TOPIC 2: SIMPLE INTEREST (I)

the amount of money paid for the use of borrowed capital or income produced by money which
has been loaned.

I = Pin where:
I- Interest earned For interest period (n)
P- Principal If months is given:
i - interest rate (%/ decimal)
n- interest period (no. of years) n= months/12

F = P+I - Future interest If days is given:

n= days/?
where:
F - Future worth
TWO TYPES OF SIMPLE INTEREST
ORDINARY SIMPLE INTEREST EXACT SIMPLE INTEREST

1 yr = 1 banker’s yr. 1 yr = 365 days

1 mos = 30 days 1 yr = 366 days (leap yr)
∴ 360 days For Century / 400

PRACTICE:

NOTE: 1990
If year is NOT given, assume it is 1991
ORDINARY. Hence, if year is 1992
given assume EXACT 1600
1700
1800
PRACTICE:

DETERMINE THE ORDINARY SIMPLE INTEREST ON 700 FOR 8 MONTHS AND 15 DAYS IF THE RATE
OF INTEREST IS 15%.
PRACTICE:

DETERMINE THE EXACT SIMPLE INTEREST ON 500 FOR THE PERIOD FROM JANUARY 10 TO
OCTOBER 28, 1996 @ 16% OF INTEREST.
PRACTICE:

AIRCOND NETWORK COMPANY BORROWED 523,500 ON MAY 13 WITH INTEREST DUE ON SEPT.
27, 1999. IF THE INTEREST RATE IS 10%, FIND THE INTEREST ON THE LOAN USING:

a.) EXACT
b.) ORDINARY
TOPIC 3: COMPOUND INTEREST
“interest on top of interest.” Interest earned for a given interest period is calculated based on the
principal plus the accumulated interest at the start of the period.

SIMPLE INTEREST COMPOUND INTEREST

F = P(1+in) F = P(1+i)N
Exponentially growing
Types of Interest for Compound Interest

F = P(1+i)N

Nominal Interest Rate, in

where:
i= r/m m- mode of compounding

Effective Interest Rate, ie

ie=(1+i)m – 1
PRACTICE:

1. 12% compounded quarterly.

a.) Nominal Rate
b.) Effective Rate
Factors in Compound Interest

F = P(1+i)N
Single payment compound factor

P = F(1+i)-N

Single payment present worth factor

F=Pern CONTINUOUS COMPOUNDING

TOPIC 4: DISCOUNT
Occurs when a transaction requires that interest be paid in advance , usually @ the start of the
interest period.

D= F-P
D = Fdn i=di+d
d= i/i+1
where:
D - Discount
F - Future Worth
P- Principal
d - discount rate (%)
n- interest period (no. of years)
TOPIC 5: CASH FLOW DIAGRAM
Simple graphical representation of cash flows drawn on a time scale. Cash-flow diagram for
economic analysis problems is analogous to that of free body diagram for mechanics problems

RECEIPT (POSITIVE CASH FLOW OR CASH INFLOW) NOTE:

Cash flow diagram

DISBURSEMENT (NEGATIVE CASH FLOW OR CASH OUTFLOW) depends on the
150 person’s viewpoint

A loan of 100 at simple interest of 10%

will become 150 after 5 years.

100
TOPIC 4: CASH FLOW DIAGRAM

150
A loan of 100 at simple interest of 10%
will become 150 after 5 years.

LENDER

100

100

BORROWER

150
TOPIC 6: INFLATION
Where:

F’=P (1+i’)N i1 -INTEREST EARNED

i2 -INFLATION RATE

(1+i’)=(1+i1)(1+i2)-1
i’ -ADJUSTED INTEREST RATE

i = (1+i1)/(1+i2) -1

150
TOPIC 7: ANNUITY

EQUAL PAYMENTS AT EQUAL INTERVAL OF TIME

TYPES OF ANNUITY

1. ORDINARY ANNUITY
2. ANNUITY DUE
3. DEFERRED ANNUITY
4. PERPETUITY

150
TOPIC 7: ANNUITY

1. ORDINARY ANNUITY
Type of annuity where the 1st payment
happen at the end of the first period.

PA= A/i (1-(1+i)-N)

FA= A [(1+i)N -1 / i]

150
TOPIC 7: ANNUITY

2. ANNUITY DUE
Type of annuity where the 1st payment
happen at the beginning of the first period.

PA= A + A/i [1-(1+i)-(N-1)]

FA= PA (1+i)N

150
TOPIC 7: ANNUITY

3. DEFERRED ANNUITY
Type of annuity where the 1st payment will NOT happen at the
beginning or end of the first period.

O.A
SPCAF

PA= A/i [1-(1+i)-N](1+i)-x

x
3rd term

F A= P A
(1+i)N

150
TOPIC 7: ANNUITY

4. PERPETUITY
Occurs when a series of uniform payments, A, continue
indefinitely

PA= A/i N=∞ Null

[1-(1+i)-N]
F A= P A
(1+i)N

150
TOPIC 7: ANNUITY

4. PERPETUITY
Occurs when a series of uniform payments, A, continue
indefinitely

UNIFORM SERIES PRESENT WORTH FACTOR 9(P/A,i %, n)

USPWF= 1-(1+i)-N /i

CAPITAL RECOVERY FACTOR (P/A,i %, n)

CRF= i/1-(1+i)-N
150
TOPIC 7: ANNUITY

4. PERPETUITY
Occurs when a series of uniform payments, A, continue
indefinitely

UNIFORM SERIES FUTURE WORTH FACTOR 9(P/A,i %, n)

USFWF=(1+i)N-1 /i

SINKING FUND FACTOR (A/F,i %, n)

SFF= i/(1+i)N -1
TOPIC 8: GRADIENT
UNIFORM ARITHMETIC GRADIENT PAYMENT

A1-A2 =G ∴
COMMON DIFFERENCE
P=PA+PG
TOPIC 8: GRADIENT
UNIFORM ARITHMETIC GRADIENT PAYMENT

PA= A/i (1-(1+i)-N) FA= A/i ((1+i)N -1)

PG= G/i ((1+i)N-1/i -N) FG= G/i ((1+i)N-1/i -N)

PT=PA+PG +
-
ASCEND
DESCEND FT=PT(1+i)N

AT= A1 -G/i (1-(ni/(1+i)N-1)

TOPIC 8: GRADIENT
GEOMETRIC GRADIENT PAYMENT

Where:

An =A1(1+g)n-1
g = rate of increase

NO COMMON DIFFERENCE

P= A1/ 1+g [1-(1+icr)-n/icr ] (1+i)-2

icr=(1+i / 1+g) -1
TOPIC 8: GRADIENT
GEOMETRIC GRADIENT PAYMENT

UNIFORM GEOMETRIC GRADIENT

P= G/1+i [1-xn/1-x]

X=1+r/1+i