“IN THE NAME OF ALLAH THE MOST

BENEFICIENT, THE MOST MERCIFUL”

1
WEL COME TO
BUSINESS
MATHEMATICS
COURSE
2
• In the course the main concentration is on the
applications of mathematics to businesses.
• These may be seen in the form of stated
problems from the text book.
• Our focus will be on the procedures to find
the solutions of these problems.
• Some business terminologies will be used in
the course.

3
 Mathematics of Finance 1
Profit:
 The difference between the selling price and
the cost price of an item is called the profit or
mark-up. Thus if “S” is the selling price and “C” is
the cost price the mark-up can be calculated as:
P=S–C
 The mark-up is expressed as the percentage of
the cost price or the selling price.
 Often the mark-up is based on the cost.
 The selling price can be determined by adding
the mark-up to the cost.
4
 Continue…
If “C” and “S” represents the cost price
and the sale price respectively and “r” is
the percentage mark-up, then:
S = C + Cr = C(1+r)
Example:
If the Cost price of an item is Rs.
2,400 and the mark-up on cost is 23%. Find the
sale price.
Sol:
Using the formula
S = C(1+r)
Putting the values
S = 2,400(1+0.23) = 2,952

5
 Continue…

When mark-up is stated as a percentage on sale

If “p” is the percentage mark-up on sales. Then p.S would represent
the profit or mark-up.
Now
Profit = Sales price – Cost price
p.S = S – C
Or C = S - p.S
= S(1- p)
Example:
After a mark-up of 30% on sales a watch sells for Rs. 225.
i) What is its cost price?
ii)What is the %age mark-up on sales if the cost price of watch would
have been Rs. 153? (Solution on White Board)
6
 Simple Interest and Present Value
o Interest is a fee which is paid for having the
use of money.
o The amount of money that is lent or invested
is called principal.
o Interest is usually paid in proportion to the
principal and the period of time over which the
money is used.
o The interest rate specifies the rate at which
interest accumulates.
o The interest rate is typically stated as a
percentage of the principal per period of time.

7
 Continue…
o The interest paid only on the principal is
called simple interest.
o Simple interest is usually associated with
loans or investments which are short-term in
nature.
Computation
Simple interest = (principal ) * ( interest rate) * (number of time
period)
Or I = Prt
Where I = simple interest
P = principal
r = interest rate
t = number of time period of loan
8
 Continue…
The total amount “A” to be repaid is the
principal plus the accumulated interest, or
A =P+I
= P + Prt
= P(1 + rt)
If the future value “A” is known, the present
value of an amount “P” at simple interest “r” can
be written as :
A 1
P  A(1  rt )
1  rt
9
 Important
Note that in computing the interest it
is customary to consider a 360-day
year instead of a 365-day year. Thus
30 days will be considered
30 1
as of

an ordinary year 360and12 so on. The
interest thus obtained is called
“ordinary interest” but if it is based
on 365 days it is called the “exact
interest”.
10
 Application of the formula
Example:
A credit union has issued a 3-year loan of
$5,000. Simple interest is charged at the rate of
10% per year. The principal plus interest is to
be paid at the end of third year. Compute the
interest for the 3-year period. What amount
will be repaid at the end of the third year?
Solution: On board

11
 Simple Discount
If “A” is the amount to be paid at maturity
after a time “t” at the simple interest rate of
“r percent” per annum. Then the simple
interest “I” on maturity value “A” in time “t” is
given by
I  Art
To get the present “P” value we must
subtract this from “A”.
P  A  Art
P  A(1  rt )
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 Discounting Negotiable Instrument

A written promise to pay money at a certain

specific date is called Negotiable Instrument.
They are of two types,
Non interest bearing
Interest bearing
The basic principles of discounting a bill of
exchange or short term note at a bank or at any
other party are the same as those of obtaining a
loan from a bank which deducts interest in
advance.

