COMPOUND INTEREST

The compound interest is computed based on the principal amount and the total accumulated interest
earned. The total accumulated amount on the principal P for n periods at an interest rate of i per period is
given by

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COLLEGE OF EDUCATION, ARTS AND SCIENCES

F = P(1 + i)n

Where:

j
n = mt and i = m

The interest rate j is called the nominal rate and m is the number of compounding periods in a year. For
example, if the interest rate is 6% compounded quarterly for 2 years, then the total number of periods is n
j 0 . 06
i= = =0 . 015≈1. 5 %
= mt = (4)(2) = 8 periods and the interest rate per quarter is m 4

Example 3. A mother invested P100,000in a mutual fund on the date her first son was born. If the money is
worth 10% compounded semi-annually, how much will the son receive on his 18 th birthday?

Solution:

j 0.1
i= = =0. 05
The total number of periods, n=mt=( 2 ) ( 18 )=36 . The interest rate per period is m 2 .
Hence, the total amount the son should receive is

F=P ( 1+i )n
=( 100,000 ) ( 1+0.05 )36
¿ P579,182
Example 4. What is the amount that should be deposited today at 6.5% compounded quarterly in order to
withdraw P200,000 and leave nothing in the fund at the end of 5 years?

Solution:

( )
mt
j
F=P 1+
m
F
P=
1+( )
j mt
m

( )
4 ( 5)
0.065
200 ,000=P 1+
4
P=P 144 ,883 . 46
Example 5. How long will it take to triple the sum of money invested at 12% compounded monthly?

Solution:

Given the F=3 P , then

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COLLEGE OF EDUCATION, ARTS AND SCIENCES

( )
n
0 .12
F=3 P=P 1+
12
n
3= (1 .01 )
ln ( 3 ) ==n ln ( 1 . 01 )
ln ( 3 )
n= =110. 41
ln ( 1. 01 )

Thus, the number of year is

n 110 . 41
t= = =9 .2 yrs
m 12

Effectively interest rate, ER, is equivalent to interest rate compounded annually. It can be used to compare
two rates with different compounding periods.

( )
m
j
ER= 1+ −1
m
Example 6. If one bank advertises its rates as 6.2% compounded monthly, and another bank advertises its
rate as 6.3% compounded annually, which rate is better for an investment?

Solution:

For the bank 1, the effective rate is

( )
12
0.062
ER= 1+ −1=0 .064≈6. 4 %
12
For the bank 2, the interest rate is 6.3%

Hence, bank 1 has a better rate. A higher rate is good for financial investment.

ANNUITY: SINKING FUND and AMORTIZATION

An annuity is a series of equal payments made at regular time intervals. It is also known as a sinking
fund which is used for future financial obligations such as educational expenses for children, replacement
of machines or equipment, and amortization of loan or assets.

An ordinary annuity is one whose payments are made at the end of each interest period. The
present value P and the future value F of an ordinary annuity A are given by

A
P= =( 1−( 1+ i )−n )
i
A
F= ( ( 1+i )n −1 )
i

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COLLEGE OF EDUCATION, ARTS AND SCIENCES

Where A is the payment made at the end of each successive period, i is the interest rate per period,
and n is the total number of periods.

Example 7. A house and lot amounting to P3.5M is to be amortized by monthly payments over 5 years at
an annual interest rate of 10%. What is the monthly payment?

Solution:

0 .1
i= =0 . 008333
Here, P = 3,500,000, 12 , and n=( 12 )( 5 ) =60
Using the formula for ordinary annuity, then

( ( )
)
−60
0.1
1− 1+
12
3 ,500 , 000=A =A ( 47 . 0654 )
0.1
12
3 ,500 , 000
A= =P 74 ,364 . 61
47 . 0654
Example 8. An equipment costs P200,000 today and has a resale value of P50,000 after 10 years. The
inflation rate is 5% per year. The annual interest rate earned on investment is 6%. How much money needs
to be set aside each year in order to replace the said equipment with an identical model 10 years from
now?

