CHAPTER 4-

THE NATURE OF FINANCIAL

MANAGEMENT

Copyright -CNE Mathematics in the Modern World

What we will do in this Chapter.

• We will study the nature of managing finances.

• We will investigate simple interests and explain how
compound interests work.
• We will explore amortized loans.
• We will investigate annuities, because they provide
one of the best ways for an average person to save
money.
• We will discuss installment buying and credit cards.
The Nature of Financial Management

• How do personal decisions affect responsible

financial management?
• Is the ability to accurately calculate
Essential Questions

mathematics problems important? How is

money earned and spent in the world?
• Can investors use abstract reasoning to predict
investment outcomes? What are the costs and
benefits of investing?
• Does mathematics play a role in the
construction of viable arguments for and
against credit cards? What are the costs and
benefits of credit cards?
What is Financial Management?

• Financial Management is the process of

planning, organizing, directing, controlling and
monitoring financial resources with a view to
achieve personal or organizational goals and
objectives.
• It is an ideal practice for controlling the
financial activities of an organization such as
procurement of funds, utilization of funds,
accounting, payments, risk assessment and
every other thing related to money.
• It means applying general management
principles to financial resources of an
individual or an enterprise.
Simple Interests
• Simple interest is the interest in which only the
original principal bears interest for the entire
term of a loan or investment.
• Simple interest is a handy, easy tool for
estimating the interest earned or paid on a certain
balance in one period. 
• The formula for simple interest is:
Simple Interest
Simple Interests Terminologies
• The payment for the use of borrowed money
is called interest.
• The capital or sum of money invested is
called the principal.
• The fractional part of the principal that is paid
on the loan or borrowed money is the rate of
interest and is usually expressed as percent.
• The time or term of the loan is the unit or
units of the time (days, months, years) for
which the money is borrowed and for which
interest is calculated.
Calculating Simple Interests
• When the time is expressed in number of years,
the formula is where is in years.
• When the time is expressed in number of
months, the formula .
• When the time is expressed in number of days,
there are two ways to calculate simple interests:
• Ordinary Interest:

• Exact Interest:
Calculating Simple Interests
• When the time is expressed in between
dates, there are 4 ways to calculate simple
interests:
• Ordinary Interest:
• Ordinary Interest:
• Exact Interest:
• Exact Interest:
* This is known as the Banker Rule, the formula
being applied by banks in computing interests on
savings deposits.
Example: Calculating Simple Interests
• Find the interest and accumulated amount on
Php 55,000 at 5 ½% simple interest for 5 years.

The accumulated amount after 5 years is

Php 55,000 + Php 15,125 = Php70,125.
• Find the interest and accumulated amount on
Php 15,000 at 6 ¼% simple interest for 10
months.
year

The accumulated amount after 10 months is

Php 15,000 + Php 781.25 =
Php15,781.25.
Example: Calculating Simple Interests
• Find the interest and accumulated amount on Php
84,000 at 4 ¾% simple interest for 3 years and 7
months.

The accumulated amount after

3 years and & 7 months is
Php98,297.50.
• If a principal of Php 12,500 earns interest of Php1,720
in 2 years and 9 months, what is interest rate that is in
effect?
Example: Calculating Simple Interests
• Find the ordinary and exact simple interest
on Php 25,000 for 200 days at rate of
interest.
(for Ordinary Simple Interest)

(for a common year)

and Php 734.29. (for a leap year)

