PRINCIPLES OF MONEY AND TIME RELATIONSHIPS INTEREST the amount of the money paid for the use of borrowed

d capital. Simple Interest the interest paid that is directly proportional to the length of time the amount or principal is borrowed. Principal the amount of money borrowed and on which interest is charged. Rate of Interest the amount earned by one unit of principal during a unit of time. I = Pin Where: I total interest earned by the principal, P amount of the principal I- rate of interest expressed in decimal form, n number of interest periods F = P + I = P (1 + in) Where: F - total amount to be repaid. Ordinary simple interest computed on the basis of one bankers year, or 1 bankers year = 12 months, each consisting of 30 days = 360 days. Exact Compound Interest based on the exact number of days, 365 for an ordinary year and 366 days for a leap year. Ordinary simple interest = Pi (d/360) Exact simple interest = Pi (d/365) For ordinary year = Pi (d/360) For leap year Compound Interest the interest earned by the principal if not paid at the end of each interest period (considered as added to the principal that will also earn interest for the succeeding periods). F = P (1 + I) n, where the factor (1 + n) n = (F/P, i%, n) or Single Payment Compound Amount Factor (SPCAF). Derivation Interest Period 1 2 n Principal at start of period P P (1 + I) P (1 + I) exp(n-1) Interest earned during period Pi P (1 + I) I P (1 + I) exp (n-1) I Compound amount at end of the period P (1+I) exp (n-1) + P (1+I) exp (n-1) = P (1+I) exp n = F

Continuous Compounding F = P (1 + r/m) mn Where: r nominal annual interest rate, m number of interest period each year i = r/m interest rate per interest period, m number of interest periods in n years. Nominal Rate of Interest the rate of interest in compound interest that specifies the rate of interest and the number of interest periods per year. Effective Rate of Interest the actual rate of interest on the principal for one year. Effective rate of interest(ERI) = (1+I)n -1 Present Value (P) the value of the compound amount F at present, or the present value of the amount F, or the amount which when invested now will become F after n periods. P = F (1+I) n = F/(1+I)n where the factor (1+I) n is the Single Payment Present Worth Factor or SPPWF = (P/F, i%, n). Discount (d) the difference between what is worth in the future and its present worth. Rate of discount the discount on one unit of principal per unit time. d = 1 1/(1+I) = 1 (P/F, i%, 1) or d = i/(1+i) = (P/F, i%, 1)I Equivalent rate of interest corresponding to the rate of interest I, I = d/(1-d) = d/(P/F, i%, 1) Problems: 1. Determine the exact and ordinary simple interests on P1200 for the period from January 16 to November 26, 1992, if the rate of interest is 24%. 2. A man borrows P10,000 from a loan firm. The rate of simple interest is 15%, but the interest to be deducted from the loan at the time the money is borrowed. At the end of one year he has to pay back P10,000. What is the actual rate of interest? 3. A man borrows P6400 from a loan association. In repaying this debt he has to pay P400 at the end of every 3 months on the principal and a simple interest of 16% on the principal outstanding at that time. Determine the total amount he has paid after paying all his debt. 4. A man possesses a promissory note, due 3 years hence, whose maturity value is P6,700.48. If the rate of interest is 10% compounded semi-annually, what is the value of this note now? 5. If you are investing your money which is better: 12% compounded monthly or 12.5% compounded annually? 6. An advertisement of an investment firm states that if you invest P500 in their firm today you will get P1000 at the end of 4 years. What nominal rate is implied if interest is compounded quarterly?

References: Engg Economy by M. Arreola, Engg Economy by E. Paul De Garmo, Engg Economics by C. S. Park