For Pubic Release: Distribution Unlimited

The Air Force Research Laboratory




The Handbook of
Essential Mathematics
Formulas, Processes, and Tables
Plus Applications in Personal Finance



Compilation and Explanations: John C. Sparks

Editors: Donald D. Gregory and Vincent R. Miller


For Pubic Release: Distribution Unlimited
X
2

XY Y
2

X
Y

(X + Y)
2
=X
2
+ 2XY + Y
2

X
Y
Y X
2
The Handbook of
Essential Mathematics

Air Force Publication 2006

For Public Release: Distribution Unlimited






3
Forward

Wright-Patterson Air Force Base (WPAFB) has enjoyed a
lengthy and distinguished history of serving the Greater-Dayton
community in a variety of ways. One of these ways is through the
WPAFB Educational Outreach (EO) Program, for which the Air
Force Research Laboratory (AFRL) is a proud and continuous
supporter, providing both technical expertise (from over 2000
practicing scientists and engineers) and ongoing resources for the
various programs sponsored by the WPAFB Educational
Outreach. The mission of the WPAFB EO program is

To form learning partnerships with the K-12 educational
community in order to increase student awareness and excitement
in all fields of math, science, aviation, and aerospace; ultimately
developing our nation’s future scientific and technical workforce.

In support of this mission, the WPAFB EO aspires to be
the best one-stop resource for encouragement and enhancement
of K-12 science, math and technology education throughout the
United States Air Force. It is in this spirit that AFRL offers The
Handbook of Essential Mathematics, a compendium of
mathematical formulas and other useful technical information that
will well serve both students and teachers alike from early grades
through early college. It is our sincere hope that you will use this
resource to either further your own education or the education of
those future scientists and engineers so vital to preserving our
cherished American freedoms.

LESTER MCFAWN, SES
Executive Director
Air Force Research Laboratory
4
Introduction

Formulas! They seem to be the bane of every beginning
mathematics student who has yet to realize that formulas are
about structure and relationship—and not about memorization.
Granted, formulas have to be memorized; for, it is partly through
memorization that we eventually become ‘unconsciously
competent’: a true master of our skill, practicing it in an almost
effortless, automatic sense. In mathematics, being ‘unconsciously
competent’ means we have mastered the underlying algebraic
language to the same degree that we have mastered our native
tongue. Knowing formulas and understanding the reasoning
behind them propels one towards the road to mathematical
fluency, so essential in our modern high-tech society.

The Handbook of Essential Mathematics contains three
major sections. Section I, “Formulas”, contains most of the
mathematical formulas that a person would expect to encounter
through the second year of college regardless of major. In
addition, there are formulas rarely seen in such compilations,
included as a mathematical treat for the inquisitive. Section I also
includes select mathematical processes, such as the process for
solving a linear equation in one unknown, with a supporting
examples. Section II, “Tables”, includes both ‘pure math’ tables
and physical-science tables, useful in a variety of disciples ranging
from physics to nursing. As in Section I, some tables are included
just to nurture curiosity in a spirit of fun. In Sections I and II, each
formula and table is enumerated for easy referral. Section III,
“Applications in Personal Finance”, is a small textbook within a
book where the language of algebra is applied to that everyday
financial world affecting all of us throughout our lives from birth to
death. Note: The idea of combining mathematics formulas with
financial applications is not original in that my father had a similar
type book as a Purdue engineering student in the early 1930s.

I would like to take this opportunity to thank Mr. Al
Giambrone—Chairman of the Department of Mathematics, Sinclair
Community College, Dayton, Ohio—for providing required-
memorization formula lists for 22 Sinclair mathematics courses
from which the formula compilation was partially built.

John C. Sparks
March 2006
5
Dedication

The Handbook of Essential Mathematics is dedicated to all
Air Force families




O Icarus…

I ride high...
With a whoosh to my back
And no wind to my face,
Folded hands
In quiet rest—
Watching...O Icarus...
The clouds glide by,
Their fields far below
Of gold-illumed snow,
Pale yellow, tranquil moon
To my right—
Evening sky.

And Wright...O Icarus...
Made it so—
Silvered chariot streaking
On tongues of fire leaping—
And I will soon be sleeping
Above your dreams...


August 2001: John C. Sparks


100
th
Anniversary of Powered Flight
1903—2003
M
6
Table of Contents

Section I: Formulas with
Select Processes

Index to Processes Page 06

1. Algebra 13
1.1. What is a Variable? 13
1.2. Field Axioms 14
1.3. Divisibility Tests 15
1.4. Subtraction, Division, Signed Numbers 16
1.5. Rules for Fractions 18
1.6. Partial Fractions 19
1.7. Rules for Exponents 20
1.8. Rules for Radicals 21
1.9. Factor Formulas 22
1.10. Laws of Equality 24
1.11. Laws of Inequality 26
1.12. Order of Operations 27
1.13. Three Meanings of ‘Equals’ 27
1.14. The Seven Parentheses Rules 28
1.15. Rules for Logarithms 30
1.16. Complex Numbers 31
1.17. What is a Function? 32
1.18. Function Algebra 33
1.19. Quadratic Equations & Functions 34
1.20. Cardano’s Cubic Solution 36
1.21. Theory of Polynomial Equations 37
1.22. Determinants and Cramer’s Rule 39
1.23. Binomial Theorem 40
1.24. Arithmetic Series 41
1.25. Geometric Series 41
1.26. Boolean Algebra 42
1.27. Variation Formulas 43

7
Table of Contents cont

2. Classical and Analytic Geometry 44
2.1. The Parallel Postulates 44
2.2. Angles and Lines 44
2.3. Triangles 45
2.4. Congruent Triangles 46
2.5. Similar Triangles 47
2.6. Planar Figures 47
2.7. Solid Figures 49
2.8. Pythagorean Theorem 50
2.9. Heron’s Formula 52
2.10. Golden Ratio 53
2.11. Distance and Line Formulas 54
2.12. Formulas for Conic Sections 55
2.13. Conic Sections

3. Trigonometry 57
3.1. Basic Definitions: Functions & Inverses 57
3.2. Fundamental Definition-Based Identities 58
3.3. Pythagorean Identities 58
3.4. Negative Angle Identities 58
3.5. Sum and Difference Identities 58
3.6. Double Angle Identities 60
3.7. Half Angle Identities 60
3.8. General Triangle Formulas 60
3.9. Arc and Sector Formulas 62
3.10. Degree/Radian Relationship 62
3.11. Addition of Sine and Cosine 63
3.12. Polar Form of Complex Numbers 63
3.13. Rectangular to Polar Coordinates 64
3.14. Trigonometric Values from Right Triangles 64

4. Elementary Vector Algebra 65
4.1. Basic Definitions and Properties 65
4.2. Dot Products 65
4.3. Cross Products 66
4.4. Line and Plane Equations 67
4.5. Miscellaneous Vector Equations 67
8
Table of Contents cont

5. Elementary Calculus 68
5.1. What is a Limit? 68
5.2. What is a Differential? 69
5.3. Basic Differentiation Rules 70
5.4. Transcendental Differentiation 70
5.5. Basic Antidifferentiation Rules 71
5.6. Transcendental Antidifferentiation 72
5.7. Lines and Approximation 73
5.8. Interpretation of Definite Integral 73
5.9. Fundamental Theorem of Calculus 75
5.10. Geometric Integral Formulas 75
5.11. Select Elementary Differential Equations 76
5.12. Laplace Transform: General Properties 77
5.13. Laplace Transform: Specific Transforms 78

6. Money and Finance 80
6.1. What is Interest? 80
6.2. Simple Interest 81
6.3. Compound and Continuous Interest 81
6.4. Effective Interest Rates 82
6.5. Present-to-Future Value Formulas 82
6.6. Present Value of a “Future Deposit Stream” 82
6.7. Present Value of a “ “ with Initial Lump Sum 83
6.8. Present Value of a Continuous “ “ 83
6.9. Types or Retirement Savings Accounts 84
6.10. Loan Amortization 85
6.11. Annuity Formulas 86
6.12. Markup and Markdown 86
6.13. Calculus of Finance 86

7. Probability and Statistics 87
7.1. Probability Formulas 87
7.2. Basic Concepts of Statistics 88
7.3. Measures of Central Tendency 89
7.4. Measures of Dispersion 90
7.5. Sampling Distribution of the Mean 91
7.6. Sampling Distribution of the Proportion 92
9
Table of Contents cont

Section II: Tables

1. Numerical 94
1.1. Factors of Integers 1 through 192 94
1.2. Prime Numbers less than 1000 96
1.3. Roman Numeral and Arabic Equivalents 96
1.4. Nine Elementary Memory Numbers 97
1.5. American Names for Large Numbers 97
1.6. Selected Magic Squares 97
1.7. Thirteen-by-Thirteen Multiplication Table 101
1.8. The Random Digits of PI 102
1.9. Standard Normal Distribution 103
1.10. Two-Sided Student’s t Distribution 104
1.11. Date and Day of Year 105

2. Physical Sciences 106
2.1. Conversion Factors in Allied Health 106
2.2. Medical Abbreviations in Allied Health 107
2.3. Wind Chill Table 108
2.4. Heat Index Table 108
2.5. Temperature Conversion Formulas 109
2.6. Unit Conversion Table 109
2.7. Properties of Earth and Moon 112
2.8. Metric System 113
2.9. British System 114

Section III: Applications in
Personal Finance

1. The Algebra of Interest 118
1.1. What is Interest? 118
1.2. Simple Interest 120
1.3. Compound Interest 122
1.4. Continuous Interest 124
1.5. Effective Interest Rate 129
10
Table of Contents cont

2. The Algebra of the Nest Egg 135
2.1. Present and Future Value 135
2.2. Growth of an Initial Lump Sum Deposit 138
2.3. Growth of a Deposit Stream 142
2.4. The Two Growth Mechanisms in Concert 147
2.5. Summary 151

3. The Algebra of Consumer Debt 153
3.1. Loan Amortization 153
3.2. Your Home Mortgage 162
3.3. Car Loans and Leases 173
3.4. The Annuity as a Mortgage in Reverse 183

4. The Calculus of Finance 185
4.1. Jacob Bernoulli’s Differential Equation 185
4.2. Differentials and Interest Rate 187
4.3. Bernoulli and Money 188
4.4. Applications 191

Appendices

A. Greek Alphabet 200

B. Mathematical Symbols 201

C. My Most Used Formulas 204
11
Section I

Formulas with
Select Processes
12
Index to Processes

Process Where in Section I

1. Complex Rationalization Process 1.8.11
2. Quadratic Trinomial Factoring Process 1.9.14
3. Linear Equation Solution Process 1.10.10
4. Linear Inequality Solution Process 1.11.6
5. Order of Operations 1.12.0
6. Order of Operations with Parentheses Rules 1.14.9
7. Logarithmic Simplification Process 1.15.12
8. Complex Number Multiplication 1.16.8
9. Complex Number Division 1.16.9
10. Process of Constructing Inverse Functions 1.18.6
11. Quadratic Equations by Formula 1.19.3
12. Quadratic Equations by Factoring 1.19.6
13. Cardano’s Cubic Solution Process 1.19.0
14. Cramer’s Rule, Two-by-Two System 1.22.3
15. Cramer’s Rule, Three-by-Three System 1.22.4
16. Removal of xy Term in Conic Sections 2.12.6
17. The Linear First-Order Differential Equation 5.11.7
18. Median Calculation 7.3.6

13
1. Algebra

1.1. What is a Variable?

In the fall of 1961, I first encountered the monster called
x in my high-school freshman algebra class. The letter x is still a
monster to many, whose real nature has been confused by such
words as variable and unknown: perhaps the most horrifying
description of x ever invented! Actually, x is very easily
understood in terms of a language metaphor. In English, we have
both proper nouns and pronouns where both are distinct and
different parts of speech. Proper nouns are specific persons,
places, or things such as John, Ohio, and Toyota. Pronouns are
nonspecific persons or entities such as he, she, or it.

To see how the concept of pronouns and nouns applies to
algebra, we first examine arithmetic, which can be thought of as a
precise language of quantification having four action verbs, a verb
of being, and a plethora of proper nouns. The four action verbs are
addition, subtraction, multiplication, and division denoted
respectively by ÷ ⋅ − + , , , . The verb of being is called equals or is,
denoted by =. Specific numbers such as 12, 4512 . 3 ,
5
3
23 ,
769
123
,
00045632 . 0 , 45 − , , serve as the arithmetical equivalent to
proper nouns in English. So, what is x ? x is merely a nonspecific
number, the mathematical equivalent to a pronoun in English.
English pronouns greatly expand our capability to describe and
inform in a general fashion. Hence, pronouns add increased
flexibility to the English language. Likewise, mathematical
pronouns—such as z y x , , , see Appendix B for a list of symbols
used in this book—greatly expand our capability to quantify in a
general fashion by adding flexibility to our language of arithmetic.
Arithmetic, with the addition of z y x , , and other mathematical
pronouns as a new part of speech, is called algebra.

In Summary: Algebra can be defined as a generalized arithmetic
that is much more powerful and flexible than standard arithmetic.
The increased capability of algebra over arithmetic is due to the
inclusion of the mathematical pronoun x and its associates z y, ,
etc. A more user-friendly name for variable or unknown is
pronumber.
14
1.2. Field Axioms

The field axioms decree the fundamental operating
properties of the real number system and provide the basis for all
advanced operating properties in mathematics. Let c b a & , be
any three real numbers (pronumbers). The field axioms are as
follows.


Properties Addition +
Multiplication
.

Closure
b a + is a unique real
number
b a ⋅ is a unique
real number
Commutative a b b a + = + a b b a ⋅ = ⋅
Associative
) (
) (
c b a
c b a
+ +
= + +

) (
) (
bc a
c ab =

Identity a a = + ⇒ 0 0 a a = ⋅ ⇒ 1 1
Inverse
0 ) (
0 ) (
= + − ⇒
= − + ⇒
a a
a a a

1
1
1
1
0
= ⋅ ⇒
= ⋅ ⇒ ≠
a
a
a
a a

Distributive or
Linking Property
c a b a c b a ⋅ + ⋅ = + ⋅ ) (
Transitivity
c a c b b a
c a c b b a
c a c b b a
< ⇒ < <
> ⇒ > >
= ⇒ = =
&
&
&

Note: b a b a ab ) ( ) ( = = are alternate
representations of b a ⋅
15

1.3. Divisibility Tests

Divisor Condition That Makes it So
2 The last digit is 0,2,4,6, or 8
3 The sum of the digits is divisible by 3
4 The last two digits are divisible by 4
5 The last digit is 0 or 5
6 The number is divisible by both 2 and 3
7
The number formed by adding five times the last
digit to the “number defined by” the remaining
digits is divisible by 7**
8 The last three digits are divisible by 8
9 The sum of the digits is divisible by 9
10 The last digit is 0
11
11 divides the number formed by subtracting two
times the last digit from the “ “ remaining digits**
12 The number is divisible by both 3 and 4
13
13 divides the number formed by adding four
times the last digit to the “ “ remaining digits**
14 The number is divisible by both 2 and 7
15 The number is divisible by both 3 and 5
17
17 divides the number formed by subtracting five
times the last digit from the “ ” remaining digits**
19
19 divides the number formed by adding two
times the last digit to the “ “ remaining digits**
23
23 divides the number formed by adding seven
times the last digit to the “ “ remaining digits**
29
29 divides the number formed by adding three
times the last digit to the remaining digits**
31
31 divides the number formed by subtracting
three times the last digit from the “ “ remaining
digits**
37
37 divides the number formed by subtracting
eleven times the last digit from the “ “ remaining
digits**
**These tests are iterative tests in that you continue to cycle
through the process until a number is formed that can be
easily divided by the divisor in question.

16
1.4. Subtraction, Division, Signed Numbers

1.4.1. Definitions:
Subtraction: ) ( b a b a − + ≡ −
Division:
b
a b a
1
⋅ ≡ ÷
1.4.2. Alternate representation of b a ÷ :
b
a
b a ≡ ÷
1.4.3. Division Properties of Zero
Zero in numerator: 0
0
0 = ⇒ ≠
a
a
Zero in denominator:
0
a
is undefined
Zero in both:
0
0
is undefined

1.4.4. Demonstration that division-by-zero is undefined
c b a c
b
a
⋅ = ⇒ = for all real numbers a
If c
a
=
0
, then 0 0 = ⇒ ⋅ = a c a for all real numbers a ,
an algebraic impossibility

1.4.5. Demonstration that attempted division-by-zero leads to
erroneous results.

Let y x = ; then multiplying both sides by x gives

) ( ) )( (
2 2 2
2
y x y y x y x
y xy y x
xy x
− = + −
⇒ − = −
⇒ =

Dividing both sides by y x − where 0 = − y x gives
1 2 2 = ⇒ = ⇒ = + y y y y x .

The last equality is a false statement.
17
1.4.6. Signed Number Multiplication:
) ( ) ( b a b a ⋅ − = ⋅ −
) ( ) ( b a b a ⋅ − = − ⋅
) ( ) ( ) ( b a b a ⋅ = − ⋅ −

1.4.7. Table for Multiplication of Signed Numbers: the italicized
words in the body of the table indicate the resulting sign of
the associated product.

Multiplication of b a ⋅
Sign of b
Sign of a
Plus Minus
Plus Plus Minus
Minus Minus Plus


1.4.8. Demonstration of the algebraic reasonableness of the
laws of multiplication for signed numbers. In both columns,
both the middle and rightmost numbers decrease in the
expected logical fashion.


20 ) 5 ( ) 4 (
16 ) 4 ( ) 4 (
12 ) 3 ( ) 4 (
8 ) 2 ( ) 4 (
4 ) 1 ( ) 4 (
0 ) 0 ( ) 4 (
4 ) 1 ( ) 4 (
8 ) 2 ( ) 4 (
12 ) 3 ( ) 4 (
16 ) 4 ( ) 4 (
20 ) 5 ( ) 4 (
− = − ⋅
− = − ⋅
− = − ⋅
− = − ⋅
− = − ⋅
= ⋅
= ⋅
= ⋅
= ⋅
= ⋅
= ⋅

30 ) 6 ( ) 5 (
25 ) 5 ( ) 5 (
20 ) 4 ( ) 5 (
15 ) 3 ( ) 5 (
10 ) 2 ( ) 5 (
5 ) 1 ( ) 5 (
0 ) 0 ( ) 5 (
5 ) 1 ( ) 5 (
10 ) 2 ( ) 5 (
15 ) 3 ( ) 5 (
20 ) 4 ( ) 5 (
= − ⋅ −
= − ⋅ −
= − ⋅ −
= − ⋅ −
= − ⋅ −
= − ⋅ −
= ⋅ −
− = ⋅ −
− = ⋅ −
− = ⋅ −
− = ⋅ −


18
1.5. Rules for Fractions

Let
b
a
and
d
c
be fractions with 0 ≠ b and 0 ≠ d .

1.5.1. Fractional Equality: bc ad
d
c
b
a
= ⇔ =
1.5.2. Fractional Equivalency:
cb
ca
bc
ac
b
a
c = = ⇒ ≠ 0
1.5.3. Addition (like denominators):
b
c a
b
c
b
a +
= +
1.5.4. Addition (unlike denominators):

bd
cb ad
bd
cb
bd
ad
d
c
b
a +
= + = +
Note: bd is the common denominator
1.5.5. Subtraction (like denominators):
b
c a
b
c
b
a −
= −
1.5.6. Subtraction (unlike denominators):

bd
cb ad
bd
cb
bd
ad
d
c
b
a −
= − = −
1.5.7. Multiplication:
bd
ac
d
c
b
a
= ⋅
1.5.8. Division:
bc
ad
c
d
b
a
d
c
b
a
c = ⋅ = ÷ ⇒ ≠ 0
1.5.9. Division (missing quantity):
bc
a
c b
a c
b
a
c
b
a
= ⋅ = ÷ = ÷
1
1

1.5.10. Reduction of Complex Fraction:
bc
ad
d
c
b
a
d
c
b
a
= ÷ =
1.5.11. Placement of Sign:
b
a
b
a
b
a

=

= −
19
1.6. Partial Fractions

Let ) (x P be a polynomial expression with degree less than the
degree of the factored denominator as shown.

1.6.1. Two Distinct Linear Factors:


b x
B
a x
A
b x a x
x P

+

=
− − ) )( (
) (


The numerators B A, are given by


a b
b P
B
b a
a P
A

=

=
) (
,
) (


1.6.2. Three Distinct Linear Factors:


c x
C
b x
B
a x
A
c x b x a x
x P

+

+

=
− − − ) )( )( (
) (


The numerators C B A , , are given by


) )( (
) (
,
) )( (
) (
,
) )( (
) (
b c a c
c P
C
c b a b
b P
B
c a b a
a P
A
− −
=
− −
=
− −
=


1.6.3. N Distinct Linear Factors:




=
=

=

n
i i
i
n
i
i
a x
A
a x
x P
1
1
) (
) (
with


=

=
n
i j
j
j i
i
i
a a
a P
A
1
) (
) (


20
1.7. Rules for Exponents

1.7.1. Addition:
m n m n
a a a
+
=
1.7.2. Subtraction:
m n
m
n
a
a
a

=
1.7.3. Multiplication:
nm m n
a a = ) (
1.7.4. Distributed over a Simple Product:
n n n
b a ab = ) (
1.7.5. Distributed over a Complex Product:
pn mn n p m
b a b a = ) (
1.7.6. Distributed over a Simple Quotient:
n
n
n
b
a
b
a
=
|
.
|

\
|

1.7.7. Distributed over a Complex Quotient:
pn
mn
n
p
m
b
a
b
a
=
|
|
.
|

\
|

1.7.8. Definition of Negative Exponent:
n
n
a
a


1

1.7.9. Definition of Radical Expression:
n
n
a a
1

1.7.10. Definition when No Exponent is Present:
1
a a ≡
1.7.11. Definition of Zero Exponent: 1
0
≡ a

1.7.12. Demonstration of the algebraic reasonableness of the
definitions for
0
a and
n
a

via successive divisions by 2 .
Notice the power decreases by 1 with each division.


0
1
2
3
4
2 2 2 1
2 2 4 2
2 2 2 2 8 4
2 2 2 2 2 16 8
2 2 2 2 2 2 32 16
≡ ÷ =
≡ ÷ =
= ⋅ = ÷ =
= ⋅ ⋅ = ÷ =
= ⋅ ⋅ ⋅ = ÷ =

| |
| |
| |
4
2
1
8
1
16
1
3
2
1
4
1
8
1
2
2
1
2
1
4
1
1
2
1
2
1
2 2
2 2
2 2
2 2 1
4
3
2
1




≡ = ÷ =
≡ = ÷ =
≡ = ÷ =
≡ = ÷ =


21
1.8. Rules for Radicals

1.8.1. Basic Definitions:
n
a a
n
1
≡ and
2
1
2
a a a ≡ ≡
1.8.2. Complex Radical:
n
m
a a
n m
=
1.8.3. Associative:
n
m
a a a
n m m n
= = ) (
1.8.4. Simple Product:
n n n
ab b a =
1.8.5. Simple Quotient:
n
n
n
b
a
b
a
=
1.8.6. Complex Product:
nm n m m n
b a b a =

1.8.7. Complex Quotient:
nm
n
m
m
n
b
a
b
a
=
1.8.8. Nesting:
nm n m
a a =
1.8.9. Rationalizing Numerator for m n > :
n m n
n m
a b
a
b
a

=
1.8.10. Rationalizing Denominator for m n > :
a
a b
a
b
n m n
n m

=
1.8.11. Complex Rationalization Process:

c b
c b a
c b
a
c b c b
c b a
c b
a


=
+

− +

=
+
2
) (
) )( (
) (


Numerator:
) (
2
c a b
c a
b
c a


=
+


1.8.12. Definition of Surd Pairs: If b a ± is a radical expression,
then the associated surd is given by b a m .
22
1.9. Factor Formulas

1.9.1. Simple Common Factor: a c b c b a ac ab ) ( ) ( + = + = +
1.9.2. Grouped Common Factor:

) )( (
) ( ) (
) ( ) (
d a c b
d c b a c b
c b d a c b
dc db ac ab
+ +
= + + +
= + + +
= + + +

1.9.3. Difference of Squares: ) )( (
2 2
b a b a b a − + = −
1.9.4. Expanded Difference of Squares:
) )( ( ) (
2 2
c b a c b a c b a − + + + = − +
1.9.5. Sum of Squares: ) )( (
2 2
bi a bi a b a − + = + i complex
1.9.6. Perfect Square:
2 2 2
) ( 2 b a b ab a ± = + ±
1.9.7. General Trinomial:

) )( (
) ( ) (
) ( ) (
) (
2
2
b x a x
b a x x a x
ab bx ax x
ab x b a x
+ +
= + + +
= + + +
= + + +

1.9.8. Sum of Cubes: ) )( (
2 2 3 3
b ab a b a b a + − + = +
1.9.9. Difference of Cubes: ) )( (
2 2 3 3
b ab a b a b a + + − = −
1.9.10. Difference of Fourths:

) )( )( (
) )( (
2 2 4 4
2 2 2 2 4 4
b a b a b a b a
b a b a b a
+ + − = −
⇒ + − = −

1.9.11. Power Reduction to an Integer:
) )( (
2 2 2 2 4 2 2 4
b ab a b ab a b b a a + − + + = + +
1.9.12. Power Reduction to a Radical:
) )( (
2
a x a x a x + − = −
1.9.13. Power Reduction to an Integer plus a Radical:
) )( (
2 2
b ab a b ab a b ab a + − + + = + +

23
1.9.14. Quadratic Trinomial Factoring Process
Let c bx ax + +
2
be a quadratic trinomial where the three
coefficients c b a , , are integers.

Step 1: Find integers N M, such that

ac N M
b N M
= ⋅
= +
.
Step 2: Substitute for b ,

c x N M ax
c bx ax
+ + +
= + +
) (
2
2

Step 3: Factor by Grouping (1.9.2)

∴ +
|
.
|

\
|
+
= |
.
|

\
|
+ + |
.
|

\
|
+
=
|
.
|

\
| ⋅
+ + +
= + + +
) (
) (
2
2
N ax
a
M
x
a
M
x N
a
M
x ax
a
N M
Nx Mx ax
c Nx Mx ax


Note: if there are no pair of integers N M, with both b N M = +
and ac N M = ⋅ then the quadratic trinomial is prime.

Example: Factor the expression 7 13 2
2
− − x x .

) 1 2 )( 7 (
) 7 ( 1 ) 7 ( 2 :
7 14 2
7 3 2 :
1 , 14
13 & 14 ) 7 ( 2 :
3
2
2
2
1
+ −
= − ⋅ + −
− + −
= − −
= − =
⇒ − = + − = − ⋅ =
x x
x x x
x x x
x x
N M
N M MN
a
a
a

24
1.10. Laws of Equality

Let B A = be an algebraic equality andC , D be any quantities.

1.10.1. Addition: C B C A + = +
1.10.2. Subtraction: C B C A − = −
1.10.3. Multiplication: C B C A ⋅ = ⋅
1.10.4. Division:
C
B
C
A
= provided 0 ≠ C
1.10.5. Exponent:
n n
B A = provided n is an integer
1.10.6. Reciprocal:
B A
1 1
= provided 0 , 0 ≠ ≠ B A
1.10.7. Means & Extremes: AD CB
B
D
A
C
= ⇒ = if 0 , 0 ≠ ≠ B A
1.10.8. Zero Product Property: 0 = ⋅ B A ⇔ 0 = A or 0 = B

1.10.9. The Concept of Equivalency

When solving equations, the Laws of Equality—with the exception
of 1.10.5, which produces equations with extra or ‘extraneous’
solutions in addition to those for the original equation—are used to
manufacture equations that are equivalent to the original equation.
Equivalent equations are equations that have identical solutions.
However, equivalent equations are not identical in appearance.
The goal of any equation-solving process is to use the Laws of
Equality to create a succession of equivalent equations where
each equation in the equivalency chain is algebraically simpler
than the preceding one. The final equation in the chain should be
an expression of the form a x = , the no-brainer form that allows
the solution to be immediately determined. In that algebraic
mistakes can be made when producing the equivalency chain, the
final answer must always be checked in the original equation.
When using 1.10.5, one must check for extraneous solutions and
delete them from the solution set.

