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MATHEMATICS
Financial Mathematics
Financial Mathematics
FINM-A
Objectives................................................................................................. FINM 1
FINM-B
FINM-C
FINM-D
FINM-E
FINM-F
Summary.................................................................................................. FINM 10
FINM-G
FINM-H
FINM-Y
Index......................................................................................................... FINM 13
FINM-Z
Solutions................................................................................................... FINM 14
FINM-A
Objectives
FINM 1
Financial Mathematics
FINM-B
Simple Interest
When money is borrowed for a loan or invested, interest accumulates. The amount of interest depends
on:
the amount of money borrowed or invested, the principal;
the interest rate; and
the time.
To calculate the simple interest, I, accumulated on the principal, P, over an interval of t years at an
annual interest rate of r, the formula I = P r t is used.
The percentage interest rate must be expressed as a decimal for calculations. The symbol p.a. used with
interest rates denotes per annum meaning an annual or yearly interest rate. Interest rates stated as flat
rates are used in simple interest calculations.
The total amount of money that must be repaid on a loan or the total value of an investment can be
called the future value, S. The future value is calculated using S = P + I . The principal is also
called the present value.
Examples FINM-B1
1.
2.
A student borrows $600 to buy a camera. The loan is over two years, and the simple interest
rate is 6% per year. How much interest does the student pay? What is the total amount of
money repaid?
Principal = P = $600
Interest rate = 6% per year r = 0.06
t = 2 years
I =Prt
= 600 0.06 2
= 72
Interest to be paid is $72
write formula
substitute values
evaluate
answer in words
S = P+I
= 600 + 72
= 672
Total amount ot be paid is $672
write formula
substitute values
evaluate
answer in words
An investor lent $12000 to a business associate for 6 months at an interest rate of 8% per year.
Calculate the interest the investor earns and how much in total will be repaid.
Principal = P = $12 000
list known information
Interest rate = 8% per year r = 0.08
t = 6 months = 126 = 0.5 year
I =Prt
= 12000 0.08 0.5
= 480
Interest to be earned is $480
write formula
substitute values
evaluate
answer in words
S = P+I
= 12000 + 480
= 12480
Total amount ot be paid is $12 480
write formula
substitute values
evaluate
answer in words
FINM 2
Financial Mathematics
Calculate the simple interest earned when $500 is invested at 7.5% p.a. for 21 months.
Principal = P = $500
Interest rate = 7.5% per year
21
t = 21 months = 12
= 1.75 years
r = 0.075
I =Prt
= 500 0.075 1.75
= 65.625
Interest to be earned is $65.63
write formula
substitute values
evaluate
answer in words
Exercise FINM-B1
1.
2.
3.
For each of the following situations define principal P, the interest rate r, and the time t.
(a)
Barry borrows $15000 in order to buy a second-hand car. The loan is over three
years and the interest rate is 12% per year.
(b)
Britney wishes to purchase a boat which requires her to take out a $20000 loan at
15% per annum over five years.
Find the simple interest due and the total amount owing for each of the following loans.
(i) $2000 at 8% per year for 3 years.
(ii)
(iii)
(iv)
Find the simple interest due, and the total amount to be repaid for each of the following
loans.
(i) $3000 at 10% per year for 3 years 6 months.
(ii) $3000 at 8% per year for 18 months.
(iii) $3000 at 12% per year for 2 years 9 months.
(iv) $3000 at 8.5% per year for 36 months.
It is possible to use the simple interest formula, I = P r t to calculate the principal, P, interest rate, r,
or the time, t, required to give the specified amount of simple interest, I. To find these values it will be
necessary to substitute in given quantities and then rearrange the equation to solve for the unknown.
Sometimes it is necessary to calculate how much money is required to be invested now, (present value)
at a given interest rate, to amount to a specified value at some time in the future (future value). To
achieve this the formula needs to be manipulated as follows.
S = P+I
S = P+P r t
S = P(1 + rt )
S
P =
1 + rt
FINM 3
Financial Mathematics
Examples FINM-B2
1.
Calculate the amount of money that would earn $750 simple interest if it was invested at
4.5% p.a. for 5 years.
Principal = P = ?
list known information
Interest = I = 750
Interest rate = 4.5% per year
r = 0.04.5
t = 5 years
=Prt
I
750 = P 0.045 5
750 = 0.225 P
750
P =
= 3333.33
0.225
$3333.33 would need to be invested.
