MATHEMATICS OF INVESTMENT

A Simplified Technology-based Approach

Rosalinda P. Galarpez

PREFACE
This first instructors edition of work text for Mathematics of Investments: A Simplified Technology-based Approach is designed to provide the basic and essential knowledge of the fundamentals of mathematics of investments to the students of business, accountancy and information technology students. Money makes money, and the money that money makes, makes more money Benjamin Franklin

The illustrated, real-life and practical examples in business today are carefully selected in order to provide mathematically sound and comprehensive coverage of the topics considered essential in a business course. This work text has been designed to meet the needs of business students. This workbook is calculator-based. It deviates from the traditional use of tables to calculate problems on business transactions. The topics of financial mathematics presented in the text include simple and compound interest; annuities; present value; sinking fund and amortization; depreciation and stocks and bonds. The topics in the text are not only useful to classroom situations but also can be used to personal business endeavors in later life. The author trust that end-users may find satisfaction through the contents of this humble fruit of hard work and dedication to her profession. The author sincerely and gladly welcome comments, suggestions and recommendations to improve this workbook to improve this workbook further and publish it. Thank you.

R.P.G.

Dedicated to

the business, accountancy and information technology

students of Divine Word College of Laoag for the inspiration, respect and love;

 a special person for the wisdom, inspirational thoughts, unconditional love and unbounded spiritual guidance; ... God, be all the glory.

Acknowledgments
The author would like to thank the people who have reviewed this manuscript and provided many valuable suggestions and contributions in the developmental editing of this work text;

Dr. Wilson D. Dela Cruz, CPA Prof. Libertine Gertrude R. Macaspac

You will always be part of someone elses LIFE. You may never find out where you fit, but other will fill up the empty spaces in their lives with pieces of you. So, when you wonder why God put you on this earth, remember that others lives may never be complete without you.
rpg

TABLE TABLE of of CONTENTS CONTENTS

II II Preface .... i Dedicaion ... ii Acknowledgment . iii

Table of Contents ... iv Introduction .. v I. Simple Interest

A. Introduction . B. Simple Interest . C. Simple Discount . D. Promissory Notes .. E. Review Exercises ..

II. Compound Interest . A. Concept of Compound Interest B. Manipulation of Compound Amount Formula .. C. Present Value D. Review Exercises

III. Annuity A. Classification of Annuities . B. Simple Ordinary Annuity . C. Simple Annuity Due D. Simple Deferred Annuity and Simple Perpetuity .. E. Review Exercise

IV. Sinking Fund and Amortization .. A. Sinking Fund B. Amortization .

C. Review Exercises

V. Depreciation . A. Factors to Determine Depreciation Expense .. B. Methods Used for Financial Statement Reporting . C. Review Exercises ..

INTRODUCTION ============================================================= Worlds Billionaires (2011)

Ran k Name Net Age Worth Source Country of Citizensh ip Mexico

Carlos Slim Helu

$74 B

71

Telecom

2 Bill Gates

$56 B 55

Microsoft

United States

Warren Buffett

$50 B 80

Berkshire United Hathaway States

Source: Forbes Magazine, March 2011

1. Carlos Slim Helu

"Technology is going to transform people's lives and society everywhere in the world. My main task is to understand what's going on and try to see where we can fit in." Carlos Slim Helu Carlos Slim Helu has been referred to as the "Warren Buffett of Latin America", but he thinks of himself as an operator of companies, rather than just an investor (like Buffett).

At an early age his businessman father instilled in his kids the habit of tracking income and expenses by giving them a savings book to track their weekly allowance and what they spent it on. In 1966, when he was only 25 years old he started building what was to become one of his flagship companies, Grupo Carso, He would buy businesses that was under-performing and turn them into more profitable enterprises. This is a strategy he learned from his dad - buying when there is blood in the streets (which his farther learned during the early 20th century Mexican revolution). 2. William Henry Gates III

"To enable people and businesses throughout the world to realize their full potential." - Microsoft Mission Statement Microsoft mogul, futurist and America's richest person has, with help from billionaire buddy Warren Buffett, convinced nearly 60 of the world's wealthiest to sign his "Giving Pledge," promising to donate the majority of their wealth to charity either during their lifetime or after death. He is no longer the planet's richest person, but that's because he's given away $30 billion to his foundation. The Gates Foundation, the world's most influential charity, tackles tuberculosis and polio and funds famine-resistant crops to fight hunger. He is calling for "a higher sense of urgency" in AIDS vaccine development and also pushing for better tools to rate teacher performance. Gates holds 70% of his wealth in investment fund Cascade, dabbling in everything from autos to hedge funds to Mexican Coke bottler Femsa; the rest of his wealth is held in Microsoft stock. 3. Warren Buffet In 1947, a seventeen year old Warren Buffett graduated from High School. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000. Buffett stayed two years, complaining that he knew more than his professors. Warren Buffett showed early signs of being entrepreneurial through being involved in various business dealings as a child, including purchasing bottles of cola cheaply and selling them for a profit. He also made his first investment in the stock market when he was just 11 years old. Buffett is often called the "Oracle of Omaha"[ or the "Sage of Omaha"[7] and is noted for his adherence to the value investing philosophy and for his personal frugality despite his immense wealth The venerable investor's Berkshire Hathaway climbed more than 15% over the last year adding $3 billion to his to fortune. The 80-year-old is still hunting big deals: "Our elephant gun has been reloaded, and my trigger finger is itchy." Along with bridge partner Bill Gates, the Oracle of Omaha is coaxing America's richest to pledge half their fortunes to charity. "Too often a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse and long-

standing friends." He met value investor Benjamin Graham, his mentor, at Columbia; bought textile firm Berkshire Hathaway 1965, and transformed it into massive holding company: food, insurance, utilities, industrials. Buffett acquired railroad giant Burlington Northern Santa Fe for $26 billion in 2009.

Simple Interest and Simple Discount

LEARNING OBJECTIVES At the end of this chapter, the student should be able to: 1. define and explain the business terms used in the concept of simple interest; 2. compute simple interest; 4. manipulate simple interest formula; 5. apply simple interest formula in business transaction problems

CHAPTER CHAPTER 1 1 ..

SIMPLE INTEREST

When a person deposits money in a bank, for example, in a savings account, the person is permitting the bank to use the money. The bank may use the deposited money to lend customers who are in need of funds for worthwhile purposes. The bank pays the depositor for the privilege of using the deposited money. The amount paid for the privilege of using that money is called interest. If you are the one borrowing money from the bank or any lending institution or from an individual, the amount you pay for the privilege of using that money is also called interest.

A financial agency or a person who invest or lends the money is the lender or creditor and the one who owes it or borrows is the borrower or debtor . The original amount deposited or borrowed is called the principal.

The amount of interest paid is usually given as a percent of the principal. The percent used to determine the amount of interest is the interest rate. Before performing calculations involving an interest rate, write or convert interest rate as a decimal.

The time is the period or length of time for which the money is borrowed or loaned. In borrowing money, the total amount to be repaid to the lender or creditor is

the sum of the principal and the interest. This amount is called the maturity value of the loan.

Interest may be computed by either of the two methods simple interest or compound interest. Interest paid on the original amount is called simple interest. Simple interest is an interest computed on the amount the borrower or debtor received and is added to the original amount when the loan becomes due. Compound interest means the interest is computed more than once during the period of timer of the loan. It is computed not only on the original amount but also on interest already earned.

1.1 Finding Simple Interest

Interest = Principal Interest Rate Time

Interest rates are generally given as percents. Before performing the calculations involving an interest rate, convert or write the interest rate as a decimal for easy computation.

Application: 1. Calculate the simple interest due on a 2-year loan of Php 1,500 that has an annual interest rate of 7.5%

Given: Principal = 1,500. Interest Rate = 7.5% ( .075 )

Time = 2 years Formula: Principal Interest Rate Time = Interest 1,500 .075 2 = Php 225.

1.2 Finding the Maturity Value

Maturity Value = Principal + Interest In borrowing money, the total amount to be repaid to the creditor is the sum of the principal and the interest, the amount is called the maturity value of a loan. Strategy in finding the maturity value: 1. Use the simple interest formula to find the simple interest due. 2. Find the maturity value by adding the principal amount and the interest due. Application: 1. In the example of finding simple interest, the simple interest due on the borrowed money of Php1,500 was P225. Formula: Principal + Interest P1,500 + P 225 = Maturity Value = Php 1,725.

1.3 Finding the Time

The Concept of Time Time is the period between the date of the loan and the due date also known as maturity date. With simple interest rate expressed as an annual rate, time is expressed in years. If the time is not exact, in years and months, say, 2 years and 4 months, 1 years or 1 year and 90 days, it has to be converted to decimal to facilitate computation. Time may be expressed in months. The 12-month period is used in converting time into a fractional form. It is advisable to convert the time expressed in months to decimal form. For example, the time of 9 months is 9/12 or .75; 2 years and 3 months is 1 3/12 or 1.25 years; 16 months is 16/12 or 1.33 years. If the time is given in months and only the loan date is stated, the maturity date shall coincide with the loan date. For example, a loan was

obtained on June 13, 2010 payable in 6 months will mature December 13, 2010. In addition, if the loan maturity date does not make mention of the year, it shall be assumed that these dates fall on the same year. There are also cases when the time is expressed in number of days. It follows that the year should be measured in terms of the number of days. When only the loan date and maturity date are given, the number of days may be counted as either actual time or approximate time. Actual Time is determined by counting every day excluding the loan date until the maturity date. Approximate Time is determined by assuming that each month has 30 days. Actual time is longer than approximate time. Application: 1. Count the Actual Time and Approximate Time from April 17, 2010 to October 18, 2010. Actual Time April (30 17) = 13 May = 31 June = 30 July = 31 August = 31 September = 30 October = 18 184 days 181 days Approximate Time April (30 17) = 13 May = 30 June = 30 July = 30 August = 30 September = 30 October = 18

Two methods are utilized to determine interest when time is expressed in number of days. First, the Exact Interest Method, which uses 365 days as the time denominator. And second, Ordinary Interest Method, which uses 360 days. Exact Interest Method ( IE ) Simple Exact Interest = Principal Rate Time/365 Ordinary Interest Method ( IO ) Simple Ordinary Interest = Principal Rate Time/360 Application: 1. Mr. Co borrowed P125,000 at 4% interest for 65 days. How

much would the interest using the exact and ordinary interest methods? Exact Interest Method ( IE ) Simple Exact Interest = Principal Rate Time/365 = 125,000 .04 65/365 = P 890.41 Ordinary Interest Method ( IO ) Simple Ordinary Interest = Principal Rate Time/360 = 125,000 .04 65/360 = P902.78

Four Time Combinations: A. Simple Exact Interest Using Actual Time I E = Principal Rate Actual Time/365

B. Simple Exact Interest Using Approximate Time I E = Principal Time/365 Rate Approximate

C. Simple Ordinary Interest Using Actual Method I O = Principal Rate Actual Time/360

D. Simple Ordinary Interest Using Approximate Time I O = Principal Time/360 Rate Approximate

Ordinary interest using the actual time is most favorable to the creditor since it yielded the highest interest. This time combination is known as the Bankers Rule and being adopted by banks and lending institutions. In cases the interest method is not specified, bankers Rule is applied.

Application:

1. Compute for the interest if Dominique Sid borrowed P122,500 at 11% from BDO Bank, Laoag Branch on April 17, 2010 to be repaid on October 18, 2010. 2. Exact Interest using actual time IE = Principal Rate Actual Time/365 = P122,500 .11 184/365 = P6,792.88 3. Exact Interest using approximate time IE = Principal Rate Approximate Time/365 = P122,500 .11 181/365 = P6,682.12 4. Ordinary Interest using actual time I O = Principal Rate Actual Time/360 = P122,500 .11 184/360 = P6,887.22 5. Ordinary Interest using approximate time I O = Principal Rate Approximate Time/360 = P122,500 .11 181/360 = P6,774.93 Manipulating the Simple Interest Formula:

There may be cases when the original amount, rate of interest or the time is unknown. The variable or unknown factor is isolated to one side of the equation opposite the given values.

