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2.1
CHAPTER 2: MATHEMATICS OF FINANCE
(TOÁN TÀI CHÍNH CĂN BẢN) Simple Interest: lãi đơn;
Sequences: dãy số, cấp số.

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Objectives Simple Interest

If a sum of money P (called the principal-vốn) is
• To find the future value and the amount of interest invested for a time period t (frequently in years) at an
for a simple interest loan and an investment interest rate r per period, the simple interest is given
• To find the simple interest rate earned on an by the following formula.
investment
• To find the time required for a simple interest
investment to reach a goal
• To write a specified number of terms of a sequence
• To find specified terms and sums of specified
numbers of terms of arithmetic sequences
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Example 1 – Simple Interest Simple Interest

Future Value
(a) If $8000 is invested for 2 years at an annual
The future amount of an investment, or its future value,
interest rate of 9%, how much interest will be at the end of an interest period is the sum of the principal
received at the end of the 2-year period? and the interest. Thus, in Example 1(a), the future value is

(b) If $4000 is borrowed for 39 weeks at an annual Similarly, the future amount of a loan, or its future value,
interest rate of 15%, how much interest is due at the is the amount of money that must be repaid. In Example
end of the 39 weeks? 1(b), the future value of the loan is the principal plus the
interest, or

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Simple Interest Example 2. Loans and Investments

Future Value (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 principal P of an investment is also called the the best available interest rate is 6.05% per year, how
present value of the investment. The present value
of a loan is the original loan amount, which is also much must be invested now to yield the desired
called the face value of the loan. amount?
face value: mệnh giá
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Sequences Ex.3 – Terms of a Sequence

Write the first four terms of the sequence whose n-th
term is an = (–1)n(2n).

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Arithmetic Sequences Arithmetic Sequences

The sequence 2020, 2040, 2060, 2080, 2100, . . . can Arithmetic Sequence (cấp số cộng)
also be described in the following way:

This sequence is an example of a special kind of

sequence called an arithmetic sequence. (Cấp số Common difference: công sai
cộng)
In such a sequence, each term after the first can be
found by adding a constant to the preceding term.
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Arithmetic Sequences Arithmetic Sequences

n-th Term of an Arithmetic Sequence Sum of an Arithmetic Sequence
(tổng của cấp số cộng)

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Ex. 4: Sums of Arithmetic Sequence cont’d

Find the sum of

(a) the first 10 terms of the arithmetic sequence Exercises: Pages 367-369
with first term 2 and common difference 4 1-26; 48-54;
(b) the first 91 terms of the arithmetic sequence
1 7 11
, , ,…
4 12 12

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Ví dụ 2.1.2: Một công ty trách nhiệm hữu hạn

1) Nếu bạn gửi ngân hàng 60 triệu đồng với lãi thực hiện việc trả lương cho các kĩ sư theo
suất năm 4%, theo phương thức lãi đơn thì sau phương thức sau: Mức lương của quý làm việc
bao lâu, tổng số tiền bạn thu được là 72 triệu đầu tiên cho công ty là 4,5 triệu đồng / quý, và
đồng? kể từ quý làm việc thứ hai, mức lương sẽ được
tăng thêm 0,3 triệu đồng mỗi quý. Hãy tính tổng
số tiền lương một kĩ sư được nhận sau 3 năm
2) Anh A gửi ngân hàng 90 triệu đồng, trong 2 làm việc cho công ty.
năm. Tổng số tiền anh A thu được là 99 triệu
đồng. Tìm mức lãi đơn của khoản đầu tư này.

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Objectives
• To find the future value of a compound interest
investment and the amount of interest earned when
interest is compounded at regular intervals or
2.2 continuously
• To find the annual percentage yield (APY), or the effective
Compound Interest: Lãi kép annual interest rate, of money invested at compound
Geometric Sequences: Cấp số nhân interest
• To find the time it takes for an investment to reach a
specified amount
• To find specified terms, and sums of specified numbers of
terms, of geometric sequences
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Compound Interest Compound Interest

A second method of paying interest is the compound Future Value (Annual Compounding)
interest method, where the interest for each period is
added to the principal before interest is calculated for
the next period.

With compound interest, both the interest added and

the principal earn interest for the next period. With
this method, the principal grows as the interest is
added to it.

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Ex.1 – Annual Compounding Compound Interest

If $3000 is invested for 4 years at 9% compounded Some accounts have the interest compounded
annually, how much interest is earned? semiannually, quarterly, monthly, weekly, or daily.
(1year=360 days, 1year = 52 weeks)
Unless specifically stated otherwise, a stated interest rate,
called the nominal annual rate, is the rate per year and is
denoted by r.