2.
answer in words
Calculate the time required for $8300 to earn $3087.60 interest at the flat rate of 6.2% p.a.
list known information
P = $8300
I = $3087.60
r = 0.062
t=?
=Prt
I
3087.60 = 8300 0.062 t
3087.60 = 514.6t
3087.60
t =
=6
514.6
It would take 6 years to earn $3087.60 interest.
3.
write formula
substitute values
solve for unknown
write formula
substitute values
solve for unknown
answer in words
Betty won $245 000 in lotto. She wants to travel with the interest earned by investing her
winnings. At what interest rate must betty invest her money so that she will earn $27 500
every 18 months?
P = $245 000
I = $27 500
t = 18 months =
= 1.5 years
r=?
I
27500
27500
r
write formula
substitute values
=Prt
= 245000 r 1.5
= 367500r
27500
=
367500
= 0.074829
0.075 = 7.5%
answer in words
FINM 4
Financial Mathematics
Examples FINM-B2
4.
continued
Brendan wants to have $15000 for a new boat in 10 years time. How much should he invest
at 5% per year to save this amount (assuming no withdrawals are made and the interest rate
does not change)?
write formula
transpose formula
substitute values
evaluate
= P+I
S
= P+P r t
S
15000 = P + P 0.05 10
15000 = P + 0.5 P
15000 = 1.5 P
15000
= P = 10000
1.5
write formula
substitute values
solve for unknown
answer in words
When money is borrowed, it is usually paid back on a regular basis over the term of the loan. The total
amount of the loan, S, is divided by the required number of payments to give the amount of the
regular repayment.
Example FINM-B3
A student borrows $600 to buy a camera. The loan is over two years, and the simple interest rate
is 6% per year. How much will her monthly repayments be?
list known information
P = $600 Interest rate = 6% per year r = 0.06
t = 2 years = 24 months
I =Prt
S = P+I
= 600 0.06 2 = 600 + 72
= 72
= 672
Total repaid
S 672
= =
= 28
no. of months n 24
Her repayments will be $28 per month.
repayments =
Exercise FINM-B2
1.
Find the principal that was invested to earn $3348 interest in 6 years at 6.2% p.a.
2.
How long was $4500 borrowed for at 7.1% p.a. to cost $798.75 interest?
3.
At what interest rate was $875 invested for to earn $73.50 interest in 18 months?
4.
What amount of money should be invested now at 10% per year to amount to $1800 in 2
years time?
What amount of money should be invested now at 6% per year to amount to a future value of
$8000 seven months from now?
A $120 000 property is purchased with a deposit of $30000. The balance is repayable over
15 years at 7% per year. Find:
(a) the balance of the purchase price
(b) the interest due
(c) the total amount repayable
(d) the monthly repayments
Brian wishes to borrow $15000 for a 6 month holiday in Europe. He has approached two
banks and has the following options. The People's Bank quotes an interest rate of 5% per
year with the repayments to be made over 3 years, whilst the Friendly Bank interest rate is
4% per year and the payments are to be made over 4 years. Which loan will ultimately be
cheaper for Brian?
5.
6.
7.
FINM 5
Financial Mathematics
FINM-C
Compound Interest
In compound interest, the interest earned by an invested amount of money (or principal) is reinvested
so that it too earns interest. That is, at the end of each interest period the interest earned for that period
is added to the principal so that the interest also earns interest over the next interest period. In the same
way, interest due on a debt at the end of a period is subject to interest in the next period.
The accumulated amount or compounded amount, S, has same meaning as future value. The
difference between the compounded amount and the original principal is called the compound
interest, I = S P .
For an original principal of P invested at a periodic interest rate of i for n periods, the compounded
amount (or future value), S, is given by S = P (1 + i )
The periodic interest rate can be found by dividing the annual interest rate, r, by the number of
r
periods in a year, N, i.e. i =
N
Example FINM-C1
Clarissa invests $5000 at 6.2% p.a. with interest compounded monthly. What would her
investment be worth after five years? What amount of interest has been earned during the five
years?
P = $5000
N = 12 (12 months in a year) r = 0.062 p.a.
r 0.062
i = =
per month
N
12
t = 5 years n = 5 12 = 60 months
S = P (1 + i )
substitute values
evaluate using calculator
5000 ( 1 + 0.062 12 ) x y 60 =
answer in words
n
60
0.062
S = 5000 1 +
12
= $6811.69
The investment will be worth $6811.69.
write formula
write formula
S = P+I
I =SP
= 6811.69 5000 = 1811.69
The interest earned was $1811.69.