1.10.10. Linear Equation Solution Process
Start with the general form ) ( ) ( x R x L = where ) (x L and ) (x R
are first-degree polynomial expressions on the left-hand side and
right-hand side of the equals sign.
25

Step 1: Using proper algebra, independently combine like terms
for both ) (x L and ) (x R
Step 2: Use 1.10.1 and 1.10.2 on an as-needed basis to create an
equivalent equation of the form b ax = .
Step 3: use either 1.10.3 or 1.10.4 to create the final equivalent
form
a
b
x = from which the solution is easily deduced.
Step 4: Check solution in original equation.

Example: Solve 3 ) 1 ( 5 1 )} 9 ( 2 ] 9 ) 3 ( 7 [ 3 { 4 − − = − − + + − y y y .
∴ =
⇒ =
=
⇒ + − = + −
⇒ − = −
⇒ − − = − −
⇒ − = −
− = −
⇒ − = − −
⇒ − = − −
⇒ − = − − + −
⇒ − = − − + −
⇒ − − = − − + + −
⇒ − − = − − + + −
87
209
209 87 :
209 87
217 8 217 217 87
8 217 87
8 5 5 217 5 92
8 5 217 92 :
8 5 217 92
8 5 1 216 92
8 5 1 } 54 23 { 4
8 5 1 } 18 2 36 21 { 4
8 5 1 } 18 2 ] 12 7 [ 3 { 4
3 5 5 1 } 18 2 ] 9 21 7 [ 3 { 4
3 ) 1 ( 5 1 )} 9 ( 2 ] 9 ) 3 ( 7 [ 3 { 4 :
3
2
1
y
y
y
y
y
y y y y
y y
y y
y y
y y
y y y
y y y
y y y
y y y
a
a
a

:
4
a Check the final answer
87
209
= y in the original equation
3 ) 1 ( 5 1 )} 9 ( 2 ] 9 ) 3 ( 7 [ 3 { 4 − − = − − + + − y y y .
26
1.11. Laws of Inequality

Let B A > be an algebraic inequality and C be any quantity.

1.11.1. Addition: C B C A + > +
1.11.2. Subtraction: C B C A − > −

1.11.3. Multiplication:
C B C A C
C B C A C
⋅ < ⋅ ⇒ <
⋅ > ⋅ ⇒ >
0
0


1.11.4. Division:
C
B
C
A
C
C
B
C
A
C
< ⇒ <
> ⇒ >
0
0

1.11.5. Reciprocal:
B A
1 1
< provided 0 , 0 ≠ ≠ B A

Similar laws hold for B A < , B A ≤ , and B A ≥ . When
multiplying or dividing by a negative C , one must reverse the
direction of the original inequality sign. Replacing each side of the
inequality with its reciprocal also reverses the direction of the
original inequality.

1.11.6. Linear Inequality Solution Process
Start with the general form ) ( ) ( x R x L > where ) (x L and ) (x R
are as described in 1.10.10. Follow the same four-step process as
that given in 1.10.10 modifying per the checks below.

9 Reverse the direction of the inequality sign when multiplying or
dividing both sides of the inequality by a negative quantity.

9 Reverse the direction of the inequality sign when replacing
each side of an inequality with its reciprocal.

9 The final answer will have one the four forms a x > , a x ≥ ,
a x < , and a x ≤ . One must remember that in of the four
cases, x has infinitely many solutions as opposed to one
solution for the linear equation.
27
1.12. Order of Operations

Step 1: Perform all power raisings in the order they occur from left
to right
Step 2: Perform all multiplications and divisions in the order they
occur from left to right
Step 3: Perform all additions and subtractions in the order they
occur from left to right
Step 4: If parentheses are present, first perform steps 1 through 3
on an as-needed basis within the innermost set of
parentheses until a single number is achieved. Then
perform steps 1 through 3 (again, on an as-needed basis)
for the next level of parentheses until all parentheses have
been systematically removed.
Step 5: If a fraction bar is present, simultaneously perform steps 1
through 4 for the numerator and denominator, treating
each as totally-separate problem until a single number is
achieved. Once single numbers have been achieved for
both the numerator and the denominator, then a final
division can be performed.



1.13. Three Meanings of ‘Equals’

1. Equals is the mathematical equivalent of the English verb “is”,
the fundamental verb of being. A simple but subtle use of
equals in this fashion is 2 2 = .
2. Equals implies an equivalency of naming in that the same
underlying quantity is being named in two different ways. This
can be illustrated by the expression MMIII = 2003 . Here, the
two diverse symbols on both sides of the equals sign refer to
the same and exact underlying quantity.
3. Equals states the product (either intermediate or final) that
results from a process or action. For example, in the
expression 4 2 2 = + , we are adding two numbers on the left-
hand side of the equals sign. Here, addition can be viewed as
a process or action between the numbers 2 and 2 . The result
or product from this process or action is the single number 4 ,
which appears on the right-hand side of the equals sign.

28
1.14. The Seven Parentheses Rules

1.14.1. Consecutive processing signs ÷ ⋅ − + , , , are separated by
parentheses.
1.14.2. Three or more consecutive processing signs are
separated by nested parenthesis where the rightmost sign
will be in the innermost set of parentheses.
1.14.3. Nested parentheses are typically written using the various
bracketing symbols to facilitate reading.
1.14.4. The rightmost processing sign and the number to the
immediate right of the rightmost sign are both enclosed
within the same set of parentheses.
1.14.5. Parentheses may enclose a signed or unsigned number
by itself but never a sign by itself.
1.14.6. More than one number can be written inside a set of
parentheses depending on what part of the overall
process is emphasized.
1.14.7. When parentheses separate numbers with no intervening
multiplication sign, a multiplication is understood. The
same is true if just one plus or minus sign separates the
two numbers and the parentheses enclose both the
rightmost number and the separating sign.

1.14.8. Demonstrating the Seven Basic Parentheses Rules

9 12 5 − + : Properly written as ) 12 ( 5 − + . 1.14.1, 1.14.4
9 12 5 − ⋅ : Properly written as ) 12 ( 5 − ⋅ . 1.14.1, 1.14.4
9 12 5 − − + : Properly written as )] 12 ( [ 5 − − + . 1.14.1 thru 4
9 12 ) ( 5 − ⋅ : Incorrect per 1.14.5
9 ) 12 ( ) 5 ( − ⋅ : Correct per 1.14.1, 1.14.4, 1.14.5
9 12 5⋅ − : Does not need parentheses to achieve separation
since the 5 serves the same purpose. Any use of
parentheses would be optional
9 12 ) 5 ( ⋅ − : The optional parentheses, though not needed,
emphasize the negative5 per 1.14.5
9 ) 12 5 ( ⋅ − : The optional parentheses emphasize the fact that
the final outcome is negative per 1.14.5, 1.14.6
29
9 ) 12 ( 4 : The mandatory parentheses indicate that 4 is
multiplying12. Without the parentheses, the expression would
be properly read as the single number 412 , 1.14.7.
9 ) 5 ( 7 − : The mandatory parentheses indicate that 7 is
multiplying 5 − . Without the intervening parentheses, the
expression is properly read as the difference 5 7 − , 1.14.7.
9 ) 5 )( 32 ( − − : The mandatory parentheses indicate that 32 − is
multiplying 5 − . The expression ) 5 ( ) 32 ( − ⋅ − also signifies
the same, 1.14.7.

1.14.9. Demonstration of Use of Order-of-Operations with
Parentheses Rules to Reduce a Rational Expression.
∴ =
×
×
=
=
+
=
⋅ +
=
⋅ +
=
⋅ + +
=
⋅ + + +
=

⋅ + + − −
=

⋅ + + − −
17
95
17 2
95 2
34
190
34
54 136
34
9 6 136
34
9 6 ) 34 ( 4
34
9 6 ) 8 26 ( 4
) 17 ( 2
9 6 ) 8 ] 8 18 ([ 4
) 64 81 ( 2
9 6 ) 8 } 8 { 18 ( 4
) 8 9 ( 2
9 6 ) 2 } 8 { 18 ( 4
2 2
3


30
1.15. Rules for Logarithms

1.15.1. Definition of Logarithm to Base 0 > b :
x y
b
log = if and only if x b
y
=
1.15.2. Logarithm of the Same Base: 1 log = b
b

1.15.3. Logarithm of One: 0 1 log =
b

1.15.4. Logarithm of the Base to a Power: p b
p
b
= log
1.15.5. Base to the Logarithm: p b
p
b
=
log

1.15.6. Notation for Logarithm Base 10: x Logx
10
log ≡
1.15.7. Notation for Logarithm Base e : x x
e
log ln ≡
1.15.8. Change of Base Formula:
b
N
N
a
a
b
log
log
log =
1.15.9. Product: M N MN
b b b
log log ) ( log + =
1.15.10. Quotient: N M
N
M
b b b
log log log − = |
.
|

\
|

1.15.11. Power: N p N
b
p
b
log log =

1.15.12. Logarithmic Simplification Process
Let
p
m n
C
B A
X = , then

( ) ( )
( ) ( ) ( )
( ) ( ) ( )∴ − + =
⇒ − + =
⇒ − =

|
|
.
|

\
|
=
C p B m A n X
C B A X
C B A X
C
B A
X
b b b b
p
b
m
b
n
b b
p
b
m n
b b
p
m n
b b
log log log ) ( log
log log log ) ( log
log log ) ( log
log ) ( log


Note: The use of logarithms transforms complex algebraic
expressions where products become sums, quotients become
differences, and exponents become coefficients, making the
manipulation of these expressions easier in some instances.

31
1.16. Complex Numbers

1.16.1. Definition of the imaginary unit i : i is defined to be the
solution to the equation 0 1
2
= + x .
1.16.2. Properties of the imaginary unit i :
1 1 0 1
2 2
− = ⇒ − = ⇒ = + i i i
1.16.3. Definition of Complex Number: Numbers of the form
bi a + where b a, are real numbers
1.16.4. Definition of Complex Conjugate: bi a bi a − = +
1.16.5. Definition of Complex Modulus:
2 2
b a bi a + = +
1.16.6. Addition: i d b c a di c bi a ) ( ) ( ) ( ) ( + + + = + + +
1.16.7. Subtraction: i d b c a di c bi a ) ( ) ( ) ( ) ( − + − = + − +

1.16.8. Process of Complex Number Multiplication

i bc ad bd ac
bd i bc ad ac
bdi i bc ad ac
di c bi a
) (
) 1 ( ) (
) (
) )( (
2
+ + −
− + + +
= + + +
= + +


1.16.9. Process of Complex Number Division

i
d c
ad bc
d c
bd ac
d c
i ad bc bd ac
di c di c
di c bi a
di c di c
di c bi a
di c
bi a
|
.
|

\
|


+

+
=

− + +
=
− +
− +
=
+ +
+ +
=
+
+
2 2 2 2
2 2
) ( ) (
) )( (
) )( (
) )( (
) )( (

32
1.17. What is a Function?

The mathematical concept called a function is
foundational to the study of higher mathematics. With this
statement in mind, let us define in a working sense the word
function: A function is any process where numerical input is
transformed into numerical output with the operating restriction
that each unique input must lead to one and only one output.

The above figure is a diagram of the general function
process for a function named f . Function names are usually
lower-case letters, , , , h g f etc. When a mathematician says, ‘let
f be a function’, the entire input-output process—start to finish—
comes into discussion. If two different function names are being
used in one discussion, then two different functions are being
discussed, often in terms of their relationship to each other. The
variable x is the independent or input variable; it is independent
because any specific input value can be freely chosen. Once a
specific input value is chosen, the function then processes the
input value via the processing rule in order to create the output
variable ) (x f , also called the dependent variable since the value
of ) (x f is entirely determined by the action of the processing rule
upon x . Notice that the complex symbol ) (x f reinforces the fact
that output values are created by direct action of the function
process f upon the independent variable x . Sometimes, a simple
y will be used to represent the output variable ) (x f when it is
well understood that a function process is indeed in place. Two
more definitions are noted. The set of all possible input values for
a function f is called the domain and is denoted by the
symbol Df . The set of all possible output values is called the
range and is denoted by Rf .
Function Name
x
Input Side
) (x f
Output Side
Processing
Rule
f
33
1.18. Function Algebra

Let f and g be functions, and let
1 −
f be the inverse for f

1.18.1. Inverse Property: x x f f x f f = =
− −
)] ( [ )] ( [
1 1

1.18.2. Addition/Subtraction: ) ( ) ( ) )( ( x g x f x g f ± = ±
1.18.3. Multiplication: ) ( ) ( ) )( ( x g x f x g f ⋅ = ⋅
1.18.4. Division:
) (
) (
) (
x g
x f
x
g
f
=
|
|
.
|

\
|
;
) (
) (
) (
x f
x g
x
f
g
=
|
|
.
|

\
|

1.18.5. Composition:
)] ( [ ) )( (
)] ( [ ) )( (
x f g x f g
x g f x g f
=
=
o
o


1.18.6. Process for Constructing Inverse Functions

Step 1: Start with x x f f =

)) ( (
1
, the process equality that must
be in place for an inverse function to exist.
Step 2: Replace ) (
1
x f

with y to form the equality x y f = ) ( .
Step 3: Solve for y in terms of x . The resulting y is ) (
1
x f

.
Step 4: Verify by the property x x f f x f f = =
− −
)) ( ( )) ( (
1 1
.

1.18.7. Demonstration of 1.18.6:
Find ) (
1
x f

for 2 ) (
3
+ = x x f .

( ) x x x x f f
x x x x f f
x y
x y
x y
x x f x f f
= + − = + − =
= = − + =
− =
⇒ = +
= +
= + =


− −
2 ) 2 ( 2 ) 2 ( )) ( ( :
2 ) 2 ( )) ( ( :
2
2 ) ( :
2 ) ( :
2 )) ( ( )) ( ( :
3
3
1
4
3 3
3
3 1
4
3
3
3
3
2
3 1 1
1
a
a
a
a
a

34
1.19. Quadratic Equations & Functions

1.19.1. Definition and Discussion

A complete quadratic equation in standard form (ready-to-be-
solved) is an equation having the algebraic structure
0
2
= + + c bx ax where 0 , 0 , 0 ≠ ≠ ≠ c b a . If either 0 = b or
0 = c , the quadratic equation is called incomplete. If 0 = a , the
quadratic equation reduces to a linear equation. All quadratic
equations have exactly two solutions if complex solutions are
allowed. Solutions are obtained by either factoring or by use of the
quadratic formula. If, within the context of a particular problem
complex solutions are not admissible, quadratic equations can
have up to two real solutions. As with all real-world applications,
the number of admissible solutions depends on context.

1.19.2. Quadratic Formula with Development:


− ± −
=


± =
|
.
|

\
|
+


=

|
.
|

\
|
+
⇒ + − = + |
.
|

\
|
+
⇒ − =
|
.
|

\
|
+ ⇒ = + +
a
ac b b
x
a
ac b
a
b
x
a
ac b
a
b
x
a
b
a
c
a
b
x
a
b
x
a
c
x
a
b
x c bx ax
2
4
2
4
2
4
4
2
4 4
0
2
2
2
2
2
2
2
2
2
2
2 2


1.19.3. Solution of Quadratic Equations by Formula
To solve a quadratic equation using the quadratic formula—the
more powerful of two common methods for solving quadratic
equations—apply the following four steps.

Step 1: Rewrite the quadratic equation so it matches the
standard form 0
2
= + + c bx ax .
35
Step 2: Identify the two coefficients and constant term c b a ,& , .
Step 3: Apply the formula and solve.
Step 4: Check your answer(s) in the original equation.

1.19.4. Solution Discriminator: ac b 4
2

⇒ > − 0 4
2
ac b two real solutions
⇒ = − 0 4
2
ac b one real solution of multiplicity two
⇒ < − 0 4
2
ac b two complex (conjugates) solutions

1.19.5. Solution when 0 & 0 ≠ = b a :

b
c
x c bx

= ⇒ = + 0

1.19.6. Solution of Quadratic Equations by Factoring
To solve a quadratic equation using the factoring method, apply
the following four steps.

Step 1: Rewrite the quadratic equation in standard form
Step 2: Factor the left-hand side into two linear factors using the
quadratic trinomial factoring process 1.9.14.
Step 3: Set each linear factor equal to zero and solve.
Step 4: Check answer(s) in the original equation

Note: Use the quadratic formula when a quadratic equation cannot
be factored or is hard to factor.

1.19.7. Quadratic-in-Form Equation: 0
2
= + + c bU aU where
U is an algebraic expression of varying complexity.

1.19.8. Definition of Quadratic Function:

a
ac b
a
b
x a c bx ax x f
4
4
2
) (
2
2
2


|
.
|

\
|
+ = + + =
1.19.9. Axis of Symmetry for Quadratic Function:
a
b
x
2

=
1.19.10. Vertex for Quadratic Function:
|
|
.
|

\
| − −
a
b ac
a
b
4
4
,
2
2

36
1.20. Cardano’s Cubic Solution

Let 0
2 3
= + + + d cx bx ax be a cubic equation written in
standard form with 0 ≠ a

Step 1: Set
a
b
y x
3
− = . After this substitution, the above cubic
becomes 0
3
= + + q py y where

− =
2
2
3a
b
a
c
p and

+ − =
a
d
a
bc
a
b
q
2 3
2
3 27
2


Step 2: Define v u & such that v u y − = and uv p 3 =

Step 3: Substitute for p y & in the equation 0
3
= + + q py y .
This leads to 0
27
) (
3
3 2 3
= − +
p
qu u , which is quadratic-
in-form in
3
u .

Step 4: Use the quadratic formula 1.19.3 to solve for
3
u


2
3
27
4
2
3
p q q
u
+ + −
=

Step 5: Solve for v u & where
u
p
v
3
= to obtain

3
3
27
4
2
3
3
27
4
2
2
&
2
p q q
v
p q q
u
+ − −
− =
+ + −
=

Step 6: Solve for x where
a
b
v u x
a
b
y x
3 3
− − = ⇒ − =
37
1.21. Theory of Polynomial Equations

Let
0 1
2
2
1
1
... ) ( a x a x a x a x a x P
n
n
n
n
+ + + + + =


be a
polynomial written in standard form.

The Eight Basic Theorems

1.21.1. Fundamental Theorem of Algebra: Every polynomial
) (x P of degree 1 ≥ N has at least one solution
0
x for
which 0 ) (
0
= x P . This solution may be real or complex (i.e. has
the form bi a + ).

1.21.2. Numbers Theorem for Roots and Turning Points: If ) (x P
is a polynomial of degree N , then the equation 0 ) ( = x P has up
to N real solutions or roots. The equation 0 ) ( = x P has exactly
N roots if one counts complex solutions of the form bi a + . Lastly,
the graph of ) (x P will have up to 1 − N turning points (which
includes both relative maxima and minima).

1.21.3. Real Root Theorem: If ) (x P is of odd degree having all
real coefficients, then ) (x P has at least one real root.

1.21.4. Rational Root Theorem: If ) (x P has all integer
coefficients, then any rational roots for the equation 0 ) ( = x P
must have the form
q
p
where p is a factor of the constant
coefficient
0
a and q is a factor of the lead coefficient
n
a . Note: This
result is used to form a rational-root possibility list.

1.21.5. Complex Conjugate Pair Root Theorem: Suppose ) (x P
has all real coefficients. If bi a + is a root for
) (x P with 0 ) ( = +bi a P , then 0 ) ( = −bi a P .

1.21.6. Irrational Surd Pair Root Theorem: Suppose ) (x P has all
rational coefficients. If b a + is a root for ) (x P with
0 ) ( = + b a P , then 0 ) ( = − b a P .
38
1.21.7. Remainder Theorem: If ) (x P is divided by ) ( c x − , then
the remainder R is equal to ) (c P . Note: this result is extensively
used to evaluate a given polynomial ) (x P at various values of x .

1.21.8. Factor Theorem: If c is any number with 0 ) ( = c P , then
) ( c x − is a factor of ) (x P . This means ) ( ) ( ) ( x Q c x x P ⋅ − =
where ) (x Q is a new, reduced polynomial having degree one less
than ) (x P . The converse 0 ) ( ) ( ) ( ) ( = ⇒ ⋅ − = c P x Q c x x P is
also true.

The Four Advanced Theorems

1.21.9. Root Location Theorem: Let ) , ( b a be an interval on the
x axis with 0 ) ( ) ( < ⋅ b P a P . Then there is a value ) , (
0
b a x ∈ such
that 0 ) (
0
= x P .

1.21.10. Root Bounding Theorem: Divide ) (x P by ) ( d x − to
obtain R x Q d x x P + ⋅ − = ) ( ) ( ) ( . Case 0 > d : If both R and all
the coefficients of ) (x Q are positive, then ) (x P has no
root d x >
0
. Case 0 < d : If the roots of ) (x Q alternate in sign—
with the remainder R ”in sync” at the end—then ) (x P has no
root d x <
0
. Note: Coefficients of zero can be counted either as
positive or negative—which ever way helps in the subsequent
determination.

1.21.11. Descartes’ Rule of Signs: Arrange ) (x P in standard
order as shown in the title bar. The number of positive real
solutions equals the number of coefficient sign variations or that
number decreased by an even number. Likewise, the number of
negative real solutions equals the number of coefficient sign
variations in ) ( x P − or that number decreased by an even number.

1.21.12. Turning Point Theorem: Let a polynomial ) (x P have
degree N . Then the number of turning points for a polynomial
) (x P can not exceed 1 − N .
39
1.22. Determinants and Cramer’s Rule

1.22.1. Two by Two Determinant Expansion:
bc ad
d c
b a
− =

1.22.2. Three by Three Determinant Expansion:

ceg cdh bdi bfg ahf aei
eg dh c fg di b fh ei a
h g
e d
c
i g
f d
b
i h
f e
a
i h g
f e d
c b a
− + − + −
= − + − − −
= + − =
) ( ) ( ) (

1.22.3. Cramer’s Rule for a Two-by-Two Linear System

Given
f dy cx
e by ax
= +
= +
with 0 ≠ =
d c
b a
D

Then
D
d f
b e
x = and
D
f c
e a
y =

1.22.4. Cramer’s Rule for a Three-by-Three Linear System

Given
l iz hy gx
k fz ey dx
j cz by ax
= + +
= + +
= + +
with 0 ≠ =
i h g
f e d
c b a
D

Then
D
l h g
k e d
j b a
z
D
i l g
f k d
c j a
y
D
i h l
f e k
c b j
x = = = , ,

40
1.22.5. Solution Types in
D
Dx
x
i
i
=
0 0 , 0 = ⇒ ≠ =
i i
x D Dx
⇒ = = 0 , 0 D Dx
i i
x has infinite solutions
⇒ ≠ ≠ 0 , 0 D Dx
i i
x has a unique solution
⇒ = ≠ 0 , 0 D Dx
i i
x has no solution


1.23. Binomial Theorem

Let n and r be positive integers with r n ≥ .

1.23.1. Definition of ! n : 1 )... 2 )( 1 ( ! − − = n n n n ,
1.23.2. Special Factorials: 1 ! 0 = and 1 ! 1 =
1.23.3. Combinatorial Symbol:
)! ( !
!
r n r
n
r
n

=
|
|
.
|

\
|

1.23.4. Summation Symbols:
n
n
i
i
a a a a a a a + + + + + + =

=
...
4 3 2 1 0
0

n k k k k
n
k i
i
a a a a a a + + + + =
+ + +
=

...
3 2 1

1.23.5. Binomial Theorem:

=

|
|
.
|

\
|
= +
n
i
i i n n
b a
i
n
b a
0
) (

1.23.6. Sum of Binomial Coefficients when 1 = = b a :


=

= + =
|
|
.
|

\
|
n
i
n n i i n
i
n
0
2 ) 1 1 ( 1 1

1.23.7. Formula for the th r ) 1 ( + Term:
r r n
b a
r
n

|
|
.
|

\
|

41
1.23.8. Pascal’s Triangle for 10 : =
|
|
.
|

\
|
n
r
n

1
1 1
1 2 1
1 3 3 1
1 4 6 4 1
1 5 10 10 5 1
1 6 15 20 15 6 1
1 7 21 35 35 21 7 1
1 8 28 56 70 56 28 8 1
1 9 36 84 126 126 84 36 9 1
1 10 45 120 210 252 210 120 45 10 1


1.24. Arithmetic Series
1.24.1. Definition:

=
+ =
n
i
ib a S
0
) ( where b is the common
increment
1.24.2. Summation Formula for S : ] 2 [
2
) 1 (
nb a
n
S +
+
=


1.25. Geometric Series
1.25.1. Definition:

=
=
n
i
i
ar G
0
where r is the common ratio
1.25.2. Summation Formula for G :

r
r a
G
ar a ar ar rG G
ar rG ar G
i
i
n
i
i
n
i
i
n
i
i
n
i
i


=
⇒ − = − = −
⇒ = ⇒ =
+
+
=
+
=
=
+
=
∑ ∑
∑ ∑
1
) 1 (
1
1
0
1
0
0
1
0

1.25.3. Infinite Sum Provided 1 0 < < r :
r
a
ar
i
i

=


=
1
0

42
1.26. Boolean Algebra

In the following tables, the propositions q p & are either True (T)
or False (F).

1.26.1. Elementary Truth Table:

⇔ =⇒ = ∨ = ∧ = , ~: : : implies negation or and
p q p ~ q ~ q p ∧ q p ∨ q p ⇒ q p ⇔
T T F F T T T T
T F F T F T F F
F T T F F T F F
F F T T T F T T

1.26.2. Truth Table for the Exclusive Or
e
∨:

p q
q p
e

T T F
T F T
F T T
F F F

1.26.3. Modus Ponens: Let T p q p = ⇒ & . Then, T q = .
1.26.4. Chain Rule: Let r q q p ⇒ ⇒ & . Then T r p = ⇒ ) ( .
1.26.5. Modus Tollens:
Let F q q p = ⇒ & . Then T p q = ⇒ ) ~ (~ .
1.26.6. Fallacy of Affirming the Consequent:
Let T q q p = ⇒ & .Then F p q = ⇒ ) ( .
1.26.7. Fallacy of Denying the Antecedent:
Let F p q p = ⇒ & . Then F q p = ⇒ ) ~ (~ .
1.26.8. Disjunctive Syllogism for the Exclusive Or:
Let F q T q p
e
= = ∨ & . Then T p =

43
1.26.9. Demonstration that the English double-negative in the
slang expression “I don’t got none” actually affirms the
opposite of what is intended.

Step Phrase Comment
1 I do not have any
The original proposition p as
intended
1 I do have none Assume T p =
2 I do not have none Negation of p : F p = ) (~
3 I don’t have none
Proper contracted form of 3:
F p = ) (~
4 I don’t got none Slang version of 3
5 I have some
Logical consequence of 3:
T p F p = ⇒ = ) (~ ~ ) (~


1.27. Variation or Proportionality Formulas

1.27.1. Direct: kx y =
1.27.2. Inverse:
x
k
y =
1.27.3. Joint: kxy z =
1.27.4. Inverse Joint:
y
kx
z =
1.27.5. Direct to Power:
n
kx y =
1.27.6. Inverse to Power:
n
x
k
y =
44
2. Geometry

2.1. The Parallel Postulates



2.1.1. Let a point reside outside a given line. Then there is
exactly one line passing through the point parallel to
the given line.
2.1.2. Let a point reside outside a given line. Then there is
exactly one line passing through the point
perpendicular to the given line.
2.1.3. Two lines both parallel to a third line are parallel to
each other.
2.1.4. If a transverse line intersects two parallel lines, then
corresponding angles in the figures so formed are
congruent.
2.1.5. If a transverse line intersects two lines and makes
congruent, corresponding angles in the figures so
formed, then the two original lines are parallel.