I.4 Finding the Principal

Principal = Interest Interest Rate Time

Application: 1. Asia Bank loaned money to Polaris Company at 8% simple interest for 90 days. If the amount of interest earned was P4,000, use the ordinary interest method to find the principal amount borrowed. Given: Rate = 8%

Interest = P4,000 Time = 90 days Formula: Principal = Interest Interest Rate Time Principal =

Interest RatexTime 4, 000 .08 x90 / 360 4, 000 .02

Principal =

Principal =

Principal = P200,000

I.5 Finding the Interest Rate

When an unknown rate is being computed, it will be noticed that the answer is a decimal number. This must be converted to percent inasmuch always express interest rates as a percentage.

Interest Rate = Interest Principal Time

Application: 1. If a principal amount of P1,250 loaned earns interest of P175. in 2 years, what interest rate is in effect?

Given: Principal Amount - Php 1,250 Interest Time 175

- 2 yrs

Interest Interest Rate = Pr incipalxTime

Interest Rate =

175 1, 250 x 2

Interest Rate = 7%

I.6 Finding the Time

When the time is missing, a whole number in the answer represents years and the decimal represents the portion of a year. The decimal part should be converted to months by multiplying it by 12. If in cases the decimal portion would like to be converted in days, can do it by multiplying it by 360 for ordinary interest or by 365 days for exact interest. Time = Interest Principal Interest Rate

Application: 1. How long will it take for Ms. Gaces loan of P266,000 at 11% interest to earn Php 10,150?

Given: Principal = P266,000 Interest = 20,150

Interest Rate = 5%

Interest Time = Pr incipalxInterestRate 20,150 Time = 266, 000 x5%

Time = 1.515037594 or 1 year and 6 months

II.

Simple Discount
Alternative way of lending money is to collect the interest in advance. This interest is referred to as bank discount. A discount is the deduction from the maturity value. A bank discount is an interest computed on the maturity value

of the loan and is deducted from that amount at loan date to determine the net amount to be received by the borrower. Bank Discount is the product of the maturity value, discount rate and time. Net, also known as the proceeds, is the amount received by the borrower after the bank discount is deducted from the original amount. The factors to be considered in computing for the bank discount are: maturity value, bank discount rate and time. Maturity value is the amount paid for by the borrower on loan date. The bank discount rate is converted to a decimal for computation purposes, expressed in percentage. The time expressed in years or fractional part of a year, is the period between the loan and maturity date.

2.1 Finding the Bank Discount

Bank Discount = Maturity Value x Discount Rate x Time

Application: 1. Cleofe availed of Php 245,000 at 12% discount rate for 10 months. Find the bank discount and proceeds of the loan.

Given:

Maturity value = 245,000 Discount Rate = 12% Time = 10 months

Formula:

Bank Discount = = =

= Maturity Value x Discount Rate x Time 245,000 x 12% x 10/12 245,000 x .12 x .83 Php 24,402.

2.2 Finding the Proceeds

Solving for the proceeds: The computed bank discount had to be deducted from the maturity value. Follow the proceeds formula:

Proceeds = Maturity Value Bank Discount

Proceeds

= 245,000 24,402. = Php 220,598

Hence, Cleofe will received P220,598.00 on loan date as proceeds of her loan.

III.

Promissory Notes

For every business transactions which involve loans, it is necessary for the borrower gives assurance to the creditor that his responsibility will be settled on the prescribed time.

Nowadays, in actual cases, when a business entity or person obtains a loan, he signs a note as an evidence of indebtedness and commitment to pay. A promissory note is a document stating the details of a loan. As stated in Negotiable Instrument Law, a promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. This negotiable instrument when properly endorsed can be transferred or sold to another person or a bank which is not a party to the original loan.

Types of Notes Promissory notes may either be interest-bearing or noninterest-bearing note. Generally, there are two types of notes; simple interest note and bank discount note.

Parts of Simple Interest Note: Maker the maker is the person or business borrowing the money. Payee the payee is the person or business entity lending the money. Face Value the face value is the principal amount borrowed. Simple interest rate the rate of interest charged. Term the time period or duration of the note. Issue date the date when the note was signed and issued. Maturity date the date when maturity value is due the payee.

Application: 1. On January 18, 2011, Greg Garces applied for a loan at Dominique Credit Cooperative. The loan of Php 175,000. was released at 8% simple interest for 18 months.

January 18, 2011 Laoag City Eighteen months after date, I promise to pay to the order of Dominique Credit Cooperative, One Hundred Seventy Five Thousand and xx/100 Pesos for the amount received with simple interest at 8% on June 18, 2012. (Sgd) Greg Garces

Solution: The simple interest on the note is computed by substituting the face value to the principal in the simple interest formula, hence it becomes: Interest = Principal x Rate x Time Interest = Face Value x Rate x Time

Interest = Face Value x Rate x Time = 175,000 x .08 x 18/12 = Php 21,000. Maturity value is computed as Maturity Value = Face Value + Interest Maturity Value = Face Value + Interest = 175,000 + 21,000 = Php 196,000

Bank Discount Note Parts of the Simple discount Note: Maker - the maker is the person or business entity borrowing the money. Payee - the payee is the person or business entity lending the money. Face Value - the face value of the note is the maturity value of the loan. Bank discount rate - the rate interest charged Term - the time period or duration of the note. Issue date - the date when the note was signed and issued. Maturity Date - the date when maturity is due the payee

Application: 1. On April 17, 2010, Aprilyn Ramos was granted a loan by ABCDE Lending Inc. for Php 250,000 payable in 2 years at 5% bank discount.

April 17, 2010 Quezon City Two years after date, I promise to pay to the order of ABCDE Lending INC., Two Hundred Fifty Thousand and xx/100 Pesos for value received with bank discount at 5% per annum on April 17, 2012

(SGD) Aprilyn Ramos

Solution: The bank discount on the note maybe computed by substituting the face value to the maturity value in the bank discount formula, hence: Bank Discount = Face Value x Discount rate x Time Bank Discount = Face Value x Discount rate x Time = 250,000 x .05 x 2 = Php 25,000. Finding the proceeds, Proceeds = = Face Value Bank Proceeds Face Value Discount Bank Discount = 250,000 25,000 = Php 225,000.

Effective Rate of a Bank Discount Note In a bank discount note, the borrower receives only the proceeds. Proceeds are less than the face value, the stated discount rate is not the true or effective rate of the note. Effective interest rate is computed as: Effective interest rate =

Steps in Finding the effective interest rate: 1. Solve for the bank discount 2. Solve for the proceeds

3. Solve for the effective interest rate Application: 1. What is the effective rate of a bank discount note for Php 325,000 at a bank discount rate of 10% for a period of10 months? Bank Discount = Face Value x Discount rate x Time = 325,000 x .10 x 10/12 = Php 27,083.33

Proceeds

= Face Value Bank Discount = 325,000 27,083.33 = Php 297,916.67

bankdiscount Pr oceedsxTime

Effective interest rate =

27, 083.33 297, 916.67 x10 / 12 27, 083.33 248, 263.89 0.10909 or 11 %

= =

Discounting Notes before Maturity Date Businesses or individuals extend credit to their clients or customers by accepting a short-term (less than a year) promissory notes as payment for goods or services. Prior to the maturity date of these notes, the payee may take the note to a bank or individual and sell it. This is a convenient way for a business entity or individual to cash-in a note at any time before the maturity date. This process is called discounting a note. The time used to compute the proceeds is from the date the note is discounted to the maturity date. This is known as the discount period. For example, when a note is discounted at a bank, the original payee receives the proceeds of the discounted note, and the bank or business, who is the new payee, receives the maturity value of the note when it matures.

Discounting a Simple Interest Note Application:

1. North Star Corporation received a Php150,000 simple interest note for 6 months at 10% simple interest from one of its client. After 4 months, North Star Corp. needed cash so it discounted the note at the BDO Bank at a discount rate of 12%. Determine the proceeds that North Star will receive from the discounted note. Solution: Solve for simple interest = 150,000 x .10 x 6/12 = Php 7,500

Solve for maturity value

= 150,000 + 7,500 = Php 157,500

Count the number of months or days of the discount period. 6 months less 4 months = 2 months had lapsed.

Solve for the bank discount = 157,500 x .12 x 2/12 = Php 3,150

Solve for the proceeds

= 157,500 3,150 = Php 154,350

Discounting a Bank Discount Note Application: 1. Southsea Pearl Inc. received a Php 350,000 bank discount note for 10 months from one customer. After 4 months, the note was discounted at the UCPBank at a discount rate of 14%. Determine the proceeds. Count the number of months or days of the discount period: 10 onths less 4 months = 6 months

Solve for the bank discount: = 350,000 x .14 x 6/12 = 350,000 x .14 x .5

= Solve for the proceeds:

Php 24,500

= 350,000 24,500 = Php 325,500

Name: Class Schedule:

Score: Date:

Problem 1. Concepts of Simple Interest

1. What are the two most common methods used by business in computing interest?

2.

What are the factors being considered in computing simple interest?

3. State the simple interest formula.

4. State the principal, rate, and time formulas.

5. For computing simple interest when time is stated as a certain number of days, what are the two methods that may determine the time denominator?

6. How are actual time and approximate time counted?

7. Enumerate the four time combinations. Identify the Bankers Rule.

8. What is bank discount? State the bank discount formula.

9. Explain the promissory note.

10. Who are the original parties involved to a promissory note?

11. What is effective rate of a note?

Name: Class Schedule:

Score: Date:

Problem 2. SIMPLE INTEREST and MATURITY VALUE

1. A man borrowed Php25,000.00 2 years at 7% per year. Find the amount of simple interest

2. Mrs. Go loaned an amount of Php18,500.00 from the BOD bank that charges 6% simple interest for 1 year and 7 months. Find the amount of interest charged.

3. Seychelle Co invested Php50,000.00 in a cooperative that pays 5 2/5 % simple interest for 3 year and 6 months. How much interest did she earn?

4. Mr. Tonypet Cruz deposited an amount of Php95,000.00 in a savings bank. If the bank pays 4 3/5 % simple interest, determine the amount interest earned per year.

5. Miss Angel Pascua borrowed an amount of Php65,450.00 from a lending institution that charges 6.75% simple interest for 3 years. Find the amount of interest per annum and total amount of interest due on the loan.

6. Mr. Cruz borrowed Php 25,650.00 at 4 3/.5% interest for 2 years and 4 months to buy kitchen appliance. Find the maturity value of the loan.

7. Mrs. Arellano signed a loan of Php 380,500.00 for 4 years and 6 months at 8.25% ordinary interest. Find the amount of interest and the maturity value of her loan.

8. If a loan of Php 25,300.00 at 8 2/5% exact interest was obtained on May 28, find the date of the loan is due, amount of interest and maturity value.

Name: Class Schedule:

Score: Date:

Problem 3. CONCEPT OF TIME A. Find the actual number of days 1. 2. 3. 4. 5. January 18 to April 17 of the same year September 14 to February 14 of the following year November 4, 2001 to February 10 of the following year October 23 to January 18 of the following year (leap year) October 23 to December 26 of the same year (leap year)

B. Find the approximate number of days 1. 2. 3. 4. 5. April 15 to October 17 of the same year July 13 to December 23 of the same year September 8 to January 15 the following year August 17 of the current year to January 6 of the following year January 18 to April 17 of the same year

C. Determine the due date after the indicated number of days. 1. 2. 3. 4. 5. 86 days from April 17 196 days from January 18 246 days from July 18 (not a leap year) 4 months from March 7, 2001 6 months from May 8, 2004

Name: Class Schedule:

Score: Date:

Problem 4. EXACT and ORDINARY INTEREST A. Find the Exact Interest 1. Php 23,570.00 for 6% for 126 days

2. Php 45,678.00 for 4 3/5% for 90 days 3. A loan of Php 135,000.00 at 5 2/5% made on August 17 and due on December 8 of the same year 4. A man borrows Php 12,000.00 at 5.7% for 10 months 5. Mrs. San Diego loaned an amount of Php 22,500 from a credit union for 120 days at 6.25 %

B. Find the Ordinary Interest 1. Php 180,000.00 at 8% for 90 days 2. Php 345,500.00 at 4.35% for 230 days 3. Php 25,250.00 at 6 1/5% for 145 days 4. A loan of Php 56,500.00 at 7 1/8% made on October 23 and due on April 18 5. A loan of Php 47,500.00 obtained on November 24 a following at 3.75% and due on June 24 of the following year which is a leap year.

