OFPPT Financial Mathematics

CHAPTER 1: SIMPLE INTERESTS

I. Generalities:

1) Notion of interest: it is the rent of money, it can be an expense or an income:

expense: for the borrower, the interest corresponds to the remuneration of the borrowed capital
-Revenue: for the lender, interest is the income derived from the lent capital

2) Interest system:
-simple interest: used for short-term investments (< 1 year)
-L’intérêt composé: pour les placements à long terme (> 1 an)

2) Characteristics of simple interest

3) Interest is paid at the end of each loan period.
The initial capital remains unchanged.
The interests are equal from period to period.
The amount of interest is proportional to the duration of the loan.

Note:
The interest calculated at the end of each period is not added to the principal to calculate the interest for the period.
Next, we say that the loan is made at simple interest. We distinguish:
Interest accrued; are paid at the time of loan repayment (due term)
Prepaid interest: is paid in advance at the time of the loan amount disbursement.
Periodic interest: is paid at the end of each period (month, quarter, semester, year...)

1- Establishment of the general formula for simple interest:

The investment duration (n) can be expressed in years, months, or days.
a) Duration of placement expressed in 'year'
Example: Calculate the amount of interest on a borrowed capital of 30,000 DH at an annual rate of 3% for a
duration of 5 years?

30000 * 3 * 5
é ê = 4500 ℎ
100
=

C: the amount of capital loaned (or invested)

interest rate in % per year (annual)
Let it ben:durée
: du prêt ( ou de placement) so:
the amount of interest

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b) Duration of placement expressed in 'months':

Example: An investor deposited 60,000 DH in the bank at an annual interest rate of 8% for a period of 30 months.
What is the amount of interest generated by this capital?

Let n be the duration in years = 33/12 = 2.5 years

I = 60,000 x 8% * 30/12 = 12,000 DH

Formula:

c) Duration of placement expressed in 'days'

Example 1: Calculate the interest earned on a capital of 55,000 DH invested at 9% per year for 95 days?
Let the number of days in a year be: 360 days (commercial year)
So the duration in years = 95/360 = 0.26388888... years and for an exact calculation keep 95/360.

= 55 000∗ 9∗95 = 1306.25

36000
Formula:

Note

For simplicity reasons, we work in Morocco with the commercial year which consists of 360 days.
and the months are counted for their exact number of days (and not 30 days)
To calculate the number of days in a month, one does not count one of the extreme days. the months
Whole numbers are counted for their calendar duration (total)

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Cas Application
1. Calculate the interest amount for a capital of 25,000 dhs, loaned for 130 days, at a rate of 14%.

Solution
1.I = (25,000 * 14 * 13) / 36,000
= 1 263,88 Dh

Example 2:
Rachid borrowed 150,000 DH at an annual interest rate of 12% on March 13, 2019, and he repaid it on June 22, 2019?
1- What is the duration of the loan in number of days?
TAF
2- Calculate the amount of simple interest generated?
3-Calculate the amount that Rachid must repay at maturity?

Solution
1-Calculating the number of days of this loan:

Mars 31-13= 18j 18

April 30 j 30
I 31j 31
June 22j 22

Total number of days 101 j

2) Interest calculation: 150,000 * 12 * 101 / 36,000 = 5,050 dh

3) Le montant à rembourser à l’échéance (22/06/2019) par Rachid :

150,000 + 5,050 = 155,050 dh (we are talking about the acquired value)

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2- The acquired value

— The value acquired by a capital is the nominal value increased by the interest accrued during the time elapsed.
beyond the chosen date as the origin of time. VA=C + I

I = 25000 * 9 * 40 = 250 dh
36000

3) Calculation of the different elements of the formula

a) Calculation of the Acquired Value (AV)
What is the value acquired by a capital of 5000 dhs invested for 48 days at 9% per year?
I=(5 000*48*9) / 36 000 = 60
We know that VA = C + I
So VA = 5000 + 60 = 5,060

b) Calculation of capital (C):

What is the capital placed at a rate of 10% per year for a duration of 80 days that has produced an acquired value of
46,000 DH
It is known that VA = C + I VA = C + (C * T * J) / 36,000 46000 = C + (C * 10 * 80) / 36000
46,000 = C(1 + (800 / 36,000)) 46,000 = C / 1.02222 C=46000/1.02222 C=45,000

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3-Method of fixed numbers and divisors:

It is a quick method that simplifies the calculation of interest. It is used when the duration (n) is
expressed in days.
a) Principle:

Example: calculate the interest on a capital of 5600 dhs placed at a rate of 9% for 33 days.
applying the method of numbers and divisors?

b)Overall interest with a single rate:

The method of numbers and divisors is useful when it comes to calculating total interest obtained.
by several capitals invested at the same rate for different durations.
Example:
We have three different placements as follows:
No. Capital Rate Duration in days
1 3,500 9% 80
2 2,200 9% 60
3 6 200 9% 100
TAF:

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calculate the total amount of interest from these three investments, using the method of numbers and
fixed divisors

Ig = N/D = (C * J) / (36000 / t)

Ig = (3500*80)+(2200*60)+(6200*100)
(36000/9)

=280,000 + 132,000 + 620,000

4000

Ig = 258

∑ = ×
And so Ig= avecDest leDiviseur fixe

4-Average rate of several investments

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5. prepaid interest and effective placement rate:

There are two ways to pay interest:

by a one-time payment at the final loan repayment (payment of interest on the
repayment day of the loan for example) it is said that the interest is accrued.
In advance at the time of the capital payment (the savings bonds for example),
that is to say, payment of interest on the day of the conclusion of the loan agreement.