13
 Discounting non-Interest-Bearing Note
Example:
After Khalid accepted a bill for Rs. 4,500. Hanif
discounted it at National Bank Karachi on April
15. The maturity date of the bill was May 15.
How much did Hanif receive if the bill was
discounted at 8%?
Solution:
Period of discount = 30 days or t = 1/12 year.
A = 4,500 & r = 8%
the discounted value
P = A(1-rt) = Rs. 4,470
14
 Discounting Interest-Bearing Note
We follow the following two steps in discounting an interest-
bearing note.
i. Find the maturity value from the face value of the note after
adding the interest which would have been earned up to the
maturity date at the given rate.
ii. Find the proceeds by discounting the maturity value obtained in
step (i) at the discounting rate.

15
 Example
Mohsin had a note for Rs. 15,000 with an
interest rate of 6%. The note was dated
January 12, 1983 and the maturity date was
90 days after date. On January 27, 1983 he
took the note to his bank which discounted
it at a rate of 7%. How much did he receive?
Solution:
Step-1: Find maturity value A
Step-2: Discount the maturity value at
7%
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Equivalent Values of Different Debts and their
Payments
Sometimes a situation arises when a single debt or a set
of debts are to be paid on different dates by means of a
single payment or a set of payments. To satisfy both
the creditor and the debtor, the values of payments
should be equivalent to the values of the original debts
on a certain date called the comparison date.
Due to interest, a sum of money has different values at
different times. Therefore a comparison date should
first be chosen to equate the sum of the values of the
original debts with the values of the desired payments
on the same date. This process will bring the different
debts and the subsequent payments on the same
footing.
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 Example
A man owes Rs. 800, Rs. 1,000, and Rs. 200 due in 30
days, 60 days and 90 days respectively. If the rate of
interest is 6%, when will a single payment of Rs. 2,020
will discharge ail the three debts?
Solution:

Let the comparison date be 90

days from now. The given diagram
illustrates the situation.

18
 Continue…
Debts Values on comparison date

Rs. 800 800[1+(60/360)(0.06)] = Rs. 808.00

Rs.1,000 1,000[1+(30/360)(0.06)] = Rs. 1005.00
Rs. 200 = Rs. 200

Rs. 2,000 Rs. 2,013.00

Total Total on comparison date

Borrowed 19
 Continue…
The amount Rs. 2,013 on the comparison date
is less than Rs. 2,020, therefore it will further
earn interest for some more days over and
above the comparison date.
Suppose these days be “x”.
Therefore,
2013 {1+(x/360)(0.06)} = 2,020
Solving for “x”, we get
x = 20.86
x = 21 days
Thus total no. of days = 90 + 21 = 111 days
20
 Getting More Involved
Solving
PRACTICE SET 9, p # 110-111
&
PROBLEM SET 9, p # 112-113

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 CHAPTER 10

MATHEMATICS
OF
FINANCE-II
22
 Compound Interest
• Compounding involves the calculation of interest
periodically over the life of the loan (or investment).
• After each calculation the interest is added to the
principal.
• Future calculations are on the adjusted principal (old
principal plus interest).
• Compound interest is the interest on the principal plus
the interest of prior periods.
• Future value, or compound amount, is the final amount
of the loan or investment at the end the last period.

23
 Lets see
How $1 will grow if it is calculated for 4 years at
8% annually?

24
 Some term to understand
• Compounded annually: Interest calculated on the
balance once a year.
• Compounded semiannually: Interest calculated on
the balance every 6 months or every ½ years.
• Compounded quarterly: Interest calculated on the
balance every 3 months or every ¼ years.
• Compounded monthly: Interest calculated on the
balance each month.
• Compounded daily: Interest calculated on the
balance each day.
• Number of periods: Number of years multiplied by
number of times the interest is compounded per year.

