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Parisa Abdoly

Financial Mathematics
For me, all of the topics provided in the Financial Mathematics were interesting and
valuable. From those, I chose Compound Interest (Future Value) and Present Value which
addressed in the chapter 12. Totally, there are two different interests. Simple interest which is the
interest on the loan only while compound interest is the interest on the loan plus the interest of
the previous stages. To properly distinguish these two interests, I will provide some examples.
The general formula for calculating simple interest is: Internet(I)= Principle(P) x Rate (R)
x Time (T). For example: David deposited $100 in his saving account for 5 years at the annual
interest rate of 8%. What is Davids simple interest in this situation? Using the above formula,
the answer would be $140 ((Interest: $40=$100 x .08 x 5) + Principle)) = $140. Thus, at the end
of 5 years David will received a total amount of $140.
There are five different timely compound interest that we should pay attention while
calculating the interests. 1.Compounded annually (once a year) 2. Compounded semiannually
(every six months) 3. Compounded quarterly (every three months) 4. Compounded monthly
(each month) Compounded daily (each day).
Throughout this chapter, we learned how to calculate the compound interest (FV) both
manually and using table 12.1 provided in the book. Compound interest or Future Value (FV) is
the final amount of the loan at the end of last period. For example: If David wanted to know the
balance account at the end of 5 years if he deposited $200 in the saving account that pays 6%
interest compound semiannually, using the Table 12.1 the answer would be $268.78 (Periods
=5x2=10 Rate=6%/2 = 3% 10 periods, 3%, in Table 12.1=1.3439 (table factor) $200 x
1.3439 = $268.78). Thus, David will have total amount of $268.78 at the end of 5 years if he
deposits $200 semiannually at the interest rate of 6%.
Additionally, we learned how to calculate the present value (PV) using the Table 12.3.
The PV is the amount that we need to deposited in our account today to reach a specific amount
of maturing in the future. For example: David needs to have $30,000 for college in 4 years. He
can earn 6% compounded semiannually at his bank. How much he need to deposit at the
beginning of the year to reach his goal? Using the Table 12.3 the answer is $23,682 (n=8 R= 3%
table factor = 0.7894 So, 0.7894 x $30,000 = $23,682. Thus, David need to invest $23,682 in
his account today to have $30,000 in 4 years at the interest rate of 6%.
I chose this chapter because this concept is one the most critical principles in todays live
for all of the people. It is normal that one day in our lives, we will plan to buy our own house or
our own car and we will look for a loan. We should know the principle of the loan and interest
process in the real world. If we have this knowledge, we will be aware of the interest rate that we
should pay and then easily find the place with the best interest rate offers. Before reading this
chapter, like many of other people, I had no ideas about the interest concept and how is work in
the real life. Thus, I afraid to apply for any loan. However, this chapter helped me to gain
precious knowledge in calculating different interests and ultimately choose the best rate, when I
need, with more confident.