The interest rate per period, denoted by i, is the nominal

rate divided by the number of interest periods per year.

The interest periods are also called conversion periods,

and the number of periods is denoted by n.
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Compound Interest Compound Interest

The future value of an investment of this type is
Thus, if $100 is invested for 5 years at 6%
found using the following formula.
compounded semiannually (twice a year), it has
been invested for n = 10 periods (5 years  2 periods Future Value (Periodic Compounding)
per year) at i = 3% per period (6% per year  2
periods per year).

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Example 2 – Future Value Compound Interest

Jim and Eden want to have $200,000 in Maura’s If we invest a sum of money, say $100, then the
college fund on her 18th birthday, and they want to
know the impact on this goal of having $10,000 higher the interest rate, the greater the future value.
invested at 9.8%, compounded quarterly, on her 1st
birthday. Figure shows a
To advise Jim and Eden regarding this, find graphical comparison of
(a) the future value of the $10,000 investment. the future values when
(b) the amount of compound interest that the $100 is invested at 5%, 8%,
investment earns. and 10%, all compounded
(c)the impact this would have on their goal. annually over a period of
30 years.
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Compound Interest Compound Interest

If the interest is compounded m times per year, the
Note that higher interest rates yield consistently higher future value is given by
future values and have dramatically higher future
values after 15–20 years.

Note also that these graphs of the future values are

growth exponentials. Table shows the future values that result as the
number of compounding periods increases.
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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Compound Interest Compound Interest

Table shows that as the number of periods per year Future Value (Continuous Compounding)
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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Ex.3 – Continuous Compounding Compound Interest

Annual Percentage Yield
(a) Find the future value if $1000 is invested for 20
years at 8%, compounded continuously. For example, suppose $1 is invested for 1 year at 8%,
compounded semiannually.
(b) What amount must be invested at 6.5%,
compounded continuously, so that it will be worth Then i = 0.08/2 = 0.04, n = 2, the future value is
$25,000 after 8 years? S = $1(1.04)2 = $1.0816, and the interest earned for the
year is $1.0816 – $1 = $0.0816.

Note that this amount of interest represents an annual

percentage yield of 8.16%, so we say that 8%
compounded semiannually has an annual percentage
yield (APY), or effective annual rate, of 8.16%.
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Compound Interest Compound Interest

Hence we can calculate the APY with the following
Similarly, if $1 is invested at 8% compounded formulas.
continuously, then the interest earned is Annual Percentage Yield (APY)

for an APY of 8.33%.

In general, the annual percentage yield equals I/P, or

just I if P = $1.

* Note that the annual percentage yield is also called the effective annual rate.

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Example 4 – Comparing Yields Geometric Sequences

Suppose a young couple such as Jim and Eden from our If $P is invested at an interest rate of i per period,
Application Preview found three different investment compounded at the end of each period, the future
companies that offered college savings plans: value at the end of each succeeding period is
(a) one at 10% compounded annually,

(b) another at 9.8% compounded quarterly, and The future values for each of the succeeding periods
form a sequence in which each term (after the first) is
(c) a third at 9.65% compounded continuously. found by multiplying the previous term by the same
Find the annual percentage yield (APY) for each of number. Such a sequence is called a geometric
these three plans to discover which plan is best. sequence.
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Geometric Sequences Example 5

n-th Term of a Geometric Sequence

Find the seventh term of the geometric sequence
with first term 5 and common ratio –2.
The formula for the nth term of a geometric
sequence is as follows:

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Geometric Sequences Example 6

Sums of Geometric Sequences
Sum of a Geometric Sequence
(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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Ví dụ 2.1.7: Bạn có một hợp đồng thuê một người cont’d

mới vào làm giúp việc nhà. Để kích thích tăng năng
suất và cũng để thử việc, bạn hứa sẽ trả lương theo
tuần thay vì trả theo tháng như sau: Exercises Pages 380-382
Tuần đầu tiên trả 100.000 đồng, từ tuần thứ hai trở
đi sẽ tăng 1,1 lần so với lần kế trước đó. 1-48; 61-74;
Hỏi:
a. Tháng đầu tiên người giúp việc thu nhập bao
nhiêu?
b. Tháng thứ hai thu nhập bao nhiêu?
c. Tháng thứ ba thu nhập bao nhiêu?
d. Tuần thứ 6 thu nhập bao nhiêu?
e. Tổng thu nhập của 3 tháng đầu là bao nhiêu?
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2.3
Future Values of Annuities Future Values of Annuities
Present Values of Annuities
(giá trị tương lai và hiện tại của dòng tiền đều)