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 For Example
If we compound $1 for 4 years at 8% annually,
semiannually, or quarterly, the following periods
will result:
Annually: 4 years * 1 = 4 periods
Semiannually: 4 years * 2 = 8 periods
Quarterly: 4 years * 4 = 16 periods
• Rate for each period: Annual interest rate divided by
the number of times the interest is compounded per
year. Compounding changes the interest rate for annual,
semiannual, and quarterly periods as follows:

26
 Continue…
Annually: 8% / 1 = 8%
Semiannually: 8% / 2 = 4%
Quarterly: 8% / 4 = 2%
Note:
Both the number of periods (4) and
the interest rate (8%) for the annual
example do not change. The rate and
periods (not years) will always change
unless the interest is compounded
yearly.
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 Compound Amount Formula
Let
P = Principal
i = interest rate per compounding period
n = number of compounding periods
(number of periods in which the
principal has earned interest)
S = compound amount
The compound amount after one period is
S = P + iP
S = P(1 + i)
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 Continue…

compound interest earned

compound amount
amount = + during the second
after one period
after two periods period

S  P1  i   i[ P (1  i )]
S  P (1  i )(1  i )
S  P (1  i ) 2
Similarly, the compound amount after three periods is given by:

S  P (1  i ) 3

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 Continue…

Thus we have the following definition:

If an amount of money “P” earns interest
compounded at a rate of “i” percent per period, it
will grow after “n” periods to the compound
amount “S”, where
S  P (1  i ) n
This equation is often referred as the compound
interest formula.
The compound interest is given by:
Compound interest = S - P
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 Examples
1. Find out the compound amount and the
compound interest at the end of three
years on a sum of Rs. 20,000 borrowed at
6% compounded annually.
2. If Rs. 3,000 are invested at 6% interest
compounded semi-annually what would it
amount to at the end of 8 years?

31
 Effective Interest Rates
Interest rates are typically stated as the
annual percentages. The stated annual rate
is usually referred to as the nominal rate.
When interest is compounded semiannually,
quarterly, and monthly, the interest earned
during a year is greater than if compounded
annually.
When compounding is done more frequently
than annually, an effective annual
interest rate can be determined.

32
 Continue…
Definition:
The effective interest rate is the interest rate
compounded annually which is equivalent
to a nominal rate compounded more
frequently than annually. The two rates
would be considered equivalent if both will
result in the same compound amount.
Example:
The nominal rate of 8% compounded quarterly is
equivalent to the effective rate of interest 8.24%.
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Formula for finding the Effective
rate of interest

e  1  i   1
m

Where
e = the effective rate
i = interest rate per conversion period
m = number of conversion periods in one year

34
 Formula for Finding the
Equivalent Rates of Interest
# of periods for # of periods for
nominal rate the given rate

? ?
 x  r
1    1  
Given interest rate

 ?  ?
# of times the compounding is
required per year (for given rate)
Unknown nominal interest rate

# of times the compounding is

required per year (for nominal rate)
35
 Example
At what nominal rate
compounded quarterly will
a principal accumulate to
the same amount as at 8%
compounded semi-
annually?
SOLUTION ON BOARD
36
Depreciation by Reducing Balance Method

If ‘C’ is the original cost of a machinery and ‘T’ is the trade in

or scrap value of the machinery after ‘n’ years of useful life
and ‘r’ is the percentage rate of depreciation on the reduced
balance each year.
Then,
Depreciation for 1st year = Cr
Residual value after 1st year = C – Cr = C(1-r)
Depreciation for the 2nd year = C(1-r)r
Residual value after 2nd year = C(1-r) – C(1-r)r = C(1-r)2
Continuing in this way we get:
Residual value after ‘n’ years = C(1-r)n
37
 Continued….

Since ‘n’ is the useful life of the machinery

when its residual value is ‘T’, therefore,
C (1  r ) n  T
T
(1  r ) n

C
T
1 r  n
C
T
r  1 n
C
38
 Getting More Involved

Discussion on
Practice Set 10-
A, (P# 121/122)
39
 PRESENT VALUE
(AT COMPOUND INTEREST)
 The compound amount formula is given by:
S P
 A slight rearrangement 
1
of the i gives:
formula  n

S
 S 1  i 
n
P
1  i 
This formula is called
formula.
then Present value or discounting

 The factor or is called the present value

factor or the discounting factor.
1
1  i  n 1  i  n

40
 Examples
i. Find the present value of Rs. 4,814.07 due at
the end of 8 years if money is worth 6%
compounded semi-annually.
ii. What sum of money invested at 6%
compounded annually will amount to Rs. 500
in 4 years?
iii. Find the present value of Rs. 4,958.54 due at
the end of 8½ years if money is worth 6%
compounded semi-annually.