Name: Class Schedule:

Score: Date:

Problem 5. PRINCIPAL, RATE and TIME 1. Mr. Delgado borrowed a sum of money from a lending agency that charges 5.8% simple interest. If he paid Php 7,850.00 for the use of the money in 2 years, how much did he borrow?

2. If Miss Fittu will pay Php 2,755.00 interest for the laptop she bought that cost her Php 52,250.00, what is the rate of interest will be charged for 180 days using the Bankers Rule.

3. How long in years will it take for Php 200,000.00 to amount 220,750.00 at 5.5% simple interest?

4. What is the rate of interest will be charged if Mr. Cuevas borrowed Php 30,000.00 for 1 year and 7 months and the amount of interest was Php 14,305.

5. Miss Santos paid the cooperative Php 16,637.00 interest at 6.8% ordinary interest for 120 days, ord. How much did Miss Santos borrow?

Name: Class Schedule:

Score: Date:

Problem 6. SIMPLE DISCOUNT 1. Janet signs a Php 35,000.00 note for 9 months. The bank discounts the note at 4%. Find the amount of discount and the proceeds.

2. Mrs. De Belen borrows Php 230,000.00 for 245 days at a discount rate of 8.5%. How much will be his discount and proceeds using the Bankers Rule.

3. A note with a face value of Php 24,700.00 was discounted for 11%. If the discount is Php 1,200.00 find the length of the loan in days.

4. Buntan bank is charging 7.4% discount rate. How much will be the discount and the proceeds on a Php 82,400.00 loan for 90 days?

5. Mariano received Php 21,800.00 after signing a 180-day for Php 22,642.00. Find the discount rate.

Name: Class Schedule:

Score: Date:

Problem 7. PROMISSORY NOTE

1. ABKDE company owns a note dated March 15 at 6.75% simple interest with a term of 180 days. The company sold the note to GHMAN Inc. at 8 % simple discount 100 days after March 15, find the following: a) Maturity value b) Proceeds of the note

2. A one-year interest-bearing note with a face value of Php 100,000.00 that earns 7% would have a maturity value of Php 115,000.00. If the note will be discounted at 5% four months before maturity, find the net proceeds.

3.

Mr. Ramos owns a Php 45,200.00 promissory note dated July 11 at 6 2/5% simple interest. The term is 160 days. Fifty days after July 11, Mr. Ramos sold the note to Gaces Corporation at 7 % simple discount. Find: a) the maturity value and

b) proceeds of the note

4. Miss De Leon issued a promissory note on May 21, with the amount of Php 32,400.00 for 125 days with an interest at 7 % simple interest and sold to Mr. Qrput a) find the maturity value and b) maturity date

Bibliography

Arce, Ma. Teresa, et.al. (2010). Math of Investment. 2010 ed. (Based on CMO 03 series 2007) Manila: Rex Bookstore Ballada, Win Lu and Ballada, Susan. (2009). Investment Mathematics: Made Easy Sampaloc Manila. Domdane Publishing and Made Easy Books Capitulo, F. M. and C. M. Cruz, (1990). Mathematics of Investment (A Simplified Approach) 2nd ed. Mandaluyong City. National Bookstore Hart, William L. (1980). Mathematics of Investments. 5th ed. Lexington, D.C. Heath and Co. Tolentino, Rebecca C., Castillo, Benigno A. (2009). Math of Investment: TechnologyBased. Malabon City: Mutya Publishing House Young, Felina C. (2009). Mathematics of Investment Made Simple. Manila: Rex Bookstore. Zorilla, Roland s. et.al. (2010) Business Mathematics, Mutya Publishing House Inc. Malabon City.

Compound Interest

LEARNING OBJECTIVES At the end of this chapter, the student should be able to: 1. define and explain the business terms used in the concept of compound interest; 2. differentiate simple interest and compound interest; 3. differentiate nominal rate from effective rate; 4. compute compound interest; and 5. manipulate and apply compound interest formula to solve business problems.

CHAPTER CHAPTER II II ..

COMPOUND INTEREST
Usually, the interest paid on money deposited or borrowed is compound interest. The interest earned each period of time keeps increasing. This is the effect of compound interest. Compound interest is calculated on the original principal and the interest previously earned by an account. This means that a sum of money invested for one year that earns interest compounded monthly will earn simple interest for the first month of the total period. The interest is added to the original principal to have a new principal. This new principal now becomes the basis for calculating the interest for the second month, and the process is repeated until the last month of the period. In other words, a compound interest is the interest on the principal and the interests of previous periods.

2.1 Time Value of Money

The concept of time value of money is one of the cornerstones on which most financial theory is based. The time value of money says that the amount received today is worth more than the amount received tomorrow. This can be true because a peso received today can be invested and earn interest. The interest compensates the lender for both the cost of not having the funds available to invest elsewhere and risk or uncertainty of not being paid by the borrower. The difference between a present value and a future value is the interest that is included in the future amount. Interest accrues over time. Therefore, the difference between the two values depends on two factors: 1. The interest rate at which the present value increases; the greater the rate, the larger the interest and as a result, the future value. 2. The length of time over which interest accumulates; the longer the money is left in the account, the more interest it gains. Interest may be compounded periodically such as monthly, quarterly, semiannually, or annually over the life of the investment or loan. Compound interest is usually used by banks or individuals in calculating interest for long-term investments and loans.

Compounding Periods (m ) the frequency of conversion period for computing interest at regular stated intervals, expressed by length of time and taken as an exact division of the year such as: Annually (1) Semiannually (2) Quarterly (4) Monthly (12) Daily - once a year or every year - twice a year or every six months - four times a year or every three months - 12 times a year or once a/every month - everyday or 365 times in a year

Number of Conversion Period (n ) this is the total number of compounding period in a year (n ) for the whole investment term obtained in multiplying the time by the number of compounding period per year. n = time x number of compounding period n = t x m

Application: The term of the loan is 5 years compounded: Time (t ) a) Annually b) Semi-annually c) Quarterly d) Monthly 5 yrs 5 yrs 5 yrs 5 yrs x Compounding period (m) x x x x 1 2 4 12 = = n 5

= 10 = 20 = 60

Periodic Rate ( i ) this is the rate of interest per conversion period. interest rate per compounding period obtained in dividing the interest rate by the number of conversion period per year. Periodic Rate = nominal interest rate period per year i= r m

Application: The interest rate is 7% compounded: a) Annually b) Semiannually c) Quarterly d) Monthly 7% 1 = .07 or 7% 7% 2 = .035 or 3.5% 7% 4 = .0175 or 1.75% 7% 12 = .0058 or .58%

The more frequent the compounding periods, the more interest the principal earns. Say, the interest that had been compounded quarterly rather annually, the interest have earned been greater. Nominal Rate ( j ) This is the stated rate of interest per year. Example: 5% means 5% is the nominal rate per year.

2.2 Finding the Compound Amount and Compound Interest

The compound amount or future value is the final amount of the investment or loan at the end of the term. The Compound Amount Formula: CA = P ( 1 + i )
n

where:

CA P i n

= = = =

Compound Amount or Future Value Present Value or Principal Interest rate per period Total compounding periods

Note that factor ( 1 + i )n is called the accumulation factor for compound interest. The compound interest is the difference between the compound amount and the original principal. Exponential Calculation Order: 1 + i = Yx/caret/xy n x P = C A

Application: 1. Compute for the compound amount of Php10, 000 invested at 6% interest compounded semi-annually for 3 years. Solution: Step 1. Periodic Rate = Nominal Interest Rate periods per year i i i i = r m = 6% 2 = .06 2 = .03

Step 2. Total number of conversion periods per year = time multiply by the compounding period per year n n n Step 3. = txm = 3 years x 2 = 6

CA = P ( 1 + i )n = 10,000 (1 + .03)6 = Php 11,940.52

1 + . 03 = yx /caret/xy 6 x 10,0 00 = 11,940.52

Calculation order:

2.3 Finding the Nominal Interest Rate

In problem when the interest rate is being asked while values for other variables are stated, the compound amount formula may be restated as:

( 1 + i )n = CA P
Application: 1. What is the interest rate compounded annually if Php10,000 will accumulate to Php50,544.70 in 17 years? Solution: ( 1 + i )n = CA P ( 1 + i )17 = 50,544.70 10,000 ( 1 + i )17 = 5.05447 where n = 17 years x 1 (annually) i = 10%.

2.4 Finding the Time

The same formula as with interest rate problems will be used for compound interest problems that may involve the total number of compounding periods ( n ) as the missing value while the compound amount, interest rate per period and principal are given. Formula: ( 1 + i )n = CA P

Application: How long will it take P10,000 to accumulate to the amount of P11,050. at 18% compounded monthly? ( 1 + i )n = CA P n ( 1 + 1.5% ) = 11,050 10,000 ( 1 + i )n = 1.105 where: i = 18% 12 i = 1.5% Referring to Table 1, look for the column under 1.5%. Value 1.105 cannot be found in Table 1, it falls between 1.093 (n = 6) and 1.1098 (n = 7).

2.5 Compound Amount at a Fraction of a Period

In the CA formula P ( 1 + i )n , n is assumed to be an integer. However if n contains whole periods and a fraction of a period (mixed number; year and months), the maturity value shall be the sum of the compound amount of the whole number part and the accumulated value of the fractional part of a simple interest. To calculate the maturity value on compound interest whose term contains whole periods and a fraction of a period, observe the steps and procedures, as follows: 1. Find the compound amount to the end of the whole number periods. 2. Accumulate the compound amount obtained in step 1 for the fractional part at simple interest. Applications 1. If Php 42,000 is invested for 5 years and 5 months at 8% compounded annually, find the compound amount . Given: Present value = Php 42,000 Term = 5 years and 5 months Nominal rate ( j ) = 8% Compounding period ( m ) = annually Number of conversion ( n ) = 5 Periodic rate ( i )= 8% Solution: Step 1. Find the compound amount at the end of 5 years CA 1 = PV ( 1 + i )n = 42,000 ( 1 + .08) 5 = 61,711.78 (rounded to the nearest centavo) Using scientific calculator: 42,000 x (1+.08) 5 = 61,711.78

Step 2. Accumulate the compound amount (CA1 ) obtained in step 1 using the simple interest for the fractional period of 5/12 years. CA 2 = CA 1 ( 1+ rate x time) = 61,711.78 ( 1 + .08 x (5 12) ) CA2 = 63,768.84 (rounded to the nearest centavo) Using scientific calculator: 61,711.78 x ( 1 + (5 12) ) = 63,768.84

The two steps can be combined by using a single formula, as follows: CA = PV ( 1 + I ) n ( 1 + rt )

2.If Php 50,000 is loaned for 3 years and 9 months at 7% compounded at the end of every 6 months, find the compound amount. Given: PV T R m i n Solution: CA = = = = = = 50,000 3 years and 9 months 7% semi-annually .07 2 = .035 txm = 3x2 = 6

= PV ( 1 + I ) n ( 1 + rt ) 50,000 x { ( 1 + .035) 6 x [ 1 + (3 12) ] } = 64,727.20

PRESENT VALUE
The process of calculating present value is actually the opposite of finding the compounded future value (compound amount). When a compound amount (future value) is known, the present value is the amount that must be invested today in such a way, it will accumulate compound interest to be added to the future value. For example, if a family wants to put up a business in the future, they want Php 500,000 in 5 years (the future value), what amount must be invested today (the present value) at 8% compounded quarterly to achieve the goal?