2.2. Angles and Lines

2.2.1. Complimentary Angles: Two angles β α, with
0
90 = + β α .

α β
0
180 = + β α
α
β
0
90 = + β α
45
2.2.2. Supplementary Angles: Two angles β α, with
0
180 = + β α
2.2.3. Linear Sum of Angles: The sum of the two angles
β α, formed when a straight line is intersected by a
line segment is equal to
0
180
2.2.4. Acute Angle: An angle less than
0
90
2.2.5. Right Angle: An angle exactly equal to
0
90
2.2.6. Obtuse Angle: An angle greater than
0
90


2.3. Triangles

2.3.1. Triangular Sum of Angles: The sum of the three
interior angles γ β α , , in any triangle is equal to
0
180
2.3.2. Acute Triangle: A triangle where all three interior
angles γ β α , , are acute
2.3.3. Right Triangle: A triangle where one interior angle
from the triad γ β α , , is equal to
0
90
2.3.4. Obtuse Triangle: A triangle where one interior angle
from the triad γ β α , , is greater than
0
90
2.3.5. Scalene Triangle: A triangle where no two of the
three side-lengths c b a , , are equal to another
2.3.6. Isosceles Triangle: A triangle where exactly two of
the side-lengths c b a , , are equal to each other
2.3.7. Equilateral Triangle: A triangle where all three side-
lengths c b a , , are identical c b a = = or all three
angles γ β α , , are equal with
0
60 = = = γ β α
α β
γ
a
b
c
0
180 = + + γ β α
46
2.3.8. Congruent Triangles: Two triangles are congruent
(equal) if they have identical interior angles and
side-lengths.
2.3.9. Similar Triangles: Two triangles are similar if they
have identical interior angles.
2.3.10. Included Angle: The angle that is between two
given sides
2.3.11. Opposite Angle: The angle opposite a given side
2.3.12. Included Side: The side that is between two given
angles
2.3.13. Opposite Side: The side opposite a given angle


2.4. Congruent Triangles
Given the congruent two triangles as shown below

2.4.1. Side-Angle-Side (SAS): If any two side-lengths and
the included angle are identical, then the two
triangles are congruent.
Example: f e c b & & & & φ α =
2.4.2. Angle-Side-Angle (ASA): If any two angles and the
included side are identical, then the two triangles are
congruent.
Example: ϕ φ β α & & & & f c =
2.4.3. Side-Side-Side (SSS): If the three side-lengths are
identical, then the triangles are congruent.
Example: d f e a c b & & & & =
2.4.4. Three Attributes Identical: If any three attributes—
side-lengths and angles—are equal with at least one
attribute being a side-length, then the two triangles
are congruent. These other cases are of the form
Angle-Angle-Side (AAS) or Side-Side-Angle (SSA).
Example (SSA): ϕ β & & & & d e a b =
Example (AAS): d a & & & & ϕ φ β α =
α β
γ
a
b
c
φ
ϕ
ω
d
e
f
47
2.5. Similar Triangles

Given the two similar triangles as shown below

2.5.1. Minimal Condition for Similarity: If any two angles
are identical (AA), then the triangles are similar.
Suppose ϕ β φ α = = &
Then
φ ϖ ϕ γ β α
ϖ ϕ φ γ β α
= − − = − − =
⇒ = + + = + +
0 0
0 0
180 180
180 & 180


2.5.2. Ratio laws for Similar Triangles: Given similar
triangles as shown above, then
d
a
f
c
e
b
= =

2.6. Planar Figures

A is the planar area, P is the perimeter, n is the number of sides.

2.6.1. Degree Sum of Interior Angles in General Polygon:
] 2 [ 180
0
− = n D

2.6.2. Square: s P s A 4 :
2
= = , s is the length of a side





α β
a
b
γ
c
φ
ϕ
ω
d
e
f
5 = n 6 = n
0
0
720 6
540 5
= ⇒ =
= ⇒ =
D n
D n
s
48
2.6.3. Rectangle: h b P bh A 2 2 : + = = , h b & are the
base and height





2.6.4. Triangle: bh A
2
1
= , h b & are the base and altitude





2.6.5. Parallelogram: bh A = , h b & are the base and
altitude


2.6.6. Trapezoid: h b B A ) (
2
1
+ = , b B & are the two
parallel bases and h is the altitude






2.6.7. Circle: r P r A π π 2 :
2
= = where r is the radius, or
d P π = where r d 2 = , the diameter.





2.6.8. Ellipse: ab A π = ; b a & are the half lengths of the
major & minor axes



b
h
b
h
h
b
B
b
h
r
a
b
49
2.7. Solid Figures

A is total surface area, V is the volume

2.7.1. Cube:
3 2
: 6 s V s A = = , s is the length of a side






2.7.2. Sphere:
3
3
4
2
: 4 r V r A π π = = , r is the radius







2.7.3. Cylinder: l r V rl r A
2 2
: 2 2 π π π = + = , l r & are
the radius and length








2.7.4. Cone: h r V rt r A
2
3
1
2
: 2 π π π = + = , h t r & & are
the radius, slant height, and altitude








s
r
l
t
h
r
r
50
2.7.5. Pyramid (square base): h s V st s A
2
3
1
2
: 2 = + = ,
h t s & & are the side, slant height, and altitude





2.8. Pythagorean Theorem

2.8.1. Statement: Let a right triangle ABC ∆ have one
side AC of length x , a second side AB of length y ,
and a hypotenuse (long side) BC of length z . Then
2 2 2
y x z + =


2.8.2. Traditional Algebraic Proof: Construct a big square
by bringing together four congruent right triangles.


x
z
y
x
y
z
÷
A
B
C
t
s
h
51
The area of the big square is given by


2
) ( y x A + = , or equivalently by
|
.
|

\
|
+ =
2
4
2
xy
z A .
Equating:
∴ + =
⇒ = +
⇒ + = + +
⇒ |
.
|

\
|
+ = +
2 2 2
2 2 2
2 2 2
2 2
2 2
2
4 ) (
y x z
z y x
xy z y xy x
xy
z y x
.

2.8.3. Visual (Pre-Algebraic) Pythagorean Proof:

The idea is to observe that the two five-sided irregular polygons on
either side of the dotted line have equivalent areas. Taking away
three congruent right triangles from each area leads to the desired
Pythagorean equality.

2.8.4. Pythagorean Triples: Positive integers
N M L , , such that
2 2 2
N M L + =

2.8.5. Generating Formulas for Pythagorean triples: Let
n m, with 0 > > n m be integers. Then
2 2
n m M − = , mn N 2 = , and
2 2
n m L + =
52
2.9. Heron’s Formula

Let ) (
2
1
c b a s + + = be the semi-perimeter of a general triangle
and A be the internal area enclosed by the same.


2.9.1. Heron’s Formula: ) )( )( ( c s b s a s s A − − − =

2.9.2. Derivation Using Pythagorean Theorem:
:
1
a Create two equations for the unknowns h and x
2 2 2
2
2 2 2
1
) ( :
:
a x c h E
b x h E
= − +
= +

:
2
a Subtract
2
E from
1
E and solve for x
c
a b c
x
a b c cx
a b x c x
2
2
) (
2 2 2
2 2 2
2 2 2 2
− +
=
⇒ − = −
⇒ − = − −

:
3
a Substitute the value for x into
1
E
2
2
2 2 2
2
2
b
c
a b c
h =

− +
+
:
4
a Solve for h

| |

− + −
=
2
2
2 2 2 2 2
4
4
c
a b c b c
h
a
b
c
h
x x c −
÷
53

| | { } | | { }
| | { }| | { }
{ }{ }{ }{ }
2
2
2 2 2 2
2
2 2 2 2 2 2
4
4
4
2 2
c
a b c a b c b c a c b a
h
c
a b c b c a
h
c
a b c cb a b c cb
h
+ + − + − + − +
=

− + − −
=

− + + − + −
=

:
5
a Solve for area using ch A
2
1
= .

{ }{ }{ }{ }
{ }{ }{ }{ }
16
4
2 2
1
a b c a b c b c a c b a
A
c
a b c a b c b c a c b a
c A
+ + − + − + − +
=

+ + − + − + − +
=

:
6
a Substitute
2
c b a
s
+ +
= and simplify.
∴ − − − =
⇒ − − − =

)
`
¹
¹
´
¦

)
`
¹
¹
´
¦

)
`
¹
¹
´
¦
− =
) )( )( (
) )( )( (
} {
2
2
2
2
2
2
c s b s a s s A
s a s b s c s A
s
a
s
b
s
c
s A


2.10. Golden Ratio

2.10.1. Definition: Let 1 = p be the semi-perimeter of a
rectangle whose base and height are in the
proportion shown, defining the Golden Ratioφ .
Solving for x leads to 6181 . 1 = φ .


x
x − 1
x
x − 1
1
φ =

=
x
x
x 1
1
54
2.10.2. Golden Triangles: Triangles whose sides are
proportioned to the Golden Ratio. Two examples are
shown below.

b a
b ab a
ab b a
ab b a
φ =
⇒ = − −
⇒ + =
⇒ + =
0
) (
2 2
2 2
2 2 2








2.11. Distance and Line Formulas
Let ) , (
1 1
y x and ) , (
2 2
y x be two points where
1 2
x x > .

2.11.1. 2-D Distance Formula:
2
1 2
2
1 2
) ( ) ( y y x x D − + − =
2.11.2. 3-D Distance Formula: For the points ) , , (
1 1 1
z y x
and ) , , (
2 2 2
z y x ,
2
1 2
2
1 2
2
1 2
) ( ) ( ) ( z z y y x x D − + − + − =
2.11.3. Midpoint Formula: |
.
|

\
| + +
2
,
2
2 1 2 1
y y x x

Line Formulas
2.11.4. Slope of Line:
1 2
1 2
x x
y y
m


=
2.11.5. Point/Slope Form: ) (
1 1
x x m y y − = −
2.11.6. General Form: 0 = + + C By Ax
2.11.7. Slope/Intercept Form: b mx y + = where
|
.
|

\
| −
0 ,
m
b
and ) , 0 ( b are the x and y Intercepts:
a
b
ab
A
B
C
C
B
A D
0
72
0
72
0
36
0
36
0
36
0
108
a
a
a
b
55
2.11.8. Intercept/Intercept Form: 1 = +
b
y
a
x

where ) 0 , (a and ) , 0 ( b are the x and y intercepts
2.11.9. Slope Relationship between two Parallel Lines
1
L
and
2
L having slopes
1
m and
2
m :
2 1
m m =
2.11.10. Slope Relationship between two
Perpendicular Lines
1
L and
2
L having slopes
1
m
and
2
m :
2
1
1
m
m

=
2.11.11. Slope of Line Perpendicular to a Line of
Slope m:
m
1 −


2.12. Formulas for Conic Sections
2.12.1. General: 0
2 2
= + + + + + F Ey Dx Cy Bxy Ax
2.12.2. Circle of Radius r Centered at ) , ( k h :

2 2 2
) ( ) ( r k y h x = − + −
2.12.3. Ellipse Centered at
) , ( k h : 1
) ( ) (
2
2
2
2
=

+

b
k y
a
h x

I) If b a > , the two foci are on the line k y = and are
given by ) , ( k c h − & ) , ( k c h + where
2 2 2
b a c − = .
II) If a b > , the two foci are on the line h x = and are
given by ) , ( c k h − & ) , ( c k h + where
2 2 2
a b c − = .

2.12.4. Hyperbola Centered at ) , ( k h :
1
) ( ) (
2
2
2
2
=



b
k y
a
h x
or 1
) ( ) (
2
2
2
2
=



a
h x
b
k y

I) When
2
2
) (
a
h x −
is to the left of the minus sign, the two
foci are on the line k y = and are given by ) , ( k c h − &
) , ( k c h + where
2 2 2
b a c + = .
56
II) When
2
2
) (
b
k y −
is to the left of the minus sign, the two
foci are on the line h x = and are given by ) , ( c k h − &
) , ( c k h + where
2 2 2
a b c + = .

2.12.5. Parabola with Vertex at ) , ( k h and Focal
Length p :
) ( 4 ) (
2
h x p k y − = − or ) ( 4 ) (
2
k y p h x − = −
I) For
2
) ( k y − , the focus is ) , ( k p h + and the directrix is
given by the line p h x − = .
II) For
2
) ( h x − , the focus is ) , ( p k h + and the directrix is
given by the line p k y − = .

2.12.6. Transformation Process for Removal of xy
Term in the General Conic Equation
0
2 2
= + + + + + F Ey Dx Cy Bxy Ax :
Step 1: Set
C A
B

= ) 2 tan( θ and solve for θ .

Step 2: let
θ θ
θ θ
cos sin
sin cos
y x y
y x x
′ + ′ =
′ − ′ =


Step 3: Substitute the values for y x, obtained in Step 2
into 0
2 2
= + + + + + F Ey Dx Cy Bxy Ax .

Step 4: Reduce. The final result should be of the form
0 ) ( ) ( ) ( ) (
2 2
= ′ + ′ ′ + ′ ′ + ′ ′ + ′ ′ F y E x D y C x A .


57
3. Trigonometry

3.1. Basic Definitions of Trigonometric
Functions & Trigonometric Inverse
Functions








Let the figure above be a right triangle with one side of length x , a
second side of length y , and a hypotenuse of length z . The
angle α is opposite the side of length. The six trigonometric
functions—where each is a function of α —are defined as follows:

Z : Arbitrary Z is 1 Inverse when Z is 1
3.1.1.
z
y
= ) sin(α y = ) sin(α α =

) ( sin
1
y
3.1.2.
z
x
= ) cos(α x = ) cos(α α =

) ( cos
1
x
3.1.3.
x
y
= ) tan(α
x
y
= ) tan(α α = |
.
|

\
|

x
y
1
tan
3.1.4.
y
x
= ) cot(α
y
x
= ) cot(α α =
|
|
.
|

\
|

y
x
1
cot
3.1.5.
x
z
= ) sec(α
x
1
) sec( = α α = |
.
|

\
|

x
1
sec
1

3.1.6.
y
z
= ) csc(α
y
1
) csc( = α α =
|
|
.
|

\
|

y
1
csc
1


Note:
1
sin

is also known as arcsin . Likewise, the other inverses
are also known as sec cot, arctan, arccos, arc arc and csc arc .
x
y
z
α
58
3.2. Fundamental Definition-Based Identities

3.2.1.
) sin(
1
) csc(
α
α =
3.2.2.
) cos(
1
) sec(
α
α =
3.2.3.
) cos(
) sin(
) tan(
α
α
α =
3.2.4.
) sin(
) cos(
) cot(
α
α
α =
3.2.5.
) cot(
1
) tan(
α
α =

3.3. Pythagorean Identities

3.3.1. 1 ) ( cos ) ( sin
2 2
= + α α
3.3.2. ) ( sec ) ( tan 1
2 2
α α = +
3.3.3. ) ( csc ) ( cot 1
2 2
α α = +

3.4. Negative Angle Identities

3.4.1. ) sin( ) sin( α α − = −
3.4.2. ) cos( ) cos( α α = −
3.4.3. ) tan( ) tan( α α − = −
3.4.4. ) cot( ) cot( α α − = −

3.5. Sum and Difference Identities

3.5.1. ) sin( ) cos( ) cos( ) sin( ) sin( β α β α β α + = +
3.5.2. ) sin( ) cos( ) cos( ) sin( ) sin( β α β α β α − = −
3.5.3. ) sin( ) sin( ) cos( ) cos( ) cos( β α β α β α − = +
3.5.4. ) sin( ) sin( ) cos( ) cos( ) cos( β α β α β α + = −
59
3.5.5.
) tan( ) tan( 1
) tan( ) tan(
) tan(
β α
β α
β α

+
= +
3.5.6.
) tan( ) tan( 1
) tan( ) tan(
) tan(
β α
β α
β α
+

= −

3.5.7. Derivation of Formulas for ) cos( β α + and
) sin( β α + :

In the figure below, each coordinate of the point
)} sin( ), {cos( β α β α + + is decomposed into two components
using both definitions for the sine and cosine in 3.1.1. and 3.1.2.

From the figure, we have

∴ − = +
⇒ − = +
) sin( ) sin( ) cos( ) cos( ) cos(
) cos(
2 1
β α β α β α
β α x x



∴ + = +
⇒ + = +
) cos( ) sin( ) cos( ) sin( ) sin(
) sin(
2 1
α β β α β α
β α y y
.
) 0 , 0 ( ) 0 , 1 ( α
β
)} sin( ), {cos( β α β α + +
)} sin( ), {cos( α α
) cos(β
) sin(β
) cos( ) sin(
1
β α = y
÷
) cos( ) cos(
1
β α = x
α
) cos( ) sin(
2
α β = y
) sin( ) sin(
2
α β = x
x
y
60
3.6. Double Angle Identities

3.6.1. ) cos( ) sin( 2 ) 2 sin( α α α =
3.6.2. ) ( sin ) ( cos ) 2 cos(
2 2
α α α − =
3.6.3. ) ( sin 2 1 1 ) ( cos 2 ) 2 cos(
2 2
α α α − = − =
3.6.4.
) ( tan 1
) tan( 2
) 2 tan(
2
α
α
α

=

3.7. Half Angle Identities

3.7.1.
2
) cos( 1
)
2
sin(
α α −
± =
3.7.2.
2
) cos( 1
)
2
cos(
α α +
± =
3.7.3.
) sin(
) cos( 1
) cos( 1
) sin(
) cos( 1
) cos( 1
)
2
tan(
α
α
α
α
α
α α −
=
+
=
+

± =


3.8. General Triangle Formulas

Applicable to all triangles: right and non-right









3.8.1. Sum of Interior Angles:
0
180 = + + θ β α (also
2.3.1.)
3.8.2. Law of Sines:
z x y
) sin( ) sin( ) sin( θ β α
= =
x
y
z
α
θ
β
61
3.8.3. Law of Cosines:

a) ) cos( 2
2 2 2
α xz z x y − + =
b) ) cos( 2
2 2 2
β yz z y x − + =
c) ) cos( 2
2 2 2
θ xy y x z − + =

3.8.4. Area Formulas for a General Triangle:

a) ) sin(
2
1
α xz A =
b) ) sin(
2
1
β yz A =
c) ) sin(
2
1
θ xy A =

3.8.5. Derivation of Law of Sines and Cosines:

Let ABC ∆ be a general triangle and drop a perpendicular from
the apex as shown.

For the Law of Sines we have


∴ = ⇒ =
= ⇒ =
= ⇒ =
) sin( ) sin(
) sin( ) sin( :
) sin( ) sin( :
) sin( ) sin( :
3
2
1
α β
β α
β β
α α
a b
a b
a h
a
h
b h
b
h
a
a
a


The last equality is easily extended to include the third angle γ .
a
b
c y x = +
÷
α
β
γ
h
x y
A B
C
62
For the Law of Cosines we have ) sin(α b h = .

:
1
a Solve for y and x in terms of the angle α

) cos(
) cos( ) cos(
α
α α
b c y c x
b y
b
y
− = − =
⇒ = ⇒ =

:
2
a Use the Pythagorean Theorem to complete the
derivation.

∴ − + =
⇒ = + −
⇒ = + + −
⇒ = + −
⇒ = +
) cos( 2
) cos( 2
) ( sin ) ( cos ) cos( 2
)] sin( [ )] cos( [
2 2 2
2 2 2
2 2 2 2 2 2
2 2 2
2 2 2
α
α
α α α
α α
bc b c a
a b bc c
a b b bc c
a b b c
a h x


Similar expressions can be written for the remaining two sides.

3.9. Arc and Sector Formulas








3.9.1. Arc Length s : θ r s =
3.9.2. Area of a Sector: θ
2
2
1
r A =

3.10. Degree/Radian Relationship

3.10.1. Basic Conversion: π =
0
180 radians
θ
r s
63
3.10.2. Conversion Formulas:

From To Multiply by
Radians Degrees
π
0
180

Degrees Radians
180
π



3.11. Addition of Sine and Cosine

) sin( cos sin α θ θ θ + = + k b a where

+
=
+ =

2 2
1
2 2
sin
b a
b
b a k
α

or

+
=

2 2
1
cos
b a
a
α

3.12. Polar Form of Complex Numbers

3.12.1. ) sin (cos θ θ i r bi a + = + where


2 2
b a r + = ,

=

a
b
Tan
1
θ
3.12.2. Definition of
θ i
re : ) sin (cos θ θ
θ
i r re
i
+ =
3.12.3. Euler’s Famous Equality: 1 − =
π i
e
3.12.4. De-Moivre’s Theorem:
θ θ in n n i
e r re = ) ( or
| | ]) sin[ ] (cos[ ) sin (cos θ θ θ θ n i n r i r
n n
+ = +
64
3.12.5. Polar Form Multiplication:
) (
2 1 2 1
β α β α +
⋅ = ⋅
i i i
e r r e r e r
3.12.6. Polar Form Division:
) (
2
1
2
1 β α
β
α

=
i
i
i
e
r
r
e r
e r


3.13. Rectangular to Polar Coordinates

) , ( ) , ( θ r y x ⇔

( ) x y y x r
r y r x
/ tan ,
sin , cos
1 2 2 −
= + =
= =
θ
θ θ


3.14. Trigonometric Values from Right
Triangles

In the right triangle below, let
1
) sin( ) ( sin
1
x
x x = = ⇒ =

α α .

Then
3.14.1.
2
1 ) cos( x − = α
3.14.2.
2
1
) tan(
x
x

= α
3.14.3.
x
x
2
1
) cot(

= α
3.14.4.
2
1
1
) sec(
x −
= α
3.14.5.
x
1
) csc( = α
α
x
1
2
1 x −
65
4. Elementary Vector Algebra

4.1. Basic Definitions and Properties

Let ) , , (
3 2 1
v v v V =
r
, ) , , (
3 2 1
u u u U =
r
be two vectors.



4.1.1. Sum and/or Difference: V U
r r
±
) , , (
3 3 2 2 1 1
v u v u v u V U ± ± ± = ±
r r

4.1.2. Scalar Multiplication: ) , , ( ) (
3 2 1
u u u U α α α α =
r

4.1.3. Negative Vector: U U
r r
) 1 (− = −
4.1.4. Zero Vector: ) 0 , 0 , 0 ( 0 =
r

4.1.5. Vector Length:
2
3
2
2
2
1
| | u u u U + + =
r

4.1.6. Unit Vector Parallel toV
r
: V
V
r
r
| |
1

4.1.7. Two Parallel Vectors: U V
r r
|| means there is a
scalar c such that U c V
r r
) ( =

4.2. Dot Products

4.2.1. Definition of Dot
Product:
3 3 2 2 1 1
v u v u v u V U + + = •
r r

4.2.2. Angleθ Between Two Vectors:
| || |
cos
V U
V U
r r
r r

= θ
4.2.3. Orthogonal Vectors: 0 = •V U
r r

U
r
V
r
θ
66
4.2.4. Projection of U
r
ontoV
r
:


| |
| |
cos | |
| | | | | |
) (
2
V
V
U
V
V
V
V U
V
V
V U
U proj
V
r
r
r
r
r
r
r r
r
r
r r
r
r
θ
=


=


=


4.3. Cross Products
4.3.1. Definition of Cross Product:
3 2 1
3 2 1
v v v
u u u
k j i
V U = ×
r r


4.3.2. Orientation of V U
r r
× ; Orthogonal to BothU
r
andV
r
:
0 ) ( ) ( = × • = × • V U V V U U
r r r r r r


4.3.3. Area of Parallelogram: θ sin | || | | | V U V U A
r r r r
= × =



4.3.4. Interpretation of the Triple Scalar Product:


3 2 1
3 2 1
3 2 1
) (
w w w
v v v
u u u
W V U = × •
r r r


The triple scalar product is numerically equal to the volume of the
parallelepiped at the top of the next page
U
r
V
r
θ
V U
r r
×
67



4.4. Line and Plane Equations

Given a point ) , , ( c b a P =
r


4.4.1. Line Parallel to P
r
Passing Through ) , , (
1 1 1
z y x :
If ) , , ( z y x is a point on the line, then

c
z z
b
y y
a
x x
1 1 1

=

=


4.4.2. Plane Normal to P
r
Passing Through ) , , (
1 1 1
z y x .
If ) , , ( z y x is a point on the plane, then
0 ) , , ( ) , , (
1 1 1
= − − − • z z y y x x c b a
4.4.3. Distance D between a point & plane:
If a point is given by ) , , (
0 0 0
z y x and
0 = + + + d cz by ax is a plane, then

2 2 2
0 0 0
c b a
d cz by ax
D
+ +
+ + +
=

4.5. Miscellaneous Vector Equations
4.5.1. The Three Direction Cosines:

| |
cos ,
| |
cos ,
| |
cos
3 2 1
V
v
V
v
V
v
r r r = = = γ β α
4.5.2. Definition of Work: constant force F
r
along the
path Q P
r
:
| || ) ( | Q P F proj Q P F W
Q P
r r r r
r
= • =
U
r
V
r
W
r
68
5. Elementary Calculus

5.1. What is a Limit?

Limits are foundational to calculus and will always be so.
Limits lead to results unobtainable by algebra alone.

So what is a limit? A limit is a numerical target, a target
acquired and locked. Consider the expression 7 → x where x is
an independent variable. The arrow ( →) points to a target on the
right, in this case the number 7 . The variable x on the left is
targeting 7 in a modern smart-weapon sense. This means x is
moving, moving towards target, closing range, and programmed to
merge eventually with the target. Notice that the quantity x is a
true independent variable in that x has been launched and set in
motion towards a target, a target that cannot escape from its
sights. Independent variables usually find themselves embedded
inside an algebraic (or transcendental) expression of some sort,
which is being used as a processing rule for a function. Consider
the expression 3 2 + x where the independent variable x is about
to be sent on the mission 5 − → x . Does the entire expression
3 2 + x in turn target a numerical value as 5 − → x ? A way to
phrase this question using a new type of mathematical notation
might be ? ) 3 2 ( arg
5
= +
− →
x et t
x
Interpreting the notation, we are
asking if the dynamic output stream from the expression 3 2 + x
targets a numerical value in the modern smart-weapon sense as
the equally-dynamic x targets the value 5 − . Mathematical
judgment says yes; the output stream targets the value 7 − .
Hence, we complete our new notation as 7 ) 3 2 ( arg
5
− = +
− →
x et t
x
.
This explanation is reasonable except for one little problem: the
word target is nowhere to be found in calculus texts. The
traditional replacement (weighing in with 300 years of history) is
the word limit, which leads to the following working definition:

Working Definition: A limit is a target in the modern smart-weapon
sense. In the above example, we will write 7 ) 3 2 ( lim
5
− = +
− →
x
x
.
69
5.2. What is a Differential?

The differential concept is one of the two core concepts
underlying calculus, limits being the other.

Wee is a Scottish word that means very small, tiny,
diminutive, or minuscule. In the context of calculus, ‘wee’ can be
used in similar fashion to help explain the concept of differential,
also called an infinitesimal. To have a differential, we first must
have a variable, z y x , , etc. Once we have a variable, say x , we
can create a secondary quantity dx , which is called the differential
of the variable x . What exactly is this dx , read ‘dee x’? The
quantity dx is a very small, tiny, diminutive, or minuscule
numerical amount when compared to the original x . Moreover, it is
the very small size of dx that makes it, by definition, a wee x . How
small? In mathematical terms, the following two conditions hold:

1 0 << < xdx and 1 0 << <
x
dx
.

