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Finance Mathematics: Interest & Annuities

Chapter 4 covers essential mathematical concepts for finance, including simple and compound interest, annuities, and their applications in population growth, depreciation, leasing, capital budgeting, and bond valuation. It explains the calculations for present and future values, net present value, and rates of return. Key formulas and definitions are provided for effective financial decision-making.

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6 views2 pages

Finance Mathematics: Interest & Annuities

Chapter 4 covers essential mathematical concepts for finance, including simple and compound interest, annuities, and their applications in population growth, depreciation, leasing, capital budgeting, and bond valuation. It explains the calculations for present and future values, net present value, and rates of return. Key formulas and definitions are provided for effective financial decision-making.

Uploaded by

amitsingh572008
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

Chapter 4

Mathematics for finance


• Simple interest

• compound interest
n = conversion period
= no . Of years * 1/2/4/12
r =rate of interest
i = r ¥ 1/2/4/12

Application of compound interest


* problems on population - A = final population
P= initial population
i = growth rate (i.e. birth rate - death rate)
* problems on depreciation - A = scrap value
P= cost price
i = rate of depreciation
n= effective life of the asset
* effective rate of return =

• Annuity Annuity regular


[payment at the end of period]

Annuity due
[payment at the beginning of period]
Future Value ( future me kitna milega )
(If instalment are paid initially & total amount is to
be received after certain year)

Present value ( aaj ke din ki value)


(If amount is received initially & instalments are paid
later on)
. For present value factor

PVAF (n,%) PVF(n,%)


[when all the cash flows are same ] [when cash flows are different]
On calculator 1/1+i = n times And press GT. On calculator 1/1+i = n times

For application of future value and present value


• leasing: leasing is a financial arrangement under which the owner owner of the asset( lessor) allows
the user of the asset(lessee)to use the asset for the defined period of time (lease term) for a
consideration ( lease rental) payable over the period.
lease is favourable if pv of all lease payment > cost of asset

Use PVAF(n,%)

• Capital budgeting ( investment decision): purchasing of asset today with the anticipated benefit
which would flow across the life of investment.
compare PV of all future cashflow with initial investment made.

• Valuation of bond: A bond is debt security in which the issuer owes the holder a debt & is obligated to
repay the principal & interest . Bonds are generally issued for a fixed term longer than 1 year.
value of bond = PV of interest /coupon +PV of face value
PVAF(n;%) pvf(n.%)
• Perpetuity : annuity in which the periodic payments or receipts begins on fixed date & continues
infinitely
R= regular payment
perpetuity = R ÷ i
i = rate of interest
Growing perpetuity = R ÷ i-g
g= growth rate
• Net present value = PV of all cash inflow - PV of cash outflow
• Nominal rate of return = real rate of return + inflation.
• Real rate of return= nominal rate of return - inflation
• Compound annual growth rate =
· ¸ 1
V (tn) tn ¡ t0
¡1
V (t0)

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