I = Pin
where, I = interest, in dollar
P = principal amount
i = interest rate
n = number of years
Mathematics of Finance
I = Pin
I=?
P = principal amount = $1,460
i = interest rate = 10% = 0.1
n = number of years = 72/360
I = $29.20
Mathematics of Finance
F = P + Pin = P (1 + in)
Compound Interest
FV = 1000 ( 1 + 0.07) 10
= $1,967.15
Mathematics of Finance
FVn = PV (1 + i/m) n m
= $1,104.02
Mathematics of Finance
Ans: 4 years
Mathematics of Finance
At what interest rate compounded annually will
a sum of money double in 10 years?
Let PV = $1, FV = $2
⇒ 2 = 1 (1+ i)10
⇒ 2 = (1+ i)10
⇒ 21/10 = 1 + i
⇒ 20.1 = 1 + i
⇒ 1.07177 = 1 + i
⇒ i = 0.07177 = 7.17%
Mathematics of Finance
Ans: 8%
Mathematics of Finance
1
PV = $100 3
(1.10)
= $100(0.7513)= $75.13
Mathematics of Finance
n1 n (1 i)n 1
FVAn PMT (1 i) PMT
t 0 i
Mathematics of Finance
0 1 2 3
5%
105
110.25
FV = 315.25
Mathematics of Finance
(1.05) 1
3
FVA 3 $100
0.05
$100(3.15250) $315.25
Mathematics of Finance
(1.02) 1
20
FVA 5 $100
0.02
$100(24.29736982) $2,429.74
Mathematics of Finance
Sinking fund
(Page 428)
Mathematics of Finance
n
1 1 - 1
PVAn PMT t
PMT (1 i) n
t 1 (1 i) i
Mathematics of Finance
0 1 2 3
10%
90.91
82.64
75.13
248.69 = PV
Mathematics of Finance
1 - 1 3
(1.10)
PVA 3 $100
0.10
$100(2.48685) $248.69
Mathematics of Finance
Amortized Loans
1 - (1 1i)n
PVAn PMT
i
Page 435
Mathematics of Finance