THE MATHEMATICS OF

FINANCE
PART 2 (CONTINUATION)
CREDIT CARDS AND
CONSUMER LOANS
 Credit Card

• A credit card is a payment card issued to users (cardholders) to enable the

cardholder to pay a merchant for goods and services based on the cardholder’s
promise to the card issuer to pay them for the amounts plus the other agreed
charges. The card issuer (usually a bank) creates a revolving account and grants a
line of credit to the cardholder, from which the cardholder can borrow money for
payment to a merchant or as a cash advance. In other words, credit cards combine
payment services with extensions of credit. Complex fee structures in the credit
card industry may limit costumers’ ability to comparison shop, helping to ensure
that the industry is not price-competitive and helping to maximize industry
profits. Due to concerns about this, many legislatures have regulated credit card
fees.
 Credit Card

• Credit cards are best suited for financing extending over a shorter time period.
Remember that it does not give you more money, rather it enables you to have
higher purchasing power in your everyday life. And so it is important to be aware
of the price of having a credit card. Similar to all the services and products you
use, you should be aware of the terms and prices. Remember that it is expensive
to postpone payments. Also keep in mind that the sooner you pay, the least
interest you pay. As long as you make your payments on time, there are no
accruing interests.
• Many credit cards charge annual fees but also come with interest-free grace
periods, balance transfers and rewards.
 Credit Card

• Usually
  credit card companies issue monthly bills. If the bill is paid in full before its due date
no charges is added otherwise interest charges will start to accrue. The most common method of
determining finance charges is the average daily balance method
Example #1. An unpaid bill for P2,500.00 had a due date of January 15. A
purchase of P1,650.00 was made on January 18 and P560.00 was charge on
January 27. A payment of P2,000.00 was made on January 20. The next billing date
is February 15. The interest on the average daily balance is 1.25% per month. Find
the finance charge on the February 15 bill.
Solution:
Prepare first a table showing this information.
Date Payments or Balance each day No. of days unit Unpaid balance
Purchases balance changes times no. of days
Jan 15 – Jan 17 2,500 3 7,500

Jan 18 – Jan 19 1,650 4,150 2 8,300

Jan 20 – Jan 26 -2,000.00 2,150 7 15,050

Jan 27 – Feb 14 560 2,710 19 51,490

Total 31 P82,340.00
 

Use the day of the year table to identify the number of days in the billing period.
Finding the finance charge on the February 15 bill
𝐼 = 𝑃𝑟𝑡 = (2,656.13)(0.0125)(1) = 𝑃 33.20
Example #2. An unpaid bill P4,585.00 had a due date of March 2. A purchase of
P15,000.00 was made on March 8 and another was on March 10 amounting to
P3,200.00. A payment of P10,000.00 was made on March 15. An P875.00 was
charge on March 21. The interest on the average daily balance is 2.3% per month.
Find the finance charge on the April 2 bill.
Solution:
Prepare first a table showing this information.
Date Payments or Balance each day No. of days unit Unpaid balance
Purchases balance changes times no. of days
March 2 – March 7 4,585 6 27,510
March 8 – March 9 15,000 19,585 2 39,170
March 10 – March 14 3,200 22,785 5 113,925
March 15 – March 20 -10,000 12,785 6 76,710
March 21 – April 1 875 13,660 12 163,920
Total 31 P 421,235.00
 

Use the day of the year table to identify the number of days in the billing period.
Finding the finance charge on the April 2 bill
𝐼 = 𝑃𝑟𝑡 = ()(0.023)(1) = 𝑃 312.53
ANNUAL PERCENTAGE RATE (APR)

CREDIT CARDS AND CONSUMER LOANS

 A credit card’s interest rate is the price you pay for borrowing money. For credit
cards, the interest rates are typically stated as a yearly rate. This is called the annual
percentage rate (APR). On most cards, you can avoid paying interest on purchases
if you pay your balance in full each month by the due date

Annual percentage rate is the annualized interest rate on a loan or investment

which doesn’t account for the effect of compounding. It is the annualized form of
the periodic rate which when applied to a loan or investment balance gives the
interest expense or income for the period. In most cases, it is the interest rate quoted
by banks and other financial intermediaries on various products like loans,
mortgages, credit cards, deposits, etc. It is also called the nominal annual interest
rate or simple interest rate.

This APR was covered by the Republic Act No. 3765 otherwise known as the
“Truth in Lending Act”. It is an act requiring the disclosure of finance charges in
connection with the extension of credit.
The policy behind the law is to protect the people from lack of awareness of the
true cost of credit by assuring full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment of the national economy.