Solution:

Due to inflation, the value of the equipment 10 years from now will be

n 10
F1 =P ( 1+i ) =2000 , 000 ( 1+0 . 05 ) =P 325 ,779

The amount to be raised in 10 years will be

F=F−resalevalue=325 ,779−50 , 000=P 275 ,779

The amount that needs to be set aside yearly is computed as follows:

F=A (
( 1+i )n−1
i )
275 ,775= A (
(1+0.06 )10 −1
0. 06 ) =A ( 13. 1808 )
275 ,779
A= =P20 ,923
13 .1808
Test yourself:

Solve the following

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COLLEGE OF EDUCATION, ARTS AND SCIENCES

1. How much will be the future worth of money after 12 months if the sum P35,000 is invested today at a
simple interest rate of 3% per month?
2. A man expects to receive P125,000 in eight years. How much is that money worth now considering an
interest rate of 12% compounded quarterly?
3. How long will it take the money to triple itself if invested at 9.5% compounded quarterly?

SECTION 2: PRACTICAL APPLICATIONS OF INTEREST THEORY

There are numerous practical applications of interest rates in people’s daily activities, whether in business
transactions or in personal markers. Researchers are continually done to develop economically efficient
guidelines that seek protection and benefit to the general public.

FINANCE CHARGES on CREDIT CARDS

A finance charge is the amount of interest paid by a customer who acquires products or services using a
credit card. It is computed using the simple interest formula and the average daily balance method.

The Average Daily Balance (ADB) is defined as

TotalPurchasedamountsduringthebillingMonth
ADB=
ActualNumberofDay sintheBillingMonth
On the other hand, the Finance Charge on a Month (FC) is given by

FC=( ADB ) (interest rate)

Example 1. On November 10, a customer’s credit card had a balance of P12,300. Purchases of P2,450 and
P5,600 were made on November 13 and November 23, respectively. A payment of P10,000 was made on
December 5. If the interest rate on the average daily balance is 3.5% per month, find the finance charge on
the December 10 bill.

Solution:

You can compute for the total unpaid balance accumulated for the whole month as follows:

Period Purchases or Unpaid Balance Number of days Total Unpaid

Payments per day Balance
Nov 10 – 13 12,300 3 36,900
Nov 13 – 23 2,450 14,750 10 147,500
Nov 23 – Dec 5 5,600 20,350 12 244,200
Dec 5 – Dec 10 -10,000 10,350 5 51,750
Total 30 480,350

The average daily balance is

480 ,350
ADB= =P 16 , 011. 67
30

Thus, the finance charge on ADB for the month of December is

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COLLEGE OF EDUCATION, ARTS AND SCIENCES

FC=( 16 ,011 . 67 ) ( 0. 035 ) =P560 . 41

STOCKS, BONDS, and MUTUAL FUNDS

Stocks and bonds are two financial instruments which have different intrinsic values. A corporation
sell bonds to the public to increase its debt capital in exchange for interest paid periodically and the return
of the amount of the bond upon maturity. Stocks are sold to increase a corporation’s equity capital.

Shares of stock indicate the fractional ownership of a corporation that is proportional to the total
number of shares from all investors. The investors of these stocks are called stockholders of the
corporation. The profits shared by the stockholders are called dividends which are usually expressed as
per-share amount.

The dividend yield is computed as the annual dividend divided by the stock price using the interest
formula I = Prt with t = 1 year.

Corporation sell bonds to borrow money from investors called bondholders. Usually, government
agencies issue bonds in the form of treasury bills. The amount paid to the bond is called the face value or
the principal value. The corporation has to pay the said amount on a particular agreed-upon date called the
maturity date, at a specified rate of interest, called coupon. To determine the face value PV and the discount
D of a treasury bill, the formulas are as follows:

PV =PP 1+r ( d
360 )
D=PV −PP

Where PP = purchase price, PV = principal or face value, r = coupon, and d = number of days.

Example 2. Compute the dividends a shareholder should receive if he has 80 shares and a stock is
equivalent to P75 per share.

Solution:

The shareholder should receive

Total Dividends =
( 80 shares ) ( )
P 75
share
=P 6 , 000

Example 3. What is the dividend yield for a stock that pays an annual dividend of P150 per share and trades
at P3,000?