2.6 Finding Present Value Using Formula

The present value of an amount due in n interest period is the value of principal which is invested at a given rate. Hence, to find the present value (PV) of a compound amount, use the following formula:

CV PV = (1 + i ) n or PV = CV (1 + i ) n

Where:

PV = Present Value CA = Compound Amount i = Interest rate per period n = Total compounding periods

Note that (1 + i ) n is called discounting factor. Using Exponential Calculation Order Press : 1 + i = yx/caret/x
y

M +

C A

MR/An s

P V

Application: 1. Find the present value of Php 30,000 if the interest rate is 16% compounded quarterly for 6 years. CV PV = (1 + i ) n Given: CA = 30,000 j = 16% t = 6 years m = quarterly i = 16% 4 = 4% n = 6 x 4 = 24
30,000 (1 + .04) 24 30,000 2.5633041 Php 11,703.64

PV =

PV = PV =

2. Find the present value of Php 12,250 due in 3 years if the interest rate is 8% compounded quarterly. Given: CA = 12,850. j = 8% t = 3 years m = quarterly i = .08 4 = 2% n = 3 x 4 = 12

Using a scientific calculator: PV = 12,850 x ( 1 + .02) 12 +/ = 10,132.14

2.7

Present Value at a Fraction of a Period

In the formula PV = CA ( 1 + i ) n , n is assumed as an integer. However, if n contains whole periods and a fraction of a period (mixed number, year and months), the present value shall be calculated by following the steps and procedures: 1.Add one whole period to the number of whole periods to have n + 1 and use this to discount the final amount. 2.Accumulate the discounted final amount, now PV1 , using the added fractional period in step 1 that completed the added one whole period. Applications 1. Find the present value of PHP 30,000 due in 3 years and 7 months at 7% compounded annually. Given: CA = 30,000. j = 7% t = 3 years and 7 months m = annually i = .07 1 = 7% n = 3x1 = 3 Solution: Step 1. P1 = CA ( 1 + i ) n = 30,000 ( 1 + .07 ) 4 = 22,688.86 (rounded to the nearest centavo) Using scientific calculator: P1 = 30,000 x ( 1 + .07 ) 4 +/ = 22,688.86 Step 2. Accumulate the discounted final amount, now P 1 , at simple interest using the added fractional period ( 5 months) that completed the added n + 1 number of whole periods, as follows:

P2 = P1 ( 1 + rt ) = 22,688.86 [ ( 1 + .07 ( 5 12) ] = 23,554.39 9rounded to the nearest centavo) Using scientific calculator: 22,688.86 x [ ( 1 + (.07 x 5 12 ) ] = 23,554.39

Name: Class Schedule:

Score: Date:

Problem 1. COMPOUND AMOUNT and COMPOUND INTEREST

1. Find the compound amount and compound interest if Php 124,000.00 is invested at 6 3/5% compounded: a) Annually b) Semi-annually c) Quarterly d) Monthly

2. Php 225,350.00 is deposited in a savings account at 3% compounded semiannually for 4 years and 5 months. Find the: a) compound interest

b) Compound amount

3.

If Php 280,600.00 is placed in a cooperative fund that pays interest at 7.3% compounded monthly for 3 years months.

4. Accumulate Php 17,800.00 for 4 years and 7 months at 6 3/8% compounded quarterly.

5. Find the maturity value of Php 48,750.00 at the end of 3 1/3% years if the discount rate is 5.25% compounded semi-annually.

Name: Class Schedule:

Score: Date:

Problem 2. PRESENT VALUE and COMPOUND INTEREST

1.

If Php 20,430.00 is invested today compounded semi-annually due at the end of 2 years and 6 months at 4%, find the present value.

2.

Php 150,400 at 6.2% is due after 4 years compounded quarterly, find the present value.

3. Discount Php 229,560.00 for 5 years at 4 % compound annually.

4. How much must be invested today in a savings fund to accumulate Php 80,000.00 after 6 years if money earns 6.5% compound semi-annually.

5. How much must be deposited in a bank now that gives 7.2% interest compounded monthly so that after 6 years , depositor will have Php 450,000.00

Name: Class Schedule:

Score: Date:

Problem 3. COMPOUND AMOUNT and PRESENT VALUE AT A FRACTIONAL PERIOD

1. Discount Php 229,560.00 for 3 years and 5 months at 4 % compound annually.

2. How much must be invested today to accumulate Php 80,000.00 after 6 years if money earns 6.5% compounded quarterly.

3. Php 48,600.00 is payable at the end of 4 years and 4 months. If the rate of interest charged is 4 3/5% compounded monthly, how much is its value today?

4. A businesswoman will need Php 650,000.00 to buy a vehicle at the end of 6 years and 6 months. How much should be deposited now that pays 4.6% interest compounded quarterly to be able to buy the vehicle?

5. How much must internet caf owner deposit in a savings bank now that gives 9% interest compounded annually so that after 6 years and 3 months the owner will have Php 550,500.00?

6. Accumulate Php 57,670.00 for 4 years and 11 months at 4 compounded at the end of each 3 months.

5/9%

7. Find the future value of Php 54,000.00 at the end of 3 years if it is invested at 6 1/8% compounded twice a year.

Bibliography

Arce, Ma. Teresa, et.al. (2010). Math of Investment 2010 ed.. Manila: Rex Bookstore Ballada, Win Lu and Ballada, Susan. (2009). Books. Sampaloc Manila. Investment Mathematics. Made Easy

Cabero, Jonathan B. (2008). Mathematics of Investment. Manila: Booklore Publication Caras, Madeleine S. (2008). Mathematics of Investments. Sta Cruz, Manila: Booklore Publication Tolentino, Rebecca C., Castillo, Benigno A. (2009). Math of Investment: TechnologyBased. Malabon City: Mutya Publishing House Young, Felina C. (2009). Mathematics of Investment Made Simple. Manila: Rex Bookstore.

CHAPTER CHAPTER III III

Annuities

LEARNING OBJECTIVES At the end of this chapter, the student should be able to: 1. define and explain the concept of annuity; 2. describe different types of annuity; 3. compare and contrast different types annuities;

..

4. calculate the compound amount and present value of annuities; 5. determine the amount of periodic payments in annuity problems; 6. Identify and solve for the unknown values in different problems in different types of annuity; 7. Apply the concept of annuity to solve business problems.

ANNUITY
Most of the time in business, transactions involve a series of equal periodic payments rather than lump sums. The idea relating to compound interest is concerned with lump sum investments or payments. Examples of annuities are installment payments, life insurance premiums, periodic savings, periodic payments such as rentals, utility payments. This is known as annuity. Annuity is a series periodic equal payments made at regular intervals of time. Annuity was originally referred to only to annual payments, but it now applies to payment interval of any length of time. Payments are computed by the compound interest method and are made at equal intervals of time. An annuity is an interestbearing financial contract that combines the tax-deferred savings and investment properties of retirement accounts with the guaranteed-income aspects of insurance. 3.1 Types of Annuities There are several different types of annuities available, each with different properties and costs that should be taken into consideration as business owners put

together their retirement investment portfolio. The two basic forms that annuities take are immediate and deferred. An immediate annuity begins providing payouts at once. Payouts may continue either for a specific period or for life, depending on the contract terms. Immediate annuities, which are generally purchased with a one-time deposit, are not very common. They tend to appeal to people who wish to roll over a lump-sum amount from a pension or inheritance and begin drawing income from it. The immediate annuity would be preferable to a regular bank account because the principal grows more quickly through investment and because the amount and duration of payouts are guaranteed by contract. Deferred annuities, in contrast, delay payouts until a specific future date. The principal amount is invested and allowed to grow tax-deferred over time. More common than immediate annuities, deferred annuities appeal to people who want a tax-deferred investment vehicle in order to save for retirement. Basic Types of Deferred Annuity: Beyond the funding distinction that separates deferred from immediate annuities, there is also the different ways annuities generate income. When the insurance company receives payment, they invest the money in one of three different ways: 1. Fixed Annuities is a stream of equal pay payments at equal time interval. Interest earned from debt instruments like certificates of deposits (CDs), bonds, and mortgages. 2. Variable Annuities: interest earned from equity instruments like stocks and commodities. Fixed annuities provide a guaranteed interest rate over a certain period, usually between one and five years. In this way, fixed annuities are comparable to certificates of deposit (CDs) and bonds, with the main benefit that the sponsor guarantees the return of the principal. Fixed annuities generally offer a slightly higher interest rate than CDs and bonds, while the risk is also slightly higher. In addition, like other types of annuities, the principal is allowed to grow tax-deferred until it is withdrawn. Payment Interval is the period of time between consecutive payments dates. The time between the beginning of the first payment interval and the end of the last payment interval is called the term of the annuity. The interval may be monthly, quarterly, semiannually and annually.

3.2 CLASSIFICATIONS OF SIMPLE ANNUITIES A. Annuities Classified by Term

a) Annuity Certain is an annuity whose term is fixed, when the term starts and ends on definite dates. If the term of the annuity has been stipulated and agreed upon between the two parties. Example: the term of annuity certain e.g. educational plan, in which begins and ends on definite dates such as a 5-year term from April 1, 2004 to April 1, 2009. b) Perpetuity. The term of a perpetuity begins on a definite date but never ends, such as principal that remains forever untouched, drawing interest. The length of the term is infinite. Example is the trust funds. c) Contingent Annuity is an annuity whose term depends upon some uncertain events. The term of contingent annuity begins on a definite date but the ending date is not fixed in advance. The ending date depends on some condition happening in the future. For example, life insurance plans; and pensions are paid only so long as the insured is living; the length of time is therefore uncertain.

B. Annuities Classified by Dates of Payment

a) Ordinary Annuity is a simple annuity whose payments or deposits are made at the end of each payment interval. b) Annuity Due is an annuity whose payments are made at the beginning of each payment interval. c) Deferred Annuity is an annuity in which the first payment is to be made on some future date. Periodic payments are made at the end of each payment interval. However, the term of the annuity does not begin until after a designated period of time. The length of time from the present to the beginning of the first payment interval is called the period of deferment.

An annuity is considered simple annuity if the payment interval coincides with the time of interest conversion, otherwise, it is considered general annuity.

3.3 Finding the Compound Amount or Future Value of an Ordinary Annuity The process of finding the compound amount (future value) of an ordinary annuity uses the formula:

where:

FVOA = compound amount or future value C i n = annuity or periodic payment = periodic rate ( j m) = number of period per year ( t x m)

Application: 1. What amount will accumulate if you deposit Php5,000 at the end of each year for the next 5 years? Assume an interest of 6% compounded annually.

3.4

Finding the Present Value of an Ordinary Annuity

where:

PVOA = compound amount or future value C = annuity or periodic payment i = periodic rate ( j m) n = number of period per year ( t x m )

Application 1. What amount must you invest today at 6% compounded annually so that you can withdraw Php5,000 at the end of each year for the next 5 years?

3.5

Finding the Future Value of an Annuity Due

where:

PVAD= compound amount or future value C = annuity or periodic payment i = periodic rate ( j m) n = number of period per year ( t x m )

Application:
1. What amount will accumulate if you deposit Php5,000 at the beginning of each year for the next 5 years? Assume an interest of 6% compounded annually

3.6

Finding the Present Value of an Annuity Due

where:

PVAD = compound amount or future value C = annuity or periodic payment i = periodic rate ( j m) n = number of period per year ( t x m )

Application: 1. What amount must you invest today a 6% interest rate compounded annually so that you can withdraw Php5,000 at the beginning of each year for the next 5 years? 3.8 Finding the Periodic Payment The size of the periodic payment must be determined when the future value or the present value of an annuity is known.

Application:

1. Find the periodic payment, required to accumulate a sum of Php20,000 over 8

years with interest earned at the rate of 5%/year compounded twice a year. 2. What will be the periodic payment if a debt of Php25,000 was paid back in ten equal payments if the rate of interest was 7% compounded quarterly?

Name: Class Schedule:

Score: Date:

Problem 1. COMPOUND AMOUNT OF AN ORDINARY ANNUITY

1.