It is possible to calculate the principal if the period of investment and compounded amount are known.
By transposing the compound interest formula, S = P (1 + i ) , the formula for the principal becomes
n
P=
S
(1 + i )
OR P = S (1 + i )
In a similar way the periodic interest rate can be determined by transposing the compound interest
formula for i.
1
i=
S
S n
1 or 1 .
P
P
FINM 6
Financial Mathematics
Examples FINM-C2
1.
S = P (1 + i )
S
n
P=
or S (1 + i )
(1 + i ) n
n
13000
20
0.12
or 13000 1 +
0.12
1 +
P = 7197.78
The principal required is $7197.78
2.
to
P=
compound
20
= P (1 + i )
13000
0.12
= P 1 +
13000
0.12
1 +
20
n
20
= P = 7197.78
P = $3000 S = $3500
N = 4 (4 quarters in a year)
t = 5 years n = 5 4 = 20 quarters
r = ? find i first.
S = P (1 + i )
write formula
transpose formula
i=n
S
S n
1 or 1
P
P
1
3500
3500 20
i = 20
1 or
1
3000
3000
= 0.007737313
substitute values
evaluate using calculator
( 3000 3500 ) x y ( 1 20 ) =
The periodic rate is 0.774%, so the annual rate would be 4 0.774% = 3.096%
Exercise FINM-C1
1.
Find the compounded amount and compound interest for the following:
(a) $600 for 8 years at 8% compounded monthly.
(b) $1000 for 5 years at 12% compounded daily.
(c) $750 for 12 months at 6% compounded weekly.
(d) $3000 for 4 years at 9% compounded quarterly.
2.
How much should be invested at 8% compounded semi-annually for six years in order to
provide a compounded amount of $10000?
3.
The day Charlotte was born her father deposited $500 in a bank account. If the account was
compounded annually and on Charlottes twenty-first birthday there was $1326.65 in the
account. What was the annual interest rate?
4.
FINM 7
Financial Mathematics
FINM-D
The effective rate of interest is the equivalent rate of simple interest earned over a period of one year
for an interest rate which is compounded twice or more over the year. The annual simple interest rate
will be greater than the annual compounding interest rate to earn the same amount of interest.
The effective annual interest rate, re, is calculated using:
N
re = 1 + 1
N
where r is the annual interest rate (in decimal form) and N is the number of periods per year.
The annual interest rate, r, for compounding calculations is often called the nominal rate. Effective
interest rates can be used to compare investment opportunities.
Examples FINM-D1
1.
What effective interest rate is equivalent to a nominal rate of 12% compounded (a) monthly
and (b) daily?
12
(a)
0.12
re = 1 +
1 0.1268
12
= 12.68%
(b)
0.12
re = 1 +
365
365
1 0.1275
= 12.75%
2. Which is the "best" investment, 6% per annum compounded monthly or 6.20% compounded
annually?
12
0.06
compunding monthly = 1 +
1 0.0617 = 6.17%
12
So, an annual rate of 6.20% is better for investment than 6% per annum compounded
monthly.
Exercise FINM-D1
1.
Find the compounded amount and the compound interest for the given investment and annual
rate.
(i) $6000 for 8 years at an effective rate of 8%.
(ii) $750 for 12 months at an effective rate of 10%.
2.
Find the effective rate that corresponds to the given nominal rate.
(i) 10% compounded quarterly.
(ii)
(iii)
8% compounded daily.
(iv)
3.
A $6000 certificate of deposit is purchased for $6000 and is held for 7 years. If the
certificate earns an effective rate of 8%, what is it worth at the end of that period?
4.
To what sum will $2000 amount in 8 years if invested at a 6% effective rate for the first 4
years and 6% compounded semi-annually thereafter?
FINM 8
Financial Mathematics
FINM-E
Equations of Value
An amount of money can have different values at different times, for a particular interest rate. The
value of money is dependant on its ability to earn interest. Equations of value are used to compare
the value of money at various times.
The equation S = P (1 + i )
P = S (1 + i )
is used to find the value of money, at various points in the future while
is used to find the value of money at some point prior to this time. To perform
calculations the value of repayments or debts must be determined at only one point in time.