The two above conditions state dx is small enough to guarantee
that both its product and quotient with the original quantity x is still
very small and much, much closer to zero than to one (the
meaning of the symbol 1 << ) . Both inequalities imply that dx is
also very small when considered independently 1 0 << < dx .
Lastly, both inequalities state that 0 > dx , which brings us to the
following very important point: although very small, the quantity
dx is never zero. One can also think of dx as the final h in a limit
process
0
lim
→ h
where the process abruptly stops just short of target,
in effect saving the rapidly vanishing h from disappearing into
oblivion! Thinking of dx in this fashion makes the differential a
prepackaged or frozen limit of sorts. Differentials are designed to
be so small that second-order and higher terms involving
differentials, such as
2
) ( 7 dx , can be totally ignored in associated
algebraic expressions. This final property distinguishes the
differential as a topic belonging to the subject of calculus.
70
5.3. Basic Differentiation Rules

5.3.1. Limit Definition of Derivative:

− +
=

h
x f h x f
x f
h
) ( ) (
lim ) ( '
0

5.3.2. Differentiation Process Indicator: ] [ ′
5.3.3. Constant: | | 0 =

k
5.3.4. Power: | |
1 −
=

n n
nx x , n can be any exponent
5.3.5. Coefficient: | | ) ( ' ) ( x af x af =


5.3.6. Sum/Difference: | | ) ( ) ( ) ( ) ( x g x f x g x f ′ ± ′ =

±
5.3.7. Product: | | ) ( ' ) ( ) ( ' ) ( ) ( ) ( x f x g x g x f x g x f + =


5.3.8. Quotient:
2
) (
) ( ' ) ( ) ( ' ) (
) (
) (
x g
x g x f x f x g
x g
x f −
=

5.3.9. Chain: | | ) ( ' )) ( ( ' )) ( ( x g x g f x g f =


5.3.10. Inverse: | |
)) ( ( '
1
) (
1
1
x f f
x f


=


5.3.11. Generalized
Power: { } | | { } ) ( ' ) ( ) (
1
x f x f n x f
n n −
=

;
Again, n can be any exponent

5.4. Transcendental Differentiation

5.4.1.
x
x
1
] [ln = ′
5.4.2.
a x
x
a
ln
1
] [log = ′
5.4.3.
x x
e e = ′ ] [
5.4.4. a a a
x x
ln ] [ = ′
5.4.5. x x cos ] [sin = ′
71
5.4.6.
2
1
1
1
] ) ( [sin
x
x

= ′


5.4.7. x x sin ] [cos − = ′
5.4.8.
2
1
1
1
] ) ( [cos
x
x


= ′


5.4.9. x x
2
sec ] [tan = ′
5.4.10.
2
1
1
1
] ) ( [tan
x
x
+
= ′


5.4.11. x x x tan sec ] [sec = ′
5.4.12.
1 | |
1
] ) ( [sec
2
1

= ′

x x
x

5.5. Basic Antidifferentiation Rules
5.5.1. Antidifferentiation Process Indicator:


5.5.2. Constant:

+ = C kx kdx
5.5.3. Coefficient:
∫ ∫
= dx x f a dx x af ) ( ) (
5.5.4. Power Rule for 1 − ≠ n :

+
+
=
+
C
n
x
dx x
n
n
1
1

5.5.5. Power Rule for 1 − = n :
∫ ∫
+ = =

C x dx
x
dx x ln
1
1

5.5.6. Sum:
| |
∫ ∫ ∫
+ = + dx x g dx x f dx x g x f ) ( ) ( ) ( ) (
5.5.7. Difference:
| |
∫ ∫ ∫
− = − dx x g dx x f dx x g x f ) ( ) ( ) ( ) (
5.5.8. Parts:
∫ ∫
′ − = ′ dx x f x g x g x f dx x g x f ) ( ) ( ) ( ) ( ) ( ) (
5.5.9. Chain:

+ = ′ ′ C x g f dx x g x g f )) ( ( ) ( )) ( (

72
5.5.10. Generalized Power Rule for 1 − ≠ n :
| |
| |
C
n
x f
dx x f x f
n
n
+
+
= ′

+
1
) (
) ( ) (
1


5.5.11. Generalized Power Rule for 1 − = n :


− = + =

1 , ) ( ln
) (
) (
n C x f dx
x f
x f


5.5.12. General Exponential:

+ = ′ C e dx x f e
x f x f ) ( ) (
) (

5.6. Transcendental Antidifferentiation

5.6.1.

+ − = C x x x xdx ln ln
5.6.2. C e dx e
x x
+ =


5.6.3. C e x dx xe
x x
+ − =

) 1 (
5.6.4. C
a
a
dx a
x
x
+ =

ln

5.6.5. C x dx x + =

sin cos
5.6.6. C x dx x + − =

cos sin
5.6.7.

+ − = C x xdx | cos | ln tan
5.6.8.

+ = C x xdx | sin | ln cot
5.6.9.

+ + = C x x xdx | tan sec | ln sec
5.6.10.

+ = C x xdx x sec tan sec
5.6.11.

+ = C x xdx tan sec
2

5.6.12.

+ + − = C x x xdx | cot csc | ln csc
5.6.13.

+ − = C x xdx cot csc
2

73
5.6.14. C
x a
dx
a
x
+ =



) ( sin
1
2 2

5.6.15. C
x a
dx
a
x
a
+ =
+


) ( tan
1
1
2 2

5.6.16. C
x a
dx
a x
a x
a
+ =

+


| | ln
2
1
2 2


5.7. Lines and Approximation

5.7.1. Tangent Line at )) ( , ( a f a :
) )( ( ) ( a x a f a f y − ′ = −
5.7.2. Normal Line at )) ( , ( a f a : ) (
) (
1
) ( a x
a f
a f y −


= −
5.7.3. Linear Approximation: ) )( ( ) ( ) ( a x a f a f x f − ′ + ≅
5.7.4. Second Order Approximation:

2
) (
2
) (
) )( ( ) ( ) ( a x
a f
a x a f a f x f −
′ ′
+ − ′ + ≅
5.7.5. Newton’s Iterative Formula:
) (
) (
1
n
n
n n
x f
x f
x x

− =
+

5.7.6. Differential Equalities:
dx x f x F dx x F
dx x f x f dx x f
dx x f dy x f y
) ( ) ( ) (
) ( ) ( ) (
) ( ) (
+ = +
′ + = +
′ = ⇒ =

5.8. Interpretation of Definite Integral

At least three interpretations are valid for the definite integral.

First Interpretation: As a processing symbol for functions, the
definite integral

b
a
dx x f ) ( instructs the operator to start the
process by finding ) (x F (the primary antiderivative for dx x f ) ( )
and finish it by evaluating the quantity ) ( ) ( | ) ( a F b F x F
b
a
− = .
This interpretation is pure process-to-product with no context.
74
Second Interpretation: As a summation symbol for differential
quantities,

b
a
dx x f ) ( signals to the operator that myriads of
infinitesimal quantities of the form dx x f ) ( are being continuously
summed on the interval ] , [ b a with the summation process
starting at a x = and ending at b x = . Depending on the context
for a given problem, such as summing area under a curve, the
differential quantities dx x f ) ( and subsequent total can take on a
variety of meanings. This makes continuous summing a powerful
tool for solving real-world problems. The fact that continuous sums
can also be evaluated by ) ( ) ( | ) ( ) ( a F b F x F dx x f
b
a
b
a
− = =

is a
key consequence of the Fundamental Theorem of Calculus (5.9.).

Third Interpretation: The definite integral

b
a
dx x f ) ( can be
interpreted as a point solution ) (b y to any explicit differential
equation having the general form 0 ) ( : ) ( = = a y dx x f dy . In this
interpretation

b
a
dx x f ) ( is first modified by integrating over the
variable subinterval ] , [ ] , [ b a z a ⊂ . This leads to
) ( ) ( ) ( ) ( a F z F dx x f z y
z
a
− = =

. Substituting a x = gives the
stated boundary condition 0 ) ( ) ( ) ( = − = a F a F a y and
substituting b x = gives

= − =
b
a
dx x f a F b F b y ) ( ) ( ) ( ) ( . In this
context, the function ) ( ) ( ) ( a F z F z y − = , as a unique solution to
0 ) ( : ) ( = = a y dx x f dy , can also be interpreted as a continuous
running sum from a x = to z x = .
75
5.9. The Fundamental Theorem of Calculus

Let

b
a
dx x f ) ( be a definite integral representing a continuous
summation process, and let ) (x F be such that ) ( ) ( x f x F = ′ .
Then,

b
a
dx x f ) ( can be evaluated by the alternative process
) ( ) ( | ) ( ) ( a F b F x F dx x f
b
a
b
a
− = =

.
Note: A continuous summation (or addition) process on the
interval | | b a, sums millions upon millions of consecutive, tiny quantities
from a x = to b x = where each individual quantity has the general
form dx x f ) ( .

5.10. Geometric Integral Formulas

5.10.1. Area Between two Curves for ) ( ) ( x g x f ≥ on
] , [ b a :


− =
b
a
dx x g x f A )] ( ) ( [
5.10.2. Area Under 0 ) ( ≥ x f on ] , [ b a :

=
b
a
dx x f A ) (
5.10.3. Volume of Revolution about x Axis Using Disks:


=
b
a
dx x f V
2
)] ( [ π
5.10.4. Volume of Revolution about y Axis using Shells:


=
b
a
dx x f x V | ) ( | 2π
5.10.5. Arc Length:

′ + =
b
a
dx x f s
2
)] ( [ 1
76
5.10.6. Revolved Surface Area about x Axis:
dx x f x f SA
b
a
x

+ =
2
)] ( ' [ 1 | ) ( | 2π
5.10.7. Revolved Surface Area about y Axis:
dx x f x SA
b
a
x

+ =
2
)] ( ' [ 1 | | 2π
5.10.8. Total Work with Variable Force ) (x F on ] , [ b a :


=
b
a
dx x F W ) (
5.11. Select Ordinary Differential Equations (ODE)
5.11.1. First Order Linear: ) ( ) ( x g y x f
dx
dy
= +
5.11.2. Bernoulli Equation:
n
y x g y x f
dx
dy
) ( ) ( + =
5.11.3. ODE Separable if it reduces
to: dx x f dy y g ) ( ) ( =
5.11.4. Falling Body with Drag:
n
kv mg
dt
dv
m + − = −
5.11.5. Constant Rate Growth or Decay:
0
) 0 ( : y y ky
dt
dy
= =
5.11.6. Logistic Growth:
0
) 0 ( : ) ( y y y y L k
dt
dy
= − =
5.11.7. Continuous Principle Growth:
0 0
) 0 ( : P P c rP
dt
dP
= + =
5.11.8. Newton’s Law in One Dimension:

= F mV
dt
d
) (
5.11.9. Newton’s Law in Three
Dimensions:

= F V m
dt
d
r r
) (
77
5.11.10. Process for Solving a Linear ODE

Step1: Let ) (x F be such that ) ( ) ( x f x F = ′
Step 2: Formulate the integrating factor
) ( x F
e
Step 3: Multiply both sides of ) ( ) ( x g y x f
dx
dy
= + by
) ( x F
e

( ) ) (
) ( ) (
) ( ) (
) ( ) ( ) (
x g e ye
dx
d
x g e y x f e
dx
dy
e
x F x F
x F x F x F
⋅ =
⇒ = +

Step 4: Perform the indefinite integration.

| | ∴ + ⋅ ⋅ = =
⇒ + ⋅ = ⋅
− −


) ( ) ( ) (
) ( ) (
) ( ) (
) (
x F x F x F
x F x F
Ce dx x g e e x y y
C dx x g e y e


5.12. Laplace Transform; General Properties

5.12.1. Definition: ) ( ) ( )] ( [
0
s F dt e t f t f L
st



≡ =
5.12.2. Linear Operator Property:
) ( ) ( )] ( ) ( [ s bG s aF t bg t af L + = +
5.12.3. Transform of the Derivative:

) 0 ( ... ) 0 (
) 0 ( ) ( )] ( [
) 1 ( ) 2 (
) 1 ( ) (
− −

− − ′
− − =
n n
n n n
f f s
f s s F s t f L

5.12.4. Derivative of the Transform: ) ( ) ( ) (
) (
t f t s F
n n
− =
5.12.5. Transform of the Definite Integral:
s s F d f L
t
/ ) ( ] ) ( [
0
=

τ τ
78
5.12.6. Transform of the Convolution:
) ( ) ( ) ( ) (
0
s G s F d t g f
t
⇔ −

τ τ τ
5.12.7. First Shifting Theorem: ) ( ) ( a s F t f e
at
− ⇔
5.12.8. Transform of Unit Step Function ) ( a t U − where
0 ) ( = − a t U on ] , 0 [ a and 1 ) ( = − a t U
on ] , ( ∞ a .
s
e
a t U
as −
⇔ − ) (
5.12.9. Second Shifting Theorem:
) ( ) ( ) ( s F e a t U a t f
as −
⇔ − −

5.13. Laplace Transform: Specific Transforms

Entries are a one-to-one correspondence between ) (t f and ) (s F .

5.13.1. s / 1 1 ⇔
5.13.2.
2
/ 1 s t ⇔
5.13.3.
) 1 (
/ !
+

n n
s n t
5.13.4. ) /( 1 a s e
at
− ⇔
5.13.5.
2
) /( 1 a s te
at
− ⇔
5.13.6.
1
) /( !
+
− ⇔
n at n
a s n e t
5.13.7.
2 2
) sin(
k s
k
kt
+

5.13.8.
) 4 (
2
) ( sin
2 2
2
2
k s s
k
kt
+

5.13.9.
2 2 2
) (
2
) sin(
k s
ks
kt t
+

5.13.10.
2 2
) cos(
k s
s
kt
+

5.13.11.
) 4 (
2
) ( cos
2 2
2 2
2
k s s
k s
kt
+
+

79
5.13.12.
2 2 2
2 2
) (
) cos(
k s
k s
kt t
+


5.13.13.
2 2
) sinh(
k s
k
kt


5.13.14.
) 4 (
2
) ( sinh
2 2
2
2
k s s
k
kt


5.13.15.
2 2 2
) (
2
) sinh(
k s
ks
kt t


5.13.16.
2 2
) cosh(
k s
s
kt


5.13.17.
) 4 (
2
) ( cosh
2 2
2 2
2
k s s
k s
kt



5.13.18.
2 2 2
2 2
) (
) cosh(
k s
k s
kt t

+

5.13.19.
2 2
) (
) sin(
k a s
k
kt e
at
+ −

5.13.20.
2 2
) (
) sinh(
k a s
k
kt e
at
− −

5.13.21.
) )( (
1
b s a s b a
e e
bt at
− −




5.13.22.
2 2
) (
) cos(
k a s
a s
kt e
at
+ −


5.13.23.
2 2
) (
) cosh(
k a s
a s
kt e
at
− −


5.13.24.
) )( ( b s a s
s
b a
be ae
bt at
− −




80
6. Money and Finance

6.1. What is Interest?

Interest affects just about every adult in America. If you
are independent, own a car or a home or both, or have a credit
card or two, you probably pay or have paid interest. So, what
exactly is interest? Interest is a rent charge for the use of money.

As a rent charge for the use of housing accumulates over
time, likewise, an interest charge for the use of money also
accumulates over time. Interest is normally stated in terms of a
percentage interest rate such as
year
%
8 . Just as velocity is a rate of
distance accumulation (e.g.
hour
miles
60 ), percentage interest rate is a
‘velocity’ of percent accumulation. When driving in America, the
customary units of velocity are miles per hour. Likewise, the
customary units for interest rate are percent per year. The reader
should be aware that other than customary units may be used in
certain situations. For example, in space travel
sec
7
miles
is used to
describe escape velocity from planet earth; and, when computing
a credit-card charge, a monthly interest rate of
month
%
5 . 1 may be
used. Both velocity and percentage interest rate need to be
multiplied by time—specified in matching units—in order to obtain
the total amount accumulated, either miles or percent, as in the
two expressions miles hours D
hour
miles
175 2 75
3
1
= ⋅ = or
percent months
month
percent
7 3 2 %
2
1
= ⋅ = .

Once the total accumulated interest is computed, it is then
multiplied by the amount borrowed, called the principal P , in
order to obtain the total accumulated interest charge I The total
accumulated interest charge I , the principal P , the percentage-
interest rate r (simply called the interest rate), and the time t
during which a fixed principal is borrowed are related by the
fundamental formula t I Pr = . This basic formula applies as long
as the principal P and the interest rate r remain constant
throughout the duration of the accumulation time t .
81
For the remaining subsections in 6.0, the following apply.

α : Annual growth rate as in the growth rate of voluntary
contributions to a fund
A: Total amount gained or owed
D: Periodic deposit rate—weekly, monthly, or annually
i
D : Deposit made at the start of the
th
i compounding period
FV : Future value
i : Annual inflation rate
L : Initial Lump Sum
M : Monthly payment
n : Number of compounding periods per year
P : Amount initially borrowed or deposited
PV : Present value
r : Annual interest rate
eff
r : Effective annual interest rate
SM : Total sum of payments
t : Time period in years for an investment
T : Time period in years for a loan

6.2. Simple Interest

6.2.1. Accrued Interest: T I Pr =
6.2.2. Total repayment over T :
) 1 ( Pr rT P T P A + = + =
6.2.3. Monthly payment over T :
T
rT P
M
12
) 1 ( +
=
6.3. Compound and Continuous Interest
6.3.1. Compounded Growth:
nt
n
r
P A ) 1 ( + =
6.3.2. Continuous Growth:
rt
Pe A =
6.3.3. Annually Compounded Inflation Rate i :
t
i P A ) 1 ( − =
6.3.4. Continuous Annual Inflation Rate i :
it
Pe A

=

Note: inflation rate can be mathematically treated as a negative
interest rate, thus the use of the negative sign in 6.3.3 and 6.3.4.
82
6.4. Effective Interest Rates

6.4.1. Simple Interest: 1 1 − + =
T
eff
rT r
6.4.2. Compound Interest: 1 ) 1 ( − + =
n
n
r
eff
r
6.4.3. Continuous Interest: 1 − =
r
eff
e r
6.4.4. Given T A P , , : 1 − =
T
eff
P
A
r

6.5. Present-to-Future Value Formulas

6.5.1. Compound Interest:

nt
n
r
nt
n
r
FV
PV PV FV
) 1 (
) 1 (
+
= ⇔ + =
6.5.2. Annual Compounding with
eff
r :

t
eff
t
eff
r
FV
PV r PV FV
) 1 (
) 1 (
+
= ⇔ + =
6.5.3. Constant Annual Inflation Rate with Yearly
Compounding: Replace
eff
r with i − in 6.5.2.
6.5.4. Continuous Compounding:
rt
rt
e
FV
PV PVe FV = ⇔ =
6.5.5. Simple Interest:
) 1 (
) 1 (
rt
FV
PV rt PV FV
+
= ⇔ + =
6.6. Present Value of a Future Deposit Stream

Conditions: n compounding periods per year; total term t years
with nt compounding periods; annual interest rate r ; nt identical
deposits D made at beginning of each compounding period.

6.6.1. Periodic Deposit with no Final Deposit
1 + nt
D :
( ) ( ) { }
n
r
nt
n
r
r
Dn
PV + − + =
+
1 1
1

83
6.6.2. Periodic Deposit with Final Deposit
1 + nt
D :
( ) { } 1 1
1
− + =
+ nt
n
r
r
Dn
PV
6.6.3. Annual Deposit with no Final Deposit
1 + t
D :
( ) ( ) { }
eff
t
eff
eff
r r
r
D
PV + − + =
+
1 1
1

6.6.4. Annual Deposit with Final Deposit
1 + t
D :
( ) { } 1 1
1
− + =
+ t
eff
eff
r
r
D
PV

6.7. Present Value of a Future Deposit Stream
Coupled with Initial Lump Sum

Assume the initial lump sum D L >
6.7.1. Periodic Deposit with no Final Deposit
1 + nt
D :
( ) ( ) ( ) { }
n
r
nt
n
r
nt
n
r
r
Dn
D L PV + − + + + − =
+
1 1 1 ) (
1

6.7.2. Periodic Deposit with Final Deposit
1 + nt
D :
( ) ( ) { } 1 1 1 ) (
1
− + + + − =
+ nt
n
r
nt
n
r
r
Dn
D L PV
6.7.3. Annual Deposit with no Final Deposit
1 + t
D :
( ) ( ) ( ) { }
eff
t
eff
eff
t
eff
r r
r
D
r D L PV + − + + + − =
+
1 1 1 ) (
1

6.7.4. Annual Deposit with Final Deposit
1 + t
D :
( ) ( ) { } 1 1 1 ) (
1
− + + + − =
+ t
eff
eff
t
eff
r
r
D
r D L PV

6.8. Present Value of a Continuous Future
Deposit Stream
6.8.1. Annual Deposit Only: ) 1 ( − =
rt
e
r
D
PV
84
6.8.2. Annual Deposit plus Lump
Sum: ) 1 ( − + =
rt rt
e
r
D
Le PV
6.8.3. Increasing Annual Deposit
t
De
α
:
) (
t rt
e e
r
D
PV
α
α


=

6.8.4. 6.8.3 plus Lump Sum:
) (
t rt rt
e e
r
D
Le PV
α
α


+ =

6.9. Types of Retirement Savings Accounts
STANDARD
IRA
ROTH IRA 401 (K)
KEOGH
PLAN
Sponsored by
Individual
Sponsored by
Individual
Sponsored
by Company
Plan for self
employed
Taxes on
contributions
and interest
are deferred
until
withdrawn
Taxes on
contributions
paid now. No
taxes on any
proceeds
withdrawn
Taxes on
contributions
and interest
are deferred
until
withdrawn
Taxes on
contributions
and interest
are deferred
until
withdrawn
$3000/year
$6000/year
for jointly
filing couples
$3000/year
$6000/year
for jointly
filing couples
Increases
every year.
Currently
$15,000.00
Up to 25% of
income
Withdrawals
can begin at
age 59.5,
must begin at
70.5
Withdrawals
can begin at
age 59.5
Withdrawals
can begin at
age 59.5,
must begin at
70.5
Withdrawals
can begin at
age 59.5,
must begin at
70.5
Substantial
penalty for
early
withdrawal
Lesser
penalty for
early
withdrawal
Substantial
penalty for
early
withdrawal
Substantial
penalty for
early
withdrawal
Limited heir
rights
Substantial
heir rights
Limited heir
rights
Limited heir
rights
85

6.10. Loan Amortization

Assume monthly payments M
6.10.1. First Month’s Interest:
12
1
rP
I
st
=
6.10.2. Amount of Payment:
( ) | |
T
r
rP
M
12
12
1 1 12

+ −
=

6.10.3. Total Loan Repayment: TM SM 12 =
6.10.4. Total Interest Paid: P TM I
total
− =12
6.10.5. Payoff
j
PO after the
th
j Payment:
( ) ( ) { } 1 1
12
1
12 12
− + − + =
j
r
j
r
j
r
M
P PO

6.10.6. Amount
Pj
M of
th
j Payment to Principle:
( )
1
12
1
12
12

+


=
j
r
Pj
rP M
M

6.10.7. Amount
Ij
M of
th
j Payment to
Interest:
Pj Ij
M M M − =
6.10.8. Pros and Cons of Long-Term Mortgages:

PROS CONS
Increased total mortgage costs
are partially defrayed by tax
breaks and inflation via payoff
by cheaper dollars
Total mortgage costs are much
more over time
Allows the borrower to buy
more house sooner: with
inflation, sooner means
cheaper
Home equity buildup by
mortgage reduction is much
slower for long-term mortgages
Historically, inflation of home
purchase prices contributes
more to home equity buildup
than home equity buildup by
mortgage reduction
Mortgage is more vulnerable to
personal misfortune such as
sickness or job loss
86
6.11. Annuity Formulas

Note: Use the loan amortization formulas since annuities are
nothing more than loans where the roles of the institution and the
individual are reversed.

6.12. Markup and Markdown

C : Cost
OP : Old price
NP : New price
% P ; Given percent as a decimal equivalent
6.12.1. Markup Based on Original Cost:
C P NP %) 1 ( + =
6.12.2. Markup Based on Cost plus New Price:
NP NP P C = ⋅ + %
6.12.3. Markup Based on Old Price: OP P NP %) 1 ( + =
6.12.4. Markdown Based on Old Price:
OP P NP %) 1 ( − =
6.12.5. Percent given Old and New Price:
OP NP P / % =
6.13. Calculus of Finance
6.13.1. General Differential Equation of Elementary
Finance:
0
) 0 ( : ) ( ) ( P P t D P t r
dt
dP
= + =
6.13.2. Differential Equation for Continuous Principle
Growth or Continuous Loan Reduction Assuming a
Constant Interest Rate and Fixed Annual
Deposits/Payments

) 1 ( ) (
) 0 ( :
0
0
0 0 0
0
− ± =
⇒ = ± =
rt t r
e
r
D
e P t P
P P D P r
dt
dP

6.13.3. Present Value of Total Mortgage Repayment:

( )
) 1 (
) (
1
) (
0
0
0


= ⇒


=


∫ rT
T i r rT
i
r
PV
it
T
rT
rT
PV
e
e e P
A dt e
e
e rP
A
87
7. Probability and Statistics

7.1. Probability Formulas
Let U be a universal set consisting of all possible events.
Let Φbe the empty set consisting of no event.
Let U B A ⊂ ,

7.1.1. Basic Formula:
ways of number total
ways of number favorable
P
− − −
− − −
=

7.1.2. Fundamental Properties:
0 ) (
1 ) (
= Φ
=
P
U P


7.1.3. Order Relationship: 1 ) ( 0 ≤ ≤ ⇒ ⊂ A P U A

7.1.4. Complement Law: ) (~ 1 ) ( A P A P − =

7.1.5. Addition Law:
) ( ) ( ) ( ) ( B A P B P A P B A P ∩ − + = ∪

7.1.6. Conditional Probability Law:

) (
) (
) | (
) (
) (
) | (
A P
B A P
A B P
B P
B A P
B A P

=

=


7.1.7. Multiplication Law:
) | ( ) ( ) (
) | ( ) ( ) (
A B P A P B A P
B A P B P B A P
⋅ = ∩
⋅ = ∩


7.1.8. Definition of Independent Events (IE):
Φ = ∩B A

7.1.9. IE Multiplication Law:
) ( ) ( ) ( B P A P B A P ⋅ = ∩
88
7.2. Basic Statistical Definitions

7.2.1. Set: an aggregate of individual items—animate or
inanimate
7.2.2. Element: a particular item in the set
7.2.3. Observation: any attribute of interest associated
with the element
7.2.4. Statistic: any measurement of interest associated
with the element. Any statistic is an observation, but
not all observations are statistics
7.2.5. Data set: a set whose elements are statistics
7.2.6. Statistics: the science of drawing conclusions from
the totality of observations—both statistics and other
attributes—generated from a set of interest
7.2.7. Population: the totality of elements that one wishes
to study by making observations
7.2.8. Sample: that population subset that one has the
resources to study
7.2.9. Sample Statistic: any statistic associated with a
sample
7.2.10. Population Statistic: any statistic associated with
a population
7.2.11. Random sample: a sample where all population
elements have equal probability of access
7.2.12. Inference: the science of using sample statistics
to predict population statistics

7.2.13. Brief Discussion Using the Above Definitions

Let a set consist of N elements } ,..., , , {
3 2 1 N
E E E E where there
has been observed one statistic of a similar nature for each
element. The data set of all observed statistics is denoted
by } ,..., , , {
3 2 1 N
x x x x . The corresponding rank-ordered data set is
a re-listing of the individual statistics } ,..., , , {
3 2 1 N
x x x x in
numerical order from smallest to largest. Data sets can come from
either populations or from samples. Most data sets will be
considered samples. As such, the sample statistics obtained
from the sample will be utilized to make inferential predictions for
corresponding population statistics characterizing a much larger
population. Inference processes are valid if and only if one can
be assured that the sample obtained is a random sample.
89
The diagram below supports sections 7.2 through 7.4 by
illustrating some of the key concepts.