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Objectives Future Values of Annuities

An annuity is a financial plan characterized by
• To compute the future values of ordinary annuities and
annuities due
regular payments. We can view an annuity as a
savings plan in which the regular payments are
• To compute the payments required in order for ordinary contributions to the account, and then we can ask
annuities and annuities due to have specified future
values what the total value of the account will become.
• To compute the payment required to establish a sinking Also, we can view an annuity as a payment plan
fund (such as for retirement) in which regular payments
are made from an account, often to an individual.
• To find how long it will take to reach a savings goal

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Ordinary Annuities
Most people save (or invest) money by depositing
relatively small amounts at different times. If a
Ordinary Annuities depositor makes equal deposits at regular intervals,
(dòng tiền đều thông thường: xuất he or she is contributing to an annuity.
hiện vào cuối mỗi chu kỳ)
The payments (deposits) may be made weekly,
monthly, quarterly, yearly, or at any other interval of
time. 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 Ordinary Annuities

In this section we will deal with annuities in which If a periodic payment R is made for n periods at an
the payments begin and end on fixed dates, and we interest rate i per period, the future amount of the
will deal first with annuities in which the payments annuity, or its future value, will be given by
are made at the end of each of the equal payment
intervals.
Future Value of an Ordinary Annuity
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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Ex.1 – Future Value for Twin 1

Twin 1 invests $2000 at the end of each of 8 years
in an account that earns 10%, compounded
annually.

After the initial 8 years, no additional contributions

are made, but the investment continues to earn
10%, compounded annually, for 36 more years
(until twin 1 is age 65).

How much does twin 1 have at age 65?

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Ex.2 – Time to Reach a Goal

A small business invests $1000 at the end of each
month in an account that earns 6% compounded
monthly. Annuities Due
(dòng tiền đều đầu kỳ: xuất hiện vào
How long will it take until the business has $100,000 đầu mỗi chu kỳ)
toward the purchase of its own office building?

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Annuities Due Annuities Due

We can find the future value of an annuity due by
Deposits in savings accounts, rent payments, and
treating each payment as though it were made at
insurance premiums are examples of annuities due.
the end of the preceding period in an ordinary
Unlike an ordinary annuity, an annuity due has the
annuity.
periodic payments made at the beginning of the
period. Then that amount, remains in the account for
one additional period (see Figure ) and its future
The term of an annuity due is from the first
value is
payment to the end of one period after the last
payment. Thus an annuity due draws interest for
one period more than the ordinary annuity.

Figure
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Annuities Due Example 3 – Future Value

Thus the formula for the future value of an annuity Find the future value of an investment if $150 is
due is as follows. deposited at the beginning of each month for 9
years and the interest rate is 7.2%, compounded
Future Value of an Annuity Due monthly.

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Exercises: page 390-391

7-14; 17-24; 25-42
Present Values of Annuities

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Objectives Present Values of Annuities

• To compute the present values of ordinary annuities, Contributing to an annuity program will result in a
annuities due, and deferred annuities sum of money, and we have called that sum the
future value of the annuity.
• To compute the payments from various annuities
Just as the term annuity is used to describe an
• To find how long an annuity will last account in which a person makes equal periodic
payments (deposits), this term is also used to
• To apply present values to bond pricing describe an account from which a person receives
equal periodic payments (withdrawals).

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Present Values of Annuities

That is, if you invest a lump sum of money in an
account today, so that at regular intervals you will
receive a fixed sum of money, you have established
an annuity. Ordinary Annuities

The single sum of money required to purchase an

annuity that will provide these payments at regular
intervals is the present value of the annuity.

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Ordinary Annuities Ordinary Annuities

Suppose we wish to invest a lump sum of money The formula for the present value of an ordinary
(denoted by An) in an annuity that earns interest at annuity is as follows:
rate i per period in order to receive (withdraw) Present Value of an Ordinary Annuity
payments of size $R from this account at the end of
each of n periods (after which time the account
balance will be $0).

Note that receiving payments at the end of each

period means that this is an ordinary annuity.

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Example 4 – Present Value

Find the lump sum that one must invest in an
annuity in order to receive $1000 at the end of each
month for the next 16 years, if the annuity pays 9%,
compounded monthly.