For equations of values the general formula used is repayments = debts (at the same point in time). The
value of each repayment or debt should be determined at the point in time when the final repayment is
to be paid. To assist with calculations a time line can be drawn showing all repayments and debts.
Examples FINM-E1
1.
If Edna owes $200 in 2 years and a further $300 in 5 years, how much does she need to
pay at present to account for these debts? (Assume 8% compounding quarterly.)
0.08
per quarter
4
S 1 = 200
S2 = 300
n1 = 2 4quarters = 8
n1 = 5 4quarters = 20
i = 8% p.a. =
write formula
8
20
0.08
0.08
substitute values
x = 200 1 +
+ 300 1 +
4
4
evaluate
= 170.69 + 201.89
= 372.58
Edna needs to pay only $372.58 now to cover her future debts.
2.
A debt of $5000, which was due 5 years from now, is instead going to be repaid by three
payments: $2000 now, $1000 in 2 years time and the third payment after 4 years. What will be
the final payment if the assumed interest rate is 6% p.a. compounding half-yearly?
i = 6% p.a. =
0.06
per quarter
2
0.06
note: 1 +
= 1.03
2
= debts
= debt
2
4
0.06
2000 1 +
+ 1000 (1.03) + x = 5000 (1.03)
2
2533.54 +1125.51
+x
= 4712.98
x
= 1053.93
FINM 9
write formula
substitute values
evaluate
answer in words
Financial Mathematics
Exercise FINM-E1
1.
2.
3.
4.
A debt of $550 due in 4 years and $550 due in 5 years is to be repaid by a single payment
now. Find how much the payment is if an interest rate of 10% compounded quarterly is
assumed.
A debt of $600 due is 3 years and $800 due in 4 years is to be repaid by a single payment 2
years from now. If the interest rate is 8% compounded semiannually, how much is the
payment?
A debt of $5000 due in 5 years is to be repaid by a payment of $2000 now and a second
payment at the end of 6 years. How much should the second payment be if the interest rate is
6% compounded quarterly?
A debt of $5000 due 5 years from now and $5000 due 10 years from now is to be repaid by a
payment of $2000 in 2 years, a payment of $4000 in 4 years, and a final payment at the end
of 6 years. If the interest rate is 7% compounded annually, how much is the final payment?
FINM-F
Summary
To calculate the simple interest, I, accumulated on the principal, P, over an interval of t years at an
annual interest rate of r, the formula I = P r t .
The total amount of money that must be repaid on a loan or the total value of an investment can be
called the future value, S. and is calculated using S = P + I .
It is possible to use the simple interest formula to calculate the principal, P, interest rate, r, or the time,
t, required to give the specified amount of simple interest, I. It is also to determine the principal, P, to
S
be invested now to accumulate to some future value, S, using the formula P =
.
1 + rt
The total amount of the loan, S, is divided by the required number of payments to give the amount of
the regular payment.
For an original principal of P invested at a periodic interest rate of i for n periods, the compounded
amount (or future value), S, is given by S = P (1 + i )n . The periodic interest rate can be found by
dividing the annual interest rate, r, by the number of periods in a year, N.
It is possible to calculate the principal if the period of investment and compounded amount are known
S
n
using: P =
OR P = S (1 + i ) . In a similar way the periodic interest rate can be determined
n
(1 + i )
1
by i = n
S
S n
1 or 1 .
P
P
N
Equations of value are used to compare the value of money at various times. The equation
S = P (1 + i ) is used to find the value of money at various points in the future, while P = S (1 + i )
n
used to find the value of money at some point before this time. For equations of value, the general
formula used is repayments = debts (at the same point in time).
FINM 10
is
Financial Mathematics
FINM-G
1.
2.
Review Exercise
Calculate the simple interest and accumulated amount for each of the following.
(i)
(ii)
Angela bought a computer for $2100. She paid a deposit of $300 and took out a loan for the
remainder at 8 12 % p.a. simple interest over 3 years.
(a)
(b)
(c)
3.
How much needs to be invested at 11% p.a. simple interest to have an accumulated amount
of $7800 in 5 years from now?
4.
Calculate the compounded amount and the compound interest for the following.
(i)
(ii)
5.
Find the compound interest on a loan of $600 borrowed at 7.5% compounded quarterly for 3
years.
6.
What annual interest rate, compounded monthly, would be required for an investment of
$5000 to amount to $6500 in 4 years?
7.
