MATHEMATICS OF INVESTMENT

AN INTRODUCTION

CHAPTER 1
Simple and Discount Interest

In financial transactions, interest is the amount paid by a borrower to a lender for the
use of money over a period. Interest that is paid as a percent of amount borrowed or invested
is called simple interest. The formula for simple interest is given by the following:

Simple Interest

Where,

( )

( )

Example

1. Suppose and amount Php 500.00 is invested for 2 years at 6% per year. How much is the
earning of the investment after two years?

Solution:
The following can be obtained from the problem: P 500 , r 0.06 , t 2 .
I Pr t 5000.062 60 . From this we conclude that, the investment earned Php60.00.

2. If Php4, 000.00 is borrowed at an annual interest rate of 16% for 0.75 years. How much is the
interest due in borrowing the amount of money?

Solution:
The following can be obtained from the problem: P 4,000 , r 0.16 , t 0.75 .
I Pr t 4,0000.160.75 480 . From this we conclude that, the interest due is
Php480.00.

Prepared by: Francis Joseph H. Campea 1

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

Sometimes if we are the investor, we consider the value of our investment after a given period.
In this case we introduce the concept of future values or accumulated values or maturity
value.

Future Value

( )

Where,

( )

( )

Example

1. If Php4, 000.00 is borrowed at an annual interest rate of 16% for 0.75 years, what is the value
of the investment after 0.75 years?

Solution:
Since the interest earned by the amount invested for 0.75 years is Php480.00, the value of
Php4,000.00 after 0.75 years is Php4,480.00.

2. What is the simple interest rate applied if an investment of Php37,500 accumulates to

Php45,937.00 in the period of 1.5 years?

Solution:
We note that the interest earned by the investment is Php8, 437, that is, I 8437 . From the
I 8,437
formula I Pr t , we have r 0.15 15%
Pt 37 ,5001.5

3. The repayment on a loan was Php12,100. If the loan was for 15 months or 1.25 years at
16.8% interest a year, how much was the principal?

Prepared by: Francis Joseph H. Campea 2

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

Solution:
Based from the given we have the following: F 12,100 , r 0.168 , and t 1.25
Since F P1 rt , we have P
F 12,100
10,000 .
1 rt 1 0.1681.25
Different ways of expressing time/term of a loan or investment.

Sometimes the term of investment is not given in years. The term or time frame given in
certain problems maybe stated in days or months. In cases where the time is expressed in
months it is easy to express it in years. But when the term/time is given in days we use a time
factor such as the following:

Ordinary Simple Interest or Bankers Rule

Exact Simple Interest

The Bankers Rule or Ordinary Simple Interest is applied whenever a given

Remark problems does not specify the time factor to be used.

Sometimes the term or time frame may be drawn from the specified origin and repayment
dates. The following indicates how to compute for the actual time and approximate time.

Actual time Number of days until the repayment date except the origin date.
Approximate time Assumes that every month contains 30 days.

Prepared by: Francis Joseph H. Campea 3

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

Example
1. Find the actual and approximate time from May 1, 1983 to September 15, 1983.

Actual Time 31-1=30 Approximate Time 30-1=29

May 30 May 29
June 30 June 30
July 31 July 30
Aug 31 Aug 30
Sept 15 Sept 15
137 134

2. Find the actual and approximate time from April 15, 2008 to December 21, 2008.

Actual Time 30-15=15 Approximate Time 30-15=15

April 15 April 15
May 30 May 30
June 30 June 30
July 31 July 30
Aug 31 Aug 30
Sept 30 Sept 30
Oct 31 Oct 30
Nov 30 Nov 30
Dec 21 Dec 21
250 246

3. Find the actual and approximate time from June 25, 2008 to Nov 18, 2008.

Actual Time 30-25=5 Approximate Time 30-25=5

June 5 June 5
July 31 July 30
Aug 31 Aug 30
Sept 30 Sept 30
Oct 31 Oct 30
Nov 18 Nov 18
146 143

Prepared by: Francis Joseph H. Campea 4

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

Discount Interest.
Similar to simple interest, discount interest is an amount paid for borrowing money. Unlike
simple interest, however, discount interest is charged at the time the loan has been negotiated
and executed. Whereas, simple interest is paid on the maturity date when it is added to the
amount of the loan applied for on the origin date, discount interest is charged in advance and is
taken from the amount of the loan applied for on the origin date.