The law covers any creditor, which is defined as any person engaged in the
business of extending credit (including any person who as a regular business
practice make loans or sells or rents property or services on a time, credit, or
instalment basis, either as principal or as agent) who requires as an incident to the
extension of credit, the payment of a finance charge.

A finance charge includes interest, fees, service charges, discounts, and such other
charges incident to the extension of credit as may be prescribed by the Monetary
Board of the Bangko Sentral ng Pilipinas through regulations.
 
This formula can be used to estimate the annual percentage rate (APR) on a
simple interest rate instalment loan.

where: n = number of payments

r = simple interest rate
 Example #1. An investors borrowed P35,000.00 from a bank that advertises a
12% simple interest rate. He agrees to a 5 monthly installment. (a) Calculate its
monthly payment , (b) Compute for the APR

Given:
P = P35,000.00
r = 12% or 0.12
t = 5 months or 5/12

a. Calculate its monthly payment

Solution:
𝐼 = 𝑃𝑟𝑡 = (35,000)(0.12) ( ) = 𝑃1,750.00

𝑀 = 𝑃 + 𝐼 = 35,000 + 1750 = 𝑃36,750.00

𝑴𝒐𝒏𝒕𝒉𝒍𝒚 𝑷𝒂𝒚𝒎𝒆𝒏𝒕 = = 𝑃7,350.00

 Solving for the interest on the first month
𝐼 = 𝑃𝑟𝑡 = (35,000)(0.12) ( ) = 𝑃350.00

Solving for the interest on the second month

𝐼 = 𝑃𝑟𝑡 = (28,000)(0.12) () = 𝑃280.00 Principal – 7,000 = 28,000
7,350 – 280 = 7,070

Solving for the interest on the third month

𝐼 = 𝑃𝑟𝑡 = (20,930)(0.12) () = 𝑃209.30 28,000 – 7,070 = 20,930
7,350 – 209.30 = 7,140.70

Solving for the interest on the fourth month

𝐼 = 𝑃𝑟𝑡 = (13,789.30)(0.12) () = 𝑃137.89 20,930 – 7,140.70 = 13,789.30
7,350 – 137.89 = 7,212.11

Solving for the interest on the fifth month

𝐼 = 𝑃𝑟𝑡 = (6,577.19)(0.12) () = 𝑃65.77 13,789 – 7,212.11 = 6,577.19
First Payment: P7,000.00; Second Payment: P7,070.00; Third Payment: P7,140.70;
Fourth Payment: P7,212.11; and Fifth Payment: P6,577.19

These shows that each month the amount you owe is decreasing and not by a
constant amount.

Republic Act No. 3765 tells us that the interest rate for a loan be calculated only on
the amount owed at a particular time, not on the original amount borrowed.
b. Compute for the APR The annual percentage rate on the loan is
n=5   APR= approximately 20%. Recall that the simple
r = 12% or 0.12 interest rate was 12% much less than the
actual rate. The Truth in Lending act provides
the consumer with a standard interest rate,
APR, so that it is possible to compare loans.
The 12% simple interest loan described in
problem no.1 is equivalent to an APR loan of
about 20%.
Example #2. A manager bought a brand new car amounting to P750,000.00. He gave a down
payment of 25% and the balance was agreed to be paid in 18 equal monthly instalments. The
finance charge on the balance was given at 12% simple interest.
a. Calculate for the finance charge.
b. Calculate the annual percentage rate in two decimal places.

Solution:
 b. Solving for the annual percentage rate
c. Solving for the finance charge (APR)

Downpayment = 25% of 750,000 n = 18

= 0.25(750,000) r = 0.12
= P187,500.00
APR=
Amount Finance = 750,000 – 187,500
= P562,500.00

Interest Owed = finance rate x amount financed

= 0.12(562,500)
= P67,500.00 (is the finance charge)
CONSUMER LOANS
CREDIT CARDS AND CONSUMER LOANS
 A consumer loan is when a person borrows money from a lender, either
unsecured or secured. There are several types of consumer loans and some of the
most popular ones include mortgages, refinances, home equity lines of credit,
credit cards, auto loans, student loans, and personal loans.