7.3. Measures of Central Tendency

7.3.1. Sample Mean or Average x :

=
=
N
i
i N
x x
1
1


7.3.2. Population Mean or Average u :

=
=
N
i
i N
x
1
1
u
Smaller sample } ,... , {
2 1 N
E E E
Having known statistics
} ,... , {
2 1 N
x x x and s x,
Much larger population
having unknown
statistics σ u,
i
E
Did
i
E have equal-
probability access?
Example of Statistical Inference
Use x to predict u .
Questions:
9 Is my sample a random sample?
9 How close is my prediction?
9 How certain is my prediction?
90
7.3.3. Median x
~
: the middle value in a rank-ordered data
set
7.3.4. Mode M : the data value or statistic that occurs most
often.
7.3.5. Multi-Modal Data Set: a data set with two or more
modes
7.3.6. Median Calculation Process:
Step 1: Rank order from smallest to largest all elements in the
data set.
Step 2: The median x
~
is the actual middle statistic if there is an
odd number of data points.
Step 3: The median x
~
is the average of the two middle statistics if
there is an even number of data points.

7.4. Measures of Dispersion
7.4.1. Range R :
S L
x x R − = where
L
x is the largest data
value in the data set and
S
x is the smallest data
value

7.4.2. Sample Standard Deviation s :
2
1
1
1
) ( x x s
N
i
i N
− =

=

.
7.4.3. Population Standard Deviationσ :
2
1
1
) ( u σ − =

=
N
i
i N
x .
7.4.4. Sample Variance:
2
s

7.4.5. Population Variance:
2
σ
7.4.6. Sample Coefficient of Variation
VS
C :
x
s
C
VS
=
7.4.7. Population Coefficient of Variation
VP
C :
u
σ
=
VP
C
7.4.8. Z-Score
i
z for a Sample Value
i
x :
s
x x
z
i
i

=
91
7.5. Sampling Distribution of the Mean

The mean x is formed from a sample of individual data points
randomly selected from either an infinite or finite population. The
number of data points selected is given by n . The sample is
considered a Large Sample if 30 ≥ n ; a Small Sample if 30 < n .

7.5.1. Expected Value of x : u = ) (x E

7.5.2. Standard Deviation of x :

Infinite Population Finite Population of Count N

n
x
σ
σ =
n
N
n N
x
σ
σ
1 −

=

7.5.3. Large Sample Z-score for
i
x :
n
x
z
i
i
/ σ
u −
=
When σ is unknown, substitute s .

7.5.4. Interval Estimate of Population Mean:

Large-Sample Case Small-Sample Case

⋅ ±
n
z x
σ
α
2

⋅ ±
n
s
t x
2
α


Note: No assumption about the underlying population needs to be
made in the large-sample case. In the small-sample case, the
underlying population is assumed to be normal or nearly so. When
σ is unknown in the large-sample case, substitute s .

7.5.5. Sampling Error
R
E :

⋅ =
n
z E
R
σ
α
2

7.5.6. Sample Size Needed for a Given Error:
2
2


=
R
E
z
n
σ
α
.
92
7.6. Sampling Distribution of the Proportion

The proportion p is a quantity formed from a sample of individual
data points randomly selected from either an infinite or finite
population. The proportion can be thought of as a mean
formulated from a sample where all the individual values are either
zero ( 0 ) or one (1). The number of data points selected is given
by n . The sample is considered a Large Sample if both 5 ≥ np
and 5 ) 1 ( ≥ − p n .

7.6.1. Expected Value
X
E of p : u = ) ( p E
X

7.6.2. Standard Deviation of p :

Infinite Population Finite Population of Count N

n
p p
p
) 1 ( −
= σ
n
p p
N
n N
p
) 1 (
1



= σ

7.6.3. Interval Estimate of Population Proportion:


n
p p
z p
) 1 (
2

⋅ ±
α


Note: Use 5 . = p in
n
p p ) 1 ( −
if clueless on the initial size of p .

7.6.4. Sampling Error:
n
p p
z E
R
) 1 (
2

⋅ =
α

7.6.5. Sample Size Needed for Given Error:
2
2
) 1 (
2
ER
p p z
n
− ⋅
=
α


7.6.6. Worse case for 7.6.5., proportion unknown:
2
2
4
2
ER
z
n
α
=
93



Section II

Tables

94
1. Numerical

1.1. Factors of Integers 1 through 192

The standard order-of-operations applies; ^ is used to denote the
raising to a power; and * is used for multiplication.

INTEGER FOLLOWED BY FACTORIZATION
1 1 29 Prime 57 3*19
2 Prime 30 2*3*5 58 2*29
3 Prime 31 Prime 59 Prime
4 2^2 32 2^5 60 2^2*3*5
5 Prime 33 3*11 61 Prime
6 2*3 34 2*17 62 2*31
7 Prime 35 5*7 63 3*3*7
8 2^3 36 2^2*3^2 64 2^6
9 3*3 37 Prime 65 5*13
10 2*5 38 2*19 66 2*3*11
11 Prime 39 3*13 67 Prime
12 2^2*3 40 2^3*5 68 2^2*17
13 Prime 41 Prime 69 3*23
14 2*7 42 2*3*7 70 2*5*7
15 3*5 43 Prime 71 Prime
16 2^4 44 2^2*11 72 2^3*3^2
17 Prime 45 3^3*5 73 Prime
18 2*3*3 46 2*23 74 2*37
19 Prime 47 Prime 75 3*5^2
20 2^2*5 48 2^4*3 76 2^2*19
21 3*7 49 7*7 77 7*11
22 2*11 50 2*5^2 78 2*3*13
23 Prime 51 3*17 79 Prime
24 2^3*3 52 2^2*13 80 2^4*5
25 5^5 53 Prime 81 3^4
26 2*13 54 2*3^3 82 2*41
27 3^3 55 5*11 83 Prime
28 2^2*7 56 2^3*7 84 2^2*3*7
95
Integer Followed By Factorization
85 5*17 121 11^2 157 3*7^2
86 2*43 122 2*61 158 2*79
87 3*29 123 3*41 159 3*53
88 2^3*11 124 2^2*31 160 2^5*5
89 Prime 125 5^3 161 7*23
90 2*3^2*5 126 2*3^2*7 162 2*3^4
91 7*13 127 Prime 163 Prime
92 2^2*23 128 2^7 164 2^2*41
93 3*31 129 3*43 165 3*5*11
94 2*47 130 2*5*13 166 2*83
95 5*19 131 Prime 167 Prime
96 2^5*3 132 2*61 168 2^3*3*7
97 Prime 133 7*19 169 Prime
98 2*7^2 134 2*67 170 2*5*17
99 3^2*11 135 3^3*5 171 3^2*19
100 2^2*5^2 136 2^3*17 172 2^2*43
101 Prime 137 Prime 173 Prime
102 2*3*17 138 2*3*23 174 2*87
103 Prime 139 Prime 175 5^2*7
104 2^3*13 140 2^2*5*7 176 2^4*11
105 3*5*7 141 3*47 177 3*59
106 2*53 142 2*71 178 2*89
107 Prime 143 11*13 179 Prime
108 2^2*3^3 144 2^4*3^2 180 2^2*3^2*5
109 Prime 145 5*29 181 Prime
110 2*5*11 146 2*73 182 2*91
111 3*37 147 3*7^2 183 3*61
112 2^4*7 148 2^2*37 184 2^3*23
113 Prime 149 Prime 185 5*37
114 2*3*19 150 2*3*5^2 186 2*93
115 5*23 151 Prime 187 11*17
116 2^2*29 152 2^3*19 188 2^2*47
117 3*3*13 153 Prime 189 3^3*7
118 2*59 154 2*7*11 190 2*5*19
119 7*17 155 5*31 191 Prime
120 2^3*3*5 156 2^2*3*13 192 2^7*3
96
1.2. Prime Numbers less than 1000

2 3 5 7 11 13 17 19 23 29
31 37 41 43 47 53 59 61 67 71
73 79 83 89 97 101 103 107 109
113 127 131 137 139 149 151 157 163 167
173 179 181 191 193 197 199 211 223
227 229 233 239 241 251 257 263 269 271
277 281 283 293 307 311 313 317 331
337 347 349 353 359 367 373 379 383 389
397 401 409 419 421 431 433 439 443
449 457 461 463 467 479 487 491 499
503 509 521 523 541 547 557 563 569 571
577 587 593 599 601 607 613 617 619
631 641 643 647 653 659 661 673 677 683
691 701 709 719 727 733 739 743 751
757 761 769 773 787 797 809 811 821
823 827 829 839 853 857 859 863 877 881
883 887 907 911 919 929 937 941 947
953 967 971 977 983 991 997



1.3. Roman Numeral and Arabic Equivalents

ARABIC ROMAN ARABIC ROMAN ARABIC ROMAN
1 I 10 X 101 CI
2 II 11 XI 200 CC
3 III 15 XV 500 D
4 IV 20 XX 600 DI
5 V 30 XXX 1000 M
6 VI 40 XL 5000 V bar
7 VII 50 L 10000 L bar
8 VIII 60 LX 100000 C bar
9 IX 100 C 1000000 M bar

97
1.4. Nine Elementary Memory Numbers

NUM MEM NUM MEM NUM MEM
2
1.4142
7
2.6457 φ 0.6180
3
1.7321 π 3.1416 ) 10 ln( 2.3026
5
2.2361 e 2.7182 ) (e Log 0.4343

1.5. American Names for Large Numbers

NUM NAME NUM NAME NUM NAME
10^3 thousand 10^18 quintillion 10^33 decillion
10^6 million 10^21 sextillion 10^36 undecillion
10^9 billion 10^24 septillion 10^39 duodecillion
10^12 trillion 10^27 octillion 10^48 quidecillion
10^15 quadrillion 10^30 nontillion 10^63 vigintillion


1.6. Selected Magic Squares

1.6.1. 3X3 Magic Square with Magic Sum 15. The second
square below is called a 3x3 Anti-Magic Square:

2 7 6
9 5 1
4 3 8

2 4 7
5 1 8
9 3 6
98
1.6.2. 4X4 Perfect Magic Square with Magic Sum 34:

1 15 6 12
8 10 3 13
11 5 16 2
14 4 9 7


1.6.3. 5X5 Perfect Magic Square with Magic Sum 65:


1 15 8 24 17
23 7 16 5 14
20 4 13 22 6
12 21 10 19 3
9 18 2 11 25



Note: For a Magic Square of size NXN, the Magic Sum is given by
the formula
2
) 1 (
2
+ N N


99
1.6.4. Nested 5X5 Magic Square with Outer Magic Sum 65:

1 18 21 22 3
2 10 17 12 24
18 15 13 11 8
21 14 9 16 5
23 7 6 4 25


1.6.5. 6X6 Magic Square with Magic Sum 111:


1 32 3 34 35 6
12 29 9 10 26 25
13 14 22 21 23 18
24 20 16 15 17 19
30 11 28 27 8 7
31 5 33 4 2 36


100
1.6.6. 7X7 Magic Square: Magic Sum is 175.

22 21 13 5 46 38 30
31 23 15 14 6 47 39
40 32 24 16 8 7 48
49 31 33 25 17 9 1
2 43 42 34 26 18 10
11 3 44 36 35 27 19
20 12 4 45 37 29 28


1.6.7. Quadruple-Nested 9X9 Magic Square with Outer Magic
Sum 369:

16 81 79 78 77 13 12 11 2
76 28 65 62 61 26 27 18 6
75 23 36 53 51 35 30 59 7
74 24 50 40 45 38 32 58 8
9 25 33 39 41 43 49 57 73
10 60 34 44 37 42 48 22 72
14 63 52 29 31 47 46 19 68
15 64 17 20 21 56 55 54 67
80 1 3 4 5 69 70 71 66

101
1.7. Thirteen-by-Thirteen Multiplication Table

Different font sizes are used for, one, two, or three-digit entries.


×
1 2 3 4 5 6 7 8 9
10 11 12 13
1 1 2 3 4 5 6 7 8 9
10 11 12 13
2 2 4 6 8
10 12 14 16 18 20 22 24 26
3 3 6 9
12 15 18 21 24 27 30 33 36 39
4 4 8
12 16 20 24 28 32 36 40 44 48 42
5 5
10 15 20 25 30 35 40 45 50 55 60 65
6 6
12 18 24 30 36 42 48 54 60 66 72 78
7 7
14 21 28 35 42 49 56 63 70 77 84 91
8 8
16 24 32 40 48 56 64 72 80 88 96
104
9 9
18 27 36 45 54 63 72 81 90 99
108 117
10 10 20 30 40 50 60 70 80 90
100 110 120 130
11 11 22 33 44 55 66 77 88 99
110 121 132 143
12 12 24 36 48 60 72 84 96
108 120 132 144 156
13 13 26 39 42 65 78 91
104 117 130 143 156 169


Note: The shaded blocks on the main diagonal are the first thirteen
squares
102
1.8. The Random Digits of PI

The digits of PI pass every randomness test. Hence, the first 900
digits of PI serve equally well as a random number table.

PI=3.-- READ LEFT TO RIGHT, TOP TO
BOTTOM
14159 26535 89793 23846 26433 83279
50288 41971 69399 37510 58209 74944
59230 78164 06286 20899 86280 34825
34211 70679 82148 08651 32823 06647
09384 46095 50582 23172 53594 08128
48111 74502 84102 70193 85211 05559
64462 29489 54930 38196 44288 10975
66593 34461 28475 64823 37867 83165
27120 19091 45648 56692 34603 48610
45432 66482 13393 60726 02491 41273
72458 70066 06315 58817 48815 20920
96282 92540 91715 36436 78925 90360
01133 05305 48820 46652 13841 46951
94151 16094 33057 27036 57595 91953
09218 61173 81932 61179 31051 18548
07446 23799 62749 56735 18857 52724
89122 79381 83011 94912 98336 73362
44065 66430 86021 39494 63952 24737
19070 21798 60943 70277 05392 17176
29317 67523 84674 81846 76694 05132
00056 81271 45263 56052 77857 71342
75778 96091 73637 17872 14684 40901
22495 34301 46549 58537 10507 92279
68925 89235 42019 95611 21290 21960
86403 44181 59813 62977 47713 09960
51870 72113 49999 99837 29784 49951
05973 17328 16096 31859 50244 59455
34690 83026 42522 30825 33446 85035
26193 11881 71010 00313 78387 52886
58753 32083 81420 61717 76691 47303

103
1.9. Standard Normal Distribution

THE STANDARD NORMAL DISTRIBUTION: TABLE
VALUES ARE THE RIGHT TAIL AREA FOR A GIVEN Z
Z
0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 .5000 .4960 .4920 .4880 .4840 .4800 .4761 .4761 .4681 .4641
0.1 .4602 .4562 .4522 .4483 .4443 .4404 .4364 .4325 .4286 .4247
0.2 .4207 .4168 .4129 .4090 .4051 .4013 .3974 .3936 .3897 .3858
0.3 .3821 .3783 .3744 .3707 .3669 .3631 .3594 .3556 .3520 .3483
0.4 .3446 .3409 .3372 .3336 .3300 .3263 .3228 .3192 .3156 .3121
0.5 .3085 .3050 .3015 .2980 .2946 .2911 .2877 .2843 .2809 .2776
0.6 .2742 .2709 .2676 .2643 .2611 .2578 .2546 .2514 .2482 .2451
0.7 .2420 .2389 .2358 .2327 .2297 .2266 .2236 .2206 .2176 .2148
0.8 .2119 .2090 .2061 .2033 .2005 .1977 .1949 .1922 .1894 .1867
0.9 .1841 .1814 .1788 .1761 .1736 .1711 .1685 .1660 .1635 .1611
1.0 .1587 .1562 .1539 .1515 .1492 .1469 .1446 .1423 .1401 .1379
1.1 .1357 .1335 .1314 .1292 .1271 .1250 .1230 .1210 .1190 .1170
1.2 .1151 .1131 .1112 .1093 .1074 .1056 .1038 .1020 .1003 .0985
1.3 .0968 .0951 .0934 .0918 .0901 .0885 .0869 .0853 .0837 .0822
1.4 .0807 .0793 .0778 .0764 .0749 .0735 .0721 .0708 .0694 .0681
1.5 .0668 .0655 .0642 .0630 .0618 .0606 .0594 .0582 .0570 .0559
1.6 .0548 .0536 .0526 .0515 .0505 .0495 .0485 .0475 .0465 .0455
1.7 .0445 .0436 .0427 .0418 .0409 .0401 .0392 .0384 .0375 .0367
1.8 .0359 .0351 .0344 .0336 .0329 .0322 .0314 .0307 .0301 .0294
1.9 .0287 .0280 .0274 .0268 .0262 .0255 .0250 .0244 .0238 .0232
2.0 .0228 .0222 .0217 .0212 .0206 .0202 .0197 .0192 .0187 .0183
2.1 .0178 .0174 .0170 .0165 .0162 .0158 .0154 .0150 .0146 .0143
2.2 .0139 .0136 .0132 .0128 .0125 .0122 .0119 .0116 .0113 .0110
2.3 .0107 .0104 .0101 .0099 .0096 .0094 .0091 .0089 .0087 .0084
2.4 .0082 .0080 .0078 .0075 .0073 .0071 .0069 .0068 .0066 .0064
2.5 .0062 .0060 .0058 .0057 .0055 .0054 .0052 .0050 .0049 .0048
2.6 .0047 .0045 .0044 .0043 .0041 .0040 .0039 .0038 .0037 .0036
2.7 .0035 .0034 .0033 .0032 .0031 .0030 .0029 .0028 .0027 .0026
2.8 .0026 .0025 .0024 .0023 .0023 .0022 .0021 .0020 .0020 .0019
2.9 .0019 .0018 .0018 .0017 .0016 .0016 .0015 .0015 .0014 .0014
3.0 .0013 .0013 .0013 .0012 .0012 .0011 .0011 .0011 .0010 .0010
3.1 .0010 .0010 .0009 .0009 .0009 .0009 .0009 .0008 .0008 .0008
3.2 .0007 .0007 .0006 .0007 .0007 .0006 .0006 .0005 .0005 .0005
3.3 .0005 .0005 .0005 .0004 .0004 .0004 .0004 .0004 .0004 .0004
3.4 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0002
3.5 .0002 .0002 .0002 .0002 .0002 .0002 .0002 .0002 .0002 .0002
3.6 .0002 .0002 .0002 .0001 .0001 .0001 .0001 .0001 .0001 .0001
3.7 .0001 .0001 .0001 Right Tail Area starts to fall below 0.0001

104
1.10. Two-Sided Student’s t Statistic

TABLE VALUES ARE T SCORES NEEDED TO
GUARANTEE THE PERCENT CONFIDENCE
Degrees of
freedom: DF
90% 95% 99%
1 6.314 12.706 63.657
2 2.920 4.303 9.925
3 2.353 3.182 5.841
4 2.132 2.776 4.604
5 2.015 2.571 4.032
6 1.943 2.447 3.707
7 1.895 2.365 3.499
8 1.860 2.306 3.355
9 1.833 2.262 3.250
10 1.812 2.228 3.169
11 1.796 2.201 3.106
12 1.782 2.179 3.055
13 1.771 2.160 3.012
14 1.761 2.145 2.977
15 1.753 2.131 2.947
16 1.746 2.120 2.921
17 1.740 2.110 2.898
18 1.734 2.101 2.878
19 1.729 2.093 2.861
20 1.725 2.083 2.845
21 1.721 2.080 2.831
22 1.717 2.074 2.819
23 1.714 2.069 2.907
24 1.711 2.064 2.797
25 1.708 2.060 2.787
26 1.706 2.056 2.779
27 1.703 2.052 2.771
28 1.701 2.048 2.763
29 1.699 2.045 2.756
30 1.697 2.042 2.750
40 1.684 2.021 2.704
60 1.671 2.000 2.660
120 1.658 1.980 2.617
∞ 1.645 1.960 2.576

105
1.11. Date and Day of Year

DATE DAY DATE DAY DATE DAY
Jan 1 1 May 1 121 Sep 1 244
Jan 5 5 May 5 125 Sep 5 248
Jan 8 8 May 8 128 Sep 8 251
Jan 12 12 May 12 132 Sep 12 255
Jan 15 15 May 15 135 Sep 15 258
Jan 19 19 May 19 139 Sep 19 262
Jan 22 22 May 22 142 Sep 22 265
Jan 26 26 May 26 146 Sep 26 269
Feb 1 32 Jun 1 152 Oct 1 274
Feb 5 36 Jun 5 156 Oct 6 278
Feb 8 39 Jun 8 159 Oct 8 281
Feb 12 43 Jun 12 163 Oct 12 285
Feb 15 46 Jun 15 166 Oct 15 288
Feb 19 50 Jun 19 170 Oct 19 292
Feb 22 53 Jun 22 173 Oct 22 295
Feb 26 57 Jun 26 177 Oct 26 299
Mar 1 60** Jul 1 182 Nov 1 305
Mar 5 64 Jul 5 186 Nov 5 309
Mar 8 67 Jul 8 189 Nov 8 312
Mar 12 71 Jul 12 193 Nov 12 316
Mar 15 74 Jul 15 196 Nov 15 319
Mar 19 78 Jul 19 200 Nov 19 323
Mar 22 81 Jul 22 203 Nov 22 326
Mar 26 85 Jul 26 207 Nov 26 330
Apr 1 91 Aug 1 213 Dec1 335
Apr 5 96 Aug 5 218 Dec 5 339
Apr 8 98 Aug 8 220 Dec 8 342
Apr 12 102 Aug 12 224 Dec 12 346
Apr 15 105 Aug 15 227 Dec 15 349
Apr 19 109 Aug 19 331 Dec 19 353
Apr 22 112 Aug 22 234 Dec 22 356
Apr 26 116 Aug 26 238 Dec 26 360
** Add one day starting here if a leap year

106
2. Physical Sciences

2.1. Conversion Factors in Allied Health

2.1.1. Volume Conversion Table

Apothecary Household Metric

1minim 1drop 1gtt
16minims 1mL (cc)
60minims 1fluidram 60gtts 1tsp 5mL (cc) or 4mL
4fluidrams 0.5fluidounce 3tsp 1tbsp 15mL (cc)
8fluidrams 1fluidounce 2tbsp 30mL (cc)
8fluidounces 1cup 240mL (cc)
16fluidounces 2cups 1pint 500mL (cc) or 480mL
32fluidounces 2pints 1quart 1000mL (cc) or 960mL

2.1.2. Weight Conversion Table

Apothecary Metric

1grain 60mg or 64mg
15grains 1g
60grains 1dram 4g
8drams 1ounce 32g
12ounces 1pound 384g

2.1.3. General Comments

9 All three systems—apothecary, household and metric
systems—have rough volume equivalents.
9 Since the household system is a volume-only system, the
Weight Conversion Table in 2.1.2 does not include household
equivalents.
9 Common discrepancies that are still considered correct are
shown in italics in both tables 2.1.1 and 2.1.2.

107
2.2. Medical Abbreviations in Allied Health


ABBREVIATION MEANING
b.i.d. Twice a day
b.i.w. Twice a week
c With
cap, caps Capsule
dil. Dilute
DS Double strength
gtt Drop
h, hr Hour
h.s. Hour of sleep, at bedtime
I.M. Intramuscular
I.V. Intravenous
n.p.o., NPO Nothing by mouth
NS, N/S Normal saline
o.d. Once a day, every day
p.o By or through mouth
p.r.n. As needed, as necessary
q. Every, each
q.a.m. Every morning
q.d. Every day
q.h. Every hour
q2h Every two hours
q4h Every four hours
q.i.d. Four times a day
ss One half
s.c., S.C., s.q. Subcutaneous
stat, STAT Immediately, at once
susp Suspension
tab Tablet
t.i.d. Three times a day
P% strength P grams per 100 mL
A:B strength A grams per B mL
108
2.3. Wind Chill Table

Grey area is the danger zone where exposed human flesh will
begin to freeze within one minute.