Find the future value of Php 100,000.00 deposited in Bhuttan bank which pays 6% interest at the end of every three months for 5 years.

2. Ms Mariz invested Php 125,000.00 at the end of every six month for 6 years at 7.5% interest compounded semi-annually, how much is Ms. Mariz investment worth after 6 years.

3. Luv U Investment is paying 4.7% interest compounded monthly. How much will 10,000.00 deposited at the end of each month be worth after 5 years?

4.

How much will Php 80,000.00 deposited at the end of every 3-month period into a savings account be worth after 3 years at 5.8% quarterly.

5. What is the future value of an ordinary annuity if the periodic payment is Php 2,500.00 payable at the end of each year for 4 years at an interest rate of 16% compounded quarterly.

6. Mr. Angeles deposits Php 23, 500 every end of the month at BOD bank that credits 4.2% monthly for 2.5 years.. How much money does he have at the end of 2.5 years

Name: Class Schedule:

Score: Date:

Problem 2. PRESENT VALUE OF AN ORDINARY ANNUITY

1.

What amount must be deposited every end of the year in an account that credits 1.5% compounded annually in order

2. XYZ Inc. purchase an office equipment and pay Php 125,000.00 to the credit union at the end of each quarter for one year. How much should be deposited now at 6% interest compounded quarterly in order to meet his obligation?

3.

What is the present value of an annuity if the size of each payment is Php 21,000.00 payable at the end of each year for 5 years and the interest rate is 7.6% ?

4. If the size of periodic payment is Pphp 25,000.00 payable at the end of each quarter for 7 years at an interest rate of 5.8% compounded quarterly, find the present value.

5.

How much must be deposited now in order to withdraw Php 14,000.00 at the end of each month for 3 years if MyCo savings and Loan pays 5% interest compounded monthly?

Name: Class Schedule:

Score: Date:

Problem 3. FINDING PERIODIC PAYMENT

1.

Mrs. Farton plans to travel abroad with her fellow employees. What amount should she save a the end of each month in the bank that credits 1.5% compounded monthly for 2 years in order to accumulated the Php 250,000.00 that she needs for her plan?

2. How much money must Nikie pays every end of the year for 4 years in a bank that charges 5.5% per annum on a loan if he wanted to avail now on a loan of Php 150,000.00 for additional capital in her buy and sell business.

3. Mrs. Sunji won Php 250,000,000.00 in a lottery. She invested her money in multi-national company that gives 12% compounded semi-annually with the condition that she will receive 25 semi-annual withdrawals starting at the end of 2 years. Determine the size of her semi-annual withdrawals.

4. To provide for the purchase of a new laptop 2 years from now, how much should Gayle deposit at the end of each 3 months in a savings account that gives 5% compounded quarterly. It is estimated the laptop will cost Php 45,500.00 in 2 years.

5.

Ekie deposits Php 100,000.00 now at 11% compounded monthly and plans to exhaust the account by making equal monthly withdrawals for the next 3 years. Find the size of the monthly withdrawals?

Name: Class Schedule:

Score: Date:

Problem 4. COMPOUND AMOUNT OF AN ANNUITY DUE

1. Bill Blass is paying 6% interest compounded quarterly. Find the future value of Php 11,000,000.00 deposited at the beginning of every 3 months for 5 years.

2. BBB company invested Php 120,000.00 at the beginning of each month at 10.20% interest compounded semi-annually, find the future value at the end of 3 years and 4 months.

3. How much is the future value of an annuity due of Php 7,000 payable at the beginning of each quarter for 6 years if the interest rate is 4%.

Name: Class Schedule:

Score: Date:

Problem 4. PRESENT VALUE OF AN ANNUITY DUE

1. What amount must be deposited now in order to withdraw Php 70,000.00 at the beginning of every six month for 12 years if interest is 8% compounded semi-annually?

2.

Find the present value of an annuity due of Php 40,000.00 every year payable at the beginning of each year for 18 years if the interest rate is 7% compounded annually?

3. Mr. Guidotti plans to get a life insurance policy which has an annual premium of Php 15,000.00 due at the beginning of the year. If he chooses to pay his premium in quarterly installments, how much should he pay at the beginning if each quarter if the interest rate is 10% compounded quarterly?

4. If Mrs. Montenegro wants Php 13,000.00 must be withdrawn at the beginning of each 3-month period for 4 years at 12% quarterly, how much must be deposited now to yield the annuity payment needed.

5. Determine what amount must be deposited now in order to withdraw Php 7,000 payable at the beginning of each month for 6 years if the interest rate is 14% compounded monthly.

Bibliography

Arce, Ma. Teresa, et.al. (2010). Math of Investment 2010 ed.(Based on CMO 03 S. 2007). Manila: Rex Bookstore Ballada, Win Lu and Ballada, Susan. (2009). Investment Mathematics. Made Easy. Sampaloc Manila. Domdane Publishing and Made Easy Books. Cabero, Jonathan B. (2008). Mathematics of Investment. Manila: Booklore Publication Caras, Madeleine S. (2008). Mathematics of Investments. Sta Cruz, Manila: Booklore Publication Tolentino, Rebecca C., Castillo, Benigno A. (2009). Math of Investment: TechnologyBased. Malabon City: Mutya Publishing House Young, Felina C. (2009). Mathematics of Investment Made Simple. Manila: Rex Bookstore.

Online Resources: www.accountingcoach.com www.investopedia.com www.getobjects.com www.collegecram.com www.yourteacher.com

CHAPTER CHAPTER IV IV

Amortization and Sinking Fund

LEARNING OBJECTIVES At the end of this chapter, the student should be able to: 1. define and explain the business terms used in the concept of sinking fund and amortization; 2. Calculate the periodic payment, original amount of the loan, and the interest paid in an amortization; 3. Construct the amortization schedule; 4. Calculate the periodic table deposit, interest and the amount in fund in a sinking fund problem; 5. Set up sinking fund schedule;

AMORTIZATION and SINKING FUND

Amortization and sinking fund are two common applications of annuities . These are two general methods of repaying loans. In the amortization method, the borrower repays the lender by means of installment payments at periodic intervals. Typically this method is used with individual borrowers. Examples include car loan, mortgage repayment. In the sinking fund method, the borrower repays the lender by means of a lumpsum payment at the end of the term of the loan. The borrower pays interest on the loan in installments over this period. It is also assumed that the borrower makes periodic payments into a fund, called a sinking fund, which will accumulate to the amount of the loan to be repaid at the end of the term of the loan.

AMORTIZATION Amortization is a method of repaying an interest bearing debt by a series of equal payments at expected time periodic interval. It is the repayment of a loan by installments at periodic interval. These equal payments form an annuity whose present value is the original principal of loan. Amortization is a financial arrangement whereby a lump-sum obligation measured at present is incurred and is write off or liquidated by a series of equal periodic payments for a specified amount of time at compound interest. It is the distribution of a loan repayment into multiple cash flow installments as determined by an amortization schedule. Synonymous terms: outstanding loan balance, outstanding principal, unpaid balance, remaining loan indebtedness Amortization schedule shows precisely how a loan will be repaid. It gives the required payment on each specific date and shows how much of it constitutes interest and how much constitutes repayments of the principal. Outstanding balance, At each moment of time, you need to know the present value of your outstanding liabilities. This is of great practical importance. Suppose that you have just paid the installment number. If you want to completely repay your loan, in addition to the current installment, you must pay the present value of the remaining future installments. Principal refers to the amount borrowed that has to be paid back to the lender as opposed to interest that has to be paid for use of the principal. Each period, a business may pay interest and also make a payment on the principal of the loan, which reduces the principal amount of the loan, of course. In this situation the loan is amortized, or gradually paid down.

GENERAL FORMULA OF AMORTIZATION

The amortization calculator formula is:

where:
P = is the principal amount borrowed A = is the periodic payment R = is the periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments) n = is the total number of payments (for a 30-year loan with monthly payments n = 30 12 = 360).

SINKING FUND
Sinking Fund refers to a fund created by making periodic deposits to anticipate the need of paying a large amount of money at some future dates. Sinking fund is a lump sum payment at the end of the term of the loan and used to pay off other debts, replace worn-out equipment, or provide money for the purchase of new equipment. The amount in the fund at any time is the sum of an ordinary annuity accumulated by equal periodic payments at equal intervals of time. Sinking fund payments may be computed as:

where: P = is the principal amount borrowed A = is the periodic payment R = is the periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments) n = is the total number of payments (for a 30-year loan with monthly payments n = 30 12 = 360).

Name: Class Schedule: Time/Day:

Score: Date:

Problem 1. AMORTIZATION

1. Dominique purchased a set of spa salon equipment worth Php 150,000,000 and made a Php 50,000.00 down payment. She agreed to pay the balance by making equal payments at the end of each month for 6 years. If the interest charged is 10% compounded monthly, how much is the amortization payment?

2. Salidumay Marketing purchased a set of 10 computer units for Php 320,000.00. What is the amortization payment is required for a 3-month period at 10% interest to pay off this obligation in 5 years?

3. Dally Lending is offering mortgage at 7% interest. What annually payments would be required is amortized a loan of Php 1,500,000.00 for 5 years? Construct an amortization schedule.

4. Lumen purchased a new iphone for Php 55,000.00. What amortization payments are required every 3 month at 8% for 5 years to pay off the iphone. Construct an amortization schedule.

5. A loan of Php 140,000.00 is to be amortized with Php 10,000.00 being paid at the end of each quarter. The interest rate is 16% compounded quarterly. Construct an amortization schedule.

Name: Class Schedule: Time/Day:

Score: Date:

Problem 2. SINKING FUND

1. What sinking fund payment is required at the end of each month 8% interest
compounded monthly to amount Php 40,000.00 in 3years.

2. Cristi has plan of having a vacation in Singapore in 2 years and will need a Php
150,000.00 for the holiday trip. Cristi set up a sinking fund savings account in preparation for the trip. She makes a regular payments at the end of each month period into the fund that pays 4% interest compounded monthly. What periodic sinking fund payment will allow Cristi to fulfill her planned vacation?

3. I want to accumulate Php 180,000.00 in 2 years for a new set gym equipment.
If my bank is paying 3% interest compounded quarterly, how much must I deposit at the end of the 3-month period to buy the gym equipment?

4. Pochacha wants to venture in a internet caf business in 3 years and she needs
Php 275,000.00 for the initial investment. She set up a sinking fund account to achieve her goal. What equal payments must be deposited every 6 months if interest is 8% compounded semi-annually?

5. Hyacinth hotel has a financial obligation of Php 10,000,000.00 due in 10 years.

A sinking fund is designed to meet the obligation at 12% interest compounded monthly. What equal monthly sinking fund payments are required to accumulate the needed amount.

Bibliography

Arce, Ma. Teresa, et.al. (2010). Math of Investment 2010 ed.(Based on CMO 03 S. 2007). Manila: Rex Bookstore Ballada, Win Lu and Ballada, Susan. (2009). Investment Mathematics. Made Easy. Sampaloc Manila. Domdane Publishing and Made Easy Books. Cabero, Jonathan B. (2008). Mathematics of Investment. Manila: Booklore Publication Caras, Madeleine S. (2008). Mathematics of Investments. Sta Cruz, Manila: Booklore Publication Tolentino, Rebecca C., Castillo, Benigno A. (2009). Math of Investment: TechnologyBased. Malabon City: Mutya Publishing House

Online Resources: www.accountingcoach.com www.investopedia.com www.getobjects.com www.collegecram.com www.yourteacher.com

Depreciation

LEARNING OBJECTIVES At the end of this chapter, the student should be able to: 1. define and explain the business terms used in the basic concepts of depreciation; 2. know different methods of solving for depreciation; 3. compute depreciation expense applying different methods; and 4. construct depreciation schedule correctly.

