MODULE 4 Exact and Approximate Time

MATHEMATICS OF FINANCE An interest period will involve two dates. The date the
In this module, basic mathematics operations and the loan is given and the end date or the maturity date. The
application of mathematical techniques to a wide range lending institution will inform you if they count the day
of business problems will be discussed. It covers topics in the loan is due or the day before. This can vary.
the mathematics of finance particularly simple interest, - In order to determine the exact number of days,
simple discount, compound interest, and annuity. It is you will first need to know the number of days
very helpful to use a scientific calculator or an Excel each month while for the approximate time, you
application. will assume that each month has 30 days.
- You can remember the number of days in a
SIMPLE INTEREST month by memorizing the days of the months in
a nursery rhyme:
Simple Interest is an example of arithmetic growth
o 30 days = September, April, June, and
where the amount of interest generated each term is
November
constant.
o 31 days = January, March, May, July,
- It is based on only the starting amount. Year to
August, October, December
year there is a constant difference in the value
o February = 28 days only, but 29 days
of the savings account, and so the successive
every leap year
values track a linear function.
Exact Time Approximate Time
- When you borrow money from a bank, you pay
Month Days Month Days
interest for the use of the bank’s money. When
January 31 January 30
you deposit money into a savings account, you
February 28 (29 leap) February 30
are paid interest. Simple interest is one type of
March 31 March 30
fee paid for the use of money.
April 30 April 30
- When individuals lend or invest money, they
May 31 May 30
expect to receive interest at the end of the term. June 30 June 30
One way of calculating interest is simple interest July 31 July 30
(I). This is calculated on the original amount of August 31 August 30
the loan called the principal (P). The interest September 30 September 30
rate (r) refers to the percent taken from the October 31 October 30
principal; the time (t) refers to the term of the November 30 November 30
loan while the amount paid at the end of the December 31 December 30
term is called the total amount or the final
amount (F). Ordinary and Exact Simple Interest
Formula Primarily, there are two kinds of simple interest:
𝑰 = (𝑷)(𝒓)(𝒕) ordinary and exact. These two terms use the same
▪ Principal (P) – the amount of money borrowed formula for solving the simple interest but they differ on
or invested. using the time.
▪ Rate of Interest (r) – is the percent charged or Ordinary Interest
earned. ~ I0 = Pr (days/360)
▪ Time (t) – time that the money is borrowed of ~ The ordinary simple interest uses 360
invested (in years) days as the equivalent number of days in
▪ I – Interest a year.
Exact Interest
𝑻𝒐𝒕𝒂𝒍 𝒐𝒓 𝑭𝒊𝒏𝒂𝒍 𝑨𝒎𝒐𝒖𝒏𝒕 = 𝑰 + 𝑷 ~ Ie = Pr (days/365)
▪ I – Interest ~ Exact simple interest uses an exact
▪ P – Principal number of days in a year which is 365 (or
▪ F – Final/Total amount 366 for leap year).
Simple Discount Interest This is different from simple interest. Simple interest is a
In the Simple discount situation, an amount of money fixed amount paid only on the principal at the end of the
(future value) due on a certain future date, usually within period. A term deposit usually earns simple interest but
a year, can be paid in advance if both the debtor and the the power of compounding helps you to save more
creditor agree with each other. The money to be paid money because Compound interest accrues and is
today (present value or proceeds) is less than the added to the accumulated interest of previous periods.
amount borrowed; in fact, the future value is subtracted Formula
by the discount calculated in proportion to time and rate 𝑨 = 𝒑 (𝟏 + 𝒓)𝒕
of discount. Sometimes, a bank will give what is called a ▪ A – amount
discount loan: in this case, interest is deducted at the ▪ p – Principal
time the loan is obtained. ▪ r – rate
▪ t – time in years
Example: To find how much you’d earn:
If you agree to pay a bank Php90,000 in 2 years at a 6% 𝑯𝒐𝒘 𝒎𝒖𝒄𝒉 𝒖 𝒆𝒂𝒓𝒏 = 𝑨 − 𝑷
simple discount, how much will you receive? ▪ A – amount/compound interest
o First the bank will compute the interest: ▪ P – Principal
I = Prt = 90,000 (0.06) (2) = Php10,800
o then deduct this from the total. So you would Example: As an example, suppose a principal of 1.00 was
receive Php90,000 – 10,800 = Php79,200 invested in an account paying 6% annual interest
o and you would owe the bank Php90,000 after 2 compounded monthly. How much would be in the
years. Notice that you end up paying Php10,800 account after one year?
in interest, which is 6% of Php90,000, but Formulas to be used
received more than 6% or Php79,200. 𝒓
𝑨 = 𝑷 (𝟏 + )𝒎𝒕
𝒎
Another way of solving this problem is by using the ▪ A – future amount
formula: ▪ P – principal amount
𝑫 = (𝑭𝒗)(𝒅)(𝒕) and 𝑷 = 𝑭𝒗 − 𝑫 ▪ r – interest rate
▪ Fv – maturity value or future value ▪ m – number of compounding periods in one year
▪ d – discount interest rate ▪ t – total number of years
▪ t – term of discount 𝑨 = 𝑷 (𝟏 + 𝒊)𝒏
▪ D – amount of discount ▪ i – r/m
▪ P – proceeds or present value ▪ n – (m)(t)