Now try these!
1) A lending company charged its client Php2,750 on a loan of
Php15,800 for 2 years and 3 months. What simple interest
rate is the company using?
2) Three months after borrowing money, PJ pays an interest of
Php250. How much did he borrow if the simple interest rate
was 5 ½ %?
3) Elizabeth loans Php 80,000 at 4 ¾ % simple interest. How
long will it take her to get Php5,000 interest?
4) Find the ordinary and exact interest on Php20,000 for 150
days at 7 ½ % simple interest?
5) Find the actual and approximate time from November 11 of
the previous year and July 18 of the current year.
Now try these!
6) Miller invested Php15,250 for 10 years and received
Php9,150 in simple interest. What was the rate of that
investment?
7) Nick borrowed Php6,000 at 9% simple interest for 1 ½ year
to repair his rice threshing-machine. Find the simple interest
and future value.
8) Benjamin deposited Php600 in a savings account that pays
4% simple interest. How long did it take for his deposit to
earn an interest of Php72.
9) What amount was invested for 5 years at 2 ¼% if it earned
interest of Php2,500?
10) At what interest rate will Php15,000 earn an interest of
Php2,500 at 1.8 year ?
Compound Interest
• Compound interest is the interest resulting
from the periodic addition of simple interest
to the principal.
• When interest is periodically added to the
principal and this new sum is used as the new
principal for a certain number of periods, the
resulting amount is called final or compound
amount.
• The time between successive interest
computations is called compounding or
conversion period.
Compound Interest
• The number of conversion periods for one year is denoted
by while the total number of conversion periods for the
whole investment term is denoted by
• Conversion periods are usually expressed by any
convenient length of time, and is usually taken as an exact
division of the year, such as monthly, semiannually, and
annually.
• When the conversion periods are:
• Annually m =1
• Semiannually m = 2

• Quarterly m = 4
• Monthly m = 12
Compound Interest
• The total number of conversion periods for the
whole term can be found from the relation
.

For example; if the term is 10

years compounded:
annually n = 10
semiannually n = 20
quarterly n = 40
monthly n = 120
Compound Interest
• The interest rate r is usually expressed as an annual or
yearly rate, and must be changed to the interest rate per
conversion period or periodic rate and can be found using
the relation

• Thus, the interest rate at 6% compounded

annually
semiannually
quarterly
monthly
Compound Interest

• The fundamental formula to calculate

compound interest is
• and
Example: Compound Interest

• Find the compound amount and interest if

Php40,000 is invested at 8% compounded
quarterly for 5 years and 6 months.

• Interest,
•
Example: Compound Interest

• What sum of money will be required to

discharge a loan of Php 7,800 on April 1,
2019, if the loan was made 8 years and 6
months earlier, at a rate of 9%
compounded quarterly?
Example: Compound Interest

• Find the compound amount and interest on

Php 10,000 at 5 ½% for 4 years and 6
months compounded semiannually.
Now Try these!

1. Find the compound amount and interest on Php5,000 at 5 ½

% for 5 years and 9 months compounded quarterly.
2. What sum of money will be required to settle an obligation of
Php20,000 after 4 years and 3 months at 5% compounded
semiannually?
3. As a 50th birthday present to his wife, Alex deposited
Php50,000 in her account in an investment that pays 5%
converted quarterly. How much will she have in her account
on her retirement day?
4. Mrs. Vicky Guevarra deposited Php18,500 in a savings
account on June 30, 2017 at a rate of 6% compounded
quarterly. How much will she get if she withdrew all her
money on December 25, 2020?
Simple Annuities

• An annuity is a series of periodic payments made

at regular intervals of time.
• Installment payments, monthly rentals, and life
insurance premiums are familiar examples of
annuities.
• The period of time between consecutive payments
is called the payment interval. The term of an
annuity is the time from the beginning of the first
payment interval to the end of the last payment
interval. This interval may be of any convenient
length like monthly (m=12), quarterly ( m = 4),
semiannually (m = 2), and annually (m = 1).
Classification of Annuities

• An Ordinary Annuity is an annuity in which

the periodic payment (R) is made at the end
of each payment interval.
• An Annuity Due is an annuity in which the
periodic payment (R) is made at the
beginning of each payment interval.
• Deferred Annuity is an annuity in which
period payment is not made at the
beginning nor at the end of the payment
interval, but some later date.
Present Value of Ordinary Annuity