A consumer loan is a good alternative to a credit card if you want

predictability with your monthly expenses. A consume loan provides a set plan
for your monthly down payments which gives many a sense of security. You can
arrive back from a vacation paid with a consumer loans and not expect any
surprises. You will simply start paying back a pre decided amount each month. It
is also called as consumer credit or consumer lending
The payment amount for these loans is given by the following formula:
Example #1. A certain computer company is offering an 8% annual interest rate
for 2 years on all their computer gadget products. Joshua Emmanuel, a computer
technician, decided to buy one set of computer unit for P45,000.00. Find his
monthly payment.
 Solution:
Given:
r = 8% or 0.08
n =12 (monthly)
t = 2 years
Calculate APR on Payday Loans
 
To calculate the APR on a short-term payday loan:
1. Divide the finance charge by the loan amount.
2. Multiply the result by 365.
3. Divide the result by the term of the loan.
4. Multiply the result by 100%.

Example #1. You get a payday loan for  Solution

P500.00, and you pay a fee of P50.00.
The loan must be repaid within 14 days.
What is the APR? %

finance charge= P50.00

loan amount= P500.00
term of the loan= 14
CALCULATING LOAN PAYOFFS

CREDIT CARDS AND CONSUMER LOANS

 Loan payoffs is a complete repayment of a loan (principal plus interest), full
discharge of an obligation, or the return from a deal, decision or investment. Your
payoff amount is how much you will actually have to pay to satisfy the terms of
your mortgage loan and completely pay off your debt.
Your payoff amount also includes the payment of any interest you owe through
the day you intend to pay off your loan.
Example #1. A lady wants to pay off the loan in 32 months. Her monthly
obligation is P850.00 on a 3- year loan with an annual percentage rate of 7.5%.
Find the payoff amount.
 Solution:
Given:
PMT = P850.00
r = 7.5% or 0.075
n = 12
U = 36-32 = 4 months
P3,347.53 ( loan payoff)
STOCKS, BONDS, AND
MUTUAL BONDS
STOCKS
STOCKS, BONDS, AND MUTUAL BONDS
 A stock is ownership in a company. When you buy a stock, (you are called
stockholders) you buy a piece of the company. So if the company does well, you
do well. Congruently, if the company tanks, your stock tanks. Just like bonds,
there are many types of stocks because there are many different types of
companies out there. Large company stocks (large cap), mid cap stocks, small cap
stocks, international stocks, emerging stocks, tech stocks, etc. Historically, stocks
have an annual average return. However, remember that with more return comes
more risk. So when investing in stocks, keep in mind that you have to be able to
handle the extra risk or volatility to reap the potential reward in the long run.
A company may distribute profits to the owners (stockholders) in the form of
dividends. Most dividends are paid in the form of cash—for example, a company
might declare a quarterly dividend of P0.50 per share. However, though it’s less
common, companies also have the option of declaring stock dividends. When
paying a stock dividend, a company issues additional shares of stock proportional
to existing investors’ holdings.
 Calculate Dividends Paid to a Stockholder

Example #1. A stock pays an annual dividend of P0.75 per share. Calculate the
dividend paid to a shareholder who has 350 shares of the company’s stock.
Solution: (0.75 per share) (350 shares) = P262.50 (the shareholder receives
P262.50 in dividends)
 Before the stock dividends are handed out, they’re known as “stock dividends
distributable” and are listed in the stockholders’ equity section of the company’s
balance sheet.

The first step in calculating stock dividends distributable is to divide that

percentage by 100 to convert it into a decimal. For example, 10% would become
0.10. Next, multiply the company’s total outstanding shares by this decimal. You
can find the number of outstanding shares in most stock quotes.
Finally, multiply this amount by the par value of the stock, which can usually
be found in the stockholders’ equity section of the balance sheet. This is typically a
small amount, such as P0.01, and it has no relation to the actual share price of the
stock. Once you multiply these figures by one another, the result is the amount the
company would list as stock dividends distributable.

  𝑆𝑡𝑜𝑐𝑘   𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑  %
𝑆𝑡𝑜𝑐𝑘   𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑   𝐷𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙 e  =  x 𝑠 h 𝑎𝑟𝑒𝑠   𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔   x   𝑝𝑎𝑟   𝑣𝑎𝑙𝑢 e
100
Example #1. A company declares a stock dividend of 0.05 shares per outstanding
share, and there are 100 million total shares outstanding before the stock dividend
is paid. A quick look at the balance sheet tells us that the stock’s par value is P0.01
per share, so the stock dividend distributable that the company will list on its
balance sheet can be calculated as follows:

Given:
 

Solution:
 

= 0.05 × 100,000,000 × 0.01 = 𝑃50,000.00

Example #2. Joshua invested P120,000.00 in stocks and bonds. If he made a 20% profit on his
stocks and a 5% profit on his bonds, and the combined profit was P10,500.00, how much did
Joshua invest in stocks.