Solution:

I = Pr
I 150
r= = =0 .05≈5 %
P 3000

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Example 3. A treasury bond with a P200,000 principal value has a 4% coupon and a 100 – day maturity
period. Compute for the bond discount.

Solution:

(
PV =PP 1+r
d
360 )
(
200 , 000=PP 1+0 . 04
360 ))
( 100
PP=197 , 802
D=PV −PP=P 2 , 198
Hence, the bond discount is P2,198
MUTUAL FUNDS

A mutual fund is an investment trust company whose assets are based purely on stocks and bonds.
This type of company is involved only in purchasing of stocks and bonds. All investments in the mutual
fund is called the fund’s portfolio. The value of a share in a mutual fund is called the net asset value (NAV)
which is obtained by

Assets−Liabilities
NAV =
Outs tan dingshares

Example 5. An investment trust company has P500M worth of stocks, P25M worth of bonds, and P10M in
cash. The fund’s total liabilities amount to P5M. If there are 8 million outstanding shares, calculate the net
asset value of the fund.

Solution:

Total assets = 500+25+10=535 M

P 535 M−P 5 M
NAV = =P 66 .25
P8M

Example 6. If you plan to invest P150,000 in the mutual fund in Example 5, how many shares should your
receive?

Solution:

150 , 000
=2 , 264
No. of share = 66 .25

Hence, you should receive 2, 264 share of the mutual fund.

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COLLEGE OF EDUCATION, ARTS AND SCIENCES

Test yourself:

1. On October 12, a customer’s credit card had a balance of P18,000. Purchases of P5,000 and P15,000
were made on October 18 and October 23, respectively. A payment of P20,000 was made on November
5. If the interest rate on the ADB is 3.5% per month, find the finance charge on the November 12 bill.

V. REFERENCES: Aufmann, Richard N., Joanne Lockwood, Richard D. Nation, and Daniel K.
Clegg. Mathematical Excursions. 3rd ed., Brookes/Cole, Cengage Learning,
2013.
Lipschuts, Seynour, John Schiller, and R. Alu Srinivasan. Beginning Finite
Mathemaics, Shaum’s Outline Series. McGraw-Hill, 2005
“Bonds vs stocks” Youtube, uploaded by Khan Academy, 2 Feb 2009,
https://www.youtube.com/watch?v=rsmd3e4aYU.

VI. ASSESSMENT
TASK:

CHALLENGE YOURSELF

Answer the following.

1. You have deposited P5,000 in a Savings Bank on January 1, 2016 with an interest rate of 3% and have a
withdrawn it on January 1, 2017. Calculate the simple interest.
2. A loan of P3,000 bears an interest rate of 2% per month. If the loan shall be paid in 4 months, how
much is the interest?
3. Your savings deposit of P7,000 earns a simple interest of 5%. How much is the interest for 9 months?
4. Calculate the simple interest due on a 72-day loan of P3,000 if the annual interest rate is 4%.
5. Pete paid P1,400 interest for his loan from a cooperative that charges simple interest rate of 3.5%
payable in 2 years. How much loan did he apply?
6. The interest charged on a 10-month loan of P6,000 is P200. Find the simple interest rate.
7. A cooperative released a P9,000-emergency loan to Ana with a simple interest of 4.5%. If she intends to
pay it in 2 years, what amount will she pay back to the cooperative?
8. What is the compound amount and interest if P6,000 is invested at 2% compounded monthly for 2
years?
9. How much interest is earned in 4 years on P12,000 deposited in an account paying 4% compounded
semi-annually?
10. How much money should you invest at an interest rate of 6% compounded monthly, to have P400,000
in 5 years?

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VI. Assignment task

Watch the video-clip and complete the statements that follow.
Using the Scientific Method in everyday Life
https://www.youtube.com/watch?v=ZyJjisgjoeg

1. Three things that I significantly learned from the video clip.

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
2. Three things that are still unclear to me..
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

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COLLEGE OF EDUCATION, ARTS AND SCIENCES

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