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Discount and Inflation

The document explains the concept of discount in finance, defining it as the interest deducted in advance and the difference between present worth and future worth of negotiable paper. It also introduces the rate of discount and provides a formula for calculating it, alongside an example problem involving a loan. Additionally, it defines inflation as the rise in prices over time, which reduces the purchasing power of money, and includes a formula for calculating future costs considering inflation.

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2 views11 pages

Discount and Inflation

The document explains the concept of discount in finance, defining it as the interest deducted in advance and the difference between present worth and future worth of negotiable paper. It also introduces the rate of discount and provides a formula for calculating it, alongside an example problem involving a loan. Additionally, it defines inflation as the rise in prices over time, which reduces the purchasing power of money, and includes a formula for calculating future costs considering inflation.

Uploaded by

jhayromecartagena
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

DISCOUNT & INFLATION

ESECON230
Discount
Discount is defined as interest deducted in advance. In negotiable
paper, it is the difference between the present worth of the paper and
its value sometime in the future.
Discount on a negotiable paper is the difference between the
present worth (the amount received for the paper in cash) and the
worth of the paper at some time in the future (the face value of the
paper or principal). Discount is interest paid in advance.
Discount = Future Worth – Present Worth
The rate of discount is the discount on one unit of principal for one unit
of time.
Rate of Discount
Rate of discount is defined as the discount of one unit of
principal for one unit of time.
In the cash flow diagram,
P = (1+i)-1
and F = 1.00
Using the formula of discount,
d=F–P
d = 1 - (1+i)-1
d = 1 – __1__
1+i
Example Problem on discount
A man borrowed P5,000 from a bank and agreed to pay
the loan at the end of 9 months. The bank discounted
the loan and gave him P4,000 in cash.
(a) What was the rate of discount?
(b) What was the rate of interest?
(c) What was the rate of interest for one year?
Solution:
Inflation
Inflation is the increase in the prices for goods and
services from one year to another, thus decreasing the
purchasing power of money.
FC = PC ( 1+ f)n
where:PC = present cost of a commodity
FC = future cost of the same commodity
f = annual inflation
n = number of years

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