WIND SPEED (mph)
5 10 15 20 25 30 35 40
35 31 27 25 24 23 22 21 20
30 25 21 19 17 16 15 14 13
25 19 15 13 11 9 8 7 6
20 13 9 6 4 3 1 0 -1
15 7 3 0 -2 -4 -5 -7 -8
10 1 -4 -7 -9 -11 -12 -14 -15
5 -5 -10 -13 -15 -17 -19 -21 -22
0 -11 -16 -19 -22 -24 -26 -27 -29
-5 -16 -22 -26 -29 -31 -33 -34 -36
-10 -22 -28 -32 -35 -37 -39 -41 -43
-15 -28 -35 -39 -42 -44 -46 -48 -50
-20 -34 -41 -45 -48 -51 -53 -55 -57




T
E
M
P

0
F

-25 -40 -47 -51 -55 -58 -60 -62 -64


2.4. Heat Index Table

The number in the body of the table is the equivalent heating
temperature at 0% humidity

RELATIVE HUMIDITY (%)
30 40 50 60 70 80 85 90
105 114 123 135 148 163 180 190 199
104 112 121 131 144 158 175 184 193
103 110 118 128 140 154 169 178 186
102 108 116 125 136 149 164 172 180
101 106 113 122 133 145 159 166 174
100 104 111 119 129 141 154 161 168
97 99 105 112 120 129 140 145 152
95 96 101 107 114 122 131 136 141

T
E
M
P

0
F
90 89 92 96 100 106 112 115 119

109
2.5. Temperature Conversion Formulas
2.5.1. Fahrenheit to Celsius:
8 . 1
32 −
=
F
C
2.5.2. Celsius to Fahrenheit: 32 8 . 1 + = C F


2.6. Unit Conversion Table

Arranged in alphabetical order

TO CONVERT TO
MULTIPLY
BY
acres ft
2
43560
acres m
2
4046.9
acres rods 160
acres hectares 0.4047
acre feet barrels 7758
acre feet m
3
1233.5
Angstrom (å) cm 10E-8
Angstrom nm 0.1
astronomical unit (AU) cm 1.496E13
astronomical unit km 1.496E8
atmospheres (atm) feet H2O 33.94
atmospheres in of Hg 29.92
atmospheres mm of Hg 760
atmospheres psi 14.7
bar atm .98692
bar dyne/cm
2
10E6
bar psi (lb/in
2
) 14.5038
bar mm Hg 750.06
bar MPa 10E-1
barrels (bbl) ft
3
5.6146
barrels m
3
0.15898
barrels gal (US) 42
barrels liter 158.9
110




TO CONVERT TO MULTIPLY BY
BTU Canadian BTU 1.000418022
BTU cal 251.996
BTU erg 1.055055853 E-10
BTU joule 1054.35
calorie (cal) joule 4.184
centimeter (cm) inch 0.39370
cm m 1E-2
darcy m
2
9.8697E-13
dyne g cm /s
2
1
dyne Newton 10E-5
erg cal 2.39006E-8
erg dyne cm 1
erg joule 10E-7
fathom ft 6
feet (ft) in 12
feet m 0.3048
furlong yd 220
gallon (US gal) in
3
231
gallon liter 3.78541
(Imperial) gal in
3
277.419
gallon liter 4.54608
gamma Gauss 10E-5
gamma Tesla 10E-9
gauss Tesla 10E-4
gram (g) pound 0.0022046
gram kg 10E-3
hectare acre 2.47105
hectare cm
2
10E-8
horsepower Watt (W) 745.700
111




TO CONVERT TO MULTIPLY BY
inch (in) cm 2.54
inch (in) mm 25.4
joule (J) erg 10E7
joule cal 0.239006
kilogram (kg) g 10E3
kilogram pound 2.20462
kilometer (km) m 10E3
kilometer ft 3280.84
kilometer mile 0.621371
Kilometer/hr

(kph) mile/hr (mph) 0.621371
kilowatt hp 1.34102
knot mph 1.150779
liter cm
3
10E3
liter gal (US) 0.26417
liter in
3
61.0237
meter angstrom 10E10
meter ft 3.28084
micron cm 10E-4
mile ft 5280
mile km 1.60934
mm Hg dyne/cm
2
1333.22
Newton dyne 10E5
Newton pound force 0.224809
Newton-meter (torque) foot-pound-force 0.737562
ounce lb 0.0625
Pascal atmospheres 9.86923 x10E-6
Pascal psi 1.45 x10E-4
Pascal torr 7.501 x10E-3
pint gallon 0.125
poise g /cm/s 1
poise kg /m/s 0.1
112


TO CONVERT TO MULTIPLY BY
pound mass kg 0.453592
pound force Newton 4.4475
rod feet 16.5
quart gallon 0.25
stoke cm
2
/s 1
slug kg 14.594
Tesla Gauss 10E4
Torr millibar 1.333224
Torr millimeter hg 1
ton (long) lb 2240
ton (metric) lb 2205
ton (metric) kg 1000
ton (short or net) lb 2000
ton (short or net) kg 907.185
ton (short or net) ton (metric) 0.907
watt J /s 1
yard in 36
yard m 0.9144
year (calendar) days 365.242198781
year (calendar) s 3.15576 x 10E7


2.7. Properties of Earth and Moon

PROPERTY VALUE PROPERTY VALUE
Distance from
sun
9.2.9x10^6
miles
Earth
Surface g
32.2 ft/s
2

Equatorial
diameter
7926 miles
Moon distance
from earth
238,393
miles
Length of day 24 hours Moon diameter 2160 miles
Length of year 365.26 days
Moon
revolution
27 days, 7
hours

113
2.8. Metric System

2.8.1. Basic and Derived Units
QUANTITY NAME SYMBOL UNITS
Length meter m basic unit
Time second s basic unit
Mass kilogram kg basic unit
Temperature Kelvin K basic unit
Electrical
Current
ampere A basic unit
Force Newton N kg m s
-2

Volume Liter L m
3

Energy joule J kg m
2
s
-2

Power watt W kg m
2
s
-3

Frequency hertz Hz s
-1

Charge coulomb C A s
Capacitance farad F
C
2
s
2
kg
-1
m
-
2

Magnetic
Induction
Tesla T kg A
-1
s
-2



2.8.2. Metric Prefixes
PREFIX FACTOR SYMBOL METER EXAMPLE
peta 10^15 E Em
tera 10^12 P Pm
giga 10^9 G Gm
mega 10^6 M Mm
kilo 10^3 k km
hecto 10^2 h hm
deca 10^1 da dam
deci 10^(-1) d dm
centi 10^(-2) c cm
milli 10^(-3) m mm
micro 10^(-6)
u m u
nano 10^(-9) n nm
pica 10^(-12) p pm
114
2.9. British System

2.9.1. Basic and Derived Units

QUANTITY NAME SYMBOL UNITS
Length foot ft basic unit
Time second s basic unit
Mass slug basic unit
Temperature Fahrenheit
0
F basic unit
Electrical Current ampere A basic unit
Force pound lb derived unit
Volume gallon gal derived unit
Work foot-pound ft-lb derived unit
Power horsepower hp derived unit
Charge coulomb C derived unit
Capacitance farad F derived unit
Heat
British
thermal unit
Btu basic unit


2.9.2. Uncommon British Measures of Weight and Length

WEIGHT LINEAR
Grain=Basic Unit Inch=Basic Unit
1 scruple=20 grains 1 hand=4 inches
1 dram=3 scruples 1 link=7.92 inches
1 ounce=16 drams 1 span=9 inches
1 pound=16 ounces 1 foot=12 inches
1 hundredweight=100 pounds 1 yard=3 feet
1 ton=2000 pounds 1 fathom=2 yards
1 long ton=2240 pounds 1 rod=5.5 yards
1 chain=100 links=22 yards
1 furlong=220 yards
1 mile=1760 yards
1 knot mile=6076.1155 feet
1 league=3 miles

115
2.9.3. Uncommon British Measures of Liquid and Dry Volume

LIQUID DRY
Gill=Basic Unit Pint=Basic Unit
1 pint=4 gills 1 quart=2 pints
1 quart= 2 pints 1 gallon=4 quarts
1 gallon=4 quarts 1 peck=2 gallons
1 hogshead=63 gallons 1 bushel=4 pecks
1 pipe (or butt)=2
hogsheads

1 tun=2 pipes

2.9.4. Miscellaneous British Measures

AREA ASTRONOMY
1 square chain=16
square rods
1 astronomical unit (AU) =
93,000,000 miles
1 acre=43,560
square feet
1 light second = 186,000
miles =0.002 AU
1 acre=160
square rods
1 light year = 5.88x10^12
miles =6.3226x10^4 AU
1 square mile = 640
square acres
1 parsec (pc) = 3.26 light
years
1 square mile = 1
section
1 kpc=1000pc
1 township = 36
sections
1 mpc = 1000000pc


VOLUME
1 U.S. liquid gallon= 231
cubic inches
I Imperial gallon=1.2 U.S.
gallons=0.16 cubic feet
1 cord=128 cubic feet


116






This Page is Blank


117



Section III

Applications in
Personal
Finance

118
1. The Algebra of Interest

1.1. What is Interest?

Interest affects just about every adult in America. If you
are independent, own a car or a home or both, or have a credit
card or two, you probably pay or have paid interest. So, what
exactly is interest? Interest is a rent charge for the use of money.
As a rent charge for the use of housing accumulates over time,
likewise, an interest change for the use of money also
accumulates over time. Just as people sometimes borrow housing
when shelter is needed, people sometimes borrow money when
we want or need the items that money can buy.

Interest is normally stated in terms of a percentage
interest rate such as
year
%
8 . Just as velocity (
hour
miles
60 ) is a rate of
distance accumulation, percentage interest rate is a ‘velocity’ of
percent accumulation. When driving in America, the customary
units of velocity are miles per hour. Likewise, the customary units
for interest rate are percent per year. The reader should be aware
that other than customary units may be used in certain situations.
For example, in space travel
sec
7
miles
is used to describe escape
velocity from planet earth; and, when computing a credit-card
charge, a monthly interest rate of
month
%
5 . 1 may be used. Both
velocity and percentage interest rate need to be multiplied by
time—specified in matching units—in order to obtain the total
amount accumulated, either miles or percent, as illustrated below.

On the road: miles hours D
hour
miles
175 2 75
3
1
= ⋅ = 3

In the bank: percent months
month
percent
7 3 2 %
2
1
= ⋅ = $

Once the total accumulated interest is computed, it is then
multiplied by the amount borrowed, called the principal P , in order
to obtain the total accumulated interest charge I .
119
The total accumulated interest charge I , the principal P , the
percentage interest rate r (hereafter, to be simply called the
interest rate), and the accumulated time t (called the term) during
which a fixed principle is borrowed are related by the
Fundamental Interest Charge Formula t I Pr = (also called the
Simple Interest Formula). This formula applies as long as the
principal P and the interest rate r remain constant throughout
the time t .

Ex 1.1.1: Suppose 00 . 000 , 10 $ is borrowed at
year
%
7 over a 42
month period with no change in either principal or interest rate.
How much are the total interest charges? Using t I Pr = , we
obtain (after converting percent to its fractional equivalent and
months to their yearly equivalent)

00 . 2800 $ ) 3 )( )( 00 . 000 , 10 ($
2
1 1
100
8
= = years I
years
.

Note: Notice how much the formula t I Pr = resembles the formula
Rt D = , where D is distance, R is a constant velocity, and t is the
time during which the constant velocity is in effect. The variable P in
t I Pr = distinguishes the Fundamental Interest Charge Formula in that
total interest charges are proportional to both the principal borrowed and
the time during which the principal is borrowed.

There are two types of interest: ordinary interest and
banker’s interest. Ordinary interest is computed on the basis of a
365-day year, while bankers’ interest is computed on the basis of
a 360-day year. The distinction usually shows up in short duration
loans of less than one year where the term is specified in days.
Given two identical interest rates, principals, and terms, the
loan where interest is computed on the basis of bankers’
interest will always cost more.

Ex 1.1.2: Suppose 00 . 000 , 150 $ is borrowed at
year
%
9 for 125
days. How much are the total interest charges using A) ordinary
interest as the basis for computation, B) bankers’ interest as the
basis for computation?
120
Again, using t I Pr = as our fundamental starting point, we obtain

A) 29 . 4623 $ ) )( 9 )( 00 . 000 , 150 ($
365
125 %
= = years I
year

B) 50 . 4687 $ ) )( 9 )( 00 . 000 , 150 ($
360
125 %
= = years I
year
.

Notice bankers’ interest nets 21 . 64 $ to the bank.

1.2. Simple Interest

Simple interest is interest charged according to the
formula t I Pr = . We normally find simple interest being used in
loans where the term is relatively short or the principal is a few
thousand dollars or less. At one time, simple interest was the
interest method primarily used to compute changes in an
automobile loan. Today, however, with some automobile prices
approaching those of a small house—e.g. the Hummer—many
automobile loans are set up just like shorter-term home
mortgages.

When we borrow money via a simple interest contract, not
only are we to pay the interest charges, but we also must pay back
the principal borrowed in full. That is the meaning of the word
borrowed: we are to return the item used in the same condition
that it was originally loaned to us. When we borrow money, we are
to return it in its original condition—i.e. all of it and with the same
purchasing power. Since money invariably loses some of its
purchasing power with the passage of time due to the effects of
inflation, one can almost always be sure that the amount borrowed
is worth less at the end of a specified term than at the beginning.
Thus, any interest charge levied must, as a minimum, make up for
the loss of purchasing power. In actuality, purchasing power is not
only preserved but actually increased via the application of
commercial interest charges. Remember, a bank is a business
and should expect a profit (interest) on the sale of its particular
business commodity (money).


121
Retiring a simple-interest loan requires the payment of
both the principal borrowed and the simple interest charge
incurred during its term. Thus we can easily write an algebraic
formula for the total amount A to be returned, called the Simple
Interest Formula, ) 1 ( Pr rt P t P I P A + = + = + = . We can
easily use the simple interest formula to help calculate the monthly
payment M for any loan issued on the basis of simple interest.

Ex 1.2.1: You borrow 00 . 000 , 38 $ for an SUV at
year
%
5 . 3 simple
interest over a term of 7 years. What is your monthly payment?
What is the total interest charge?

∴ = − = − =
∴ = = =
= ⇒
+ = + = + =
00 . 310 , 9 $ 00 . 000 , 38 $ 00 . 310 , 47 $ :
22 . 563 $
84
00 . 310 , 47 $
#
:
00 . 310 , 47 $
}) 7 { 035 . 0 1 ( 00 . 000 , 38 $ ) 1 ( :
3
2
1
P A I
months
A
M
A
rt P I P A
a
a
a


Buyers should be aware that sometimes the actual
interest rate is more than it is stated to be. A Simple Discount Note
is a type of loan where this is indeed the case. Here, the borrower
prepays all the interest up front from the principal requested. Thus,
the funds F available for use during the term of the loan are in
fact less, as given by the expression I P F − = . This leads to a
hidden increase in interest rate if one considers the principal to be
those funds F actually transferred to the borrower. This next
example illustrates this common sleigh-of-hand scenario.

Ex 1.2.2: A Simple Discount Note for 00 . 000 , 100 $ is issued for a
term of 15 months at
year
%
10 . Find the ‘hidden’ interest rate.

00 . 500 , 87 $ 00 . 500 , 12 $ 00 . 000 , 100 $ :
00 . 500 , 12 $ ) )( 10 ( 00 . 000 , 100 $ Pr :
2
12
15 %
1
= − = − =
= = =
I P F
years t I
year
a
a

122

∴ = =
⇒ =
⇒ =
⇒ =
year
r
r
r
Frt I
%
12
15
3
4 . 11
00 . 375 , 109
00 . 500 , 12
00 . 500 , 12 00 . 375 , 109
) )( ( 00 . 500 , 87 00 . 500 , 12
: a


Notice that the interest rate is increased by 4 . 1 percentage points
by simply changing the type of loan, i.e. a Simple Discount Note.
This will always be the case: not only does interest rate matter, but
also the type of loan employing the interest rate. As shown in our
last example, precise formulas allow one to easily calculate the
various financial quantities without resorting to the use of
extensive financial tables.

1.3. Compound Interest

The simple interest formula ) 1 ( rt P A + = is used in
situations where the principal never changes during the term of the
loan. But more often than not, the principal will change due to the
fact that accrued interest is added to the original principal at
regular intervals, where each interval is called a compounding
period. This addition creates a new and enlarged principal from
which future interest is calculated. Interest during any one
compounding period is computed using the simple interest
formula. To see how this works, let P be the initial principal and
c
r be the interest rate during the compounding period (e.g. for an
annual interest r applied via monthly compounding periods,
12
r
c
r = ). Then after one compounding period, we have by the
simple interest formula

1
1
1
) 1 ( 1 Pr P r P P I P A
c c
= + = ⋅ + = + = .

After the second compounding period, we have

123
2
2 1 1
2
1
1 1 1 1 2
) 1 ( ) 1 ( ) 1 (
) 1 (
P r P r r P A
r P r P P I P A
c c c
c c
= + = + ⋅ + =
⇒ + = + = + =
.

After the third compounding period, the process cycles again with
the result

3
3 1 2
3
1
2 2 2 2 3
) 1 ( ) 1 ( ) 1 (
) 1 (
P r P r r P A
r P r P P I P A
c c c
c c
= + = + ⋅ + =
⇒ + = + = + =
.

Letting the process continue to the end of n compounding periods
leads to the Compound Interest Formula for Total Amount
Returned
n
c n
r P A A ) 1 ( + = = . If r is the annual interest rate
and n is the number of compounding periods in one year, then
the amount A after a term of t years is given by the familiar
compound-interest formula
nt
n
r
P A ) 1 ( + = .

In order to use either version of the compound interest
formula, no addition to the initial principal P must occur (other
than that generated by the compounding effect) during the totality
of the compounding process (term). The amount A is the amount
to be returned when the compounding process is complete (i.e.
has cycled itself through a specified number of compounding
periods). Both formulas are most commonly used in the case
where an initial sum of money is deposited in a
financial/investment institution and allowed to grow throughout a
period of years under a specified set of compounding conditions.

Ex 1.3.1: A lump sum of 00 . 000 , 100 $ is deposited at
year
%
3 for
10 years compounded quarterly (four times per year). Find the
amount A at the end of the term.

∴ = =
⇒ + =
⇒ + =

86 . 834 , 134 $ ) 0075 . 1 ( 00 . 000 , 100 $
) 1 ( 00 . 000 , 100 $
) 1 ( :
40
10 4
4
03 . 0
1
A
A
P A
nt
n
r
a

124
Ex 1.3.2: An amount of 00 . 000 , 25 $ compounds at
period
%
1 for
240 periods. Find the amount A at the end of the term.

∴ = =
⇒ + =
⇒ + =
84 . 313 , 272 $ ) 01 . 1 ( 00 . 000 , 25 $
) 01 . 0 1 ( 00 . 000 , 25 $
) 1 ( :
240
240
1
A
A
r P A
n
c
a


Ex 1.3.3: A grandfather invests $5000.00 in a long-term growth
fund for his newly-born granddaughter. The fund is legally
inaccessible until the child reaches the age of 65. Assuming an
effective interest rate of
year
%
9 compounded annually, how much
will the granddaughter have accumulated by age 65?

∴ = =
⇒ + =
⇒ + =

81 . 229 , 354 , 1 $ ) 09 . 1 ( 00 . 000 , 5 $
) 1 ( 00 . 000 , 5 $
) 1 ( :
65
65 1
1
09 . 0
1
A
A
P A
nt
n
r
a


The last example shows the magic of compounding as it operates
on an initial principal through a long period of time. A relatively
small financial gain received when young can grow into a
magnificent sum if left to accumulate over several decades. This
simple but powerful fact leads to our first Words of Wisdom: If
properly managed, young windfalls become old fortunes.

1.4. Continuous Interest

Consider the compound interest formula
nt
n
r
P A ) 1 ( + = .
What would be the overall effect of increasing the number of
compounding periods n in one year while holding both the annual
interest rate r and the term t constant? One can immediately see
that the exponent nt would grow in size, but the quantity inside
the parentheses,
n
r
+ 1 , would become almost indistinguishable
from the number 1 as n increases indefinitely.
125
Since 1 1 =
n
no matter how large n is, the diminishing of
n
r
+ 1
to 1 may negate the effect of having a larger and larger exponent.
Thus, we end up with a mathematical tug of war between the two
affected quantities in
nt
n
r
A ) 1 ( + = . Our exponent is growing larger
desperately trying to make A an indefinitely large number. By
contrast, our base is nearing the number 1 trying to make 1 = A .
Which wins? Or, is there a compromise?

To explore this issue, we’ll first look at a specific example
where
year
r
%
5 = , 10 = t years, 00 . 1 $ = P , and, subsequently,
n
n
A
10
05 . 0
) 1 ( 00 . 1 $ + = . The number of compounding periods n in
a year will be allowed to increase through the sequence1, 10, 12,
100, 365, 1000, 000 , 10 , 000 , 100 , and 000 , 000 , 1 . Modern
calculators allow calculations such as these to be easily performed
on a routine basis. The results are displayed in the table below
with the corresponding amount generated by using the simple
interest formula ) 1 ( rt P A + = .

n A
1 $1.6288946
10 $1.6466684
12 $1.6470095
100 $1.6485152
365 $1.6486641
1000 $1.6487006
10000 $1.6487192
100000 $1.6487210
1000000 $1.6487212

Notice that as n progressively increases without bound, the
amount A becomes more and more certain, stabilizing about one
digit to the left of the decimal point for every power of ten. In
conclusion, we can say that the battle ends in a tidy compromise
with ∞ < < A 1 , in particular ... 64872 . 1 = A
126
The process of n progressively increasing without bound
is called a limit process and is symbolized by the limit symbol
∞ → n
lim.
Limit processes are extensively used to derive most of the
mathematical tools and results associated with calculus. We now
investigate A as ∞ → n for the case of a fixed annual interest
rate r and term t in years, ] ) 1 ( [ lim
nt
n
r
n
P A + =
∞ →
. To analyze this
expression, we first move the limit process inside the parentheses
and next to the part of the expression it directly affects to obtain
t n
n
r
n
P A ]} ) 1 [( lim { + =
∞ →
. Again, we have set up our classic battle
of opposing forces: the exponent grows without bound and the
base gets ever closer to1. What is the combined effect? To
answer, first define rm n m
r
n
= ⇒ = . From this, we can establish
the towing relationship ∞ → ⇔ ∞ → m n . Substituting, we
obtain
rt m
m
m
t n
n
r
n
nt
n
r
n
P A
P A
P A
]} ) 1 [( lim {
]} ) 1 [( lim {
] ) 1 ( [ lim
1
+ =
⇒ + =
⇒ + =
∞ →
∞ →
∞ →
.

Now all we need to do is evaluate ] ) 1 [( lim
1
m
m
m
+
∞ →
, and we will do
this evaluation the modern, easy way, via a scientific calculator.

m value
m
m
) 1 (
1
+
1 2
10 2.5937
100 2.7048
1000 2.7169
10000 2.7181
100000 2.7183
1000000 2.7183

127
We will stop the evaluations at 000 , 000 , 1 = m . Notice that each
time m is increased by a factor of10, one more digit in the
expression
m
m
) 1 (
1
+ is stabilized. If more decimal places are
needed, we can simply compute
m
m
) 1 (
1
+ to the accuracy desired.
When m gets astronomically large, the expression
m
m
) 1 (
1
+
converges to the number ... 7183 . 2 = e . Correspondingly, our
final limit becomes

rt
rt
rt m
m
m
Pe A
e P A
P A
=
⇒ =
⇒ + =
∞ →
} {
]} ) 1 [( lim {
1
.

The last expression
rt
Pe A = is known as the Continuous
Interest Formula. For a fixed annual interest rate r and initial
deposit P , the formula gives the account balance Aat the end of
t years under the condition of continuously adding to the current
balance the interest earned in a ‘twinkling of an eye.’ The
continuous interest formula represents in itself an upper limit for
the growth of an account balance given a fixed annual interest
rate. Hence, it is a very important and easily used tool, which
allows a person to quickly estimate account balances over a long
period of time. The following example will illustrate this.

Ex 1.4.1: An initial deposit of 00 . 000 , 10 $ is compounded monthly
(typical turnover for a company 401K account, etc.) at
year
%
8 for a
period of 30 years. Compare the final amounts obtained by using
both continuous and compound interest formulas.


∴ =
⇒ =
⇒ =

76 . 231 , 110 $
00 . 000 , 10 $
:
) 30 08 . 0 (
1
A
e A
Pe A
rt
a

128


∴ =
⇒ =
⇒ + =
⇒ + =

73 . 487 , 109 $
) 00667 . 1 ( 00 . 000 , 10 $
) 1 ( 00 . 000 , 10 $
) 1 ( :
360
30 12
12
08 . 0
2
A
A
A
P A
nt
n
r
a


Notice that there is less than 00 . 400 $ difference between
the two amounts, which shows the continuous interest formula a
very valuable tool for making estimates when the number of
compounding periods in a year exceeds twelve or more. By
providing a quick upper bound for the total amount to be returned,
the continuous interest formula can also be thought of as a fiscal
‘gold standard’ defining the limiting capabilities of the
compounding process. In the next two examples, we explore the
use of the continuous interest formula in providing rapid estimates
for both interest rate and time needed to achieve a given
amount A. In each example, the natural logarithm (denoted by
‘ ln ’) is first used to release the overall exponent in
rt
e , which, in
turn allows one to solve for either r or t .

Ex 1.4.2: A brokerage house claims that 00 . 000 , 10 $ is
‘guaranteed’ to become 00 . 000 , 000 , 1 $ in 40 years if left with
them. What interest rate would make this so?

∴ = =
⇒ =
⇒ =
⇒ =
=
⇒ =
⇒ = ⇒ =
year
r
r
r
rt rt
r
r
e r
e
e
e
A Pe Pe A
%
40
2
40
40
1
5 . 11 057 . 0
605 . 4 40
) 100 ln( ) ln( 40
) 100 ln( ) ln( :
100
00 . 000 , 000 , 1 $ 000 , 10 $
:
a
a

129
The interest rate of
year
%
5 . 11 may be obtainable, but represents an
aggressive estimate since the average Dow-Jones-Industrial-
Average annual rate of return has hovered around
year
%
9 for the
last 40 years. Hence the brochure is making a marketer’s claim!
Suppose we actively managed our account for 40 years where we
were actually able to achieve
year
%
9 . Then
34 . 982 , 365 $ 00 . 000 , 10 $
) 40 09 . 0 (
= =

e A , which is a tidy sum, but
no million. Let buyers beware, or, better yet, let buyers be able to
figure for themselves.

Ex 1.4.3: How long does it take a starting principal P to
quadruple at
year
%
5 compounded monthly?

∴ =
⇒ =
⇒ =
= ⇒ =
⇒ =
⇒ =
years t
t
e
e P Pe
Pe P
Pe A
t
t t
t
rt
73 . 27
38629 . 1 05 . 0
) 4 ln( ) ln( :
4 4
4
:
) 05 . 0 (
2
) 05 . 0 ( ) 05 . 0 (
) 05 . 0 (
1
a
a


1.5. Effective Interest Rate

How do we compare one interest rate to another? The
question arises since not only does actual interest rate matter, but
also the way the rate interest is utilized (i.e. type of compounding
mechanism). The effective annual interest rate, designated
eff
r ,
provides a mathematical basis for comparing interest rates having
different compounding mechanisms.
eff
r is defined as that
annually-compounded interest rate that generates the same
amount as the specified interest rate and associated compounding
process at the end of t years. In the case of the compound
interest formula, we have
130


1 ) 1 (
) 1 ( 1
] ) 1 [( ) 1 (
] ) 1 [( ) 1 (
− + =
⇒ + = +
⇒ + = +
⇒ + = +
n
n
r
eff
n
n
r
eff
t n
n
r
t
eff
t n
n
r
t
eff
r
r
r
P r P
.

In the case of continuous interest, we have


1
1
] [ ) 1 (
) 1 (
− =
⇒ = +
⇒ = +
⇒ = +
r
eff
r
eff
t r t
eff
rt t
eff
e r
e r
e r
Pe r P


In the case of simple interest, we have


1 1
1 1
) 1 ( ) 1 (
) 1 ( ) 1 (
− + =
+ = +
⇒ + = +
⇒ + = +
t
eff
t
eff
t
eff
t
eff
rt r
rt r
rt r
rt P r P


The effective interest rate, as defined above, is a simple
and powerful consumer basis of comparison in that it combines
both rate and process information into a single number. Banks and
other lending institutes are legally required to state effective
interest rate in their advertising and on their documents. Stock
market returns over a long period of time are normally specified in
terms of an average annual growth or interest rate. We definitely
need to know the meaning of
eff
r and its use if we are to survive
the confusion of numbers tossed our way in modern society.
131


Ex 1.5.1: Which is the better deal,
year
%
25 . 7 compounded
continuously or
year
%
5 . 7 compounded quarterly?

∴ = = − + =
⇒ − + =
= = − =
⇒ − =
year eff
n
n
r
eff
year eff
r
eff
r
r
e r
e r
%
4
4
075 . 0
2
%
0725 . 0
1
713 . 7 07713 . 0 1 ) 1 (
1 ) 1 ( :
519 . 7 07519 . 0 1
1 :
a
a

The better deal is
year
%
5 . 7 compounded quarterly where the
effective interest rate is
year eff
R
%
713 . 7 = .

When viewed as a general concept, the effective annual interest
rate becomes a powerful economic and forecasting tool in that it
can be easily adapted to determine the average annual growth
rate for securities or any phenomena where change occurs over a
period of years.

Ex 1.5.2: Securities valued at 00 . 000 , 5 $ in 1980 have grown in
value to 00 . 000 , 80 $ in 2005. Assuming continuation of the
average annual growth value as already displayed during the past
25 years, project the value of these same securities in 2045.

Diagramming the problem in two steps, we have

? 00 . 000 , 80 $ :
00 . 000 , 80 $ 00 . 000 , 5 $ :
30
2045 2005
2
25
2005 1980
1
A P
A P
years
years


→→ =
= →→ =
a
a


Utilizing the general definition of
eff
r as found in
t
eff
r P A ) 1 ( + =
allows us to easily solve this problem for each step.
132

∴ = =
⇒ + =
= =
⇒ = = + ⇒ = +
⇒ + =
⇒ + =
00 . 401 , 223 , 2 $ ) 1172 . 1 ( 00 . 000 , 80 $
) 1172 . 0 1 ( 00 . 000 , 80 $ :
72 . 11 1172 . 0
1172 . 1 16 1 16 1 (
1 ( 00 . 000 , 5 $ 00 . 000 , 80 $
) 1 ( :
30
30
2
%
25
25 )
25 )
1
A
A
r
r r
r
r P A
year eff
eff eff
eff
t
eff
a
a


The average annual interest/growth rate of
year
%
72 . 11 is very good
and shows active management of the overall growth process. The
final reward, 00 . 401 , 223 , 2 $ , is well worth it!