Ordinary Annuity
Generally, we aren’t able to save a large sum of money
COMPOUND INTEREST in the bank today. Instead, we save for future financial
Compound Interest is an example of geometric growth obligations such as amortization of loans, educational
where the amount of interest generated each term expenses, replacement of equipment, and even
increases because it is based on both the starting amount insurance payments and pension payments, by
and the previously earned interest. depositing a smaller amount of money from each
- It is the interest from the money you originally paycheck into the bank. This idea is called an annuity.
deposited, called the principal - An annuity is a series of equal payments made at
- The interest you’ve already earned an equal interval of time. It is also known as a
- In other words, interest on interest sinking fund. An ordinary annuity is a type of
- Year to year there is a constant ratio of the annuity whose payments are made at the end of
values in the savings account, and so the each interest period.
successive values track an exponential function.
Accordingly, compound interest is commonly
said to exhibit exponential growth.
MODULE 7 Other Purpose of Statistics
MATH AS A TOOL FOR DATA MAANAGEMENT ▪ Statistics can give precise description. For
Every day, an increasingly large volume of more complex instance, in the field of education, statistical
qualitative and quantitative data is gathered at a much tools are used to get information on enrolment,
faster rate. Different statistical concepts derived from physical facilities, teachers as well as the
mathematics are used as tools to gather, organize, financial aspect which are important for a
process, summarize, analyze, and interpret these data. productive administration and management.
These statistical tools are used to describe data, compare ➢ Another example is the government
between different data sets, find the relationship itself. Statistics can provide data for an
between data sets, and predict outcomes between effective management of the affairs of
related data sets. the state. A good record of taxes, cost of
- Statistics is the branch of science that deals with living, wages, population, number of
the collection, presentation, organization, employed and unemployed and other
analysis and interpretation of data. related records w/c are useful for
- The population is the collection of all elements decisions & policy making.
under consideration in a statistical inquiry. The ▪ Statistics can predict the outcome of experiment
sample is a subset of the population. or the behavior of an individual.
- The variable is a characteristics or attributes of ➢ In forecasting, statistics is needed so
the elements in a collection that can assume that concerned individuals can plan
different values for the different elements. ahead correctly and can formulate
INTRODUCTION necessary policies needed with the
existing conditions. In business and
The parameter is a summary measure describing a economics, statistics play an important
specific characteristic of the population. The statistic is a role in business forecasting, opening
summary measure describing a specific characteristic of
business, market research as well as
the sample. quality control.
Fields of Statistics ▪ Statistics can be used to test hypothesis.
Applied Statistics Statistics is used to analyze and interpret
~ It is concerned with the procedures and numerical data which will be used for decision
techniques used in collection, making.
presentation, organization, analysis, and
interpretation of data. DESCRIPTIVE STATISTICS
Theoretical Statistics
Measures of Central Tendency are descriptive measures
~ It is concerned with the development of
that are used to describe the center of a set of data,
the mathematical foundations of the
arranged numerically.
methods used in applied statistics.
1. The arithmetic mean (x̄) is the most common
Areas of Interest in Applied Statistics type of average. It is the sum of all the observed
Descriptive Statistics values divided by the numbers of observations.
~ It includes all the techniques used in 2. The median is the value that divides the array
organizing, summarizing and presenting into two equal parts.
the data on hand. 3. The mode is the observed value that occurs with
Inferential Statistics the greatest frequency in a data set. It is the
~ It includes all the techniques used in number/value/observation in a data set which
analysing the sample data that will lead appears the greatest number of times. If no
to generalizations about a population number in the list is repeated ,then there is no
from which the sample came from. mode for the list. However, it is also possible to
have more than one mode for the same
distribution of data (bi-modal, tri-modal or multi-
modal).
 ▪ w – corresponding weight
▪ x – data or value of any particular observations
or measurement
Example:
A recent survey of a new ice cream reported the
following percentages of people who liked the flavor.
Find the weighted mean of the percentages.
Ungrouped Data
Area % Flavored Number Surveyed Σwx
To compute the mean of ungrouped data, we use the (w) & (Σw) (x)
formula: A 55 1,100 605
𝒙𝒏
𝐱̄ = 𝒙𝟏 + 𝒙𝟐 + 𝒙𝟑 … B 25 700 175
𝒏 C 70 1,000 700
- Add the given values (x) then divide the sum to
Total 1.50 1,480
the total number of the given values (n).
Weighted mean = Σwx/Σw
= 1,480/1.50
Weighted mean = 986.67 (round off) = 987

