Math2701:

Financial
Mathematics I
Ms Sekayi Campbell
Office: Math Dept, Room 10
Office Hours: Mon 4-5, Wed 1-2

Purpose of Course
Explore and apply selected mathematical
techniques that form the basis of Finance

Structure of Course
Date

Activity

September 3

Simple & Compound Interest/Discount

September 10

Present Value; Accumulated Value

September 17

Equivalent Interest Measures

September 24

Annuities Immediate/Due; Graded

Assignment (5%)

October 1

Deferred Annuities

October 8

Annuities Convertible m-thly

October 15

National Heroes Day - No lecture

October 22

Arithmetic/Geometric Annuities

October 29

Test (15%)

November 5

Loans

November 12

Stocks, Bonds

November 19

Revision

November 26

Revision; Graded Assignment

(5%)

Rules
To not disturb others, please:
Silence cell phones
Enter and leave the lecture theatre quietly,
especially if arriving after the session has begun.
Yield the floor to the speaker.

Interest
Interest is a compensation fee paid by a borrower
to the lender.
List a few reasons that a lender may demand this
compensation fee.

Interest
For todays lecture, let us assume that you are
investing money (perhaps in a bank account.)
Interest is paid to you once per year.

Simple Interest
Principal = A(0)
Interest rate charged each period = i
The interest rate is applied to the principal only
each period. Therefore the interest amount
earned each period = iA(0)

Simple Interest (Example)

You have invested $1000 for 5 years and are earning
4% simple interest. How much interest would be
earned each period? What will the amount in the
account grow to after 5 years?

Simple Interest (Example)

Year

Interest

Amount
1,000

Simple Interest (Example)

Year

Interest

Amount

1,000

4% * 1000 = 40 1,040

4% * 1000 = 40 1,040+40 =
1,080

4% * 1000 = 40 1,120

4% * 1000 = 40 1,160

4% * 1000 = 40 1,200

Simple Interest
At time t, the amount in the account will grow to
A(t) = A(0) (1 + it)

Compound Interest
Principal - P
Interest rate charged each period - i
The interest rate is applied to principal AND to the
interest earned up to that point. Therefore the
interest amount earned each period increases
over time.

Compound Interest
(Example)
You have invested $1000 for 5 years and are earning
4% compound interest. How much interest would be
earned each period? What will the amount in the
account grow to after 5 years?

Compound Interest
(Example)
Year

Interest

Amount
1,000

Compound Interest
(Example)
Year

Interest

Amount
1,000

4% * 1000.00 =
40

1,040

4% * 1040.00 =
41.60

1,040.00+41.60 =
1,081.60

4% * 1081.60 =
43.26

1,081.60+43.26=11
24.86

4% * 1124.86=
44.99

1,169.86

4% * 1169.86=
46.79

1,216.65

Compound Interest
At time t, the amount in the account will grow to
A(t) = A(0) (1 + i)t

Simple Interest vs Compound

Interest
In the previous examples, after 5 years the
amount in the account had grown to $1,200 under
simple interest and $1,216.65 under compound
interest.

Simple Interest vs Compound

Interest
If you intend to leave $1,000 in an account for 5
years, would you rather invest at 4% simple
interest or compound interest?
What about if you intended to leave the money in
the account for 1 year?
What about 6 months?

Simple Interest vs Compound

Interest
Under Simple
Interest,
A(t) = A(0)*(1 +
it)

Under Compound
Interest,
A(t) = A(0)*(1+i)t

5 years

1,200.00

1,216.65

1 year

1,040.00

1,040.00

6
months

1,020.00

1,019.80

Simple Interest vs Compound

Interest
Note that:
For periods less than 1 year, the accumulated value
in the account is higher under simple interest.
For periods greater than 1 year, the accumulated
value in the account is lower under compound
interest.
At 1 year, both values are the same.

Discount Rate
At times, a bank may quote a discount rate
instead of an interest rate.

Interest Rate vs Discount

Rate
10% interest
Now: deposit 1000
In 1 year: withdraw 1000 + 100 = 1100
(interest is paid at the end)
10% discount
Now: deposit 900
In 1 year: withdraw 1000
(interest is paid at the beginning)

Simple Discount
A(t) = A(0) (1 - dt)-1

Discount (Example)
You have invested $1000 for 5 years and are
earning 4% simple discount. What will this
amount accumulate to after 5 years?

Discount (Example)
A(t) = A(0) (1 - dt)
At time t = 5, the amount invested will accumulate
to
1000(1 5 * 0.04)-1 = 1000(1 0.20)-1 = 1,250.00

Compound Discount
A(t) = A(0) (1 - d)-t

Discount (Example)
You have invested $1000 for 5 years and are
earning 4% compound discount. What will this
amount accumulate to after 5 years?

Discount (Example)
A(t) = A(0) (1 - d)-t
At time t = 5, the amount invested will accumulate
to 1000(1 0.04)-5 = 1,226.43