41
 Application on Discounting
Interest bearing and Non-interest
bearing Notes
Example:
A non-interest bearing note of Rs. 3,000 is due in
5 years from now. If the note is discounted now
at 6% compounded semi-annually, what will be
the proceeds and the compound discount? (SOL
ON BOARD)

42
 Example: (interest bearing note)

An interest bearing note of Rs. 5,000

dated January 1,1980 at 6%
compounded quarterly for 10 years was
discounted on January 1, 1984. what
were the proceeds and the compound
discount if the note was discounted at
8% compounded semi-annually?

43
 Examples
1. Mr. Ahmad owes Mr. Bashir Rs. 5,000 in three
years and Rs. 10,000 in 5½ years. How much
should Mr. Ahmad pay at the end of 4 years which
may be acceptable to Mr. Bashir if money is worth
8% compounded semi-annually?
2. Mr.Zahir owes to Mr. Mohmood Rs. 4,000 due in 2
years and Rs. 5,000 due in 4 years. If he agree to
pay Rs. 4,500 now, how much he will have to pay
to Mr. Mahmood three years from now to settle his
two debts, if money is worth 6% compounded
semi-annually?

44
 Continued…
3. Mr. Shamim owes Rs.750 due in 3 years and Rs.
1,000 due in 8 years. He and his creditor agreed to
settle the two debts by making two equal payments
one 5 years and the other in 6 years. If the money is
worth 6% compounded semi-annually, what should
be the amount of each payment?
4. Mr. Mushtaq borrowed Rs. 500 in one year, Rs.
1500 due in two years and Rs. 2,000 in two and half
years from Jamil. If money is worth 6%
compounded semi-annually, when can Mr. Mushtaq
can discharge all the debts by a single payment of
Rs. 4,000?
45
 Continued…

Discussion on
Practice Set 10-B, P#(127-128)
&
Problem Set 10, P# (128-129)

46
 CHAPTER # 11

MATHEMATICS
OF FINANCE – III
ANNUITIES
47
 DEFINITIONS
An annuity is a series of periodic payments (usually
equal in amounts).
 The payments are made at regular intervals of time such
as annually, semi-annually, quarterly or monthly.
 Examples of annuities include
 Regular deposits to a savings account
 Monthly car
 Mortgage
 Insurance payments
 Periodic payments to a person from a retirement fund

48
 Continue…

If the payments are made at the end of the

payment periods the annuity is called an
“ordinary annuity”
If the payments are made at the beginning of
each interval the annuity is called “annuity due”
The time between two successive payment dates
is called “payment period”.
The time between the beginning of the 1 st
payment & the end of the last payment period is
called the “term of the annuity”

49
 Sum of an annuity
Let
R= payment per period
i= interest rate per period
n= number of annuity payments
(also number of periods)
S= sum (future value) of the annuity
after n periods (payments)
The sum of the annuity is given by:
 1  i  n  1 
S  R 
 i 
50
 Example
1. Find the amount of an annuity of Rs. 500 payable at the end of
each year for 10 years, if the interest rate is 6% compounded
annually.

Finding R when S is Known

2. A father at the time of birth of his daughter decides to deposit a
certain amount at the end of each year in the form of an annuity.
He wants that the sum of Rs. 20,000 should be made available for
meeting the expenses of his daughter’s marriage which he expects
to be solemnized just after her 18th birthday. If the payments
accumulate at 8% compounded annually, how much should he
start depositing annually?

51
 Use of the annuity table
• In table 5 at book page 309 values of the sum of
an ordinary annuity of Re.1 are given.
sni We use the
symbol read as “s angle n at i ” is used
(1  ifor the
)n 1
factor . i
• To search an entry in the table we consult the
table against i and n, and then multiply by the
payment per period.
• The use of the table will be discussed in the
solution of problems.
52
 Finding n when S is known
Example:
How many semi-annual payments of Rs. 100 each at an
account in the form of an ordinary annuity will accumulate Rs.
3,000 if the interest rate is 8%?