Solution:
Let x = amount invested in stock at 20%
120,000 – x = amount invested in bonds at 5%

Equation: [(x)(20%)] + [(120,000 – x)(5%)] = 10,500

[(x)(0.20)] + [(120,000 – x)(0.05)] = 10,500
0.20x + 6,000 – 0.05x= 10,500
120,000 – x = 120,000 – 30,000
0.15x = 10,500 – 6,000 = 90,000 (amount invested in bonds)
0.15x = 4,500
Checking: [(30,000)(20%)] + [(120,000 – 30,000)(5%)] = 10,500
x = 30,000.00 (amount invested in stocks) [(30,000)(0.20)] + [(90,000)(0.05)] = 10,500
(6,000 + 4,500) = 10,500
10,500 = 10,500
BONDS
STOCKS, BONDS, AND MUTUAL BONDS
 The best way to describe a bond is to think of it like a loan. You loan your
money to the government or a company, and in return they pay you interest for the
term of that loan. Typically, bonds are considered conservative types of
investments because you can choose the length and term of the bond and know
exactly how much money will you get back at the end of the term or “maturity”.
There are many types of bonds: government bonds, corporate bonds, short-term
bonds, long-term bonds, municipal and inflation protection bonds, etc. Generally,
bonds are less risky than stocks and the main way you lose money on a bond is if
the company or government issuing the bond defaults on their obligations.
Historically, bonds have an annual average total return of 6.3%.

Bonds are subject to market risk and interest rate risk if sold prior to maturity.
Bond values will decline as interest rates rise and bonds are subject to availability
and change in price.
Example #1. Harold invested P30,000.00 in various stocks and bonds. He earned 6% on his bonds
and 12% on his stocks. If Harold’s total profit on both types of investments was P2,460.00, how
much of the P30,000.00 did he invest in bonds?

Solution:
Let x = is the amount invested at 6% on his bonds
30,000 – x = is the amount invested at 12% on his stocks

Equation: (interest earned at 6%) + (interest earned at 12%) = 2,460

[(x)(0.06)] + [(30,000 – x)(0.12)] = 2,460
0.06x + 3,600 – 0.12x = 2460
-0.06x = 2,460-3,600
-0.06x = -1,140
x = 19,000.00 (amount invested in bonds)
30,000 – x = 30,000 – 19,000 = 11,000 (amount invested in stocks)
Checking: [(19,000)(0.06)] + [(30,000 – 19,000)(0.12)] = 2,460
1,140 + (11,000)(0.12) = 2,460
1,140 + 1,320 = 2,460
2,460 = 2,460
MUTUAL BONDS
STOCKS, BONDS, AND MUTUAL BONDS
 Mutual funds represent another way to invest in stocks, bonds, or cash
alternatives. You can think of a mutual fund like a basket of stocks or bonds. A
mutual fund investor is buying part ownership of the mutual fund company and
its assets. Basically, your money is pooled, along with the money of other
investors, into a find, which then invests in certain securities according to a stated
investment strategy. The fund is managed by a fund manager who reports to
board directors. By investing in the fund, you own a piece of the pie (total
portfolio), which could include anywhere from a few dozens to hundreds of
securities. This provides you with both a convenient way to obtain professional
money management and instant diversification that would be more difficult and
expensive to achieve on your own. Every mutual fund publishes a prospectus.
Before investing in a mutual fund, get a copy and carefully review the
information it contains, such as the fund’s investment objective, risks, fees, and
expenses. Carefully consider those factors as well as others before investing.
  Mutual fund units, or shares, can typically be purchased or redeemed as
needed at the fund’s current net asset value (NAV) per share, which is sometimes
expressed as NAVPS. A fund’s NAV is derived by dividing the total value of the
securities in the portfolio by the total amount of shares outstanding.

The Net Asset Value of a Mutual Fund Formula is

where: A = is the total fund assets

L = is the total fund liabilities
N = is the number of shares outstanding
 Example #1. A mutual fund has P600,000,000.00 worth of stock, P5,000,000.00
worth of bonds, and P1,000,000.00 in cash. The fund’s total liabilities amount to
P2,000,000.00. There are 25,000,000 shares outstanding. You invest P15,000.00 in
this fund.
a. Solve for the Net Asset Value.
b. How many shares will you buy?

Solution:
c. Find the NAV:
 b. Find the number of shares: