C h a p t e r 8 : T H E M AT H E M AT I C S

OF FINANCE
B Y: JETHRO TORRES
Learning Outcomes:
1. understand the diff erence between simple interest and
compound interest;
2. analyze and solve problems involving simple and
compound interest,
3. find a credit card finance charge, annual percentage rate,
monthly payment, and loan payoff ; and
4. use appropriate financial instruments involving stocks,
bonds, and mutual funds in formulating conclusions and
making decisions.
Lesson 1: Simple Interest
Simple Interest
The amount paid for the use of money is called interest (I).
Money will earn interest when it is deposited in a bank. On
the other hand, one borrows money from a bank, he or she
must pay interest.
The money that is either deposited in a bank or borrowed
from a bank is called the principal(P). The percentage
charge or earned from the principal is called the interest
rate(r), and the period that money was deposited or lent is
called the time(t).
Simple Interest
In computing for simple interest, use the formula

Where:
I = Simple Interest
P = amount of money deposited or borrowed
r = rate of interest per year
t = the length of time (in years).
Simple Interest
To find the principal, P, the rate per year, r, and the length
of time, t, the following formulas are used:
Examples:
1. Michael deposited $10,000 in a bank at 12.5% interest for
five years. How much will he earn after five years, assuming
that no withdrawals were made?
Examples:
2. Lea paid P12,500 interest at 8.5% for a three-year loan.
What was the original loan?
Examples:
3. Micah borrowed P200,000 from a bank. She paid a
P45,000 interest for 18 months. At what rate was interest
charged?
Examples:
4 How long will it take for 150,000 to accumulate to
P68,812.5 if the interest rate is 10.75%?
Simple Interest
The amount of money received at the end of the term is
called the maturity value. It is the sum of the principal and
the interest earned (F =P+D). Two more formulas can be
derived here: the amount formula (maturity value) and the
principal formula (present value). If Prt is substituted it will
become F=P+Prt Factoring P,F=P(1+rt) and P=F/(1+rt)
Examples:
How much must be invested today if Jonathan wants to have
P75,000 in three years and nine months if the interest rate
is 7.5%?
Examples:
If Hazel borrowed P97,000 from a bank at 12.5% simple
interest, how much will she pay at the end of 60 months?
Examples:
If Hazel borrowed P97,000 from a bank and she pay P157,
625 after 60 months, what is the interest rate?
Lesson 2: Compound Interest
Compound Interest
Compound interest is a type of interest which results from
the periodic addition of simple interest to the principal.
Thus, the interest earned at a certain period is automatically
reinvested to yield more interest. This type of interest often
applies to savings accounts, loans, and credit cards.
Compound Interest
In computation of compound interest, use the formula
where
F= the compound amount formula

𝑗
P = the present value
𝑛
𝐹=𝑃 ( 𝑙+𝑖 ) ;𝑖= 𝑎𝑛𝑑𝑛=𝑡𝑚
i = the interest rate per period
n = the number of conversions
m = the frequency of conversion
𝑚
j =the nominal rate
t = the time given in years
Compound Interest
To fi nd the compound present value, P, the length of time, t, and the
nominal interest rate, j, use the following formulas:
Present value:
Time:
Nominal rate:
Compound Interest
Examples of nominal rates and the corresponding frequencies of
conversion, interest rate per conversion period, and the number of
conversions.

Interest rate
Nominal Rate. J Frequency of Number of
per conversion
Time, t conversion, m conversions, n
period, I
Annually 5%, 3 years 1 0.05 3

Semi-annually 5%, 3 years 2 0.025 6

Quarterly 5%, 3 years 4 0.0125 12

Monthly 5%, 3 years 12 0.00416667 36

Examples:
1. Sheena borrowed P150,000 from a bank charging 8%
compounded quarterly. How much would she pay at the end
of four years?
Examples:
2. Jocelyn promised to pay Bonifacio P50,000 for a loan she
made three years ago. If Bonifacio charged an interest rate
of 5% compounded monthly. how much did Jocelyn borrow?
Examples:
3. If P125,000 is the present value of P180,000, find the
term of the investment if it earns at 5% compounded semi-
annually.
Examples:
4. Find the rate compounded quarterly if 150,000 is the
present value of P85,000 due at the end of three years.
Lesson 3: Credit Cards and
Consumer Loans
Credit Cards and Consumer Loans
A credit card is a payment card issued by a bank, and it
enables the customer to borrow funds from that institution.
Customers agree to pay the money back, with finance
charge, according to bank's terms. A finance charge is the
cost to the customer for the use of credit.
Credit Cards and Consumer Loans
Billing statements are issued monthly by the credit card
companies. Credit card holders can receive their billing
statements by mail or online. The due date on the bill is
usually 30 days after the billing date. Interest charges on
the outstanding balance will start to accrue if the bill is not
paid in full on due date.
The average daily balance method is a common
accounting method that determines finance charges.
Credit Cards and Consumer Loans

