BUSINESS MATHEMATICS

Definition. Interest is a payment in exchange for the use of money over a period of time.
Definition. Lender or creditor is a person (or institution) who invests the money or makes the funds available.

Definition. Borrower or debtor is a person or institution who owes the money or avails of the funds from the
lender.
Definition. Origin or loan date is the date on which money is received by the borrower.
Definition. Repayment date or maturity date is the date on which the money borrowed or loan is to be completely
repaid.

Definition. Time or term (t) is the amount of time in years the money is borrowed or invested; length of time
between the origin and maturity dates.
Definition. Principal (P) is the amount of money borrowed or invested on the origin date.

Definition. Interest rate, usually expressed in percent, is the amount charged by the lender or rate of increase of
the investment.
Definition. Maturity value of Future Value (F) is the amount after t years; that the lender receives from the
borrower on the maturity date

SIMPLE INTEREST

Definition. Simple interest is interest that is computed on the principal and then added to it.
Factors of Simple Interest
1. Principal

2. Rate of Interest - the percent used to calculate the additional amount to be paid along with the principal
3. Time or term of loan, in years

Simple Interest Is = P rt

Maturity or Future Value F = P + Is = P + P rt = P (1 + rt)

where: Is = Simple Interest; P = principal; r = rate; t = term or time, in years, F = maturity (future)
value

COMPOUND INTEREST

Definition. Compound interest is interest that is computed on the principal and on the accumulated past interests.

Compounding Once a Year

Maturity (Future) Value F = P (1 + r)t

Compound Interest Ic = F − P

F
Present Value at Compound Interest P = = F (1 + r)−t
(1 + r)t

where: F = maturity (future) value at the end of the term; P = principal; r = rate; t = term or time, in
years

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Compounding More than Once a Year

Definition. Conversion or interest period is the time between succesive conversions of interest.
i mt
Maturity Value, Compounding m times a year F = P (1 + ) = P (1 + j)n
m
F F
Present Value at Compound Interest P = =
i mt (1 + j)n
(1 + )
m
where:
P = Principal/ Present Value m = frequency of conversion
i
F = maturity (future) value at the end of the term; j = rate of interest for each conversion period (j = m)
i = nominal rate (annual interest rate) n = total number of conversion period n = mt

Continuous Compounding

Definition. If a principal P is invested at annual interest rate i compunded continuously, then the amound F at
the end of t years is given by F = P eit .
Definition. Equivalent rates are two annual rates with different conversion periods that will earn the same
compound amount at the end of a given number of years.
Definition. Nominal rate is the annual interest rate which may be compounded more than once a year.
Definition. Effective rate is the rate compounded annually that will give the same compound amount as a given
nominal rate.

ANNUITIES

Definition. Annuity is a sequence of payments made at equal (fixed) intervals or periods of time.

Payment interval- the time between successive payments

Term of an annuity (t)- time between the first payment interval and last payment interval
Regular or Periodic payment (R)- the amount of each payment
Amount (Future Value) of an annuity, (F)- sum of the future values of all the payments to be made
during the entire term of the annuity
Present value of an annuity, P- sum of the present values of all the payments to be made during the
entire terms of the annuity

Annuities may be classified as follows:

1. According to payment interval and interest period
a. Simple Annuity- the payment interval is the same as the compounding period (Ex. Installment
payment for an appliance at the end of each month with interest compounded monthly.
b. General Annuity- the payment interval is different from the compounding period(Ex. Installment
payment for an appliance at the end of each month with interest compounded annually)
2. According to time of payment
a. Ordinary Annuity (or Annuity Immediate)- the payments are made at the end of each payment
interval
b. Annuity Due- the payments are made at the start of each payment interval
3. According to duration
a. Annuity Certain- payments begin and end at definite times (Ex. installment basis of paying a car,
appliance, house and lot, tuition fee, etc)
b. Contingent Annuity- payments extend over an indefinite length of time (Ex. Life insurance, pension
payments)

Annuity Amount of Future Value Amount of Present Value

(1 + j)n − 1 1 − (1 + j)−n
Ordinary Annuity F =R· P =R·
j j

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Definition. The cash value or cash price is equal to the downpayment (if there is any) plus the present vale of
the installment payments. Cash Value = Down Payment + Present Value
Definition. A cash flow is a term that refers to payments received (cash inflows) or payments or deposits made
(cash outflows). Cash inflows can be represented by positive numbers and cash outflows can be represented by
negative numbers.
Definition. The fair market value or economic value of a cash flow (payment stream) on a particular date
refers to a single amount that is equivalent to the value of the payment stream at that date. This particular date
ic called the focal date.

DEFERRED ANNUITY

Definition. Deferred Annuity - an annuity that does not begin until a given time interval has passed.
Definition. Period of Deferral - time between the purchase of an annuity and the start of the payments for
the deferred annuity.

Steps in solving for the present value of deferred annuities

1. Assume that payments are also being made during the period of deferral.
2. Solve for the present value of the payments made during the period of deferral.
3. Subtract the present value of the payments made during the period of deferral.

The present value of a deferred annuity is given by:

1 − (1 + j)−(k+n) 1 − (1 + j)−k
P =R· −R·
j j
where:

R is the regular payment,

i is the interest rate per period,

n is the number of payments, and

k is the number of conversion periods in the period of deferral (or the number of artificial payments)

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 LOGIC

Definition. A proposition is a declarative sentence that is either true or false, but not both. If a proposition is
true, then its truth value is true which is denoted by T ; otherwise, its truth value os false and is denoted by F .
Definition. A compound proposition is a proposition formed from simpler propositions using logical connectors
or some combination of logical connectors.
Definition. A proposition is simple if it cannot be broken down any further into other component propositions.
Definition. Given a proposition, its truth table shows all its possible truth values.

LOGICAL OPERATORS

Definition. The negation of a proposition p is denoted by ∼ p (not p) and is defined through its truth table:

p ∼p
T F
F T

Definition. The conjunction of propositions p and q is denoted by p ∧ q (p and q) and is defined through its truth
table:
p q p ∧ q
T T T
T F F
F T F
F F F
Definition. The propositions p and q in a conjunction are called conjuncts.
Definition. The disjunction of propositions p and q is denoted by p ∨ q (p or q) and is defined through its truth
table:
p q p ∨ q
T T T
T F T
F T T
F F F
Definition. The propositions p and q in a disjunction are called disjuncts.
Definition. The conditional of propositions p and q is denoted by p → q (if p, then q) and is defined through its
truth table:
p q p → q
T T T
T F F
F T T
F F T
Definition. The conditional may also be read as ’p implies q’. The proposition p is called the hypothesis or
antecedent, while the proposition q is called the conclusion or consequent.
Definition. The biconditional of propositions p and q is denoted by p ↔ q (p if and only if q) and is defined
through its truth table:
p q p ↔ q
T T T
T F F
F T F
F F T
Definition. The biconditional proposition may also be written as ’p iff q’. The proposition p and q are the
components of the biconditional.

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