• The present value of an ordinary annuity is

the total of the present value of all
payments of the annuity.
• To determine the present value of an
ordinary annuity, apply the following
formula:
• , where R is the periodic payment, r is rate
per period, and n is the total number of
payments or periods.
Amount Value of Ordinary Annuity

• The Future value of an ordinary annuity is

the total of all the periodic payments at the
end of the term.
• To determine the amount of an ordinary
annuity, apply the following formula:
where R is the
periodic payment, r is rate per
period, and
n is the total number of
payments or periods.
Example: Amount and Present Value of Ordinary
Annuity

• Find the present value of Php15,000

payable at the end of every three months
for 5 years and 6 months. Money is worth
5% compounded quarterly.

• hp 286,958.44
Example: Accumulated Value of Ordinary Annuity

• Find the accumulated amount on

Php15,000 payable at the end of every
three months for 5 years and 6 months.
Money is worth 5% compounded
quarterly.

• 377,146.18
Example: Amount and Present Value of Ordinary
Annuity

• A father deposits Php 5,000 every end of 6

months in an account paying 5 ½%
interest compounded semiannually. What
amount is in the account at the end of 10
years and 6 months?

• Php
• 139,589.13
Example: Regular Investments for Ordinary Annuity

• How much monthly deposits must be

made for 8 years and 6 months in order to
accumulate Php 250,000 at 7%
compounded monthly?
Now try these!

1) A housewife buys a dinner set. She pays Php 2,500

down payment and promised to pay Php 500 at the
end of three months for 4 ½ years. If interest is
charged at 6% compounded quarterly, what is the
cash equivalent of the dinner set?
2) Find the amount and present value of an annuity of
Php 5,000 every end of 6 months for 12 years and 6
months if money is worth 5 ¼% compounded
semiannually?
3) Mark deposited Php 1,200 in an account that pays 3½%
compounded monthly. He continues to deposit the same
amount every end of the month. If the first deposit was
made on June 1, 2017, how much is in the account just
after the deposit is made on December 1, 2027?
Now try these!

4) What amount will be paid at the end of every three

months for 5 years and 9 months if the present value
is Php10,000 and interest is paid at 6% compounded
quarterly?
5) Marvin wants to buy a car worth Php1,200,000. He can
pay Php200,000 down payment and the balance every
end of the month for 5 years. How much must he pay
monthly at 3 ½% compounded monthly?
6) Joyce wants to have a debut party for her daughter.
She plans to deposit a certain sum, to achieve this, at
the end of each month. How much must she invest
every month to have Php300,000 if she starts to
deposit on her daughter’s 10th birthday.
Amount and Present Value of an Annuity Due

• An annuity due is one in which the payments are

made at the beginning of the payment interval,
rather than at the end.
• The following formulas can be used to calculate
the amount and present value of an annuity due:
• Present Value

• Future Value
Example: Amount and Present Value of an Annuity Due

• An investment of Php20,000 is made at the beginning of

each month for 6 years. How much will the investment
be at the end of the term, if interest is 6% compounded
monthly?
• Future Value

If you were to receive Php20,000.00 at the

beginning of every time period and invest each cash
flow at an interest rate of 6% for 72 time periods,
then the future value of these combined cash flows
would be Php 1,736,818.00.
Example: Amount and Present Value of an Annuity Due

• Vennie wants to have Php200,000 for traveling

expenses four years from now. How much must
she save at the beginning of each quarter starting
now, if she gets 6% compounded quarterly
interest on her savings?

• R = Php 10,988.19
Example: Amount and Present Value of an Annuity Due

• Find the cash equivalent of an item that was

purchased for Php 5,000 down payment and Php
1,250 at the beginning of each month for 3 years
and 8 months if interest is 4 ¾ % compounded
monthly?

The cash value of the item is Php

50,584.99 + Php 5,000 down payment is
Php55,584.99.
Example: Amount and Present Value of an Annuity Due

• The annual premium on a life insurance policy is

Php 22,250.00 payable in advance. What would
be the monthly payment, if interest rate is based
on 9% compounded monthly?