CHAPTER CHAPTER V V

DEPRECIATION
The valuation of the long-term or long-lived assets shall be discussed in this chapter. Long-term assets refer to those assets acquired by the business to be used in business operations. Examples of these assets are equipments, machineries, buildings, vehicles, land, tools, furniture, fixtures, among others. As time goes by, the value or the usefulness of these assets decreases except land. The cost of these assets distributed over the useful life in order to coincide with the revenue earned which is termed as depreciation. For accounting purposes, depreciation is written under the operating expense as depreciation expense when preparing income statement; while it is used to determine the current book value on the balance sheet. Basic Concepts Assets depreciate for many reasons; physically worn out from use, deterioration, or become obsolete and inadequate. Depreciation refers to the decrease or loss in value of an assets from the original cost of a long-termed asset distributed accordingly to its useful life. Book Value is the value of an asset at any given time within its expected life span. This is the net value of a business after liabilities have been deducted from asset. The book value is the difference between the original cost and the accumulated depreciation expense at a given point of time. Depreciation Schedule is a chart showing the gradual depreciation of an asset of each year in its useful life. It shows the amount of depreciation per year, the accumulated depreciation of an asset at any given time within its estimated life span. The depreciation schedule consists of the year, annual depreciation, accumulated depreciation and the book value at the end of each year.

Major Factors of Computing Depreciation Expense Total Cost or Original Cost refers to the cost of an asset plus the freight cost, handling and set-up charges shouldered by the buyer. Salvage Value refers to the value of an asset at the time it is taken out of service. The amount recovered or saved through sale or other disposition of the asset no longer useful and retired from service. Scrap Value is the fragment or bit/pieces value, Trade-in Value is the remaining value of an asset still works and in good condition. This value is collectively known as residual value. An asset cannot be depreciated lower the residual value.

Useful Life refers to the length of time an asset is expected to generate revenue. It is expressed in terms of time or unit of production. Methods for Computing Depreciation There four principal methods of solving depreciation: Straight-line method; Sum-of-the-Years Method; Declining-balance method; and Units-of-Production Method. A. Straight-line Method This is the simplest and most widely used of computing depreciation in business. This provides an equal charge distributed over the estimated useful life of an asset. In this method, the annual depreciation of an asset is evenly distributed throughout its estimated life. That is, annual depreciation is equal to total depreciation divided by the estimated life in years. Steps in Solving Depreciation Using Straight-Line Method 1. Determine the total cost of the asset. Total Cost = Original Cost + Additional cost or charges 2. Find the total depreciation Total Depreciation = Total cost Residual Value 3. Solve for annual depreciation. Annual Depreciation = Total Depreciation Useful Life in years 4. Determine the book value. Book Value = Total Cost Annual Depreciation 5. For book value of an asset at the rate of any given period n within its estimated life, and the number of years at the end of a period, the formula is: a) Annual rate of depreciation = annual depreciation Total cost x 100% b) Vn = Total cost ( 1 annual rate of depreciation) 6. Set-up a depreciation schedule.

Application:

1. Guidotti Enterprise purchased a delivery van which will last for 25 years costs Php1,250,800. If its salvage value is Php45,000, find the following using straight-line method of depreciation. a) Total depreciation b) Annual depreciation c) Annual rate of depreciation d) Book value after 5 and 15 years e) Prepare a five-year depreciation schedule Given: Original cost = Php1,250,800 Salvage value = Php45,000 Useful life Solution: 1. Total depreciation = Total cost Salvage Value = 1,250,800 45,000 = 1,205,800 2. Annual depreciation = Total depreciation Useful Life in years = 1,205,800 25 = 48,232.00 3. Annual rate of depreciation = annual depreciation Total cost x 100% = 48,232.00 1,250,800 x 100% = 4. Book value after 5 years = BV5 = Total cost ( 1 annual rate of depreciation) BV5 = 1,250,800 [ 1 ( .0386) x 5 ] BV5 = 1,009.640.00 5. Book value after 15 years = BV15 = Total cost ( 1 annual rate of depreciation) BV15 = 1,250,800 [ 1 ( .0386) x 15 ] 3.86% = 25 years

BV15 = 527,320.02 6. Prepare a 5-year depreciation schedule Year 0 1 2 3 4 5 Annual Depreciation 48,232.00 48,232.00 48,232.00 48,232.00 48,232.00 Accumulated Depreciation 48,232.00 96,464.00 144,696.00 192,928.00 241,160.00 Book value 1,250,800.00 1,202,568.00 1,154,336.00 1,106,104.00 1,057,872.00 1,009,640.00

B. Sum-of-the-Years Digits (SYD) Method The sum-of-the-years digits method is an accelerated depreciation method. In this method, the larger amount of depreciation will be allocated at the beginning of the useful life of the asset and decrease each year at a proportional rate. In the Sum-of-the-Years method, the SYD of the assets estimated life is used as the common denominator of the fractions. This can be done by adding the consecutive digits for each year of an assets estimated life together. The numerator is the years of useful life remaining at the beginning of the accounting period. Steps in Solving Depreciation Using Sum-of-the-Years Digits Method 1. Find the total depreciation. Total Depreciation = Total Cost Residual Value 2. Find the sum of the digits of useful life of an asset. Example: the expected useful life of an asset in 4 years, the denominator is 10. Thus, the denominator: 1 + 2 + 3 + 4 = 10 the numerator: 4,3,2,1 3. Make a fraction using the year numbers in the useful life as the numerator in the reverse order, the denominator will be the sum of the digits of the useful life. 1st year: 4/10 2nd year: 3/10 3rd year: 2/10 4th year: 1/10 4. Find the amount of depreciation per year by multiplying the total depreciation and each fraction formed in step 3.

Application: 1. In January 2, 2002, the RPG Company purchased a machine for its business operation for Php540,000.00 with a estimated useful life of 10 years and an estimated salvage value of Php40,000. Find the depreciation expense per year using the SYD method. Given: Total Cost = 540,000 40,000 5 years

Salvage value = Useful life Solution: Step 1. Total Depreciation =

= Total Cost Residual Value = = 540,000 40,000 500,000

Step 2. Find the sum of the digits of useful life of an asset. SYD SYD = 5 + 4 + 3 + 2 + 1 = 15 = n(n+1)2 = 5(5+1) 2 = 15 Step 3. Compute the depreciation rate fractions for an asset that has a useful life of 5 years. Year 1st year: 2nd year: 3rd year: 4th year: 5th year 1/15 Depreciation Rate Fraction 5/15 4/15 3/15 2/15 Depreciation Rate 33.33 % %

Step 4. Compute for the depreciation expense per period.

C. Declining-Balance Method Declining-balance method is the second accelerated depreciation in business. Higher depreciation costs are allocated for the assets earlier life. This means that the annual deprecation declines every year. In this method, depreciation is computed by multiplying a percentage rate by he previous periods net book value and not by the total depreciation. To determine the depreciation expense using declining balance method, 1. Find first the annual depreciation rate (also known as straight-line rate); which can be determined by 1 n , where n is the useful life of an asset.

2. Get the Declining-Balance Rate (DBR), multiply by the multiple. Multiples most commonly used: 1.25 or 125%; 1.5 or 150%. When 2 or 200% is being used as a multiple it is called double-declining balance method. DBR = (1 n ) x multiple Application: 1. SRP Shipping company purchased a container van for Php200,000. It is expected to have a 5-year life span and a trade-in value of Php20,000. Compute the depreciation expense using declining-balance method. Solution: a) Declining-balance rate = 1 useful life x multiple = = b) c) Depreciation for the year = Beginning book value x declining-balance rate Ending book value = Beginning book value depreciation for the year Ending book value: Year 1 = 1 5 x 1.5

D. Units-of-Production Method In this method, the useful life of an asset is not expressed in terms of year, rather the useful life gives in terms of units of production. To apply this method, the life of the asset is expressed in productively capacity, such as units produced, hours used, or the total amount of work performed. To calculate depreciation using units-of-production method:

1. Determine the depreciation per unit. This can be obtained by dividing the amount to be depreciated ( Total Cost Salvage value ) by the estimated units of useful life. Depreciation per unit = Total Cost Salvage Value Units of useful life 2. Find the depreciation amount per year by multiplying the number of units produced per year and the depreciation per unit. Annual depreciation = Depreciation per unit x Units produced 3. Construct depreciation schedule.

Application: 1. Ryder Enterprise purchased a printer for office use which costs Php10,000 and has estimated salvage value of Php1,000 when the printer can produce 12,000 sheets. Given: Total cost = 10,000 1,000 12,000 sheets

Salvage value = Useful life Solution: =

Step 1. Depreciation per unit = Total Cost Salvage Value Units of useful life Depreciation per unit = 10,000 1,0000 12,0000 = Php .75 per sheet Step 2. Annual depreciation = Depreciation per unit x Units produced Annual depreciation (year 1)= Annual depreciation (year 2)= Annual depreciation (year 3)= Annual depreciation (year 4)= Annual depreciation (year 5)= .75 x 3,000 = 2,250 .75 x 2.500 = 1,875 .75 x 4,000 = 3,000 .75 x 1,500 = 1,125 .75 x 1,000 = 750

Step 3. Set up the depreciation schedule

Name: Class Schedule:

Score: Date:

Problem 1. Straight-line Method

1.

A machine worth Php290,430. With estimated life of 5 years, has a salvage value of Php25,438. Determine the total and annual depreciation.

2.

SPG Internet Caf purchased equipment for its business operation worth Php280,500 and has estimated salvage value of Php35,000 after its estimated life span of 5 years. Find the total depreciation and set up the depreciation schedule

3. WGWG company purchased a vehicle for Php300,000. After 10 years, it was sold at Php 60,000. Solve for the following:

a)

Total depreciation

b) Annual depreciation c) Annual rate of depreciation d) Book value after 4 years

4.

Find the original cost and total depreciation of an asset if its annual depreciation is php1,578 and estimated life is 3 years and has a salvage value of Php2,900. Prepare a depreciation a schedule.

5.

Sacha Computer Shop purchases computer unit at Php34,000.00 and has expected life of 3 years. Its scrap value is estimated Php5,000.00, find the following: a) Total depreciation b) Annual depreciation c) Depreciation rate d) Construct the depreciation schedule

Name: Class Schedule:

Score: Date:

Problem 2. Sum-of-the-Years Method

1. A business contractor bought an equipment for his construction business at Php1,250,600.00 After 5 years, he sold it at Php390,000.00 Solve for the total depreciation.

2. The DWC hostel renovate its kitchen area at Php350,000.00. The estimated life of the renovation is 10 years with a salvage value of Php35,000.00. Compute the depreciation expense and prepare the depreciation schedule.

3. A bike worth Php32,800.00 has a trade-in value of Php9,500.00 and expected life of 6 years. Calculate for its book value at the end of the 4th year.

4. Find the book value at the end of 3 years for an asset worth 425,000.00 with an expected life of 5 years and has a scrap value of Php80,000.00.

5. A company purchases a new equipment that costs Php750,000.00 with expected salvage value of Php45,000.00 and estimated useful life of 7 years. Solve for the following: a) Annual depreciation b) Total depreciation c) Book value at the end of 4 years

Name: Class Schedule:

Score: Date:

Problem 3. Declining-balance Method .

1. A district hospital purchased an ambulance that costs Php3,245,000.00 with expected life of 4 years and rate of depreciation of 10%, find the depreciation expense.

2. Mrs Salvatierra purchased a washing machine at Php60,000.00, it has scrap value of Php5,000.00 with a useful life of 4 years. Find the rate of annual depreciation and prepare a depreciation schedule.

3. A furniture worth Php84,500 can be sold for Php3,500.00 at the end of its useful life of 6 years. Find the following:

a) Annual rate of depreciation b) Depreciation expense c) Book value at the end of 5 years

4. A printing press purchased a printing machine worth Php198,000.00 that has a salvage value of Php21, at the end of 4 years. Set-up the depreciatio0n schedule.

5.