Discount Interest

Where,

( )

Example
Francis borrows Php 10,000 from SSS for a one year term. He was charged a 5% discount
interest rate. Determine his proceeds.

Solution:
( )( )( )
( )

Prepared by: Francis Joseph H. Campea 5

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

EXERCISES
1. Determine the Actual and Approximate number of days in the given origin and repayment
dates.

Origin Date Repayment Date Actual Time Approximate Time

1 May 22, 1995
2 January 06, 1997
3 March 03, 2007
4 February 04, 1990
5 March 02, 2005
July 09, 1995
November 06, 1997
October 11, 2007
November 05, 1992
November 05, 2006

2. Justin borrowed Php 8,600 on November 2, 1992, which is to be repaid on May 21, 1993 at
16.2% interest per year. Find the amount to be repaid. How much will the interest be at the
repayment date using the following time factors?
a. Bankers Rule
b. Exact Simple Interest
c.
d.

3. How much should Mark pay to Michele if he borrowed Php 10,000 on June 25, 2008 and if
the principal and interest are to be paid on November 18, 2008 at 15% simple interest per
year? Use the following time factors.
a. Bankers Rule
b. Exact Simple Interest
c.
d.

4. At what simple interest rate will a sum of money double itself in 15 years?
5. How long will it take for Php 4,000 to grow Php 14,000 if the simple interest rae is 12.5%?
6. How much will Php 22,500 become if invested at 9% simple interest rate for 45 days?
7. April issues a check for Php 4,950 to settle a 4 month loan of Php 4,500. How much simple
interest rate was she charged?

Prepared by: Francis Joseph H. Campea 6

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

Promissory Notes

These are written commitments by a person (also called the drawer) or business to pay
a certain sum to another person (also called the drawee) or business within a specified time.

A type of promissory note is the simple interest note which has the following characteristics:
The note is drawn on the origin date
The note is redeemed on the maturity date
The stated value of the note (or the face value ) corresponds to the principal
The face value plus the interest is called the maturity value.

Example

Php 5, 000.00 Quezon City, Philippines January 11, 2008

Seventy five days after the above date, the undersigned promises to pay to the order of
Justin Cruz Five thousand pesos with simple interest at 16% per annum payable at BCC
Bank of QC, Philippines.

Mark O. Tan

From the note we have the following:

Drawer Mark Tan

Drawee Justin Cruz
Face Value Php 5,000
Interest Rate 16.2%
Term 75 days
March 27, 2008 (75 days after January 11,
Maturity Date
2008)
Interest ( )( )( )
Maturity Value

Prepared by: Francis Joseph H. Campea 7

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

Another type of promissory note is the discount note. In this case, the amount stated in the
note is the maturity value on which the interest is computed and charged in advance. The
money received by the drawer on the origin date is the proceeds. In this case, the interest
charged in advance is first computed. Then it is subtracted from the maturity value. The
difference is the proceeds.

Example

Php 7, 000.00 Manila City, Philippines September 25, 2008

One hundred days after the above date, for value received with interest at 14.4% per
annum discounted to maturity, the undersigned promises to pay to the order of
Justin Cruz Seven thousand pesos payable at BCC Bank of QC, Philippines.

John O. Javier

From the note we have the following:

Drawer John O. Javier

Drawee BBC Bank
Maturity Value Php 7,000
Discount Interest 14.4%
Rate
Term 100 days
January 3, 2009 (100 days after September 25,
Maturity Date
2008)
Interest in advance ( )( )( )
Proceeds

Remark:

Prepared by: Francis Joseph H. Campea 8

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

If the term in the note is given in months, the day of the origin date and the maturity
date coincide. Thus, a 5 month note with an origin date of May 12, 2008 will mature on
October 12, 2008.