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Ex 5. Number of Payments from an Annuity

An inheritance of $250,000 is invested at 9%,

compounded monthly. If $2500 is with drawn at
the end of each month, how long will it be until the Bond Pricing
account balance is $0?
(định giá trái phiếu)
(tự đọc)

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Bond Pricing Bond Pricing

Bonds represent a relatively safe investment similar Bonds actually constitute a loan in which the issuer
to a bank certificate of deposit (CD), but unlike CDs of the bond is the borrower, the bond holders (or
(and like stocks), bonds can be traded. And, as is purchasers) are the lenders, and the interest
also true of stocks, the trading or market price of a payments to the bond holders are called coupons.
bond may fluctuate.
In the simplest case, a bond’s issue price, or par
Most commonly, bonds are issued by the value, is the same as its maturity value, and the
government, corporations, or municipalities for coupons are paid semiannually.
periods of 10 years or longer.

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Bond Pricing Bond Pricing

For example, if a corporation plans to issue $5000 At maturity, the bond holder receives the final coupon
bonds at 6% semiannually, then the maturity value is payment of $150 plus the $5000 maturity value of the
$5000, the coupon rate is 6%, and each semiannual bond.
coupon payment will be
Because the amount of the coupon is fixed by the
coupon rate for the entire term of the bond, the
The coupons are paid at the end of every 6 months market price of the bond is strongly influenced by
and constitute an ordinary annuity. current interest rates.

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Bond Pricing Example 6 – Bond Pricing

If a $5000 bond pays a 6% coupon rate, but market Suppose a 15-year corporate bond has a maturity value of
$10,000 and coupons at 5% paid semiannually. If an
interest rates are higher than that, an investor will investor wants to earn a yield of 7.2% compounded
typically invest in the bond only if the bond’s price semiannually, what should he or she pay for this bond?
makes its rate of return comparable to the market Solution:
rate. Each semiannual coupon payment is

The rate of return that the investor requires in order

to buy the bond is called the yield rate.
•

Since the desired rate of return is 7.2% semiannually and

the bond is for 15 years, we set i = 0.0722 = 0.036 and
n = (15)(2) = 30.
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Example 6 – Solution cont’d

Example 6 – Solution cont’d
Then the market price of this bond is the sum of the (2) the present value of the ordinary annuity
present values found in (1) and (2) below. formed by the coupon payments of R = $250 at i =
(1) the principal (or present value) of a compound 0.036 for n = 30 periods
interest investment at i = 0.036 for n = 30 periods
with future value S = $10,000

Thus, to earn the desired 7.2% yield, the market

price an investor should pay for this bond is

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Bond Pricing
Note that in Example 6 the bond’s market price is less
than its maturity value. In this case the bond is said to be
selling at a discount.

This has to be the case in order for the yield rate to

exceed the coupon rate. Similarly, if the yield rate is Annuities Due
lower than the coupon rate, then the market price of the
bond will exceed its maturity value. When this happens,
the bond is said to be selling at a premium.

In general, the market price of a bond moves in the

opposite direction from current yield rates.
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Annuities Due
An annuity due is one in which payments are made
Present Value of an Annuity Due
at the beginning of each period.
This means that the present value of an annuity due
of n payments (denoted A(n,due)) of $R at interest
rate i per period can be viewed as an initial payment
of $R plus the payment program for an ordinary
annuity of n – 1 payments of $R at interest rate i per
period (see Figure 6.13).

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Annuities Due Example 7 – Lottery Prize

The formula for the present value of an annuity due A lottery prize worth $1,200,000 is awarded in
is given by: payments of $10,000 at the beginning of each
Present Value of an Annuity Due month for 10 years. Suppose money is worth 7.8%,
compounded monthly. What is the real value of the
prize?

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Exercises: page 400-401

5-14; 19-24; 25-42; Deferred Annuities
(dòng tiền trả chậm)
(tự đọc)

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Deferred Annuities Deferred Annuities

A deferred annuity is one in which the first payment is made
not at the beginning or end of the first period, but at some The formula for the present value of a deferred
later date. annuity is given by:
An annuity that is deferred for k periods and then has
payments of $R per period at the end of each of the next n Present Value of a Deferred Annuity
periods is an ordinary deferred annuity and can be illustrated
by Figure 6.14.

Deferred Annuity
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Example 7 Example 7 – Solution

Present Value of a Deferred Annuity We use and
in the formula for the present
value of a deferred annuity.
A deferred annuity is purchased that will pay
$10,000 per quarter for 15 years after being
deferred for 5 years.