The college canteen purchases new oven worth Php75,000.00 The expected useful life is 5 years with a scrap value of Php8,000. Compute for the following:

a) Annual depreciation

b) Book value at the end of 3 years c) Construct the depreciation schedule

Name: Class Schedule:

Score: Date:

Problem 4. Units-of-Production Method

1. The useful life of an asset costs Php125,000.00 is estimated to be 24,500 hours. The actual number of hours spent in the production of a certain product for the first year was 6,500 hours. Compute the depreciation charge for the first year.

2. SPG Corporation purchased an equipment worth Php135,000.00. The estimated salvage value of the asset is Php25,000.00. The estimated useful life is estimated to be 37,500 units. The actual number of units produced for each year stated as follows: Year 1 2 3 4 Number of Units Produce 8,750 12,250 10,500 6,500

a) Find the amount of depreciation charges per year b) Set up the depreciation schedule

3.

Allans Trucking business purchased a hauling truck worth Php1,500,450.00 with an expected useful life of 110,000 miles. The trade-in value of the truck is Php150,500.00. assuming that the hauling truck was driven for the following miles per year. Year 1 2 3 4 Number of Miles Driven 14,750 17,000 19,200 18,250

5 6

19,350 22,450

a) Find the annual depreciation b) Compute the book value when the hauling truck was driven 50,000 miles c) Prepare a depreciation schedule

Bibliography

Arce, Ma. Teresa, et.al. (2010). Math of Investment 2010 ed.(Based on CMO 03 S. 2007). Manila: Rex Bookstore Ballada, Win Lu and Ballada, Susan. (2009). Investment Mathematics. Made Easy. Sampaloc Manila. Domdane Publishing and Made Easy Books. Cabero, Jonathan B. (2008). Mathematics of Investment. Manila: Booklore Publication Caras, Madeleine S. (2008). Mathematics of Investments. Sta Cruz, Manila: Booklore Publication Tolentino, Rebecca C., Castillo, Benigno A. (2009). Math of Investment: TechnologyBased. Malabon City: Mutya Publishing House

Online Resources: www.accountingcoach.com www.investopedia.com www.getobjects.com www.collegecram.com www.yourteacher.com

CHAPTER CHAPTER VI VI

Stocks and Bonds

LEARNING OBJECTIVES At the end of this chapter, the student should be able to: 1. define and explain the business terms used in the concept of stocks and bonds; 2. sol 2.

Read more: http://www.answers.com/topic/annuities#ixzz1SbQhY3Ro

Carlos Slim Helu & family

$74 B
Net Worth Calculated March 2011

Age: 71 Title: Chairman Organization: Telmex Source: telecom, self-made Residence: Mexico City, Mexico Country of citizenship: Mexico Education: BA/BS, Universidad Nacional Autonoma de Mexico Marital Status: Widow Children: 6

World's Billionaires #1 overall #1 in Mexico Powerful People #21 Profile Billionaires: March 2011

The world's richest person for a second year in a row, the Mexican telecom mogul is also the year's biggest gainer, having added $20.5 billion to his fortune and widened the gap between him and no. 2, Microsoft co-founder Bill Gates, to $18 billion. A 19% rise in the Mexican stock market, a stronger peso, and successful mining and real estate spinoffs from conglomerate Grupo Carso all contributed to the astonishing increase. He also

merged his fixed-line telecom company into America Movil, Latin America's largest wireless carrier; the Slim family stake in that holding accounts for 62% of his net worth. He has other holdings in retailer Saks and the New York Times. Recently opened a new building for his Soumaya Museum, which houses his vast art collection. It is open to the public for free.

Carlos Slim Helu is a Mexican entrepreneur and businessman involved in a varied group of companies that include telecommunications, retail, banking and insurance, technology, and auto parts manufacturing businesses. He is the wealthiest Mexican man, the richest Latin American, and one of the top ten richest men in the world. Carlos Slim Hel was born on the 28th of January, 1940 in Mexico City. His father Yusef Salim Haddad and mother Linda Helu were of Lebanese decent. Carlos was the 5th of 6 children. He studied engineering at the Universidad Nacional Autonoma de Mexico. The financial success that Slim Helu has achieved has been from finding undervalued companies and making them profitable. Telefonos de Mexico (Telmex) was acquired during a privatization period in 1990 of the Mexican government. Carlos was criticized for raising phone call costs soon after purchasing the business, but he went on to improve phone services in Mexico with the company offering local and long distance calls, mobile phone services, Internet services, and a telephone directory. "It's not a question of arriving and putting in a whole new administration, but instead, arriving and "compacting" things as much as possible, reducing management layers. We want as few management layers as possible, so that executives are very close to the operations. We also don't believe in having big corporate infrastructures." Carlos Slim Helu Carlos Slim Helu has been referred to as the "Warren Buffett of Latin America", but he thinks of himself as an operator of companies, rather than just an investor (like Buffett). Even though he has admitted to having very poor computer skills, he sees the Internet and technology as a major growth area in his group of businesses. He owns the largest Internet Service Provider (ISP) in Mexico and had one of the largest in the United States of America with his acquisition of Prodigy. Slim also owns the major computer retailer CompUSA, with more than 200 retail stores throughout the USA and Puerto Rico. "Technology is going to transform people's lives and society everywhere in the world. My main task is to understand what's going on and try to see where we can fit in." Carlos Slim Helu

Carlos Slim Helu is the son of Julian Slim Haddad, a Lebanese immigrant to Mexico, and Linda Helu. He was born on January 28, 1940 in Mexico City as child number five of six children. At an early age his businessman father instilled in his kids the habit of tracking income and expenses by giving them a savings book to track their weekly allowance and what they spent it on. His father died when he was just 13 years old. Carlos Slim went on to study engineering at university while at the same time lecturing in Algebra and Linear programming.

In 1966, when he was only 25 years old he started building what was to become one of his flagship companies, Grupo Carso. Carso was derived from the start of his name and that of his wife, Soumaya Domit Gemayel, whom he also married later that year. He would buy businesses that was under-performing and turn them into more profitable enterprises. This is a strategy he learned from his dad - buying when there is blood in the streets (which his farther learned during the early 20th century Mexican revolution). For most of his early business life, Carlos managed to stay out of the public view and avoid criticism. This ended however when he won a bid for Telephonos de Mexico (Telmex) in partnership with France Telecom and Southwestern Bell during privatization of the industry. He bought a stake for around $1.7 billion which today is worth more than $11 billion. Having a monopoly in the fixed line sector allowed Telmex to set their own prices and thus increase profitability. This did not endear him to the public, but most of that was reinvested in the telecoms infrastructure. The wireless spin-off from Telmex is the biggest value creator that Carlos Slim Helu has added. This turned into America Movil which is now the largest mobile operator in Latin America with over 100 million subscribers. They managed this by being innovative and offering better prepaid services (than their competitors at the time) to the lower end of the market. Carlos Slim's stake in America Movil contributes to more than half of his wealth, around $25 billion. In the late 1990's Carlos Slim Helu started handing over operations of his businesses to his sons (Carlos Slim Domit - heads Grupo Carso, Marco Antonio Slim Domit - Inbursa, Patrick Slim Domit - Chairs America Movil) and sons-in-law (Daniel Hajj Aboumrad America Movil CEO, Arturo Elias Ayub - Telmex Foundation). His wife also died in 1999. His philanthropic contributions has increased dramatically since the 90's and he heads up the Latin America Development Fund. This fund invests in the things he believes will make a difference Latin America - infrastructure, health, education and employment. Slim's discipline and courage to buy when everyone is selling ('blood in the streets') allowed him to expand his reach considerably at rock bottom prices. Having handed over the reins of most of his businesses Carlos Slim Helu now have the time to focus on his philanthropic efforts. Though not much liked in his native Latin America, the story of Carlos Slim Helu is an inspiration for entrepreneurs and those who wish to run their own businesses (or those who want to become fabulously wealthy).

Carlos Slim Helu Biography

02 July 2009

Many people throughout the world have no idea who Carlos Slim Helu is, although he is undoubtedly one of the most famous men in Mexico's history. With a net worth of $60-billion, Helu has for some time reigned supreme as the second-richest man in the world. His transition upwards from this position is imminent, as the world's numberone richest man, Warren Buffet, recently announced plans to give the majority of his fortune away. This will leave Carlos as the king of all things money. Carlos is a paradox on some levels. He is a jack of all trades, and seemingly a master at them all as well. His talent for making money defies logic, and his holdings continue to grow at an astounding rate. Carlos Slim Helu was born January 28, 1940 in Mexico City, Mexico. Carlos isn't of Mexican descent; his parents were Lebanese immigrants: Yusef Salim Haddad and Linda Helu. A young Carlos was the 5th of 6 children in the large family, and was the smartest from a young age. He excelled in school and always remained dedicated to his studies. After high school, he decided he wanted to study engineering and was accepted to the Universidad Nacional Autonoma de Mexico. After graduating, Helu did a complete 180, however, and ended up working in investments. Helu soon found that his talent for helping companies become profitable was something that would make him extremely wealthy. He gained huge financial success by finding grossly undervalued companies and working to make them profitable. This tactic, although perfectly legal, is sometimes criticized in the business world. It's known as the mob mentality, when a person moves in to help the company and eventually takes a substantial piece of the action. This has worked out extremely well for both Helu and the companies involved. The Mexican government went through a privatization period in 1990, and Helu quickly moved in and took control of Telefonos de Mexico (Telmex). He was immediately criticized for raising the prices soon after he took control of the company. Although, he also worked to improve the phone services in Mexico, and also offered local and long distance calls, Internet services, mobile services, and a telephone directory. Helu makes his money similar to the way Warren Buffet makes his: through sound investments; but Helu prefers to think of himself as an operator of the companies instead of a mere investor.

Helu also owns Mexico's largest Internet Service Provider and even one of the largest in the United States. From 2006 to 2007, Carlos' wealth jumped from an already inflated $30-billion to an amazing $49-billion. Helu has branched out and taken a slice of multiple industries, including a 6.4% stake in The New York Times Company, making him the largest shareholder other than the Sulzberger family - the company's owners. Helu is also a renowned philanthropist. The Latin American Development Fund which he heads has a budget of over $10-billion that's used to fund various cultural projects throughout Latin America.

Bill Gates (William Henry Gates III)

$56 B
Net Worth Calculated March 2011

Age: 55 Title: Co-Chair Organization: Bill & Melinda Gates Foundation Source: Microsoft, self-made Residence: Medina, WA Country of citizenship: United States Education: Dropout, Harvard University

Marital Status: Married Children: 3

World's Billionaires #2 overall #1 in United States Powerful People #10 Forbes 400 #1 Profile Billionaires: March 2011 Microsoft mogul, futurist and America's richest person has, with help from billionaire buddy Warren Buffett, convinced nearly 60 of the world's wealthiest to sign his "Giving Pledge," promising to donate the majority of their wealth to charity either during their lifetime or after death. He is no longer the planet's richest person, but that's because he's given away $30 billion to his foundation. The Gates Foundation, the world's most influential charity, tackles tuberculosis and polio and funds famine-resistant crops to fight hunger. He is calling for "a higher sense of urgency" in AIDS vaccine development and also pushing for better tools to rate teacher performance. Gates holds 70% of his wealth in investment fund Cascade, dabbling in everything from autos to hedge funds to Mexican Coke bottler Femsa; the rest of his wealth is held in Microsoft stock.

Bill Gates - Biography and History

Bill Gates was the founder and first chairmen of Microsoft.

Microsoft co-founder Bill Gates listens during a press conference to launch a plan aimed at saving 10 million mothers and newborns in the poorest countries
Bill Gates came from a family of entrepreneurship and high-spirited liveliness. William Henry Gates III was born in Seattle, Washington on October 28th, 1955. His father, William H. Gates II, is a Seattle attorney. His late mother, Mary Gates, was a schoolteacher, University of Washington regent, and chairwoman of United Way International.

Bill Gates - Early Life

He had an early interest in software and began programming computers at the age of thirteen. In 1973, Bill Gates became a student at Harvard University, where he meet Steve Ballmer (now Microsoft's chief executive officer). While still a Harvard undergraduate, Bill Gates wrote a version of the programming language BASIC for the MITS Altair microcomputer.