Ex 1.5.3: A professional’s salary grows from $9949.00 to
00 . 951 , 107 $ over a period of 30 years. What is the average
annual growth rate?
Diagramming: 00 . 951 , 107 $ 00 . 949 , 9 $
30
= →→ = A P
years
. Solving,
we have

∴ = =
⇒ = = +
⇒ + =
⇒ + =
⇒ + =
year eff
eff
eff
eff
t
eff
r
r
r
r
r P A
%
30
30
30
1
271 . 8 08271 . 0
08271 . 1 85 . 10 1
) 1 ( 85 . 10
) 1 ( 00 . 9949 $ 00 . 951 , 107 $
) 1 ( : a


The final average growth rate of
year
%
271 . 8 certainly exceeds the
average inflation annual rate of
year
%
3 and shows a steady
increase in purchasing power over time.
133
Ex 1.5.4: 00 . 000 , 10 $ is lent to a friend at
year
%
2 simple interest
for a period of 5 years. What is
eff
r ?

Q
a
year eff
eff
t
eff
r
r
rt r
%
5
5
1
92 . 1
0192 . 0 1 1 . 1 1 5 ) 02 . 0 ( 1
1 1 :
=
⇒ = − = − + =
⇒ − + =


Ex 1.5.5: You have $25,000 to invest for 10 years. Which of the
following three deals is most advantageous to you, the investor:
year
%
12 simple interest for the entire time period,
year
%
7 interest
compounded daily for the entire time period, or
year
%
8 interest
compounded quarterly for the entire time period?

We analyze problem in two stages. First, we will compute the
eff
r
for the three cases noting that daily interest (365 compounding
periods a year) is for all effects and purposes indistinguishable
from continuous interest. The highest
eff
r will then provide our
answer. Secondly, in the modern spirit of ‘show me the money’,
we will compute the expected earnings in all three cases.
Comparing
eff
r

∴ = − + =
∴ = − =
∴ = − = − + =
⇒ − + =
year eff
year eff
year eff
eff
r
e r
r
r
%
4
4
08 . 0
3
%
07 . 0
2
% 10 10
10
1
243 . 8 1 ) 1 ( :
251 . 7 1 :
204 . 8 1 2 . 2 1 2 . 1 1
1 10 ) 12 . 0 ( 1 :
a
a
a


Quarterly compounding at
year
%
8 provides the best deal.
Calculating the associated expected earnings gives
134

∴ = + =
∴ = + =
⇒ + =
∴ = + =
⇒ + =
∴ = =
⇒ =
∴ = + =
⇒ + =
∴ = ⋅ + =
⇒ + =


89 . 199 , 55 $ ) 08243 . 0 1 ( 00 . 000 , 25 $ :
99 . 200 , 55 $ ) 1 ( 00 . 000 , 25 $
) 1 ( :
67 . 344 , 50 $ ) 07251 . 0 1 ( 00 . 000 , 25 $
) 1 ( :
82 . 343 , 50 $ 00 . 000 , 25 $
:
32 . 001 , 55 $ ) 08204 . 0 1 ( 00 . 000 , 25 $
) 1 ( :
00 . 000 , 55 $ ) 10 ] 12 . 0 [ 1 ( 00 . 000 , 25 $
) 1 ( :
10
3
10 4
4
08 . 0
3
10
2
10 07 . 0
2
10
1
1
A
A
P A
A
r P A
e A
Pe A
A
r P A
A
rt P A
alt
nt
n
r
t
eff
alt
rt
t
eff
alt
a
a
a
a
a
a


Case three, quarterly compounding at
year
%
8 , has the highest
expected earnings as predicted by the associated
eff
r .

The three alternate calculations use the effective annual
interest-rate construct formula to arrive at the exact same answers
(within a dollar or two) as those produced by the associated
compounding formulas. This would be expected; for this is how the
three
eff
r formulas were derived in the first place!

135
2. The Algebra of the Nest Egg

2.1. Present and Future Value

Money changes its value with time. This fact is as certain
as the proverbial ‘death and taxes’. Inflation is a force beyond an
individual’s control that lessens the value of money over time.
Smart investing counters inflation in that it enhances the value of
money over time. The value of money right now is called the
present value PV . The time-changed equivalent value in the
future is called the future value FV . This can be diagramed as

FV PV
process
time
→→ .

In order for a present value to become a future value, both time
and a process need to be specified. This is exactly the case in the
familiar compound interest formula
nt
n
r
P A ) 1 ( + = . Using the
above general diagrammatic pattern, we can diagram the
compound-interest formula as follows

A P
nt
n
r
t
) 1 ( +
→→ .

Replacing A P & with FV PV & respectively leads to

FV PV
nt
n
r
t
) 1 ( +
→→ .

Note: The above formula is not completely correct until one takes
in account the effects of inflation, an analysis option. To account
for inflation, subtract the annual inflation rate from the given
annual interest rate. Use the modified rate in present-to-future
value formulas to project an inflation-adjusted future value.
136
With this last note in mind, we present the four coupled
Present-to-Future-Value Formulas. All interest rates in the
formulas below need to be inflation adjusted per i r r
adj
− = if one
wants to obtain an inflation-adjusted future value.

Compound Interest:
nt
n
r
nt
n
r
FV
PV PV FV
) 1 (
) 1 (
+
= ⇔ + =
Effective Interest:
t
eff
t
eff
r
FV
PV r PV FV
) 1 (
) 1 (
+
= ⇔ + =
Continuous Interest:
rt
rt
e
FV
PV PVe FV = ⇔ =
Simple Interest:
) 1 (
) 1 (
rt
FV
PV rt PV FV
+
= ⇔ + =

Notice that the coupled Present-to-Future-Value Formulas allow
us to easily move from present value to future value (or visa versa)
as long as the compounding process, time period, and one of the
two values—present or future—is specified. Coupled present-to-
future-value formulas allow us to estimate total change in
monetary value as either investments or durable goods move
forwards or backwards in time under a given set of process
conditions.

Ex 2.1.1: Bill wishes to have 00 . 000 , 800 , 1 $ in his Individual
Retirement Account (IRA) when he retires in 35 years. What is the
present value of this amount assuming an average annual
compounding rate of
year
%
5 . 11 ?

54 . 870 , 39 $
) 115 . 1 (
00 . 000 , 800 , 1 $
) 115 . 1 (
00 . 000 , 800 , 1 $
) 1 (
:
35
35
1
= =

+
=

+
=
PV
PV
r
FV
PV
t
eff
a

137
Ex 2.1.2: Repeat the calculation in Ex. 2.1.1 if an average inflation
rate
year
i
%
3 = acts through the same 35 year time period.

Bill’s wish can be restated in terms of buying power. What Bill
really wants is 00 . 000 , 800 , 1 $ in current buying power by the time
he retires in 35 years. Thus

42 . 952 , 064 , 5 $
) 03 . 1 ( 00 . 000 , 800 , 1 $
) 1 (
) 1 ( :
35
1
=
⇒ =
+ =
⇒ + =
FV
FV
i PV FV
r PV FV
t
t
eff
a


Interpreted, 42 . 952 , 064 , 5 $ is the amount needed 35 years from
now just to preserve the buying power inherent in
00 . 000 , 800 , 1 $ today assuming a long-term steady inflation rate of
year
i
%
3 = . Turning to the present value of this new amount
assuming the same
year
%
5 . 11 , we have

83 . 147 , 96 $
) 115 . 1 (
42 . 952 , 064 , 5 $
) 115 . 1 (
42 . 952 , 064 , 5 $
) 1 (
:
35
35
2
= =

+
=

+
=
PV
PV
r
FV
PV
t
eff
a


When inflationary price increases for durable goods are
stated in terms of an annually-compounded percentage jump, we
typically use present-to-future-value formulas to estimate the
future price. This is especially true for single ‘big ticket’ items such
as houses, cars, boats, jewelry, etc. Our next example illustrates
the use of a present-to-future value formula to estimate the future
price of a newly-built house.
138
Ex 2.1.3: The price of a new house in a certain city increases at an
average rate of
year
%
5 . If a particular 3-bedroom model in a certain
subdivision is priced at 00 . 000 , 235 $ in 2006, estimate the price of
a similar model in the same subdivision in 2010.

00 . 644 , 285 $
) 05 . 0 1 ( 00 . 000 , 235 $
) 1 ( :
4
1
=
⇒ + =
⇒ + =
FV
FV
r PV FV
t
eff
a


This is some disconcerting news in that the same house will sell
for approximately 00 . 644 , 285 $ four years from now. If you can
afford it, you better buy now. Waiting costs money!

Ex 2.1.4: Calculate the present value of a 00 . 000 , 100 $ corporate
bond coming due in 15 years at
year
%
5 compounded quarterly.

76 . 456 , 47 $
) 1 (
00 . 000 , 100 $
) 1 (
:
60
4
05 . 0
1
=
+
=

+
=
PV
FV
PV
nt
n
r
a


If redeemed today, the bond would fetch $47,456.76.

2.2. Growth of an Initial lump Sum Deposit

If an initial lump-sum deposit is the only means by which
monetary growth is achieved, then the Present-to-Future-Value
Formulas are sufficient to perform the associated calculations.
We need only to identify the process by which the growth is
occurring: annual compounding via an effective interest rate,
continuous compounding, or compounding for a finite number of
compounding periods per year. Each compounding process has
an associated formula to which a total time and interest rate must
be supplied.
139
Ex 2.2.1: What is the future value (non-inflation adjusted) at age
65 of 00 . 000 , 13 $ invested at age 25 assuming
year eff
r
%
8 =
throughout the 40-year term?

Note: the making of a monetary-growth diagram is strongly recommended
as a first step for all present-to-future-value problems since pictures
engage the use of one’s right brain and the associated spatial problem-
solving capabilities. Hence, for Example 2.2.1, the associated monetary-
growth diagram is

65
8
25
1
? 00 . 000 , 13 $ :
%
age
r
age
FV
year
eff
=
→→ a

Solving:

77 . 417 , 282 $
) 08 . 0 1 ( 00 . 000 , 13 $
) 1 ( :
40
2
=
⇒ + =
⇒ + =
FV
FV
r PV FV
t
eff
a


Ex 2.2.2: Calculate the effective annual interest rate needed to
turn 00 . 000 , 10 $ into 00 . 000 , 000 , 1 $ over a 25 year period.

25
?
0
1
00 . 000 , 000 , 1 $ 00 . 000 , 10 $ :
= =
→→
t
r
t
eff
a

Note that the process mechanism implicitly assumed is annual
compounding via the referencing of an unknown
eff
r . Solving:

year eff
eff
eff
eff
eff
r
r
r
r
r
%
25
25
25
2
22 . 20 2022 . 0
1 2022 . 1
1 100
) 1 ( 100
) 1 ( 00 . 000 , 10 $ 00 . 000 , 000 , 1 $ :
= =
⇒ + =
⇒ + =
⇒ + =
⇒ + = a

140
The effective annual interest rate of
year eff
r
%
22 . 20 = is probably
impossible to sustain for an extended period of 25 years. Even in
the go-go high-tech 90s, rates of this magnitude lasted for only six
years or so.

Ex 2.2.3: What continuous interest rate is needed to quadruple a
given present value in 15 years?

Asking for a continuous interest rate
cont
r means that the
continuous interest form of the present-to-future value formula
rt
PVe FV = should be used. Also, the problem states that the
required future value is PV FV 4 = . Annotating this information
on the monetary-growth diagram and solving gives

year cont
r
r
r
t
r
t
r r
r
e
e
PVe PV
PV PV
cont
%
15
15
15
2
15
?
0
1
24 . 9 0924 . 0
15 38629 . 1
) ln( ) 4 ln(
4
4 :
4 :
= = =
⇒ =
⇒ =
⇒ =
⇒ =
→→
= =
a
a

The stated continuous interest rate of
year
%
24 . 9 is certainly
achievable in today’s markets; however, it is not automatic and will
require active management of one’s investments.

Our last example illustrates what happens if more than
one deposit is made during the overall investment period.

Ex 2.2.4: What is the projected future value (ignoring inflation) of a
retirement fund where an initial deposit of 000 . 000 , 40 $ is made
at age 30 and a subsequent deposit of 00 . 000 , 60 $ is made at
age 40. Assume an effective annual interest rate of
year eff
r
%
10 = and an anticipated retirement age of 68.
141
Understandably, the monetary-growth diagram increases in
complexity as it is modified to show the 00 . 000 , 60 $ deposit (or
insertion into the investment process) at age 40. Again, by the
stating of an effective annual interest rate
eff
r , the monetary-
growth process is understood to be annual compounding.

68
10
30
1
? 000 , 40 $ :
%
40
000 , 60 $
age
r
age
FV
year eff
age
=

→→ a
Solving for the projected future value requires direct addition of
two algebraic terms.

35 . 433 , 361 , 2 $
61 . 259 , 865 $ 73 . 173 , 496 , 1 $
) 1 . 1 ( 000 , 60 $ ) 1 . 1 ( 000 , 40 $
) 1 ( 000 , 60 $ ) 1 ( 000 , 40 $ :
28 38
28 38
2
=
⇒ + =
⇒ + =
⇒ + + + =
FV
FV
FV
r r FV
eff eff
a


To summarize Ex 2.2.4, 00 . 000 , 100 $ invested by the age of 40
becomes 35 . 433 , 361 , 2 $ by age 68 if the stated conditions hold
throughout the investment period.

Suppose that in Ex 4.2.4 a single deposit could be made
at age 30 in order to create the same 35 . 433 , 361 , 2 $ by age 68.
How much would such a deposit be? By direct application of the
coupled Present-to-Future Value Formulas
59 . 132 , 63 $
) 1 . 1 (
35 . 433 , 361 , 2 $
38
= = PV ,

a net savings to the investor of $36,867.40. Calculating the
inflation-adjusted future value of 35 . 433 , 361 , 2 $ over the same
38 years, we obtain
88 . 999 , 767 $
) 03 . 1 (
35 . 433 , 361 , 2 $
38
= =
adj
FV .
142
2.3. Growth of a Deposit Stream

Most of us don’t have an initial lump sum of 00 . 000 , 40 $
(or 59 . 132 , 63 $ ) by which to build a retirement fund. The more
typical way we build our retirement funds is by means of a periodic
deposit—either through payroll deduction or direct self-discipline—
that accumulates in value year after year. And, after thirty years or
so, we are talking about a sum jokingly referred to as ‘real money’.
But it is no joke on how the sum is obtained: through discipline,
sacrifice, and attentive money management. In this section, we will
develop and use the equations that determine the future value of a
regular deposit stream over an extended period of time.

Let nt i D D
i
, 1 : = ≡ be a deposit stream of identically-
sized payments made over a period of t years where n is the
number of compounding periods per year and r is the annual
interest rate. Suppose that each deposit
i
D is sequenced to
coincide with the beginning of the corresponding compounding
period and that the last deposit
nt
D begins the last of the nt
compounding periods. Under these conditions, what is the future
value of the entire deposit stream? Diagramming,

?
1 5 4 3 2
1
FV D
n
r
nt
D
n
r
nt
D
n
r
D
n
r
D
n
r
D
n
r
D
n
r
→ → → ⋅ ⋅ ⋅ → → → → ↑ ↑ ↑ ↑ ↑ ↑

.

Now, each deposit
i
D contributes a portion
i
FV to the total future
value FV where ( )
i nt
n
r
i i
D FV
− +
+ =
1
1 . Thus,

( )
( )



=
− +
=
− +
=
+ =
⇒ + =
⇒ =
nt
i
i nt
n
r
nt
i
i nt
n
r
i
nt
i
i
D FV
D FV
FV FV
1
1
1
1
1
1
1 .
143
The expression

( ) ( ) ( ) ( ) { }
nt
n
r
n
r
n
r
nt
i
i nt
n
r
D D + + + + + + = +

=
− +
1 ... 1 1 1
2 1
1
1


is a geometric series and can be summed accordingly as

( ) ( ) ( ) { }
n
r
nt
n
r
nt
i
i nt
n
r
r
Dn
D + − + = +
+
=


1 1 1
1
1
,

leads to the following formula: ( ) ( ) { }
n
r
nt
n
r
r
Dn
FV + − + =
+
1 1
1
.

Suppose we want to conclude our term of t years with
one final deposit
1 + nt
D as shown in the modified deposit stream

?
1 1 5 4 3 2
1
FV D
nt
D
n
r
nt
D
n
r
nt
D
n
r
D
n
r
D
n
r
D
n
r
D
n
r
+ −
↑ ↑ ↑ ↑ ↑ ↑ ↑ → → → ⋅ ⋅ ⋅ → → → →

To do so, add one more D to obtain ( ) { } 1 1
1
− + =
+ nt
n
r
r
Dn
FV .

In the case of annual compounding where
eff n
r
r = and D is a
yearly total (or rate), the two formulas become

Without Final Deposit: ( ) ( ) { }
eff
t
eff
eff
r r
r
D
FV + − + =
+
1 1
1

No Final Deposit: ( ) { } 1 1
1
− + =
+ t
eff
eff
r
r
D
FV

Similar formulas are developed for the case of continuous
compounding in Section III, Topic 5. As discussed previously, all
future values must be adjusted for inflation in order to ascertain
true buying power.
144

Ex 2.3.1: After a term of 30 years, what is the projected future
value of a retirement fund where 30 annual deposits of 00 . 5000 $
are faithfully made on 1 January of each succeeding each year.
Assume
year eff
r
%
11 = .

A modified monetary-growth diagram can be used to show the
periodic annual deposits as follows:

30
11
0
1
? ) ( 29 00 . 000 , 5 $ :
%
00 . 5000 $
=
=

=
→ × →
t
r
t
FV
year
eff
a

Here, the diagram starts with the first annual deposit of 00 . 5000 $
at 0 = t and annotates via multiplication the subsequent 29 annual
00 . 5000 $ deposits made at the start of each annual
compounding period. Solving,

( ) ( ) { }
( ) ( ) { }
87 . 565 , 104 , 1 $
11 . 1 11 . 1
11 .
00 . 5000 $
1 1
31
1
2
=
⇒ − =
⇒ + − + =
+
FV
FV
r r
r
D
FV
eff
t
eff
eff
a
.

To summarize, 30 annual deposits of 00 . 5000 $ totaling
00 . 000 , 150 $ have grown to a future value of
87 . 565 , 104 , 1 $ over a 30-year term assuming
year eff
r
%
11 = .

Ex 2.3.2: Suppose a single lump-sum deposit could be made at
the start of the 30-year period in Example 2.3.1 in an amount
sufficient to create the same future value of 87 . 565 , 104 , 1 $ . How
much would be needed? Assume
year eff
r
%
11 = .

30
11
0
1
87 . 565 , 104 , 1 $ ? :
%
=
=
=
→→
t
r
t
year
eff
PV a
145

54 . 250 , 48 $
) 11 . 1 (
874 . 565 , 104 , 1 $
87 . 565 , 104 , 1 $ ) 11 . 1 (
) 1 ( :
30
30
2
= =
⇒ =
⇒ = +
PV
PV
FV r PV
t
eff
a


Ex 2.3.3: Sam contributes 00 . 200 $ per month to a college
savings account for his daughter Mary, who just turned 12. In
addition, he makes ‘bonus deposits’ of 00 . 1000 $ on Mary’s
birthday. Sam started this practice with a combined 00 . 1200 $
deposit on the day of Mary’s birth and will ‘cash out’ on Mary’s 18
th

birthday with a final deposit of 00 . 1200 $ . How much will be in
Mary’s college savings account at that time assuming
year
r
%
7 =
and monthly compounding?

This problem can be thought of as two sub-problems: 1) a monthly
deposit stream of 217 individual deposits over a term of 18 years
and 2) a parallel yearly deposit stream of 19 individual deposits
over a period of 18 years. The total future value will be the sum of
both parallel deposit streams the day Mary turns 18.

For the monthly deposit stream, we slightly modify the monetary-
growth diagram to show the inclusion of the final deposit.


18
7
0
1
? 00 . 200 $ ) ( 215 00 . 200 $ :
%
00 . 200 $
=
=

=
= + → × →
t
month
r
t
FV
year
a

Solving:

( ) { }
( ) { }
71 . 846 , 86 $
1 1
07 . 0
) 12 ( 00 . 200 $
1 1 :
217
12
07 . 0
1
2
=
⇒ − + =
⇒ − + =
+
month
month
nt
n
r
month
FV
FV
r
Dn
FV a


146
For the yearly deposit stream, we will first need to compute the
effective annual interest rate:
year eff
r
%
12
12
07 . 0
229 . 7 1 ) 1 ( = − + = .
Now, we have all the information needed to compute
year
FV and,
consequently,
year month total
FV FV FV + =


( ) { }
( ) { }
54 . 115 , 125 $
93 . 268 , 38 $
1 07229 . 0 1
07229 . 0
00 . 1000 $
1 1 :
? 00 . 1000 $ ) ( 17 00 . 1000 $ :
19
2
18
229 . 7
0
1
%
00 . 1000 $
= + =
⇒ =
⇒ − + =
⇒ − + =
= + → × →
=
=

=
year month total
year
year
nt
eff
eff
year
t
year
r
t
FV FV FV
FV
FV
r
r
D
FV
FV
year
eff
a
a


Each of the four deposit-stream formulas can also be used
to determine the periodic deposit D needed in order to
accumulate a specified future value under a given set of
conditions.

Ex 2.3.4: Suppose Sam is not happy with the 64 . 115 , 125 $
accumulated by Mary’s 18
th
birthday and, instead, would like to
accumulate a future value of 00 . 000 , 160 $ via the single
mechanism of monthly deposits. A) How much should this deposit
be, again, assuming monthly compounding and
year
r
%
7 = ? B)
What single lump-sum deposit made on the day Mary was born
would generate an equivalent future value?

A)
18
7
0
1
? ? ) ( 215 ? :
%
?
=
=

=
= + → × →
t
r
t
FV D D
year
D
a
147

( ) { }
( ) { }
( ) { }
47 . 368 $
1 1 12
) 00 . 000 , 160 ($ 07 . 0
1 1
1 1 :
217
12
07 . 0
1
1
2
=

− +
=

− +
=
⇒ − + =
+
+
D
D
n
rFV
D
r
Dn
FV
nt
n
r
nt
n
r
a


B)
18
7
0
1
00 . 000 , 160 $ ? :
%
=
=
=
→→
t
r
t
year
PV a

09 . 551 , 45 $
) 005833 . 1 (
00 . 000 , 160 $
00 . 000 , 160 $ ) 005833 . 1 (
) 1 ( :
216
216
2
= =
⇒ =
⇒ = +
PV
PV
FV PV
nt
n
r
a


This example suggests the old maxim of pay me now or pay me
later. One could think of now as a single payment of 09 . 551 , 45 $
and later as a deposit stream of 217 payments, each 47 . 368 $ ,
totaling $79,957.99.

2.4. The Two Growth Mechanisms in Concert

Sometimes, we may have the opportunity to open up a
retirement or college investment account with a respectable lump-
sum deposit (denote by
S
L )—perhaps gained by winning a lottery
or receiving an inheritance. From then on, we contribute to this
deposit by means of a deposit stream as shown in the monetary-
growth diagram

?
1 1 5 4 3 2
FV L
nt
D
n
r
nt
D
n
r
nt
D
n
r
D
n
r
D
n
r
D
n
r
D
n
r
S
+ −
↑ ↑ ↑ ↑ ↑ ↑ ↑ → → → ⋅ ⋅ ⋅ → → → → .
148
If D D L
i S
= > (which would surely be the case for 99% of the
time), then we could redraw the monetary-growth diagram as
follows
? ) (
1 1 5 4 3 2
1
1
FV D D L
nt
D
n
r
nt
D
n
r
nt
D
n
r
D
n
r
D
n
r
D
n
r
D
n
r
S
+ −
↑ ↑ ↑ ↑ ↑ ↑ ↑ → → → ⋅ ⋅ ⋅ → → → → + − .

Examining this last diagram, one algebraic expression can be
easily written for the associated future value by summing the two
embedded monetary-growth processes:

( ) ( ) { } 1 1 1 ) (
1
− + + + − =
+ nt
n
r
nt
n
r
S
r
Dn
D L FV .

Ex 2.4.1: Suppose Bill makes quarterly deposits of 00 . 2000 $ to a
retirement fund over a period of 35 years that is started with an
initial deposit of 00 . 5000 $ and concluded with a final deposit of
00 . 2000 $ . What is the future value assuming quarterly
compounding and
year
r
%
8 = ?

The monetary-growth diagram increases in complexity again.

35
8
0
1
? 00 . 2000 $
) ( 138 00 . 2000 $ 00 . 3000 $ :
%
00 . 2000 $
=
=

=
= +
→ × → +
t
r
t
FV
year
a


Solving:

( ) ( ) { }
( )
( ) { }
92 . 628 , 579 , 1 $ 53 . 639 , 531 , 1 $ 39 . 989 , 47 $
1 1
08 . 0
) 4 ( 00 . 000 , 2 $
1 00 . 3000 $
1 1 1 ) ( :
141
4
08 . 0
140
4
08 . 0
1
2
= + =
⇒ − + +
+ =
⇒ − + + + − =
+
FV
FV
r
Dn
D L FV
nt
n
r
nt
n
r
S
a

149
Note: The reader may ask, “Is this the only way that a monetary-growth
diagram can be drawn?” The answer is an emphatic no! These diagrams
are offered as a suggested approach for two reasons: 1) they visually
imply a flow of money and 2) they have been classroom tested. The
important thing is to make a monetary-growth diagram that has meaning
to you and upon which you can assemble all the relevant information.

Ex 2.4.2: Suppose in Ex 2.4.1, Bill starts his retirement account on
his 25
th
birthday and stops contributing on his 60
th
birthday with
plans not to withdraw from his account until the age of 70. Bill is
becoming increasingly wary of higher-risk investments as he
grows older. Hence, Bill rolls his retirement account over into a
safe U.S. government-bond fund paying an effective annual
interest rate of
year eff
r
%
5 . 4 = on his 60
th
birthday. What will be the
future value of Bill’s retirement account at age 70?


42 . 115 , 453 , 2 $
) 045 . 1 ( 92 . 628 , 579 , 1 $
) 1 ( :
? 92 . 628 , 579 , 1 $ :
10
2
10
5 . 4
0
1
%
=
⇒ =
⇒ = +
→→
=
=
=
FV
FV
FV r PV
FV
t
eff
t
r
t
year
eff
a
a


Ex 2.4.2 illustrates the importance of being able to choose
the right formula for the right scenario. In many investment
scenarios, several formulas may have to be used in order to obtain
the sought-after answer. Understanding of the underlying concepts
and facility with algebra are the two keys to success. We will now
list all four future-value formulas with initial lump sum deposit
S
L
corresponding to the four deposit-stream formulas.


Final Deposit & Other-than-Annual Compounding:
( ) ( ) { } 1 1 1 ) (
1
− + + + − =
+ nt
n
r
nt
n
r
S
r
Dn
D L FV
150
No Final Deposit & Other-than-Annual Compounding:
( ) ( ) ( ) { }
n
r
nt
n
r
nt
n
r
S
r
Dn
D L FV + − + + + − =
+
1 1 1 ) (
1


Final Deposit and Yearly Compounding:
( ) ( ) { } 1 1 1 ) (
1
− + + + − =
+ t
eff
eff
t
eff S
r
r
D
r D L FV

No Final Deposit and Yearly Compounding:
( ) ( ) ( ) { }
eff
t
eff
eff
t
eff S
r r
r
D
r D L FV + − + + + − =
+
1 1 1 ) (
1


Our next example illustrates the integration of a mid-life windfall
into one’s retirement program.

Ex 2.4.3: George graduates from nursing school at age 22 and
accepts a sign-on bonus of 00 . 7000 $ to go to work at a local
hospital. At the time, George used 00 . 2000 $ of the money to
open up a Roth IRA (see Section I: 6.9). He contributes
00 . 1000 $ per year making the final deposit at age 60.

George is a fairly astute investor and was able to achieve an
effective annual interest rate of
year eff
r
%
5 . 12 = over the course of
38 years. Additionally, at age 45, George received a small
inheritance of 00 . 000 , 15 $ that he promptly invested in tax-free
municipals paying an effective annual interest rate of
year eff
r
%
5 . 4 = . What are George’s total holdings at age 60?