These two calculation methods are not equivalent from a financial point of view. the effective rate
In the second case, it is a bit higher.

Definition:
We calculate the effective rate of investment each time the interests are prepaid and that
l’intérêt est calculé sur la base de la valeur nominale. Les intérêts sont versés par
the borrower on the day of the conclusion of the loan agreement, the day when the borrower receives the
loan capital. It is then evident that the funds invested provide the lender with a rate of
placement higher than the stipulated interest rate.

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Example1 :
A person places a pre-tax interest of 10,000 DH for 1 year, rate = 10%. What rate
What placement effectiveness does it achieve?

Resolution:
The interest generated by the operation amounts to (10000 * 10 * 1) / 100 = 1000 DH. The lender
receives this interest immediately.

Things happen as if he had only spent 10000-1000 = 9000 DH.

The lender will receive, in a year, his capital of 10,000 (he has already collected the interest).
He will have therefore earned 1000 DH in one year by investing only 9000 DH. The effective rate Te
The placement is (9000 * Te * 1) / 100 = 1000 which means Te = 11.11%.

We know that I = C*T*N therefore TE=I*100

100 C*N

TE= 1 000*100 = 11.11%

9 000*1

Use of simple interest:

Simple interest is used in:

Short-term operations
Loans between banks or financial intermediaries.
Current accounts; savings books.
Consumer loans granted by financial institutions.

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II. application to current accounts of interest:

1) Definition:

The current account is opened at a bank. The funds are payable on demand and are directly collectible.
The holder of a current account can, at any time, make deposits, withdrawals, or transfers. The account
current and interest a checking account on which the amounts generate credit or debit interest
according to the direction of the operation from a date called: value date.

Difference between value date and transaction date

Operation date: effective date of the realization of the operation.

Value date: date from which interest is calculated.
Value date is equal to the date of the transaction increased or decreased.

Example: a deposit of money into the interest-bearing current account is made on 25/11/2017.
- Operation date: 11/25/2017
- Value date: 26/11/2017

There are several methods to keep such accounts. The use of computer tools has made it obsolete.
most of these methods. However, the Hamburg method is the only one still used by banks.

2) Hamburger method:
It allows you to know the status and direction of the account on each date. It is the only one applicable with rates.
differentials (the debit rate generally higher than the credit rate). They are called reciprocal rates if they are
equal.

Principle and work organization:

b) Each operation is associated with a value date

c) The operations are classified by ascending value date.
d) Interest is calculated on the account balance each time it changes in value.
e) The duration of placement of the balance is the number of days separating its value date from the value date.
next.
f) At the end of the investment period (the quarter for example), the account balance is determined after
to have included in the calculation the balance of debit and credit interest and the various commissions
collected for the maintenance of such accounts.
g) In the event of the account being reopened, the date of reference is considered as the stopping date.
of the previous balance.

h) We can use either the Hambourgeoise method directly for the calculation or the number method.
and fixed divisors applied to the Hamburg method.

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Example: presentation of checking account and interest

Exercise

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3) Special case: The savings account

The passbook account is a remunerated sight account. Credited interest is added at the end of each quarter.
to the credit of the account. Credit interest is calculated over periods expressed in numbers of fortnights
civilians.
Value dates are set on the [Link] the 16th of the month:
- For a deposit: the value date is the first or the 16th of the month following the date of the transaction.
- For a withdrawal: the value date is the end or the 15th of the month prior to the date of the transaction.

If q is the number of fortnights, the interest produced by an amount C invested for q whole fortnights is:

× ×
Interest (I) =

Example:
Operation date Operation Value date
11/06/2017 Withdrawal 31/05/2017
11/06/2017 Deposit 16/06/2017
20/06/2017 Withdrawal 16/06/2017
20/06/2017 Deposit 30/06/2017
18/07/2017 Withdrawal 16/07/2017
17/07/2017 Deposit 31/07/2017

Example:

A person deposits 18,000 dirhams into their savings account on March 25, 12,000 on June 3 of the same year.
.
Calculate the interest she will receive at the end of the year if the simple interest rate is 8.5%?