Leading company A offers rates of 8.2% p.a. compounded quarterly, while company B
advertises a rate of 8.1% compounded daily. Which company offers the best rate for a loan?
8.
Two debts, $2000 due in 3 years and $1500 due in 5 years, are to be repaid by $1000 now
and another repayment in 4 years. What is the value of the final repayment if the interest rate
is 10% compounded monthly?
FINM 11
Financial Mathematics
FINM-H
= P (1 + i )
S
S
(1 + i )
P =
P (1 + i )
(1 + i )
S
(1 + i )
or P = S (1 + i )
1
n
xn = x
= P (1 + i )
S
S
P
S
P
P (1 + i )
= (1 + i )
S
P
S
P
n n
S
P
S
P
= 1+ i
S
1 = 1+ i 1
P
S
1 = 1+ i 1
P
S
1 = i
P
S
1 = i
P
(1 + i )
OR
= (1 + i )
= 1+ i
= P (1 + i )
S
S
P
S
P
P (1 + i )
= (1 + i )
log ( PS ) = log (1 + i )
log ( PS ) = n log (1 + i )
log ( PS )
log (1 + i )
=n
OR
ln ( PS )
= ln (1 + i )
ln ( PS )
= n ln (1 + i )
ln ( PS )
ln (1 + i )
=n
FINM 12
Financial Mathematics
FINM-Y
Index
Topic
Page
FINM 2, 6, 8
FINM 6
FINM 6
FINM 8
FINM 9
FINM 2
FINM 8
FINM 2, 3
FINM 8
FINM 2
FINM 6
FINM 4
FINM 2, 3, 7
Repayments..............................................................................
FINM 5, 9
FINM 2, 3
FINM 17
FINM 13
SOLUTIONS
Financial Mathematics
FINM-Z
Solutions
FINM -B
Simple Interest
FINM -C
FINM-B1
FINM 15
FINM-B1
FINM 16
Compound Interest
FINM-C1
FINM -D
FINM 19
Equations of Value
FINM-E1
FINM -G
FINM 17
FINM -E
Equations of Value....................................................
FINM 20
Review Exercise
FINM-G
Review Exercise........................................................
FINM 14
FINM 21
SOLUTIONS
FINM-B1
1
.
(a)
Financial Mathematics
Simple Interest
P = $15 000
r = 12% = 0.12
(b)
t = 3 years
2
.
(i)
t = 5 years
P = $2000 r = 8% = 0.08
t = 3 years
I = Prt = 2000 0.08 3
(ii)
= $480
Total Amount = P + I
= 2000 + 480
= 18000 + 1125
= $19 125
P = $5 000 t = 3 years
r = 1.5% p.m. = 1.5% 12 p.a
(iv)
= 0.015 12 = 0.18
I = Prt = 5000 0.18 3
= 16000 + 3840
= $19 840
= 5000 + 2700
= $7700
(i)
(iii)
P = $3 000
r = 10% = 0.1
t = 3 y 6months = 3.5 years
I = Prt = 3000 0.1 3.5
= $1050
Total Amount = P + I
= 3000 + 1050
= $4 050
(ii)
P = $3 000
(iv)
r = 12% = 0.12
t = 2 y 9months = 2
9
12
P = $16 000
r = 8% = 0.08
t = 36 months = 3 years
I = Prt = 16000 0.08 3
= $3840
Total Amount = P + I
= $2700
Total Amount = P + I
3
.
= $2480
(iii)
P = $20 000
r = 15% = 0.15
years = 2.75 y
FINM 15
P = $3 000
r = 8% = 0.08
t = 18months = 1.5 years
I = Prt = 3000 0.08 1.5
= $360
Total Amount = P + I
= 3000 + 360
= $3 360
P = $3 000
r = 8.5% = 0.085
t = 36 months = 3 years
I = Prt = 3000 0.085 3
= $765
Total Amount = P + I
= 3000 + 765
= $3 765
SOLUTIONS
FINM-B2
Financial Mathematics
1.
P=?
r = 6.2% = 0.062 t = 6 years I = 3348
= Prt
= Prt
I
OR
I
I
=P
= P 0.062 6
3348
rt
3348
=P
= 0.372 P
3348
0.062 6
3348
P = $9 000
= P = $9 000
0.372
A principal of $9000 would need to be invested.
2.
I
I
Pr
OR
=t
= Prt
798.75
=t
4500 0.071
798.75 = 319.5t
798.75
= t = 2.5 years
319.5
The money would be invested for 2.5 years.
t = 2.5 years
3.