If money is worth 6% compounded quarterly, what

is the present value of this annuity? to the nearest cent

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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
Loans and Amortization values
(tự đọc) • 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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Amortization Amortization
•Just as we invest money to earn interest, banks and •This type of loan is usually repaid by making all
lending institutions lend money and collect interest for payments (including principal and interest) of equal size.
its use. This process of repaying the loan is called amortization.

•When a bank makes a loan of this type, it is purchasing

•Federal law now requires that the full cost of any loan from the borrower an ordinary annuity that pays a fixed
and the true annual percentage rate (APR) be return each payment period.
disclosed with the loan.
•The lump sum the bank gives to the borrower (the
•Because of this law, loans now are usually paid off by a principal of the loan) is the present value of the ordinary
series of partial payments with interest charged on the annuity, and each payment the bank receives from the
unpaid balance at the end of each payment period. borrower is a payment from the annuity.
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Amortization Example 2 – Affordable Home

Hence, to find the size of these periodic payments, we Chuckie and Angelica have $30,000 for a down
solve for R in the formula for the present value of an payment, and their budget can accommodate a
ordinary annuity, monthly mortgage payment of $1200.00.
What is the most expensive home they can buy if they
which yields the following algebraically equivalent can borrow money for 30 years at 7.8%, compounded
formula. monthly?
Amortization Formula Solution:
We seek the amount that Chuckie and Angelica can
borrow, or An, knowing that

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Example 2 – Solution cont’d

Example 2 – Solution cont’d

We can use these values in the amortization formula

and solve for An (or use the formula for the present
value of an ordinary annuity).
to the nearest cent

Thus, if they borrow $166,697 (to the nearest dollar)

and put down $30,000, the most expensive home
they can buy would cost

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Amortization Amortization
Amortization Schedule
Each time this $2637.97 payment is made, some is used
We can construct an amortization schedule that to pay the interest on the unpaid balance, and some is
used to reduce the principal.
summarizes all the information regarding the
amortization of a loan. For the first payment, the unpaid balance is $10,000, so
the interest payment is 10% of $10,000, or $1000. The
remaining $1637.97 is applied to the principal. Hence,
For example, a loan of $10,000 with interest at 10% after this first payment, the unpaid balance is
could be repaid in 5 equal annual payments of size

For the second payment of $2637.97, the amount used

for interest is 10% of $8362.03, or $836.20; the
remainder, $1801.77, is used to reduce the principal.
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Amortization Amortization
This information for these two payments and for the
remaining payments is summarized in the following Note that the last payment was increased by 3¢ so
that the balance was reduced to $0 at the end of the
amortization schedule.
5 years. Such an adjustment is normal in amortizing a
loan.

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Unpaid Balance of a Loan

Calculations for amortization of a debt are based on
the present value formula for an ordinary annuity.
Unpaid Balance of a Loan
(Tự đọc) Because of this, the unpaid balance of a loan (also
called the payoff amount and the outstanding
principal of the loan) is the present value needed to
generate all the remaining payments.

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Unpaid Balance of a Loan Ex.4 – Loan Refinancing

Unpaid Balance or Payoff Amount of a Loan Four years ago Benencorp decided to expand its production
• .
capacity and borrowed $1.3 million for 20 years at 5.2%
compounded quarterly.

After making 16 quarterly payments of $26,235.37, Benencorp is

considering refinancing this loan for 15 years at 4.8%
compounded quarterly, with refinancing charges of $5000 added
to the amount of the new (refinanced) loan.

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Ex.4 – Loan Refinancing cont’d

Example 4(a) - Solution

(a)Find the payoff amount of Benencorp’s original payoff amount of the loan is the unpaid balance
loan. after 16 payments.

(b)Find the amount of the new loan and the new Thus, payments remaining, R =
quarterly payment. $26,235.37,i = 0.052/4 = 0.013, and

(c)Should Benencorp refinance?

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Example 4(b) - Solution Example 4(b) - Solution cont’d

The new loan needs to cover this unpaid balance This amount will be financed for 15 years at 4.8%
and the refinancing charges of $5000, so that the compounded quarterly, so we use
amount of the new (refinanced) loan is
Thus, the new quarterly payment is

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Example 4(c) - Solution

References:
At first it seems Benencorp should not refinance because [1]. Ronald J. Harshbarger, James J. Reynolds,
this new payment is higher than the original. But, let’s [2019], Mathematical Applications for the
compare the total amounts paid from here on:
Management, Life, and Social Sciences, 12th ed.,
Cengage Learning.

Thus, Benencorp should refinance because it completes

making payments 1 year sooner and saves $73,085.68.

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