Chapter 2.
Mathematics of Finance
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Simple Interest
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Simple Interest
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Simple Interest
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Simple Interest
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Simple Interest
(a) If $8000 is invested for 2 years at an annual interest
rate of 9%, how much interest will be received at the end
of the 2-year period?
(b) If $4000 is borrowed for 39 weeks at an annual
interest rate of 15%, how much interest is due at the end
of the 39 weeks?
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Simple Interest
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Simple Interest
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Simple Interest
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Simple Interest
(a) If $2000 is borrowed for one-half year at a simple
interest rate of 12% per year, what is the future value
of the loan at the end of the half-year?
(b) An investor wants to have $20,000 in 9 months. If
the best available interest rate is 6.05% per year, how
much must be invested now to yield the desired
amount?
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Simple Interest
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Simple Interest
N
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Simple Interest
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Simple Interest
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Simple Interest
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Simple Interest
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Simple Interest
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Simple Interest
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Compound Interest
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Compound Interest
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Compound Interest
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Compound Interest
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Compound Interest
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Future value-compounded annually
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Future value-Periodic compounding
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Future value-Periodic compounding
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Exercises of Periodic compounded
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Exercises of Periodic compounded
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Exercises of Periodic compounded
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Exercises of Periodic compounded
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Exercises on present value
N
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Exercises on rate earned
We get
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Checkpoint
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Future value(Continuous compounding)
Continuous Compounding
In order to determine the interest that results from
continuous compounding (compounding every instant),
consider an investment of $1 for 1 year at a 100%
interest rate.
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Future value(Continuous compounding)
If the interest is compounded m times per year, the future value is
given by
Table shows the future values that result as the number of
compounding periods increases.
Table
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Future value(Continuous compounding)
Table shows that as the number of periods per year increases,
the future value increases, although not very rapidly.
In fact, no matter how often the interest is compounded, the
future value will never exceed $2.72.
We say that as the number of periods increases, the future
value approaches a limit, which is the number e:
e = 2.7182818 . . . .
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Future value(Continuous compounding)
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Future value(Continuous compounding)
Explain why do we have that formula
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Continuous compounding
N
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Continuous compounding
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Comparing Investments
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Future value(Continuous compounding)
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Annual Percentage Yield ( APY)
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Annual Percentage Yield ( APY)
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Annual Percentage Yield ( APY)
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Future value of Annuities
Geometric sequence
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Future value of Annuities
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Future value of Annuities
Sum of the first of n terms of the geometric sequence
Hence we have
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Future value of Annuities
(a) Find the sum of the first five terms of the geometric
progression with first term 4 and common ratio –3.
(b) Find the sum of the first six terms of the geometric
sequence
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Future value of Annuities
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Objectives
• To compute the future values of ordinary annuities and
annuities due
• To compute the payments required in order for ordinary
annuities and annuities due to have specified future
values
• To compute the payment required to establish a sinking
fund
• To find how long it will take to reach a savings goal
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Future value of Annuities
Annuity
An annuity is a financial plan characterized by regular
payments ( as a savings plan in which the regular
payments are contributions to the account, also, as a
payment plan in which regular payments are made from
an account).
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Future value of Annuities
Most people save (or invest) money by depositing relatively
small amounts at different times. If a depositor makes equal
deposits at regular intervals, he or she is contributing to an
annuity.
The payments (deposits) may be made weekly, monthly,
quarterly, yearly, or at any other interval of time.
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Future value of Annuities
Future value of annuity
The sum of all payments plus all interest earned is called the
future amount of the annuity or its future value.
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Ordinary Annuities
In this section we will deal with annuities in which
the payments begin and end on fixed dates, and we
will deal first with annuities in which the payments
are made at the end of each of the equal payment
intervals.
This type of annuity is called an ordinary annuity
(and also an annuity immediate). The ordinary
annuities we will consider have payment intervals
that coincide with the compounding period of the
interest.
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Future value of Ordinary annuity
We will deal with annuities in which the payments begin
and end on fixed dates.
Ordinary annuity
The payments are made at the end of each of the equal
payment intervals.
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Future value of ordinary Annuity
Solution.
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Future value of ordinary Annuity
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Future value of ordinary Annuity
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Future value of ordinary Annuity
If R is deposited at the end of each period for n periods in
an annuity that earns interest at a rate of i per period, the
future value of the ordinary annuity will be
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Future value of ordinary Annuity
N
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Future value of ordinary Annuity
N
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Future value of ordinary Annuity
No.
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Future value of ordinary Annuity
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Future value of ordinary Annuity
N
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Future value of ordinary Annuity
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Future value of ordinary Annuity
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Future value of ordinary Annuity
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Sinking Fund
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Sinking Fund
N
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Sinking Fund
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Sinking Fund
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5 to 12 page 390 ( Ordinary annuity)
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Annuity Due
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Future value of annuity Due
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Future value of annuity Due
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Future value of annuity Due
N
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Future value of annuity Due
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Future value of annuity Due
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Future value of annuity Due
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15 to 22 page 391( annuity due)
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