Math of Investment - Interest methods

Topics: Central bank, Monetary policy, Federal Reserve System Pages: 5 (404 words) Published: February 1, 2014
S21
Lleva, Aldwin G.
BSACCTY-1B

SAQR #4

Interest
Method

Definition/Background/
Applicability
Who Uses them
Related Formulas & Equivalent Meaning of Symbols
Sample Problem + Solution
Sources of Reference, Info or Book used

Principal/
Proceeds +
Present Value
Interest
Amount =
Sum/Maturity Value
Future Value

A. Simple Interest Method

A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods.

P =Principal
I =Interest
R =Rate
T =Time(in years)

I =Interest Amount
P =Principal
R =Rate
T =Time

M =Maturity Value
P =Principal
I =Interest
R =Rate
T =Time

₱8700.00 at 3.25% for 3 years

I =PRT
I =(8700)
(0.0325)(3)
I = ₱848.25

http://www.investopedia.com/terms/s/simple_interest.asp

Math Of Investment (Calculator-Based) by Zorilla, Partible, Esller, Mendoza, Bansa, Apuyan

B. Discount Interest Method

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window.

Pr = Proceeds
M = Maturity Value
B = Bank Discount

B = Bank Discount
D = Discount Rate
T = Time (in years)

M = Maturity Value
Pr = Proceeds
B = Bank Discount
D = Discount Rate
T = Time

M = ₱32000
D= 10%
T= 1.5 years

B=MDT
B = (32000)(0.10)(1.5)
=₱4800

http://www.investopedia.com/terms/d/discountrate.asp

Math Of Investment (Calculator-Based) by Zorilla, Partible, Esller, Mendoza, Bansa, Apuyan

C. Add-on Interest Method

The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window.

P =Principal
I =Interest
R =Rate
T =Time(in years)

I =Interest Amount
P =Principal
R =Rate
T =Time

M =Maturity Value
P =Principal
I =Interest
R =Rate
T =Time
₱5000 at 12% add-on interest rate for 36 months

I = (5000)(0.12)(36/12)
=₱1800+5000
=₱6800/36
=₱188.8889(monthly payment)

http://www.investopedia.com/terms/a/add-on_interest.asp

Math Of Investment (Calculator-Based) by Zorilla, Partible, Esller, Mendoza, Bansa, Apuyan

D. Compound Interest Method

Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.

P =Present Value
M =Compound Amount
i =Rate per conversion period
n = number of conversion periods

I –Compound Interest
M= Compound amount or maturity value
P= original principal

P =Present Value
M =Compound Amount
i = Rate per conversion period
n = number of conversion periods
P = ₱20000
r = 6%
n = 3

M = P(1+i)n
=20000(1+0.06)3
=23820.32
=23820.32-20000
= ₱3820.32

http://www.investopedia.com/terms/c/compoundinterest.asp

Math Of Investment (Calculator-Based) by Zorilla, Partible, Esller, Mendoza, Bansa, Apuyan
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