Exercises

1. A simple interest note for 120 days at 13.8% per annum has a maturity value of Php
5,753. What is the face value of this note?
2. Chard signed a Php 2,800 bank discount note on April 16, 2008.If the note was for 10
months a 18% per annum, find the following:
a. Maturity date
b. Interest deducted in advance
c. proceeds
3. Determine the interest and maturity value of a simple interest note signed on October
29, 2008 and due February 11, 2009. The note has a face value of Php 10,000 and an
interest rate of 16.5% per annum.

Discounting Notes

Example 1
Mike bought office furniture from Jay and gave him a Php 50,000 bank discount note due on
August 15, 1993, for the balance. Jay needs money on June 16, 1993 and sells his note to a
bank, which discounts it a 13.8%. Find the proceeds of Jay.

Solution:

The number of days from June 16, 1993 August 15, 1993 is 60. Finding the discount
interest we have:
( )( )( )
Thus the proceeds of Jay is .

Illustration

50,000

June 16 Aug 15

60 days

Prepared by: Francis Joseph H. Campea 9

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

Example 2
Bert holds a Php 7,500, 120-day simple interest note from Nestor Flores. The interest rate is
15% and the note was made on August 18, 1993. On September 17, 1993, Bert wanted to
encash the note. He found a bank which would buy the note that day at 16% interest,
collectible in advance. How much will Bert receive from the bank on September 17?
Solution
16% in 90 days

Aug 18 Aug 18 Dec 16

7,500 15% in 120 days

The value of Php 7,500 on the maturity date is ( )( )

The interest in advance that the bank will take is ( )( )

Therefore the proceeds that Bert will receive is just

Exercises

Find the proceeds of the following ban discount notes:

Maturity Value Maturity Date Date of Discount Interest Rate

1. 30,000 Nov. 25, 1993 July 3, 1993 10.2%
2. 23,200 May 16, 1994 Dec. 15, 1993 12%
3 4,000 Sept. 17, 1993 Feb. 19, 1993 9.75%
4. 6,600 June 5, 1994 Jan. 11, 1994 8%
5. 12,000 April 16, 1993 Oct. 25, 1992 12.6%

1. Mia holds a Php 4, 000 note at 12.75%, simple interest, payable in a year, from Banco de
Oro. In need of cash, Mia sells it back to the bank after 4 months. How much will he
receive if the bank charges 15% interest to be drawn in advance?
2. Caloy receives a 60-day Php 6,200 bank discount note on September 4, 2008. How much
will he received if it is discounted at 9% 15 days later?

Prepared by: Francis Joseph H. Campea 10

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

CHAPTER 2
Compound Interest
Exercises Compound Interest

1. Find the compound amount and interest:

a. If Php 2,500 is invested at 13% compounded quarterly for 12 years
Solution
Given:

( ) ( )

b. If Php 3,700 is invested at 12% compounded semi-annually for 5 years

Solution
Given:

( ) ( )

2. Find the present value of Php 2,850 due in 5 years if money is worth 10% compounded
quarterly.
Solution
Given:

( )
( )

3. How much must be invested today in a savings account to realize Php 9,000 in 4 years, if
money earns at the rate of 4% compounded quarterly?

Solution
Given:

Prepared by: Francis Joseph H. Campea 11

 MATHEMATICS OF INVESTMENT
AN INTRODUCTION

( )
( )

4. What rate compounded annually will double any sum in 6 years?

Solution
Let be the amount to be invested. . We want to find j.

( ) ( ) ( )

5. What nominal rate converted semi-annually will make Php 20,000 amount to Php
50,000 in 8.5 years?

Solution
We want to find j. Given: .

( ) ( ) ( ) ( )

6. When will Php 30,000 earn interest of Php 15,000 if it is invested at the rate of 7.5%
converted annually?

Solution
We want to find t. Given:
( ) ( ) ( )
( )

( )

7. When will a principal double itself if the interest rate is 14% compounded quarterly?

Solution
We want to find j. Given:
( ) ( ) ( ) ( )

( )

Prepared by: Francis Joseph H. Campea 12