R
R
Now try these!

1. Find the future amount and present value of an

annuity due of Php 4,500 every quarter for 5 years
and 6 months, if money is worth 5% compounded
quarterly.

2. An investment of Php 2,500 is made at the beginning

of each month for 5 years. If interest is 6%
compounded monthly, how much will the investment be
worth at the end of the term?

3. A house roof will need to be replaced after 5 years

from now at a cost of Php 180,000. How much should
the owner save at the beginning of each quarter in
order to replace the roof, if his savings earn interests
at 5 ½% compounded quarterly?
Now try these!

4. An obligation of Php 45,000 will be settled by 40

equal payments, the first payment to be made
immediately. Find the size of the monthly payment, if
money is worth 4% compounded monthly.

5. Find the periodic payment if the present value of an

annuity due is Php 20,000 for 8 years and 6 months,
if money is worth 3 ½% compounded semi-annually.

6. Find the periodic payment if the future value of an

annuity due is Php100,000 made every three
months for 10 and ¼ years if money is worth 5½%
compounded quarterly.
Now try these!

7. You want to have Php 2,000,000 in your

account when you retire in 30 years. Your
retirement account earns 8% interest. How
much do you need to deposit each month to
meet your retirement goal?

8. A more conservative investment account pays

3% interest. If you deposit Php 50 a day into
this account, how much will you have after 10
years? How much is from interest?
Deferred Annuity

• Deferred Annuity is one in which the first

payment is not made at the beginning nor end of
the payment interval, but at a later date.
• To find the amount of a deferred annuity, apply
the formula

where: is the periodic payment, is the

interest rate, is the total time period or
number of times payment is made, and
is the number of deferred periods.
Now try these!

1. Find the present value of a deferred annuity of

Php 5,000 every three months for 10 ½ years that is
deferred 4 years and 3 months, if money is worth 6%
compounded quarterly.

2. In a series of semi-annual payments of Php 2,500

each, the first payment is due at the end of 4 years
and 6 months and the last payment at the end of 15
years and 6 months. What is the present value of the
deferred annuity, if money is worth 5 ½%
compounded semi-annually?

3. What amount must be set aside on the birth of a child

which will provide 48 equal monthly payments of
Php 5,000 for his college expenses, if the first payment is to be
made on his 18th birthday? Assume that money is 6%
compounded monthly.
Now try these!

4. You want to take out a Php 4,800,000

mortgage. The interest rate on the loan is 6%,
and the loan is for 30 years. How much will
your monthly payments be?

5. Dexter is going to finance new home theater

equipment at a 2% rate over a 4 year term. If
he can afford monthly payments of Php 1,000.
How much new equipment can he buy?

6. How much would you need to save every month

in an account earning 4% interest to have
Php50,000 saved up in two years?
Amortization

• Amortization is the process of spreading out

a loan into a series of fixed payments over
time.
• The interest earned and principal are paid in
different amounts each period, although the
total payment remains equal each period.
• This most commonly happens with monthly
loan payments, but amortization is an
accounting term that can apply to other types
of balances, such as allocating certain costs
over the lifetime of an intangible asset.
Amortization

• To determine the monthly payment

taking into account the interest requires
the following formula.

where: is the monthly payment, is the

initial amount on the loan,  is the monthly
interest rate, and  is the total number of
payments.
Amortization

• An Amortization schedule is a table

which shows how much is applied to
reduce the principal and how much
portion is paid for interest to show the
outstanding principal or remaining
liabilities after each payment period.
Now try these!

1. A debt of PhP10,000 with interest at 6%

compounded quarterly, will be discharged,
interest included, by payments of Php1,250
at the end of each 3 months for as long as
necessary.
Find: a. the final or concluding payments
b. construct an amortization schedule

2. Mrs. Martin purchased a piece of jewelry for

Php 140,000 and agrees to amortize the
amount at 4 ½% compounded annually over
the next 4 years. What is the amortization
payment? Construct an amortization schedule.
Now try these!

