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Financial Math Module ODL

This document defines several financial terms and investment vehicles. It discusses return on investment (ROI), stocks, bonds, mutual funds, real estate, and interest. It provides examples of simple and compound interest calculations. It also defines amortization, mortgages, and collateral. Mortgages are loans secured by collateral, typically real estate. The document gives an example of calculating the mortgage amount based on a house price and 20% down payment.

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Zeniah Arizo
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96 views

Financial Math Module ODL

This document defines several financial terms and investment vehicles. It discusses return on investment (ROI), stocks, bonds, mutual funds, real estate, and interest. It provides examples of simple and compound interest calculations. It also defines amortization, mortgages, and collateral. Mortgages are loans secured by collateral, typically real estate. The document gives an example of calculating the mortgage amount based on a house price and 20% down payment.

Uploaded by

Zeniah Arizo
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Definition of Terms:

What is return on investment (ROI)?


ROI is the rate of revenues received for every dollar on invested in an item or activity.
What are stocks?
Stock is an instrument that signifies ownership in a corporation and represents claim on a share of a corporation’s
assets and profits. Stocks are typically riskier and long-term investments.

What are bonds?


Bonds are interest-bearing certificates used as a way for government or business to raise money. The bondholder
lends money to the bond issuer for a set amount of time and interest. When the bonds are “sold” back to the issuer,
the interest earned is given to the bondholder.
Bonds are typically low-risk and good for short-term investments.
• Types of bonds:
1. Corporate Bonds
 State law requires corporations pay bond payments on time, a given priority over other
financial obligations
2. Government bonds
 Very safe, high quality
3. Municipal bonds
 Tax-free on interest for federal returns!!
 Lower interest rates, but good overall returns due to tax-exempt status

What are mutual funds?


Mutual funds are open-ended investments that are professionally managed and consist of a variety of investment
instruments including stocks, bonds, options, commodities, and money market securities. Diversification provides
greater safety and reduces risk. Mutual funds are long-term investments.
What is real estate?
Real estate is a piece of land and any buildings or structures on it. Real estate is a long-term investment.
Annual Percentage Rate (APR): The cost of credit on a yearly basis as a percentage rate.

Collateral- A form of security to help guarantee that a creditor will be repaid.


Credit - A legal agreement to receive cash, goods, or services now and pay for them in the future.

The 3 C’s of Credit:


1. Capacity
2. Capital
3. Character

I. SIMPLE AND COMPOUND INTEREST

Interest is the “rent” that a borrower pays a lender to use the lender’s money.
Simple interest is a type of interest that is paid only on the original amount deposit
and not on past interest paid.
Simple Interest
I = Prt ; A = P+I = P(1 + rt)
where
• I = amount of interest
• P = present value (called "Principal")
• r = interest rate
• t = time (in years)
• A = Accumulated or future value

Example:
1) P 3000 earning Simple Interest at 6% per year for 2 years
Ans. P 3360
2) How much would you need to have on an account to earn P 100 simple interest in four months,
assuming that the simple interest rate is 6.4 %?
Ans. P 4687.5

Prof Ronald F. Judan ME-ECE/MAED-MATH Page 1


Compounding interest is "interest on interest."

It is a method of calculating interest where the interest is added to the original principal. This new
value is now our principal for the next time period. In this method the interest earned in past terms can earn
interest in future terms.

F=P∗(1+i )n

where F=isthe final amount including the principal


Accumulated amount
P = principal
n=isthe number of years invested
Compounding’s per period
i=is therate of interest per year

Example 1: Sometimes Compound Interest is paid instead of Simple Interest. Each year the interest is worked out
using the Principal + Interest, where in this case the Principal is the $200 and in the first year the Interest is the
$8.00 at the rate of 4% per annum. What is the compound interest of example 3 after 3 years?
3
F=200 ( 1+ 0.04 ) =$ 224.97

compound interest after 3 years=$ 224.97−$ 200=$ 24.97

Example 2. Mr. Garcia borrowed P1,000,000 for the expansion of his business. The effective rate of interest is 7%.
F=1,000,000 ( 1+ 0.07 )1=P 1,070,000

The loan is to be repaid in full after one year. How much is to be paid after one year?
An amount of P1,070,000 must be paid after one year.

Example 3. A loan of P200,000 is to be repaid in full after 3 years. If the interest rate is 8% per annum. How much
should be paid after 3 years?
Answer: F = P(1 + i)n = 200, 000 (1 + 0.08)3 = 251, 942.40

I. AMMORTIZATION AND MORTGAGE

A. Definition of Terms

Amortization Method - method of paying a loan (principal and interest) on installment basis, usually of equal
amounts at regular intervals

Mortgage - a loan, secured by collateral, that the borrower is obliged to pay at specified terms.

Chattel Mortgage - a mortgage on a movable property


Collateral - assets used to secure the loan. It may be a real-estate or other investments
Outstanding Balance - any remaining debt at a specified time

B. Discuss the basics of a mortgage loan to the students.

A mortgage is a business loan or a consumer loan that is secured with collateral.

Collaterals are assets that can secure a loan. If a borrower cannot pay the loan, the lender has a right to the
collateral. The most common collaterals are real estate property. For business loans, equipment, furniture and
vehicles may also be used as collaterals. Usually, the loan is secured by the property bought. For example, if a
house and lot is purchased, the purchased house and lot will be used as a mortgaged property or a collateral. During
the term of the loan, the mortgagor, the borrower in a mortgage, still has the right to possess and use the

Prof Ronald F. Judan ME-ECE/MAED-MATH Page 2


mortgaged property. In the event that the mortgagor does not make regular payments on the mortgage, the
mortgagee or the lender in a mortgage can repossess the mortgaged property. The most common type of mortgage
is the fixed-rate mortgage wherein the interest remains constant throughout the term of the loan.

C. Solve problems involving business or consumer loans

EXAMPLE 1. If a house is sold for P3,000,000 and the bank requires 20% down payment, find the amount of the
mortgage.

Solution:
Down payment= (down payment rate)(cash price)
= 0.20 (3,000,000)
= 600,000

Amount of Loan = (cash price) – (down payment)


= 3,000,000-600,000
= 2,400,000

The mortgage amount is P2,400,000.

Alternate Solution:

Mortgaged amount = % of financed amount x value of the property

= (0.80)(3,000,000) = P 2,400,000

Prof Ronald F. Judan ME-ECE/MAED-MATH Page 3

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