THE MEASURES OF CENTRAL TENDENCY FOR GROUPED

DATA
Data which are arranged in a frequency distribution are
called grouped data.
- Where do most of the data in a distribution tend
to be located in? This question means the same
thing as asking what the average of your data is.
Any kind of “average” is meant to be an answer
to the question “Where do the data center?” It is
what is referred to as a measure of central
tendency, also known as a measure of centrality
or central location of the data set. The three
most frequently used measures of central
tendency are:
30 ✓ Mean – the mean of a quantitative data
- To find the mode of an ungrouped data, find the set is equal to the sum of the values
frequency of each number/value/observation divided by the number of values in the
having the highest frequency as the mode. data set. The arithmetic means or simply
- Mode = number/value/observation with the the mean is the average of the numerical
highest frequency. data collected. The mean is most often
used when a distribution is close to
WEIGHTED MEAN being a symmetric distribution, either
This is used to find the mean of values of the data set there are no significant extreme values
that are not equally represented. The weighted average or there are offsetting extreme values.
can be found by multiplying the value by its The mean is often used in education,
corresponding weight and dividing the sum of the economics, meteorology, etc. and in
products by the sum of their weights. Otherwise, inferential statistics.
multiply each weight (w) by its matching value x, sum ✓ Median – is the middle value of an
that all up, and divide by the sum of weights: The formula ordered data set, where the data are
is: arranged in ascending or descending
𝜮𝒘𝒙 order. If the number of values, n, is odd,
𝒘𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒎𝒆𝒂𝒏 = the median is the precise middle number
𝜮𝒘
 in the ordered set. If n is even, the To find the mean:
median is the mean of the middle two x̄ = Σfx/n
values in the ordered list. The median is x̄ = 5,897/40
of most value in describing large data x̄ =147.43
sets. The median is useful when
distributions are not close to being COMPUTATION OF THE MEDIAN FOR GROUPED DATA
symmetric or when extreme values tend The median is the preferred measure of central tendency
to pull the mean significantly up or when one does not want extreme scores to influence the
down. average.
✓ Mode – is the value or values that occur - In order to compute the median from grouped
most frequently in the data set. The data, we also have to determine the value which
mode is particularly useful for describing divides the distribution into two equal parts,
qualitative data. In retail sales, there is thus, we consider the less than cumulative
often reference to the items for which frequency.
there were the most sales. The mode is - The median can be estimated by locating the
also used with quantitative data sets to point in which the median class lies.
locate the region in which much of the - The median class lies where half of the
data are concentrated. For example, the observation is located in the cumulative
typical senior high student is 16 to 18 frequency.
years old. - < cf is the less than cumulative frequency.
Formula:
COMPUTATION OF THE MEAN FOR GROUPED DATA 𝑵⁄ − 𝑪𝒇
To determine the mean of the interval and the data 𝑴𝒆𝒅𝒊𝒂𝒏 (𝑴𝒅) = 𝑳𝑳 + ( 𝟐 )𝒊
𝑭
organized into the frequency distribution, use the
𝟏𝟒𝟒 + 𝟏𝟒𝟓
summation of the product of the frequency (f) and the 𝑳𝑳 = = 𝟏𝟒𝟒. 𝟓
𝟐
midpoint of the class (x). Example:
Formula: Given the frequency distribution below, solve for the
𝜮𝒇𝒙 median.
𝐱̄ =
𝒏
▪ x̄ – arithmetic mean
▪ x – the midpoint of each class
▪ f – the frequency of each class
▪ n – total number of frequencies or sample size
Example:
Class Interval f x Σfx
172-180 2 176 352
163-171 4 167 668
154-162 7 158 1,106
145-153 10 149 1,490
136-144 9 140 1,260
127-135 5 131 655 Given:
118-126 3 122 366 ▪ LL = 144.5 ▪ i=9
Total N= 40 Σfx = 5,897 ▪ F = 10 ▪ N = 40
✓ Step1: Find the midpoints of each class and place ▪ Cf = 17 ▪
the values on the third column Solution:
✓ Step2: Multiply the midpoint by the frequency 𝑵⁄ − 𝑪𝒇
for each class and place the results of the fourth 𝑴𝒆𝒅𝒊𝒂𝒏 (𝑴𝒅) = 𝑳𝑳 + ( 𝟐 )𝒊
𝑭
column 𝟒𝟎⁄ − 𝟏𝟕
✓ Step3: Find the sum of the fourth column 𝑴𝒆𝒅𝒊𝒂𝒏 (𝑴𝒅) = 𝟏𝟒𝟒. 𝟓 + ( 𝟐 )𝟗
✓ Step4: Divide the sum by n. 𝟏𝟎
 𝟐𝟎 − 𝟏𝟕 𝟏
𝑴𝒆𝒅𝒊𝒂𝒏 (𝑴𝒅) = 𝟏𝟒𝟒. 𝟓 + ( )𝟗 𝑴𝒐𝒅𝒆 (𝑴𝒐) = 𝟏𝟒𝟒. 𝟓 + (𝟗)
𝟏𝟎 𝟒
𝟑 𝑴𝒐𝒅𝒆 (𝑴𝒐) = 𝟏𝟒𝟒. 𝟓 + 𝟐. 𝟐𝟓
𝑴𝒆𝒅𝒊𝒂𝒏 (𝑴𝒅) = 𝟏𝟒𝟒. 𝟓 + ( ) 𝟗
𝟏𝟎 𝑴𝒐𝒅𝒆 (𝑴𝒐) = 𝟏𝟒𝟔. 𝟕𝟓
𝑴𝒆𝒅𝒊𝒂𝒏 (𝑴𝒅) = 𝟏𝟒𝟒. 𝟓 + 𝟐. 𝟕
𝑴𝒆𝒅𝒊𝒂𝒏 (𝑴𝒅) = 𝟏𝟒𝟕. 𝟐