Finding i when S is known

Example:
An annuity of Rs. 300 payable at the end of each quarter
amounts to Rs. 13,200 in 8 years. What is the nominal rate of
interest if it is compounded quarterly?

53
 Formula for interpolating the
value of i
• Some times we can’t find the required value of i
directly from the annuity table. For example, if
s32i  44
By following along the row n = 32 in table 5 we don’t
find a value exactly equal to 44. so we have to
interpolate this value.
If “a” is the nearest value of i whose “A” entry in the
table is less than 44
“b” is the nearest value of i whose entry “B” in the
table is greater than 44
“x” is the required value of I
Then , use x  a 44  A

ba B A 54
 Present Value of an
Ordinary Annuity
• The present value of an annuity is an
amount of money today which is equivalent
to a series of equal payments in the future.
• For example
If a loan has been made, we may be
interested in determining the series of
payments (annuity) necessary to repay
the loan with interest.
55
 Finding the Present Value of an
Annuity
Let
R = amount of an annuity
i = Interest rate per compounding
periods
n = number of annuity payments (also,
the number of compounding)
P = Present Value of the annuity
Then,
1  (1  i )  n 
P  R 
 i 
56
Using table
• Table – 6 (book page 311) gives the
present value of an ordinary annuity
1  (1  i )  of

n


i
Rupee 1 per period. Theanifactor
 

is denoted by the symbol ( a angle n

at i ). Thus the general formula for the
present value of an

annuity
n

becomes:
1  (1  i )
P  R ani  R  
 i 

57
 Examples
1. A loan of Rs. 94 is to be paid back in monthly
installments the first one starting after one
month of the starting of the loan. If the
interest is charged at the rate of 24% per
annum on the unpaid principal, what will be
the amount of the monthly installment?
2. Find the present value of an annuity of Rs.
600 pay able at the end of each year for 15
years if the interest rate is 5% compounded
annually.

58
 Finding R when P is known

• Mr. Ahmad borrows Rs. 21,000 from a

bank to build a house with the
condition that he would pay back the
loan in the semi-annual equal
installments in four years with interest
rate at 6% compounded semi-annually.
If the first payment is to start at the
end of first six monthly period, what
would be amount of each installment?
59
 Finding n when P is known

• Mr. Ashraf wants to deposit his

savings of Rs. 50,000 in a bank which
offers 8% interest compounded semi-
annually so as to withdraw Rs.25,000
at the end of each six months from the
date of deposit. How many
withdrawals will he or his heir (in case
of his death) be able to make before the
entire amount is exhausted?
60
 Annuity Due
• When the periodic payments of an annuity starts at the
beginning of an interval rather than at the end of
interval the annuity is called an annuity due. Its term
begins on the date of the first payment and ends on
one interval after the last payment is made.
• The annuity due has a payment at the beginning of
each interest period but none at the end of the term.
Therefore the formula for calculating an annuity due is
given as:
S (due)  R sn 1i R  R ( sn 1i 1)
 (1  i ) n 1  1 
or S ( due)  R  1
 i 
61
 Present Value of an annuity due
• For the present value of an annuity due, we find
out the present value of (n-1) periods of an
ordinary annuity and then add the 1 st payment
which has the same present value. The formula
for calculating the present value of an annuity
due is given by:
P (due)  R an 1i  R  R (an 1i  1)
 1  (1  i )  n 1 
or P ( due)  R   1
 i 
62
 Examples
1. If Rs. 250 are deposited at the beginning of
each quarter in a fund which earns interest
at the rate of 8% compounded quarterly
what will it amount to after the end of the
year?
2. Mrs. Ahmad bought a sewing machine by
paying Rs. 50 each month for 10 months,
beginning from now. If money is worth 12%
compounded monthly, what was the selling
price of the machine on cash payment
basis?
63
 PERPETUITY
An annuity whose payments starts on certain date and
continues indefinitely is called perpetuity. As the
payments continues for ever, it is impossible to compute
the amount of the perpetuity but its present value can be
determined easily.
The formula for calculating the present value of the
perpetuity is given as:

R
P
i of periodic payment and i is the
where R is the size
interest rate per period.

