General Mathematics

Final Lecture
 Simple and Compound Interest

What are some ways to take care of hard-earned

money?
 Illustration of Simple and Compound
Interest

• Suppose you won php. 10,000 and you plan to

invest it for 5 years. A cooperative group offer
2% simple interest rate per year. A bank offers
2% compounded annually. Which will you
choose and why?
 Simple Interest With annual rate (r)
Time (T) Principal (P) Simple Interest
Solution Answer
1 10,000 (10,000)(0.02)(1) 200
2 10,000 (10,000)(0.02)(2) 400
3 10,000 (10,000)(0.02)(3) 600
4 10,000 (10,000)(0.02)(4) 800
5 10,000 (10,000)(0.02)(5) 1,000
Compound Interest with annual rate (r)
Time (T) Amount Compound Interest
start of Solution Answer
the year
(t)
1 10,000 (10,000)(0.02)(1) 200
2 10,200 (10,200)(0.02)(2) 204
3 10,404 (10,404)(0.02)(3) 208.08
4 10,612.08 (10,612.18)(0.02)(4) 212.24
5 10,824.32 (10,824.32)(0.02)(5) 216.49
Amount after years
(Maturity Value)
10,000+ 200 = 10,200
10,000+ 400 = 10,400
10,000+ 600 = 10,600
10,000+ 800 = 10,800
10,000+ 1,000 = 11,000
Amount after years
(Maturity Value)
10,000+ 200 = 10,200
10,200+ 204 = 10,404
10,404+ 208.08 = 10,612.08
10,612.08+ 212.24 = 10,824.32
10,824.32+ 216.49 = 11,040.81
• Simple Interest ( in pesos)
11,000 – 10,000 = 1,000
• Compound Interest ( in pesos)
11,040.81 – 10,000 = 1,040.81

Simple Interest remains constant throughout

the investment term. In Compound Interest, the
interest from the previous year also earns
interest, thus the grows every year.
 Simple Interest
• An annual simple interest is based on three
factors.
• A. Principal which is the amount invested or
borrowed .
• B. Simple interest rate, usually expressed in
percent.
• C. Time or term of loan, in years.
 Example
• 1. A bank offers 0.25% annual simple interest
rate for a particular deposit. How much
interest will be earned if 1 million pesos is
deposited in this savings account for 1 year?
• Given:
• P= 1,000,000
• r= 0.25%
• t= 1 year
 Solution

Answer: The interest earned is Php. 2,500.00

The interest in savings account in the Philippines is subject to

20% withholding tax.
 Example
• 2. How much interest is charged when
Php. 50,000 is borrowed for 9 months at an
annual simple interest rate at 10%?

• Note :
• When the term is expressed in months (M), It
𝑀
should be converted to years by t=
12
 Solution

Answer: The simple interest is charged is Php. 3,750.00

 Example
• 3. Complete the table below by finding the
unknown

Principal (P) Rate (r) Time (t) Interest

(a) 2.5% 4 1,500
36,000 (b) 1.5 4,860
250,000 0.5% (c) 275
500,000 12.5% 10 (d)
Solution
 Maturity Value or Future Value
• Many person or institutions are interested to
know the amount that a lender will give to the
borrower on the maturity date. For instance,
you may be interested to know the total
amount of money in a savings account after t
years at an interest r. this amount is called the
maturity value or future value.
 Example
• 1. Find the maturity value if 1 million pesos is
deposited in a bank at an annual simple
interest rate of 0.25% after (a) 1 year and (b) 5
years?
• Given. P = 1, 000, 000,
r = 0.25% = 0.0025
Solution
 Solution