P = 875 r = ?
I
= Prt
OR
I = 73.50
= Prt
I
=r
Pt
73.50
=r
875 1.5
r = 0.056 = 5.6%
73.50
= r = 0.056 = 5.6%
1312.5
73.50 = 1312.5r
P=?
r = 10% = 0.1
t = 12 years
Amount = 1800
OR
= P (1 + rt )
= P + Prt
1800
= P (1 + 0.1 2 )
= P (1 + rt )
1800
= P 1.2
S
=P
(1 + rt )
1800
1.2
=P
1800
=P
+
1
( 0.1 2 )
P = $1500
Amount = P + I
S
P=?
r = 6% = 0.06
Amount = $8000
= P (1 + rt )
= P + Prt
8000
= P (1 + 0.06 127 )
= P (1 + rt )
8000
= P 1.035
S
=P
(1 + rt )
8000
1.035
=P
8000
=P
+
127 )
1
0.06
(
P $7729.47
Amount = P + I
S
OR
FINM 16
SOLUTIONS
FINM-B2
Financial Mathematics
continued
6.
(a)
(b)
I = $90 000
r = 7% = 0.07
t = 15 years = 15 12 = 180months
I = Prt
= 90000 0.07 15
= $94 500
(c)
(d)
Monthly Repay =
184500
180
= $1025
P = $15 000
7.
rpeople = 5% = 0.05
t people = 3 years
rfriend = 4% = 0.04
t friend = 4 years
I people = Prt
I friend = Prt
= 15000 0.05 3
= 15000 0.04 4
= $2250
= $2400
= $17250
= $17400
The cheaper loan is available from the People's Bank.
FINM-C1
1.
Compound Interest
(a)
P = $600
S = P (1 + i )
n = 8 12 = 96 i =
8% 0.08
=
12
12
= 600 (1 + 0.08
$1135.47
12 )
96
I =SP
= 1135.47 600 = $535.47
(b)
P = $1000
S = P (1 + i )
n = 5 365 = 1825
i=
12% 0.12
=
365 365
= 1000 (1 + 0.12
365 )
1825
$1821.94
I =SP
= 1821.94 1000 = $821.94
(c)
P = $750
S = P (1 + i )
n=
12
52 = 52
12
i=
6% 0.06
=
52
52
= 750 (1 + 0.06
$796.35
52 )
52
I =SP
= 796.35 750 = $46.35
FINM 17
SOLUTIONS
Financial Mathematics
FINM-C1
1.
continued
P = $3000
(d)
n = 4 4 = 16
S = P (1 + i )
i=
9% 0.09
=
4
4
= 3000 (1 + 0.09
4282.86
4 )
16
I =SP
= 4282.86 3000 = $1282.86
2.
P=?
S = $10 000
n = 6 2 = 12 i =
S = P (1 + i )
P = S (1 + i )
P=
OR
= 10000 (1 + 0.04 )
8% 0.08
=
= 0.04
2
2
12
(1 + i )
10000
(1 + 0.04 )
12
P $6245.97
P = $500
S = $1326.65 n = 21
S = P (1 + i )
i=?
n
1
i=
S
1
P
OR
S n
i = 1
P
1
1326.65 21
=
1
600
0.0385 = 3.85%
1326.65
=
1
600
0.0385 = 3.85%
21
P = 4000
For 10% compounded annually
i = 10% = 0.1
i=
S10% = P (1 + i )
n =1
9.75% 0.0975
=
12
12
S9.75% = P (1 + i )
n = 12
= 4000 (1 + 0.1)
= 4000 (1 + 0.0975
12 )
= $4400
= $4407.91
12
FINM 18
SOLUTIONS
FINM-D1
1.
Financial Mathematics
P = $6000
n=8
S = P (1 + i )
i = 8% = 0.08
I =SP
= 6000 (1 + 0.08 )
= 11105.58 6000
$11105.58
= $5105.58
(ii)
P = $750
n=
S = P (1 + i )
12
=1
12
I =SP
= 750 (1 + 0.1)
= 825 750
$825
= $75
2.
