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Simple & Compounded Interest

business math

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Allan T. Babad
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9 views

Simple & Compounded Interest

business math

Uploaded by

Allan T. Babad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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MATHEMATICS OF FINANCE

INTEREST:
> Is a fraction or percentage being imputed to a sum of
money.

SIMPLE INTEREST:
> Is essentially the interest charged to a borrower or
earned by a lender for the full term of the loan.
• FORMULA:

I=PxRxT
Where:
I = interest
P = Principal
R = Rate
T = time
• TIME CONVERSION:
• > IF THE TIME IS IN TERMS OF:
• MONTHS, DIVIDE BY 12.
• SEMIANNUALLY, DIVIDE BY 2.
• QUARTERLY, DIVIDE BY 4.
• SEMIMONTHLY, DIVIDE BY 24.

• > IF THE TIME IS EXPRESSED IN DAYS:


• EXACT INTEREST: t = number of days/ 365
• ORDINARY INTEREST: t =number of days/ 360
PRINCIPAL : The sum of money that
someone borrows.

RATE : is a percentage of the principal


amount.

TIME: is the agreed date or period when the


loan will be paid in full.
• 1. Given: 3. Given:
• P = P10,000 R = 15% per month
• R= 5 % per month Time = 6 months
• Time = 5 months I = P 4,500
• I=? P=?
• 2. Given: 4. Given:
• I = P 6,000 P = P 30,000.
• P = P 20,000 I = P 9,000.
• R = 8% per year R = ? ( per month)
• T= ? T = 3 months
MATURITY AMOUNT OR FINAL
AMOUNT: ( for simple interest)
Is the amount to be paid to the holder of a
financial obligation at the obligation’s
maturity.
FINAL AMOUNT FORMULA:
F=P+I
or
F = P ( 1 + rt) r = F – P/ Pt
t = F –P/ Pr
1. GIVEN: 2. GIVEN:
P = 100,000 F= P 200,000
R = 8% per annum P = P 100,000
T = 5 years T = 7 years
I=? R=?
F=?
COMPOUND INTEREST:
Is similar to simple interest, only
that the interest charged or
earned is being rolled – up and
reinvested with the principal
amount.

The sum by which the original


principal has increased by the end
of the term of the investment.
The conversion period it can be:
• Quarterly ( 4 periods)

• Semiannually( 2 periods)

• Monthly ( 12 months)
FORMULA:
n
F = P( 1 + i)
Where:
F=Maturity amount
P = Principal amount
i = Interest rate per conversion( expressed as decimal )
i=j/m j : annual rate , m = number of conversion
periods per year
n= number of conversion periods
• Example 1.
Accumulate P 5,000 for 3 years at 10%
compounded quarterly.
Given:
P = P5,000
n=3(4) = 12
i = j/m = 10%/ 4 = .10/4 = 0.025
• Example 2
• Find the amount due at the end of 6 ¾ years
if P 2,000 is invested at 12% compounded
monthly.
• Given:
• i=j /m = .12/ 12 = .01
• P = p2,000
• n=12(6 ¾) =81
• MATURITY AMOUNT in Compound amount
• Formula:
-n
M= F(1+I) or

F
=
n
( 1 + i)

Where:
M = Maturity amount
• 1. Find the maturity amount of p5,000 due in
6 years if money is worth 12% compounded
semiannually.

• 2. If money can be invested at 12%


compounded semiannually, find the maturity
amount of p1,000 due at the end of 5 ½
years.

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