3. A loan is to be amortized by equal payments

of Php 500 each at the end of each 6
months for 10 years. If interest is based on
7% compounded semiannually, find:
a. the present value of the loan
b. accumulated amount just after the 8th
payment
c. the remaining liability after 8 years

4. Semi-annual payments of Php 9,500 each are used to repay

a loan for 4 years at 5% compounded semi-annually. Find the
amount of the loan and construct an amortization schedule.
Now try these!

5. You can afford Php 5,200 per month as a car

payment. If you can get an auto loan at 3%
interest for 60 months (5 years), how expensive
of a car can you afford? In other words, what
amount of the loan can you pay off with
Php5,200 per month?
6. You want to take out a Php 140,000 mortgage.
The interest rate on the loan is 6%, and the loan
is for 30 years. How much will the payments
be if paid monthly?
Sinking Funds

• Sinking Fund is a savings fund productively invested in

anticipation for future expenses.
• The amount in the fund at any given period is the total of
the periodic deposit already made including the interest
earned.
• A sinking fund schedule is a table showing the gradual
growth of money deposited to create a fund. It also shows
how much interest is earned every period, and the amount
before and after periodic deposits.
• The sinking fund formula can be obtained by writing in
terms of in the future value of an annuity formula

and this results to

Now try these!

1. How much must a student save in an account at

the end of each month to have Php20,000 at the
end of her 4 years in College, if money is worth
7% compounded monthly? Construct a sinking
fund schedule.
2. A fund of Php25,000 is to be created by 10
quarterly payments at the rate of 3 ½%
compounded quarterly. Find the quarterly
payment. Construct a table showing the growth of
the fund.
Now try these!

3. Construct a sinking fund schedule showing the

growth, of the money over 8 years, and the
amount in the fund at end of 5 years, if
Php4,500 is to be deposited at the rate of 7%
compounded annually?

4. A family needs to replace their car at the end of

10 years. They plan to buy an SUV that will cost
Php1.2 Million. The family will deposit equal
amounts in a fund at the end of every month. Find
the monthly deposit if money is invested at 5%
compounded monthly. Construct the first 5 lines of
the schedule.
Credit Cards and Installment Buying

• There may be times when you need extra money

for unexpected or unplanned expenses. It is always
best to plan ahead and save for such eventualities,
but sometimes that may not be possible.
• Sometimes you may have no alternative to taking
out a loan or use a credit card to cover these
expenses.
• There are many ways of borrowing and paying
back a sum of money.
• There may be administration fees, regular
instalments, insurance payments, or other fees
which a borrower is required to pay.
Credit Cards and Installment Buying

• A credit card is a payment card issued to users

(cardholders) to enable the cardholder to pay a
merchant for goods and services based on the
cardholder promise to the card issuer to pay them
for the amounts so paid plus the other agreed
charges.
• The card issuer (usually a bank) creates
a revolving account and grants a line of
credit to the cardholder, from which the
cardholder can borrow money for payment to
a merchant or as a cash advance. In other
words, credit cards combine payment services
with extensions of credit.
Annual Percentage Rate (APR)

• If you buy on installment basis or you use your credit cards

when buying, the credit card issuer charges you using an
APR.
• An annual percentage rate (APR) is the annual rate charged
for a variety of loans, including credit cards, borrowing or
earned through an investment, and is expressed as a
percentage that represents the actual yearly cost of funds
over the term of a loan.
• An APR table or APR calculator can be used as doing the
mathematical procedure.
Annual Percentage Rate (APR)

• The APR can be calculated using the equation

where C is the cash payment, A is

the amount of loan, and n is the
number of years.

• This equation can only be used when the loan is

paid by a single repayment.
Credit Cards and Installment Buying

• Borrowing Basics: How does credit

work and how can I determine when I
am ready to apply for credit?
• Charge it Right: What is the purpose
for credit cards and how can I use them
responsibly?