Example:
A credit card account had a balance of P12,000 on June 10.
A purchase of P7,500 was made on June 23, and a payment
of P5,000 was made on July 1. The next billing date is July
10. The interest on the average daily balance is 3.50% per
month. Find the finance charge on the July 10 bill.
Credit Cards and Consumer Loans

Number of Unpaid
Payment or Balance Each days Until Balance Times
Date
Purchases Day Balance Number of
Changes Days

June 10 –June 22 PHP 12,000

June 23 – June
PHP 7,500 PHP 19,500
30

July 1 – July 9 PHP -5,000 PHP 14,500

Total
Credit Cards and Consumer Loans
The sum of the total amounts owed each day of the month is
P442,500
The number of days in the billing period is 30 days

Finance charge:
Credit Cards and Consumer Loans
The fi nance charge on July 10 bills is P516.25.
An annual percentage rate (APR) is defi ned as the annual rate
charged for borrowing, expressed as a single percentage number that
represents the actual yearly cost over the term of a loan. The annual
percentage rate of a simple interest rate loan can be approximated
by

Where:
N is the number of payments.
r is the simple interest rate. r is the simple interest rate
Credit Cards and Consumer Loans
The annual percentage rate is approximately 12%.
The interest rate for consumer loans is normally the annual percentage rate as
required by the Truth in Lending Act. The payment for a loan based on annual
percentage rate is computed using the formula.

Where:
PMT is the payment
A is the loan amount
i is the interest rate per payment
n is the total number of payments
Credit Cards and Consumer Loans
Rico purchases a motorcycle for P55,000 from motor trade company.
If the annual interest rate is 6% for three years, fi nd his monthly
payment.
Credit Cards and Consumer Loans
Before the end of the loan term, sometimes a consumer wants to pay
off a loan. The pay off amount for a loan based on annual percentage
rate is computed using the formula,

Where:
A is the payoff amount for a loan
PMT is the payment
i is the interest rate per payment period
n is the total number of remining payments
Credit Cards and Consumer Loans
Angelo has a three-year car loan at an annual interest rate of 6% and
a monthly payment if P14,000. After two years, he decides to
purchase a new car. What is the payoff on his loan?
Lesson 4: Stocks, Bonds, and
M u t u a l Fu n d s
S t o c k s , B o n d s , a n d M u t u a l Fu n d s
Some owners of a company may raise money for their expansion by
issuing stocks to investors. Stocks are shares in the ownership of the
company. Investors may be considered as part owners of the
company and may be called as stockholders or shareholders.
Stockholders can earn if the stock price increase but they can lose
money if the stock prices decrease. Share in the company's profi t is
called dividend and calculated as follows:
S t o c k s , B o n d s , a n d M u t u a l Fu n d s
The dividend yield is the ratio of company's annual dividend
compared to its stock price. The dividend yield is represented as a
percentage and id calculated as follows:
S t o c k s , B o n d s , a n d M u t u a l Fu n d s
Example:
Find the dividend yield for a stock that pays an annual dividend of
P750 per share and has a current stock price of P45,000.

The dividend yield is 1.67%

S t o c k s , B o n d s , a n d M u t u a l Fu n d s
Bonds are a form of debt fi nancing or raising money by borrowing
from investors. Investors are guaranteed a return of their money plus
interest at the maturity date. The price paid for the bond is the face
value. The periodic interest payment that the bondholder receives
during the term is called coupon. The annual interest payments are
calculated using the simple interest formula.

Where:
I is the annual interest payment t is time
P is the face value r is the annual interest rate
Example:
A bond with a P500,000 face value has a 5% coupon and a fi ve-year
maturity. Find the total of the interest payments paid to the
bondholder.
S t o c k s , B o n d s , a n d M u t u a l Fu n d s
A mutual fund is a type of fi nancial vehicle made up of a pool of
money collected from many investors to invest in securities such as
stocks, and bonds. Each investor participates proportionally in the
profi ts or losses of the mutual fund. The net asset value of the fund
or NAV is the value of a share in the fund, it depends on the
performance of the stocks in the fund. The net asset value of a
mutual fund is given by

Where:
A is the total fund assets N is the number of shares
outstanding
L is the total fund liabilities
S t o c k s , B o n d s , a n d M u t u a l Fu n d s
A mutual fund has P50,000,000 worth of stock, P8,000,000 worth of
bonds, and P3,000,000 in other assets. The fund's total liabilities
amount to $2,000,000. There are three million shares outstanding.
You invest P50,000 in this mutual fund.
1. Calculate the net asset value of the fund.
2. How many shares will you purchase?