(i)
i = 10% = 0.1
r = 10% = 0.1
N =4
(iii)
r = 8% = 0.08
re = 1 + 1
N
re = 1 + 1
N
365
0.1
= 1 +
1
4
0.1038 = 10.38%
(ii)
r = 12% = 0.12
0.08
= 1 +
1
365
0.0833 = 8.33%
N = 12
(iv)
r = 12% = 0.12
r
re = 1 + 1
N
12
365
0.12
= 1 +
1
12
0.1268 = 12.68%
P = $6000
n=7
S = P (1 + i )
0.12
= 1 +
1
365
0.1275 = 12.75%
i = 8% = 0.08
= 6000 (1 + 0.08 )
10282.95
N = 365
re = 1 + 1
N
3.
N = 365
6% 0.06
n = 4 2 = 8
=
2
2
= 2524.95 (1 + 0.06
$3198.53
2 )
8
FINM 19
SOLUTIONS
FINM-E1
Financial Mathematics
Equations of Value
10% 0.1
0.1
=
1 +
= 1.025
4
4
4
repayments = debts
+
repay1 = debt1
debt2
1.
i=
x = 550
( 1.025 )
16
( 1.025 )
+ 550
8% 0.08
0.08
=
1 +
= 1.04
2
2
2
repayments = debts
repay1 = debt1
debt2
+
2.
i=
x = 600
( 1.04 )
+ 800
( 1.04 )
0.06
1 +
= 1.015
4
=debts
6% 0.06
=
4
4
repayments
i=
( 1.015 )
24
+ x = 5000 (1.015 )
2859.01 + x = 5306.82
x = $2447.81
4.
i = 7% = 0.07
(1 + 0.07 ) = 1.07
= debts
repayments
repay1 + repay2 + repay3
= debt1 +
debt2
= $1963.29
FINM 20
20
SOLUTIONS
FINM-G
1.
Financial Mathematics
Review Exercise
(i)
P = $2000
r = 8% = 0.08
(ii)
P = $35000
t = 5 years
I = Prt
I = Prt
Total Amount = P + I
2.
(a)
r = 5.6% = 0.056
Total Amount = P + I
= 2000 + 800
= 35000 + 4900
= $2800
= $39 900
I = Prt
= 1800 0.085 3
= $459
(b)
S = 1800 + 459
(c)
= $2259
Repayments =
3.
P=?
r = 11% = 0.11
t = 5 years
Amount = $7800
OR
= P (1 + rt )
= P + Prt
7800
= P (1 + 0.11 5 )
= P (1 + rt )
7800
= P 1.55
7800
1.55
=P
Amount = P + I
S
S
=P
1
+
( rt )
7800
=P
(1 + 0.11 5 )
P $5032.26
4.
(i)
P = $2000
S = P (1 + i )
n = 5 2 = 10
i=
8% 0.08
=
2
2
= 2000 (1 + 0.08
$2960.49
2 )
10
I =SP
= 2960.49 2000 = $960.49
(ii)
P = $35 000
S = P (1 + i )
n = 30
i=
5.6% 0.056
=
12
12
= 35000 (1 + 0.056
$40 246.47
12 )
30
I =SP
= 40 246.47 35000 = $5 246.47
FINM 21
2259
= $62.75
36
SOLUTIONS
FINM-G
5.
Financial Mathematics
continued
P = $600
n = 3 4 = 12 i =
S = P (1 + i )
7.5% 0.075
=
4
4
= 600 (1 + 0.075
$749.83
4 )
12
I =SP
= 749.83 600 = $149.83
The compound interest is $149.83.
6.
P = $5000
S = $6500
n = 4 12 = 48
S = P (1 + i )
i=?
n
1
i=
S
1
P
OR
S n
i = 1
P
1
48
6500
6500 48
1
=
1
5000
5000
i 0.00548 = 0.548% p.m.
7.
rA = 8.2% = 0.082
N
reA = 1 + 1
N
NA = 4
rB = 8.1% = 0.081
N B = 365
reB = 1 + 1
N
365
0.082
0.081
= 1 +
= 1 +
1
1
4
365
0.0846 = 8.46%
0.0844 = 8.44%
Company B offers the best rate for a loan.
8.
10% 0.1
=
12
12
repayments
repay1 + repay2
i=
1000 (1 +
FINM 22
=debts
= debt1 +
+ x = 2000 (1 +
1489.35 + x
x
= 2209.43
= $2077.90
0.1 48
12
debt2
0.1 12
12
+ 1500 (1 + 0.1
12 )
+1357.82
12
SOLUTIONS
Financial Mathematics
FINM 23