Answer: the future or maturity value after 5 years is Php. 1,012,500

• The savings account are covered by
Philippine Deposit Insurance Corp.
(PDIC) up to Php. 500,000.00. This
means that the money in the
savings account is insured up to
Php. 500,000.00
 Seatwork/Homework
• Solve the following problems on simple interest
• 1. What are the amounts of interest and maturity value
1
of a loan for Php. 150,000 at 6 % simple interest for 3
2
years?
• 2. At what simple interest rate per annual will Php.
25,000 accumulate to Php. 33,000 in 5 years?
• 3. How long will Php. 40,000 amount to Php. 51,200 if
the simple interest rate is at 12% per annual?
• 4. In order to have Php. 200,000 in 3 years, how much
should you invest if the simple interest is 5.5%?
• 5. Angel deposited Php. 20,000 in a bank that pays 0.5%
simple interest. How much will be her money after 6
years?
 Compound Interest
• Many bank savings account pay compound
interest. In this case, the interest is added to
the account at regular intervals, and the sum
becomes the new basis for computing
interest. Thus the interest earned at a certain
time interval is automatically reinvested to
yield more interest.
Year (T) Principal = P
Int. rate= r
Amount at the end of the
year
1 𝑃(1 + 𝑟)
2 𝑃(1 + 𝑟)2
3 𝑃(1 + 𝑟)3
4 𝑃(1 + 𝑟)4
Principal = Php. 100,000
Int. rate = 5%
Amount at the end of the year
100,000 (1.05) = 105,000
105,000 (1.05) = 110,250
110,250 (1.05) = 121,550.63
121,550.63 (1.05) = 127,628.16
 Example
• 1. Find the maturity value and the compound
interest if php. 10,000 is compounded
annually at an interest rate of 2% in 5 years
Given:
P = 10,000
r= 2%
t= 5 years
 Example
• 2. Find the maturity value and interest if php.
50,000 is invested at 5% compounded
annually for 8years.
• Given:
• P= 50,000
• r= 5%
• t= 8 years
 Example
• What is the present value of php. 50,000 due
in 7years if money is worth 10% compounded
annually?
• Given
• F= 50,000
• r= 10%
• t= 7 years
 Example
• 2. How much money should a student place in
a time deposit in a bank that pays 1.1 %
compounded annually so that he will have
Php. 200,000 after 6 years?
• Given
• F= 200,000
• r= 1.1 %
• t= 6 years
 Seatwork/ Homework
• Find the unknown principal P , rate r, time t,
and compound interest 𝐼𝑐 by completing the
table.
Principal (P) Rate (r) Time (t) Compound Maturity
Interest (𝐼𝑐 ) Value
(F)

10,000 8% 15 (1) (2)

3,000 5% 6 (3) (4)
50,000 10.5% 10 (5) (6)
(7) 2% 5 (8) 50,000
(9) 9.25% 2.5 (10) 100,000
 Annuities
• Definition of term
• Annuity – a sequence of payments made at
equal (fixed) intervals or periods of time
• Payment Interval – the time between
successive payments
• Term of an annuity t – time between the first
payment interval and last payment interval.
• Regular or Periodic payment R – the amount
of each payment
• Amount ( Future Value) of an annuity F- Sum
of future values of all payments to be made
during the entire term of the annuity.
• Present value of an annuity P- sum of
present values of all the payments to be made
during the entire term of the annuity.
 b. Allow the students to provide real
life examples of annuity certain and
contingent annuity.
• Examples of annuity - Installment basis of
paying a car, Appliances, House and Lot,
tuition fee, etc
• Example of contingent annuity – life
insurance , pension , payment.
• Both simple and general annuities have a time
diagram for its cash flow as shown below. The
main difference is that a simple annuity the
payment interval is the same as the interest
period while in a general annuity the payment
interval is not the same as the interest period.
• Example of a simple annuity – Installment
payment for an appliance at the end of each
month with interest compounded monthly.
• Example of a general annuity – Installment
payment for an appliance at the end of each
month with interest compounded annually.
 Example
• 1. Suppose Mrs. Remoto would like to save
Php. 3,000 at the end of each month for six
months in a fund that gives 9 % compounded
monthly. How much is the amount or future
value of her savings after 6 months?
 Example
• Use the formula in example given in the time
diagram
 Example 2
• In order to save for her high school
graduation, Marie decided to save Php 200 at
the end of each month. If the bank pays 0.25%
compounded monthly , how much will her
money be at the end of 6 years?
Present Value of an annuity-immediate
is given by:
 Example
• Mr. Ribaya paid Php. 200,000 as down
payment for a car. The remaining amount is to
be settled by paying Php. 16,200 at the end of
each month for 5 years. If interest is 10.5 %
compounded monthly, what is the cash price
of his car?
 Definition
• The cash value or cash price is equal to the
down payment (if there is any) plus the
present value of the installment payments.
• Cash Value = Down payment + present value
 Example
• Paolo borrowed Php. 100,000. He agrees to
pay the principal plus interest by paying an
equal amount of money each year for 3 years.
What should be his annual payment if interest
is 8% compounded annually?
 Seatwork/Homework
• A. Peter started to deposit Php. 5000 quarterly in
a funds pays 1% compounded quarterly. How
much will be in the fund after 6 years?
• B. the buyer of a lot pays Php. 50,000 cash and
Php. 10,000 every month for 10 years. If money is
8 % compounded monthly, How much is the cash
value of a lot?
• C. How much should be invested in a fund each
year paying 2 % compounded annually to
accumulate Php. 100,000 in 5 years?