COMPUTATION OF THE MODE FOR GROUPED DATA

The Mode in a frequency distribution is within the class
interval with the highest frequency. The class interval
with the highest frequency is known as the modal class.
- A crude mode may be determined by taking the
class mark with the highest frequency. However,
the rough approximation may be improved by
considering the frequencies adjoining the modal
frequency.
Formula:
∆𝟏
𝑴𝒐𝒅𝒆 (𝑴𝒐) = 𝑳𝒎 + (𝒊)
∆𝟏 + ∆𝟐
𝟏𝟒𝟒 + 𝟏𝟒𝟓
𝑳𝒎 = = 𝟏𝟒𝟒. 𝟓
𝟐
▪ Lm = lower limit of the modal class
▪ ∆𝟏 = difference between the frequencies of the
modal class and the next class lower in value
▪ ∆𝟐 = difference between the frequencies of the
modal class and the next class higher in value
▪ 𝒊 = class size
Example:
Given the frequency distribution below, solve for the
mode.

Given:
▪ Lm = 144.5 ▪ Δ1 = 10 – 9 = 1
▪ Δ2 = 10 – 7 = 3 ▪ i=9
Solution:
∆𝟏
𝑴𝒐𝒅𝒆 (𝑴𝒐) = 𝑳𝒎 + (𝒊)
∆𝟏 + ∆𝟐
𝟏
𝑴𝒐𝒅𝒆 (𝑴𝒐) = 𝟏𝟒𝟒. 𝟓 + (𝟗)
𝟏+𝟑