Tutorial : Financial mathematics
Mr. Nguyen Tuan Anh
Question 0.1. You invest P pounds in a savings account that pays 5% interest per year using annual
compounding.
i. Write down, in terms of P , the amount that will be in the account after one, two and three
years.
ii. If, after two years, the amount in the account is $1764, how much did you initially invest?
Question 0.2. Find the value of a principal sum of $10000 invested at an interest rate of 12% per
year for three years when the interest is compounded (i) annually, (ii) quarterly, (iii) monthly, and
(iv) continuously.
What is the APR of each of these investments?
Question 0.3. Two investments are made and it is given that the principal of one is 80% of the other.
If the smaller principal is put into an account where interest is paid at 5% per year using continuous
compounding and the larger principal is put into an account where interest is paid at 2% per year
using continuous compounding, how long will it take for the two accounts to have the same balance?
Question 0.4. A car is worth $20000 brand-new, but its value depreciates continuously at a rate of
20% per year.
i. How much will the car be worth in three years?
ii. When will it be worth half of its initial value?
Question 0.5. Consider that you are investing $5000 and you want to get $6000 after a five year
period. If the interest is compounded annually, what interest rate do you require the bank to have?
Question 0.6. Consider that you are investing $500 at 12% interest per year compounded annually.
How long do you need to invest for in order to get a balance of $1000?
Question 0.7. You want to invest some money for a year and are given the choice between two
accounts that use monthly compounding. Given that one account offers an interest rate of 5% per
year and the other account offers an interest rate of 6% per year for the first three months and 4%
per year for the rest of the year, find their APRs and decide which gives the best return.
Question 0.8. i. Find the sum of the arithmetic series 1 + 8 + 15 + 22 + 29 + 36 + 43 + 50 + 57.
ii. Find the sum of the odd numbers from 1 to 100.
iii. Suppose that you have an eccentric aunt who, starting in 2000, gives you a cash gift every year
and the amount you get (in pounds) is given by the year. (So, in 2000 you get a gift of £2000
and in 2001 you get a gift of £2001, etc.) If you save all of these gifts in your money box, how
much will you have after you have received the gift in 2013?
How much will you have in your money box after you have received n of these gifts?
Question 0.9. i. Find the sum the geometric series 3 + 32 + 33 + 34 + 35 + 36 + 37 .
ii. Find the sum the geometric series3 + 6 + 12 + 24 + 48 + 96
1 1 1 1
iii. Find the sum the infinite geometric series 3 − 9 + 27 − 81 + ···
Question 0.10. Suppose that, at the beginning of each year you pay $500 into a savings account
paying 7% interest per year. How much will be in the account at the end of the eighth year?
Question 0.11. Suppose that you invest $10000 in a bank account that pays 5% interest per year. If
you want to withdraw $900 at the end of each year, how many years will you be able to do this for?
Question 0.12. You win a competition and can choose between the following prizes.
i. $50000 (i.e. taking a lump sum of $50000) now.
ii. $10000 at the end of each year for seven years.
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iii. $100000 in ten years’ time.
Given that an interest rate of 8% per year compounded annually is available to you, which one should
you choose?
Question 0.13. You borrow $1200 from your bank which requires that you repay the loan in monthly
instalments over two years. If interest is charged at 12% per annum using monthly compounding, how
much will you have to pay back each month?
Question 0.14. If you decide to invest $600 at the beginning of each year in an account which pays
annually compounded interest at a rate of 12% per year, what would the balance of the account be
at the beginning of the fourth year of the investment (just after that year’s $600 has been invested)?
Find the balance at the beginning of the nth year (just after that year’s $600 has been invested),
Question 0.15. Suppose that we decide to invest $10000 in an account which pays annually com-
pounded interest at a rate of 5% per year in order to set up an annuity that will pay $I at the end of
each year for the next ten years.
i. What is the balance of the account after this annuity’s last payment?
ii. With this annuity, how big can the withdrawals be?. Assuming that we make this maximum
withdrawal at the end of each year, what is the balance of the account after the last of these
withdrawals?
iii. Alternatively, suppose that we want this annuity to pay out $1500 at the end of each year. How
many of these withdrawals will we be able to make?
Question 0.16. You win a competition and you can claim a prize of $10000 (i.e. taking a lump sum
of $10000) now or an annuity which pays $1100 at the end of each year for ten years. Which should
you choose given that an interest rate of 5% per year compounded annually is available to you?