Let's calculate the number of fortnights:

From March 25 to December 31 === 18 fortnights
From June 3 to December 31 === 13 fortnights

We know that
× ×
Interest (I) =

Donc ; (18 000*18*8.5)+(12 000*13*8.5)

2,400

I = 1,700 DH

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Commercial discount
Payment is generally made in cash, by check, or by bank transfer order. On the other hand, when the
payment of an invoice is 'due' or 'on credit' (in 30, 60 days....), the company often uses the effect of
commerce as much an instrument of settlement and mobilization of receivables.
The change has been accepted by the company ABADI.

I. The commercial discount

For a credit settlement, a company may agree to be paid by a commercial paper. The customer
commits to pay the amount of the effect at maturity

When a company has cash flow issues, it can negotiate (sell) one or more receivables it has.
holds before the due date with their bank. The latter generally charges in exchange for the service rendered,
a remuneration called fees

1) Definition:
The commercial discount is interest calculated on the nominal value of the bill, at a discount rate based on the
Duration that separates the day of negotiation (Submission of the effect to the bank) from the day of maturity.
The financial year is counted for 360 days.

Vocabulary
The value stated on the commercial paper is called: The nominal value (NV)
The payment date of the instrument is called the due date.
The negotiation date of the bill at the bank is called the discount date.
The operation of transmitting the effect to the bank is called: discounting of commercial paper
2) Calculation formula for commercial discount:
Activity: Do you deduce the calculation formula from the previous example in a problem situation?
Noted by:
the nominal value
t=tauxd’escompte
n = duration between the trading date and the expiration date
E = amount of commercial discount

3) Application on the different elements of the formula:

× ×
Commercial discount (E) =

×
The nominal value (NV) =
×

×
The duration ( n ) = ×

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a) Calculation of the commercial discount (E)

Application 1: a merchant presents to his banker, for discount at a rate of 9%, a bill of 100,000 dirhams payable
in 83 days. Calculate the amount of the discount withheld by the banker.
E=(Vn*T*J)/36 000
E= (100 000*9*83)/36000
E = 2075 dh

b) Calculation of the present value (Pv):

Application 2: what is the current value. to resume application 1?

VA = VN - E

VA = 100,000 - 2,075 = 97,925

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II. Calculation of the present value (A) of a bill

1) Definition
The current commercial value (Va) of a financial instrument is the difference between the nominal value (VN) of an instrument
trade and its commercial discount (E).

2) Formula for calculating the present value (pv):

VA = VN - E
× × ×
VA= VN - so VA=VN( - −

Application: an effect of 45,000 dirhams, payable on January 20, 2014, was negotiated by a merchant on the 29th.
November 2014 at a rate of 11% per year. What is the present value of this effect?
Solution
We know that j=52 days
E= (45000*11*52)/36000= 715
VA=VN-E
VA = 45,000 - 715 = 44,285 dh

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III. The elements of the agio:

VI definition of the elements of the premium

During a discount operation of a financial instrument, the retention made by the banker is not limited to
only at the discount (interest). In reality, the banker deducts other amounts from the nominal value of
the effect. The total of the deductions constitutes the agio, and includes: the commercial discount, various
commissions and value added tax.

AGIO (TTC) = Escompte commercial + Commissions + T.V.A

The elements of AGIO

The discount 2. The commissions

The discount rate applied by banks, whether proportional or fixed, allows the bank to
depends on the discount rate of BANK AL to recover its fees and to reward itself for the services it provides.
MAGHRIB with which the banker can Generally, a distinction is made between:
reassess the effect. Moreover, most of the - A commission of endorsement intended to cover the costs.
banks : endorsement of effects; it is calculated in the same
- Add one or more banking days. conditions for commercial discount;
- Take into account a minimum number of - A service fee with a fixed amount per effect.
days. - A flat-rate acceptance fee,
- Impose a minimum discount. in compensation for sending the instruments upon acceptance by the drawees.

[Link] tax on agio

The VAT on the interest is a tax paid on the elements of the interest.
The margin excluding tax = Commercial discount + commissions excluding tax

The VAT = Gross Margin × 10%

The margin T.T.C. = The margin H.T + VAT.

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Example:
Let there be a commercial paper of 35,500 dirhams due on July 27, 2005, and discounted on April 10 of the same year, to the
following conditions:
– Tauxd’escompte : 13 %;
– Handling fee: 2 dirhams per effect;
VAT: 10%;
– Take into account a bank holiday. Let's calculate it.
current value of the effect. We have:
j = 108 + 1 bank day = 109 days.
Vn= 35 500 dh. Donc

E= 35 500 × 109 × 13 1,397.32

36,000
+ 2 dh. (Handling commission).

+ 140 dh.(VAT.10 %)

Agio (TTC) = 1.539.32 dh.

Net value is the amount actually made available to the seller of the commercial paper before its
deadline.

Net value = Nominal value - Premium

Example:
Let's take back the example of the effect of the previous operation:

Net worth = 35,500 - 1,539.32 = 33,960.68 dh.

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