Did you know that as young teenagers Bill Gates and Paul Allen ran a small company called Traf-O-Data and sold a computer to the city of Seattle that could count city traffic?

Bill Gates & Microsoft

In 1975, before graduation Gates left Harvard to form Microsoft with his childhood friend Paul Allen. The pair planned to develop software for the newly emerging personal computer market.

Bill Gate's company Microsoft became famous for their computer operating systems and killer business deals. For example, Bill Gates talked IBM into letting Microsoft retain the licensing rights to MS-DOS an operating system, that IBM needed for their new personal computer. Gates proceeded to make a fortune from the licensing of MS-DOS. On November 10, 1983, at the Plaza Hotel in New York City, Microsoft Corporation formally announced Microsoft Windows, a next-generation operating system. On January 1, 1994, Bill Gates married Melinda French Gates. They have three children.

Bill Gates Philanthropist

Bill Gates and his wife, Melinda, have endowed the Bill & Melinda Gates Foundation with more than $28.8 billion (as of January 2005) to support philanthropic initiatives in the areas of global health and learning.
Bill Gates is one of the most influential people in the world. He is cofounder of one of the most recognized brands in the computer industry with nearly every desk top computer using at least one software program from Microsoft. According to the Forbes magazine, Bill Gates is the richest

man in the world and has held the number one position for many years. Gates was born and grew up in Seattle, Washington USA. His father, William H. Gates II was a Seattle attorney and his mother, Mary Maxwell Gates was a school teacher and chairperson of the United Way charity. Gates and his two sisters had a comfortable upbringing, with Gates being able to attend the exclusive secondary "Lakeside School". Bill Gates started studying at Harvard University in 1973 where he spent time with Paul Allen. Gates and Allen worked on a version of the programming language BASIC, that was the basis for the MITS Altair (the first microcomputer available). He did not go on to graduate from Harvard University as he left in his junior year to start what was to become the largest computer software company in the world; Microsoft Corporation. Bill Gates and the Microsoft Corporation "To enable people and businesses throughout the world to realize their full potential." Microsoft Mission Statement After dropping out of Harvard Bill Gates and his partner Paul Allen set about revolutionizing the computer industry. Gates believed there should be a computer on every office desk and in every home. In 1975 the company Micro-soft was formed, which was an abbreviation of microcomputer software. It soon became simply "Microsoft" and went on to completely change the way people use computers. Microsoft helped to make the computer easier to use with its developed and purchased software, and made it a commercial success. The success of Microsoft began with the MS-DOS computer operating system that Gates licensed to IBM. Gates also set about protecting the royalties that he could acquire from computer software by aggressively fighting against all forms of software piracy, effectively creating the retail software market that now exists today. This move was quite controversial at the time as it was the freedom of sharing that produced much innovation and advances in the newly forming software industry. But it was this stand against software piracy, that was to be central in the great commercial success that Microsoft went on to achieve. Bill Gates retired as Microsoft CEO in 2008. Bill Gates Criticism With his great success in the computer software industry also came many criticisms. With his ambitious and aggressive business philosophy, Gates or his Microsoft lawyers have been in and out of courtrooms fighting legal battles almost since Microsoft began. The Microsoft monopoly sets about completely dominating every market it enters through either acquisition, aggressive business tactics or a combination of them. Many of the largest technology companies have fought legally against the actions of Microsoft, including Apple Computer, Netscape, Opera, WordPerfect, and sun Microsystems. Bill Gates Net Worth With an estimated wealth of $53 billion in 2006, Bill Gates is the richest man in the world and he should be starting to get used to the number spot as he has been there from the mid-ninties up until now. The famous investor Warren Buffett is gaining on Gates though with an estimated $46 billion in 2006.

Microsoft hasn't just made Bill Gates very wealthy though. According to the Forbes business magazine in 2004 Paul Allen, Microsoft cofounder was the 5th richest man in the world with an estimated $21 billion. While Bill Gates' long time friend and Microsoft CEO, Steve Ballmer was the 19th richest man in the world at $12.4 billion.

Warren Buffett
$50 B
Net Worth Calculated March 2011

Age: 80 Title: CEO Organization: Berkshire Hathaway Source: Berkshire Hathaway, self-made Residence: Omaha, NE Country of citizenship: United States Education: MS, Columbia University; BA/BS, University of Nebraska Lincoln Marital Status: Widowed, Remarried Children: 3

World's Billionaires

#3 overall #2 in United States Profile Billionaires: March 2011

Powerful People #33 Forbes 400 #2

The venerable investor's Berkshire Hathaway climbed more than 15% over the last year adding $3 billion to his to fortune. The 80-year-old is still hunting big deals: "Our elephant gun has been reloaded, and my trigger finger is itchy." Along with bridge partner Bill Gates, the Oracle of Omaha is coaxing America's richest to pledge half their fortunes to charity. "Too often a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse and long-standing friends." Buffett faked breathing problems when he was 12 so he could move back to Omaha from Washington, D.C., where his father was a freshman congressman. He had read every book about investing in stocks in the Omaha Public Library by the time he was 12. He met value investor Benjamin Graham at Columbia; bought textile firm Berkshire Hathaway 1965, and transformed it into massive holding company: food, insurance, utilities, industrials. Buffett acquired railroad giant Burlington Northern Santa Fe for $26 billion in 2009.

Warren Buffett Biography

The Story of Berkshire Hathaway's Billionaire Chairman
Warren Buffett is Born
Warren Edward Buffett was born on August 30, 1930 to his father Howard, a stockbroker-turned-Congressman. The only boy, he was the second of three children, and displayed an amazing aptitude for both money and business at a very early age. Acquaintances recount his uncanny ability to calculate columns of numbers off the top of his head - a feat Warren still amazes business colleagues with today.

At only six years old, Buffett purchased 6-packs of Coca Cola from his grandfather's grocery store for twenty five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing hopscotch and jacks, Warren was making money. Five years later, Buffett took his step into the world of high finance. At eleven years old, he purchased three shares of Cities Service Preferred at $38 per share for both himself and his older sister, Doris. Shortly after buying the stock, it fell to just over $27 per share. A frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them - a mistake he would soon come to regret.

Cities Service shot up to $200. The experience taught him one of the basic lessons of investing: patience is a virtue.

Warren Buffett's Education

In 1947, a seventeen year old Warren Buffett graduated from High School. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans, and urged his son to attend the Wharton Business School at the University of Pennsylvania. Buffett stayed two years, complaining that he knew more than his professors. When Howard was defeated in the 1948 Congressional race, Warren returned home to Omaha and transferred to the University of Nebraska-Lincoln. Working full-time, he managed to graduate in only three years.

Warren Buffett approached graduate studies with the same resistance he displayed a few years earlier. He was finally persuaded to apply to Harvard Business School, which, in the worst admission decision in history, rejected him as "too young". Slighted, Warren applied to Columbia where famed investors Ben Graham and David Dodd taught - an experience that would forever change his life.

Ben Graham - Buffett's Mentor

Ben Graham had become well known during the 1920's. At a time when the rest of the world was approaching the investment arena as a giant game of roulette, he searched for stocks that were so inexpensive they were almost completely devoid of risk. One of his best known calls was the Northern Pipe Line, an oil transportation company managed by the Rockefellers. The stock was trading at $65 a share, but after studying the balance sheet, Graham realized that the company had bond holdings worth $95 for every share. The value investor tried to convince management to sell the portfolio, but they refused. Shortly thereafter, he waged a proxy war and secured a spot on the Board of Directors. The company sold its bonds and paid a dividend in the amount of $70 per share.

When he was 40 years old, Ben Graham published Security Analysis, one of the greatest works ever penned on the stock market. At the time, it was risky; investing in equities had become a joke (the Dow Jones had fallen from 381.17 to 41.22 over the course of three to four short years following the crash of 1929). It was around this time that Graham came up with the principle of "intrinsic" business value - a measure of a business's true worth that was completely and totally independent of the stock price. Using intrinsic value, investors could decide what a company was worth and make investment decisions accordingly. His subsequent book, The Intelligent Investor, which Warren celebrates as "the greatest book on investing ever written", introduced the world to Mr. Market - the best investment analogy in history.

Through his simple yet profound investment principles, Ben Graham became an idyllic figure to the twenty-one year old Warren Buffett. Reading an old edition of Who's Who, Warren discovered his mentor was the Chairman of a small, unknown insurance company named GEICO. He hopped a train to Washington D.C. one Saturday morning to find the headquarters. When he got there, the doors were locked. Not to be stopped, Buffett relentlessly pounded on the door until a janitor came to open it for him. He asked if there was anyone in the building. As luck (or fate) would have it, there was. It turns out that there was a man still working on the sixth floor. Warren was escorted up to meet him and immediately began asking him questions about the company and its business practices; a conversation that stretched on for four hours. The man was none other than Lorimer Davidson, the Financial Vice President. The experience would be something that stayed with Buffett for the rest of his life. He eventually acquired the entire GEICO company through his corporation, Berkshire Hathaway.

Warren Buffett was born in Nebraska, Omaha USA on the 30th of August in 1930. He is one of the worlds richest men, with a fortune that is only surpassed by Bill Gates of Microsoft fame. He is considered one of the most successful investors of all time and has picked up the nickname of the "Oracle of Omaha". Buffett was born to Leila and Howard Buffett and was the second of three children, he being the only boy. Buffett's father, Howard was a stockbroker and also became a member of congress. Warren Buffett showed early signs of being entrepreneurial through being involved in various business dealings as a child, including purchasing bottles of cola cheaply and selling them for a profit. He also made his first investment in the stock market when he was just 11 years old. Buffett began studying at the Wharton School of Finance at the University of Pennsylvania, but transferred to the University of Nebraska where he graduated. He then went on to the Columbia University to do a Masters in economics. This was where he met the influential value investor Benjamin Graham. The young investor was very influenced by Benjamin Graham and went to work for him in his company "Graham-Newman". It was here that Warren Buffett developed many of his stock market investing skills that have now become legendary. Graham developed a method where investors could work out the intrinsic value of a company and make intelligent investing decisions by comparing the stock price to the intrinsic value. Warren Buffett's Berkshire Berkshire Hathaway After Graham's retirement, Buffett returned to Omaha and began a limited investing fund partnership with a group of friends, family and associates. The "Buffett Partnerships Ltd" fund racked up amazing returns for its investors over a ten year period, with returns 10 times higher than the Dow Jones Industrial average for the same time. Buffett liquidated the fund and took control of the textile company Berkshire Hathaway. It was a difficult time for the textile industry and Buffett eventually wound up Berkshire Hathaway's textile activities, but kept the name for Buffett's portfolio of companies and investments. The insurance industry was the first major area of success that Berkshire Hathaway had, with the funds used to acquire carefully selected investments each year. Major undervalued companies that Buffett took advantage of included "American Express", "Coca-Cola" "The Washington Post" and "Gillette". Berkshire Hathaway owns large holdings of each of the above major brand companies (more than 5% each).

Warren Buffett lives with his long time partner Astrid Menks in Omaha, USA. He was married to Susan Thompson up until her death from stroke in July 2004, but the couple were separated in 1977. They chose not to divorce and remained good friends and business associates. Buffett's late wife was set to inherit much of his fortune upon his death. Warren Buffet Gives Away his Billions to the Bill & Melinda Gates Foundation Buffett is a generous philanthropist and was giving more than $USD12 million each year to the Buffett Foundation (no called the "Susan Thompson Buffett Foundation"). His largest charitable donation was to be upon his death when he had planned to give 99% of his massive fortune to the foundation. In June 2006 Buffett announced plans to give much of his wealth away while he is still living. The majority of the Buffett billions will go to the foundation of his Bridge partner and friend of fifteen years, Bill Gates. Read more about the Warren Buffett philanthropy plans. Warren Buffett becomes the Richest Man in the World in 2008 Warren Buffett finally knocked Bill Gates out of first position to become the richest man in the world in 2008 on the world rich list according to the Forbes business magazine. Source: www.woopidoo.com