Money and Interest: Discount, Equation of Value, and Cash Flow Diagrams, Exercises of Economics

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MONEY AND INTEREST

CHAPTER 1

(Cont.)

D. DISCOUNT

Difference between the present worth

and the worth of the paper at some time

in the future.

a. Rate of Discount, d

Discount for one unit of principal for one

unit of time.

Sample Problem 1

 A man borrowed P 20 , 000 from a bank and agreed to

repay the loan at the end of 6 months. The bank

discounted the loan and gave him P 19 , 200 in cash.

a. What was the rate of discount?

b. What was the rate of interest?

F

D

d 

Solution:

a. What was the rate of discount?

b. What was the rate of interest?

P

D

i  19 , 200

Sample Problem 2

 A man wants to receive P 10 , 000 immediately and pay it

back in one year. The bank charges a simple discount

of 5 % payable at once. How much must be borrowed?

What is the rate of interest?

F

D

d 

a. Future Worth, F

F

F 10 , 000

 ;^ F^  P^10 ,^526.^32

b. What was the rate of interest?

P

D

i  10 , 000

Solution:

F

F  P

Sample Problem 1

A man buys a house and lot worth P 1. 5 M if

paid in cash. On installment basis, he

pays P 500 , 000 downpayment; P 300 , 000 at

the end of one year; P 400 , 000 at the end

of two years and a final payment at the

end of 4 years. Find the final payment if

interest is 14 %.

Sample Problem 1

 A man buys a house and lot worth P 1. 5 M if paid in cash. On

installment basis, he pays P 500 , 000 downpayment; P 300 , 000 at the

end of one year; P 400 , 000 at the end of two years and a final

payment at the end of 4 years. Find the final payment if interest is

14 %.

0 1 2 3 4 5

1.5 M

500,000 3 00,000^4 00,000 x

Cash Flow Diagram (CFD)

Sample Problem 2

If money is worth 12 % effective, what

equal payment x at the end of 2 years

and 4 years will equitably replace the

obligations; P 3 , 000 due in 3 years and

P 5 , 000 due in 5 years, both with interest at

10 % compounded semi-annually?

Sample Problem 2

 If money is worth 12 % effective, what equal payment x at the end

of 2 years and 4 years will equitably replace the obligations; P 3 , 000

due in 3 years and P 5 , 000 due in 5 years, both with interest at 10 %

compounded semi-annually?

Cash Flow Diagram (CFD)

0 1 2 3 4 5

3,

x x

5,

ie = 12%

j = 10% comp SA

END OF CHAPTER 1!