64
Examples
1. Pakistan Manufacturing Co. is expecting to
pay Rs. 4.80 every 6 months on the share of
its stocks. What is the present value of a
share if money is worth 8% compounded
semi-annually?
2. Find the present value of Karachi Toy
Company share which is expected to earn Rs.
5.60 every six month, if money is worth 8%
compounded quarterly.

65
Discussion on Selected
Exercises from
Practice sets 11-A (p# 139),
11-B(p#157-159) &
Problem set 11(p# 160-162)
66
Chapter 16
Matrix Algebra
67
 Matrix

• A matrix is a rectangular array of numbers

enclosed in brackets or in bold face parenthesis.
Matrices are represented by capital letters such
as A, B,C, X,
1 4 and Y etc.
 5 1
A     67 
• Examples B   are:
 of matrices 3 3 C  
8 0  9

 5 4 

68
 Cont’d

A matrix is described by 1st stating its number of rows

and then its number of columns. This description of a
matrix is known as order of a matrix.
In the above examples matrix A has the order 2 x 2 (2
by 2), B has the order 3 x 2 (3 by 2), and the order of
C is 2 x 1 (2 by 1).
Generally if there are m rows in a matrix and n
columns, the order of the matrix would be m x n and
we may call it as m x n matrix.
If m = n, the matrix is called a square matrix.

69
 General Form of m x n Matrix

• Generally an m x n matrix may be in the form

 a11 a12 a13  a1n 
given below:
 
 a21 a 22 a 23  a 2n 
 a31 a32 a33  a3n 
 
      
      
 
 am1 am 2 am3  amn 
70
 Operation with Matrices
(i) Addition / Subtraction
 Matrices of the same order can be
added/Subtracted.
 While adding/subtracting two matrices of the same
order we add/subtract their corresponding
elements.
Given two matrices:
 a11 a12 a13   b11 b12 b13 
   
B   b21 b22 b23 
A   a21 a22 a23  & b
a a a   31 b32 b33 
 31 32 33 
then  a11  b11 a12  b12 a13  b13 
 
A  B   a21  b21 a22  b22 a23  b23 
a b a b a b 
 31 31 32 32 33 33  71
 Cont’d
(ii) Multiplication
a) Multiplication of a matrix by a real number
(Scalar)
 When a matrix is multiplied by a real number, each element of
the matrix is multiplied by that real number.
 The product obtained is a matrix of1 the 9  order.
6 same
 
D   0 1 2 
Example Let 1 5 3
1 6 9  
 
3.D  3.  0 1 2 
1 5 3
 
then  3*1 3* 6 3* 9 
 
  3* 0 3* ( 1) 3* 2 
 3*1 3* 5 3* 3 
 
3 18 27 
 
 0 3 6 
3 15 9 
 
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b) Multiplication of a matrix by another matrix
 Multiplication of two matrices is only possible if the
number of columns in the first matrix is equal to the
number of rows in the second matrix.
 If this condition is not satisfied multiplication will not be
possible.
 If the order of the first matrix is m x n and the order of
the second matrix is n x p multiplication will be possible
and the order of the resultant matrix will be m x p.
 To obtain any element in the product matrix, 1st determine
the row and column (in which the element lies) in the
product matrix.
 Multiply the row of the first matrix with that column of
the second matrix, this value will give us that element.
 Further the method is explained in the following
examples.

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 Examples
• If possible multiply the following matrices.

2 5   3
A  with B 
7 8   4
0 2 8
 
C  1 5 6 with D  9 3 5
4 1 1 

1 3 5 7
  0 8 1
 2 4 6 8  
M  with N  3 4 2
5 3 1 7 4
   6 5 
9 7 6 2

74