For the Roth portion

60
5 . 12
22
1
? 00 . 1000 $
) ( 38 00 . 1000 $ 00 . 1000 $ :
%
00 . 1000 $
age
Roth
r
age
FV
year
eff
= +
→ × → +
=

a

151

( ) ( ) { }
( ) ( ) { }
( ) ( ) { }
41 . 609 , 870 $ 47 . 748 , 782 $ 94 . 860 , 87 $
1 125 . 1
125 . 0
00 . 1000 $
125 . 1 00 . 1000 $
1 125 . 1
125 . 0
00 . 1000 $
125 . 1 00 . 1000 $
1 1 1 ) ( :
39 38
39 38
1
2
= + =
⇒ − + =
⇒ − + =
⇒ − + + + − =
+
Roth
Roth
Roth
t
eff
eff
t
eff S Roth
FV
FV
FV
r
r
D
r D L FV a



For the tax-free-municipals portion

( )
( )
23 . 029 , 29 $
045 . 1 00 . 000 , 15 $
1 :
? 00 . 000 , 15 $ :
15
2
60
5 . 4
45
1
%
=
⇒ =
⇒ + =
→→→
=
taxfree
taxfree
t
eff taxfree
age
taxfree
r
age
FV
FV
r PV FV
FV
year
eff
a
a

Finally: 64 . 638 , 899 $ = + =
taxfree Roth
FV FV FV

To recap, through smart investing, George was able to turn
contributions totaling 00 . 000 , 55 $ into 64 . 638 , 899 $ over a 38-
year period.

2.5. Summary

This article is not intended to be a treatise on retirement
planning. All serious retirement planning should start with a
licensed financial consultant in order to devise detailed long-term
action plans that meet individual goals. The important thing in this
day of age is to ‘just do it!’ This leads to a second Words of
Wisdom: You must first plan smart! Then, you must do smart in
order to achieve that coveted economic security!
152

We close this article with the table below, a powerful
motivational aid that shows the future value of a 00 . 4000 $ yearly
deposit for various terms and effective annual interest rates.
Notice that the shaded million-dollar levels can be reached in four
of the five columns. Reaching a net worth of one million dollars or
more is a matter of both time and average annual interest rate.
The formula used to construct the table is

( ) { } 1 1
1
− + =
+ t
eff
eff
r
r
D
FV .

GROWTH OF $4000.00 YEARLY DEPOSIT
EFFECTIVE ANNUAL INTEREST RATE
TERM 5% 7% 9% 11% 13%
5 yr $27,207 $28,613 $30,093 $31,651 $33,290
10 yr $56,827 $63,134 $70,241 $78,245 $87,257
15 yr $94,629 $111,552 $132,013 $156,759 $186,686
20 yr $142,877 $179,460 $227,058 $289,060 $369,879
25 yr $204,453 $274,705 $373,295 $511,995 $707,400
30 yr $283,043 $408,292 $598,300 $887,652 $1,329,260
35 yr $383,345 $595,653 $944,498 $1,520,657 $2,474,997
40 yr $511,359 $858,438 $1,477,167 $2,587,307 $4,585,943
45 yr $674,740 $1,227,007 $2,296,744 $4,384,675 $8,475,224
50 yr $883,261 $1,743,943 $3,557,764 $7,413,343 $15,640,972


153
1. The Algebra of Consumer Debt

3.1 Loan Amortization

Very few people buy a house with cash. For most of us,
the mortgage is the time-honored way to home ownership. A
mortgage is a long-term collateralized loan, usually with a financial
institution, where the title-deed to the house itself is the collateral.
Once a mortgage is secured, mortgage payments are then made
month-by-month and year-by-year until the amount originally
borrowed is fully paid, usually within a pre-specified time in years.
We call this process of methodically paying back—payment by
payment—the amount originally borrowed amortizing a loan. The
word ‘amortize’ means to liquidate, extinguish, or put to death. So,
to amortize a loan means to put the loan to death. In generations
past (especially those in the ‘Greatest Generation’), the final
payment in ‘putting a loan to death’ was celebrated with the
ceremonial burning of some of the mortgage paperwork. This
symbolized the death of the mortgage and the associated
transference of the title deed to the proud and debt-free
homeowners. Nowadays, we Baby Boomers or Generation Xers
don’t usually hang on to a mortgage long enough to have the
satisfaction of burning it.

Suppose we borrow a mortgage amount A, which is
scheduled to be compounded monthly for a term of T years at an
annual interest rate r . If no payments are to be made during the
term, and a single balloon payment is to be made at the end of the
term, then the future value
A
FV of this single balloon payment is

( )
T
r
A
A FV
12
12
1+ = .

Now, let T i D D
i
12 , 1 : = = be a stream of identically-sized
mortgage payments made over the same term of T years where
the first payment is made exactly one-month after mortgage
inception and the last payment coincides with the end of the term.
154
Then, the total future value
D
FV associated with the payment
stream is
( ) { } 1 1
12
12
12
− + =
T
r
D
r
D
FV

For the mortgage to be paid, the future value of the mortgage-
amount borrowed must be equal to the total future value of the
mortgage-payments made. Hence,

( ) { } ( )
( )
( ) { }
( ) { }
T
r
T
r
T
r
T
r
T
r
A D D A
rA
D
rA
D
A
r
D
FV FV FV FV
12
12
12
12
12
12
12
12
12
12
1 1 12
1 1 12
1
1 1 1
12

+ −
=

− +
+
=
⇒ + = − +
⇒ = ⇒ =
.

The last expression is the monthly payment D needed to
amortize a mortgage amount A at the end of T years given a
fixed annual interest rate. Once D is determined, we can
compute the present dollar value of the entire payment stream

TD PV
PS
12 =

and the present dollar value of all the interest paid via the entire
payment stream
A TD PV
IPS
− =12 .

Another fundamental quantity associated with a loan,
particularly a mortgage loan, undergoing the process of
amortization is the actual dollar value of the original loan still
unpaid—called the payoff or payout value—after a given number
j of monthly payments D have been made. We will denote this
payoff value by the algebraic symbol
j
PO .
155
Recall that the
th
j payment is made at the end of the
th
j
compounding period. By that time, the amount borrowed will have
grown via the compounding mechanism to ( )
j
r
A
12
1+ . In like
fashion, the future value of the first monthly payment D will have
grown to ( )
1
12
1

+
j
r
D , and the total future value of the first j
monthly payments D will have grown to ( ) { } 1 1
12
12
− +
j
r
r
D
.
Hence, the amount of the payoff
j
PO that corresponds to exactly
the first j monthly payments D is

( ) ( ) { } 1 1
12
1
12 12
− + − + =
j
r
j
r
j
r
D
A PO .

For any fixed amortization term T , the payoff amount undergoes
a negative change from the
st
j 1 − payment to the
th
j payment
as it is incrementally reduced throughout the life of the loan. The
negative of this change is the actual dollar amount
Aj
D of the
th
j
payment actually applied to loan reduction (or to principal, see
next note). Thus,

( )
( ) ( ) { }
( ) ( ) { }
( ) ( ) | | ( ) ( ) | |
( ) | |( )
( )
1
12
1
12 12
12
1
12 12
1
12
12 12
1
12
1
12
1 1
1
12
12
1 1 1
12
1 1
12
1 1
1 1
12
1
1 1
12
1


− −
− −
− −
+


=
⇒ + + −

− =
⇒ + − + − + − + =

− + − + −
− + − + =
⇒ − = − − =
j
r
Aj
j
r r
Aj
j
r
j
r
j
r
j
r
Aj
j
r
j
r
j
r
j
r
Aj
j j j j Aj
rA D
D
r
D
A D
r
D
A D
r
D
A
r
D
A D
PO PO PO PO D

156
Finally, the dollar amount of the
th
j payment D going towards
the payment of interest I is

Aj Ij
D D D − = .

Note: In this hand book, we have deliberately shied away from the term
‘principal’ in favor of more user-friendly terms that allow the construction
of non-overlapping and pneumonic algebraic symbols. Traditionally, the
principal P is a capital sum initially borrowed or initially deposited to
which a compounding mechanism is applied.

The six loan-amortization formulas presented thus far can
be split into two groups: Global Amortization Formulas and
Payment Specific Formulas. One must first compute the monthly
payment D in order calculate all remaining quantities in either
group.
Global Amortization Formulas

Monthly Payment:
( ) { }
T
r
rA
D
12
12
1 1 12

+ −
=
Sum of Payments in Payment Stream: TD PV
PS
12 =

Total Interest Paid in Payment Stream: A TD PV
IPS
− =12

Payment Specific Formulas

Payoff after the
th
j Monthly Payment:
( ) ( ) { } 1 1
12
1
12 12
− + − + =
j
r
j
r
j
r
D
A PO

Amount of
th
j Monthly Payment to Principal:
( )
1
12
1
12
12

+


=
j
r
Aj
rA D
D

Amount of
th
j Monthly Payment to Interest:
Aj Ij
D D D − =
157

Ex 3.1.1: A 00 . 000 , 400 $ business-improvement loan is
negotiated with a local bank for an interest rate of
year
r
%
7 = and
an amortization term of 17 years. Find the quantities D,
PS
PV ,
IPS
PV ,
180
PO ,
100 A
D , and
100 I
D .

Since these six quantities are a direct single-step application of the
associated formulas, a process diagram is not needed.


( ) { }
( ) { }
∴ =

+ −

=

+ −
=


mo D
D
rA
D
T
r
64 . 3358 $
1 1 12
) 00 . 000 , 400 ($ 07 . 0
1 1 12
:
204
12
07 . 0
12
12
1
a



∴ =
⇒ − =
⇒ − =
∴ =
⇒ ⋅ ⋅ =
⇒ =
09 . 163 , 285 $
00 . 000 , 400 $ 09 . 163 , 685 $
12 :
09 . 163 , 685 $
) 64 . 3358 ($ 17 12
12 :
3
2
IPS
IPS
IPS
PS
PS
PS
PV
PV
A TD PV
PV
PV
TD PV
a
a


The last three quantities are payment specific.

( ) ( ) { }
( )
( ) { }
61 . 015 , 75 $
24 . 562 , 064 , 1 $ 69 . 578 , 139 , 1 $
1 1
07 . 0
) 64 . 3358 ($ 12
1 00 . 000 , 400 $
1 1
12
1 :
180
180
180
12
07 . 0
180
12
07 . 0
180
12 12
4
=
⇒ − =
⇒ − + −
+ =
⇒ − + − + =
PO
PO
PO
r
D
A PO
j
r
j
r
j
a

158
180
PO is also the ‘balloon’ payment needed in order to amortize
the loan 2 years ahead of schedule at the end of 15 years.

( )
( )
∴ =
⇒ − =
⇒ − =
∴ =
⇒ +


=
⇒ +


=

39 . 1524 $
24 . 1834 $ 64 . 3358 $
:
24 . 1834 $
1
12
) 00 . 000 , 400 )($ 07 . 0 ( ) 64 . 3358 ($ 12
1
12
12
:
100
100
100 100
6
100
99
12
07 . 0
100
1
12
5
I
I
A I
A
A
j
r
Aj
D
D
D D D
D
D
rA D
D
a
a


Ex 5.1.2: Bill borrows 00 . 000 , 38 $ in order to buy a new SUV.
The
year
%
5 declining-balance loan (another name for a loan that is
being reduced via an amortization schedule) has a term of 7
years. A) Calculate the monthly payment D, the sum of all
monthly payments
PS
PV , and the sum of all interest
payments
IPS
PV . B) Calculate
1 A
D and
1 I
D . C) Find the payment
number J where the amount being applied to principal starts to
exceed 90% of the payment.

A)
( ) { }
( ) { }
∴ =
⇒ ⋅ ⋅ =
⇒ =
∴ =

+ −

=

+ −
=


43 . 115 , 45 $
) 09 . 539 ($ 7 12
12 :
09 . 537 $
1 1 12
) 00 . 000 , 38 ($ 05 . 0
1 1 12
:
2
84
12
05 . 0
12
12
1
PS
PS
PS
T
r
PV
PV
TD PV
mo D
D
rA
D
a
a

159

∴ =
⇒ − =
⇒ − =
43 . 115 , 7 $
00 . 000 , 38 $ 43 . 115 , 45 $
12 :
3
IPS
IPS
IPS
PV
PV
A TD PV a


B)
( )
∴ = ⇒ − =
∴ =


=


= +


=

99 . 157 $ :
30 . 381 $
12
) 00 . 000 , 38 )($ 05 . 0 ( ) 64 . 539 ($ 12
12
12
1
12
12
:
1 1 1
2
1
1
1 1
12 1
1
I A I
A
A
r
A
D D D D
D
D
rA D rA D
D
a
a


C)
( )
( )
∴ =
⇒ = − ⇒ = −
⇒ = −
⇒ =
⇒ =
⇒ = +


⇒ =
+


=




60
17 . 58 1
) 004167 . 1 ln(
) 2737 . 1 ln(
1
) 2737 . 1 ln( ) 004167 . 1 ln( ) 1 (
2737 . 1 ) 004167 . 1 (
67 . 485 $ ) 004167 . 1 ( 30 . 381 $
9 . 0 1
12
12
9 . 0 :
1
12
12
:
1
1
1
12
2
1
12
1
J
J J
J
D
rA D
D D
rA D
D
J
J
J
r
AJ
j
r
Aj
a
a


Note: Notice the use of the natural logarithm ln when solving for
1 − J . Taking the logarithm of both sides is the standard
technique when solving algebraic equations where the variable
appears as an exponent. In theory, one can use any base, but
ln is a standard key available on most scientific calculators.
160

An interesting question associated with loan amortization
asks, what percent of the first payment is applied towards principal
and what percent pays interest charges? We already have the
algebraic machinery in place to answer this question. To start,


( )


=
⇒ +


=

12
12
1
12
12
1
1
12
rA D
D
rA D
D
A
j
r
Aj
.

Recall that

( ) { }
T
r
rA
D
12
12
1 1 12

+ −
= .

Substituting the expression for D into that for
1 A
D gives

( ) { }
( )
( )

− +
=


+ −
=

|
|
.
|

\
|

+ −
=


1 1
1
12
1
1 1
1
12
12
1 1 12
12
12
12
1
12
12
1
12
12
1
T
r
A
T
r
A
T
r
A
rA
D
rA
D
rA
rA
D


Next, we form the ratio

( )
( ) { }
T
r
T
r
A
rA
rA
D
D
12
12
12
12
1
1 1 12
1 1
1
12

+ −

− +
=
161
Finally, we obtain after algebraic simplification
( ) ∴ + =
− T
r A
D
D
12
12
1
1

Ex 3.1.3: Calculate
D
D
A1
for
year
r
%
25 . 8 = and the following
values for T : 15, 20, and 30 years.


% 48 . 8 30 : % 3 . 19 20
: % 1 . 29 291 . ) 006875 . 1 ( 15
1 1
180 1
= ⇒ = ⇒
= = = ⇒

D
D
years
D
D
years
D
D
years
A A
A

The expression ( )
T
r A
D
D
12
12
1
1

+ = can be used to build a
lookup table for various annual interest rates and typical loan
amortization terms where the entries in the body of the table will
be the corresponding principal-to-overall-payment ratios
D
D
A1
for
the very first mortgage payment.

ANNUAL INTEREST RATE
TERM 5% 6% 7% 8% 9%
15 yr .473 .407 .351 .302 .260
20 yr .368 .302 .247 .202 .166
30 yr .223 .166 .123 .091 .067
40 yr .135 .091 .061 .041 .027

The above table helps answer questions such as, ‘by what
percentage would I have to increase my monthly payment in order
to reduce my amortization term from 30 years to 20 years?’ If your
mortgage interest rate is
year
%
7 , the answer from table lookup is
roughly
% 4 . 12 124 . %
123 . 247 . %
= = ∆
⇒ − = ∆
.
162

3.2 Your Home Mortgage

In his pop hit “Philadelphia Freedom”, Elton John sings
about the ‘good old family home.’ The vast majority of all
Americans purchase that ‘good old family home’ via a
collateralized declining-balance loan where the collateral is the title
deed to the house being purchased. This is the traditional home
mortgage as we Americans know it.

Two terms associated with the word mortgage are:
mortgager, the lending institution granting the mortgage; and
mortgagee, the individual obtaining the mortgage. The
responsibility of the mortgagee is to make monthly payments on
time until that time when the loan is amortized. In return, the
mortgagee is guaranteed a place to live—i.e. the house cannot be
legally resold or the mortgagee legally evicted. However, if the
mortgagee fails to make payments, then the mortgager can start
the legal process of eviction as a means of recovering the unpaid
balance associated with the home mortgage. After eviction occurs,
the lending institution will 1) sell the house, 2) recover the unpaid
balance, 3) recover expenses associated with the sale, and 4)
return any proceeds left to the mortgagee. The aforementioned
scenario is not a happy one and should be avoided at all ‘costs’.
Remember, as long as there is an unpaid mortgage balance, the
lending institution holds the title deed to the home that you and
your family occupy. Always make sure that the payment you sign
up for is a payment that you can continually meet month after
month and year after year!

The many examples in this article address various aspects
of making mortgage payments and the total lifetime costs
associated with the mortgage process. Let’s begin with the most
frequently asked question, how much is my payment?

Ex 3.2.1: The Bennett family is in the process of buying a new
home for a purchase price of 00 . 000 , 300 $ . They plan to put 20%
down and finance the remainder of the purchase price via a
conventional fixed-interest-rate home mortgage with a local
lending institution.
163
The amortization options are as follows: 1)
year
r yrs T
%
25 . 6 @ 15 = = , 2)
year
r yrs T
%
90 . 6 @ 20 = = , and 3)
year
r yrs T
%
25 . 7 @ 30 = = . Compute the monthly payment for
each of the three options.

The interest-rate range of
year
%
00 . 1 is fairly typical for a term
range of 15 years. The amount borrowed will be 00 . 000 , 240 $
after the 20% down payment is made. Proceeding with the
calculations, we have

( ) { }
( ) { }
( ) { }
∴ =

+ −
=
= =
∴ =

+ −
=
= =
∴ =

+ −
=
= =



mo D
D
r yrs T
mo D
D
r yrs T
mo D
D
r yrs T
year
year
year
66 . 1773 $
1 1 12
) 00 . 000 , 260 ($ 0725 . 0
25 . 7 @ 30 :
30 . 098 , 2 $
1 1 12
) 00 . 000 , 260 ($ 0690 . 0
90 . 6 @ 20 :
30 . 229 , 2 $
1 1 12
) 00 . 000 , 260 ($ 0625 . 0
25 . 6 @ 15 :
) 30 ( 12
12
0725 . 0
%
3
) 20 ( 12
12
0625 . 0
%
2
) 15 ( 12
12
0625 . 0
%
1
a
a
a


Of interest would be the present value TD PV
PS
12 = of all
mortgage payments comprising the payment stream for each of
the three options. Once
PS
PV is determined, we can determine
IPS
PV by the formula A TD PV
IPS
− =12 . The results from Ex
3.2.1 are shown in the next table
164


PRESENT VALUE FOR THREE
PAYMENT STREAMS
TERM
PS
PV
A
IPS
PV
15 yr $401,274.00 $260,000.00 $141,274.00
20 yr $503,592.00 $260,000.00 $243,592.00
30 yr $638,517.60 $260,000.00 $378,517.00

The facts displayed in the above table are a real eye-opener for
most of us when first exposed. The bottom line is that longer-term
mortgages with lower monthly payments cost more money—much
more money—in the long run. These considerations have to be
factored in when buying a home. Section I: 6.10.8 lists some of
the pros and cons associated with long-term mortgages.

The next example answers the question, how much house can I
afford?

Ex 3.2.2: Based on income, Bill Johnson has been approved for a
monthly mortgage payment not to exceed 00 . 3000 $ including
real-estate taxes and homeowners insurance. If, on the average,
real-estate taxes are 00 . 4000 $ per year and homeowners
insurance is 00 . 1600 $ for homes in the subdivision where Bill
wants to move, how much house can he afford assuming 30-year
mortgage rates are
year
r
%
5 . 6 = ?

We are only quoting the 30-year rate since the associated
mortgage payment will most likely be the lowest payment
available. The mortgage payment that includes principal, interest,
taxes, and insurance is traditionally known as the PITI payment,
whereas the payment that just includes principal and interest is
known as the PI payment. The first step will be the subtracting out
of the monthly portion of the 00 . 3000 $ mortgage payment that
must be allocated to taxes and insurance.

∴ =

+
− =
mo D
D
00 . 2533 $
12
00 . 1600 $ 00 . 4000 $
3000 $ :
1
a

165
In the second step, we set 00 . 2533 $ equal to the monthly
payment formula and solve for the associated mortgage
amount A.

( ) { }
( ) { }{ }
∴ =

+ −
=

+ −
=


74 . 800 , 400 $
065 . 0
00 . 2533 $ 1 1 12
1 1 12
) ( 0650 . 0
00 . 2533 $ :
) 30 ( 12
12
065 . 0
) 30 ( 12
12
065 . 0
2
A
A
A
a


In summary, Bill qualifies for a 00 . 000 , 400 $ mortgage. If one
assumes that Bill has enough money to make a 20% down
payment, then Bill would be qualified to buy a house having a
purchase price
P
P of 00 . 000 , 500 $ as shown in the algebraic
calculation below.


00 . 000 , 500 $
80 . 0
00 . 00 , 400 $
00 . 000 , 400 $ 80 . 0 00 . 000 , 400 $ 20 . 0
=
⇒ =
⇒ = ⇒ = −
P
P
P P P
P
P
P P P


Notice that the down payment needed under the above scenario is
a hefty 00 . 000 , 100 $ .

The next example answers the question, if I increase my
payment by so many dollars per month, how much sooner will I be
able to pay off my mortgage?

Ex 3.2.3: Nathan and his wife Nancy purchased a house seven
years ago, financing 00 . 000 , 175 $ for 30 years at
year
r
%
7 = . The
couple’s monthly income has recently increased by 00 . 500 $ .
Nathan and Nancy decide to use 00 . 250 $ of this increase for an
additional monthly principle payment. A) If the couple follows this
plan, how many years will they be able to save from the current 23
years remaining on the mortgage? B) How much money will they
save in interest charges?
166
In Step 1, we calculate the existing monthly payment by the usual
method.

( ) { }
∴ = ⇒
+ −
=
= =

mo D D
r yrs T
year
28 . 1164 $
1 1 12
) 00 . 000 , 175 ($ 070 . 0
00 . 7 @ 30 :
) 30 ( 12
12
070 . 0
%
1
a


In Step 2, we calculate the balance (payoff) remaining on the
mortgage at the end of seven years.

( ) ( ) { }
( )
{ }
( ) { } ∴ = ⇒ − + −
+ =
⇒ − + − + =
97 . 507 , 159 $ 1 1
070 . 0
28 . 1164 $ 12
1 000 , 175 $
1 1
12
1 :
84
84
12
070 . 0
84
12
070 . 0
84
12 12
2
PO
PO
r
D
A PO
j
r
j
r
j
a


Keeping the same payment of mo D 28 . 1164 $ = allows the
remaining principle of 97 . 507 , 159 $ to be paid off in 23 years—
right on schedule. Increasing the payment to mo D 28 . 1414 $ =
will logically result in a compression of the remaining term.

Our approach for the remainder of the problem is to use the
existing monthly payment formula
( ) { }
T
r
rA
D
12
12
1 1 12

+ −
=

in reverse in order to solve for T when D, A, and r is known.
First notice that
( ) { }
( ) { }
∴ =

+ −
=

+ −
=


mo D
D
rA
D
T
r
28 . 1164 $
1 1 12
) 97 . 507 , 159 ($ 070 . 0
1 1 12
) 23 ( 12
12
070 . 0
12
12
.
167
The previous result confirms the power of the existing monthly
payment formula in that this formula retains the algebraic linkage
amongst principal, payment, interest rate and term at any stage in
the amortization process. It also allows one to solve for any one of
the four variables provided the other three variables are known.
With this in mind, we finally proceed to Step 3 where D is
increased to mo D 28 . 1414 $ = .


( ) { }
( ) { }
( ) { }
( ) { }
( )
( ) ( )
( )
years T
T
T
rA
D
T
T
T
T
T
r
36 . 15
07268 . 1 005816 . 0 12
34209 . 0 ln 1 ln 12
34209 . 0 1
6579 . 1 1
56 . 165 , 11 $ 1 1 36 . 971 , 16 $
1 1 12
) 97 . 507 , 159 ($ 070 . 0
28 . 1414 $
1 1 12
:
12
070 . 0
12
12
070 . 0
12
12
070 . 0
12
12
070 . 0
12
12
070 . 0
12
12
3
=
− = ⋅ −
⇒ = + ⋅ −
⇒ = +
⇒ = + −
⇒ = + −

+ −
=
+ −
=





a


The answer years T 36 . 15 = represents 185 payments where the
final payment is a small fractional payment that would
ceremoniously pay off the mortgage. Going back to the original
question, Nathan and Nancy would compress the original
mortgage by
A) years years years 64 . 7 36 . 15 00 . 23 :
4
= − a

by increasing the payment to mo D 28 . 1414 $ = .

To answer part B), we calculate the original amount programmed
to interest (assuming the full thirty-year schedule) and then
recalculate it for the amount actually paid. The difference is the
savings.
168
B)
19 . 661 , 60 $
61 . 479 , 183 $ ) (
00 . 000 , 175 $ ) 28 . 1414 )($ 36 . 15 ( 12
) 28 . 1164 )($ 7 ( 12 ) ( :
80 . 140 , 244 $
00 . 000 , 175 $ 8 . 140 , 419 $
12 ) ( :
6
5
=
⇒ =
⇒ − +
=
=
⇒ − =
⇒ − =
Savings
ed recalculat PV
ed reclaculat PV
PV
PV
A TD original PV
IPS
IPS
IPS
IPS
IPS
a
a


Thus Nathan and Nancy will be able to save 19 . 661 , 60 $ in
interest charges if they faithfully follow their original plan.

In the next example, the mortgage initially has a term of
30 years and the mortgagee wishes to amortize it on an
accelerated 20 year schedule after five years have elapsed in the
original term.

Ex 3.2.4: Brian Smith purchased a house five years ago and
financed 00 . 000 , 215 $ for 30 years at
year
r
%
2 . 7 = . He would like
to pay off his house in 15 years. A) By how much should he
increase his monthly payment in order to make this happen? B)
How much does he save in the long run by following the
compressed repayment schedule?

Step 1 is the calculation of the existing monthly payment.


( ) { }
∴ =

+ −
=
= =

mo D
D
r yrs T
year
39 . 1459 $
1 1 12
) 00 . 000 , 215 ($ 072 . 0
20 . 7 @ 30 :
) 30 ( 12
12
072 . 0
%
1
a



In Step 2, we calculate the payoff at the end of five years.
169

( ) ( ) { }
( )
{ }
( ) { }
∴ =
⇒ − + −
+ =
⇒ − + − + =
89 . 809 , 202 $
1 1
072 . 0
39 . 1459 $ 12
1 000 , 215 $
1 1
12
1 :
60
60
12
072 . 0
60
12
072 . 0
60
12 12
2
PO
PO
r
D
A PO
j
r
j
r
j
a


Brian wants to accelerate the mortgage repayment schedule so
that the remaining 89 . 809 , 202 $ is paid off in 15 years. This, in
effect, creates a brand new 15-year mortgage having the same
annual interest rate. Step 3 is the calculation for Brian’s new
payment.

( ) { }
∴ = ⇒
+ −
=
= =

mo D D
r yrs T
year
66 . 1845 $
1 1 12
) 89 . 809 , 202 ($ 072 . 0
20 . 7 @ 15 :
) 15 ( 12
12
072 . 0
%
3
a


Once the old and revised payments are known, Part A) is easily
answered.
A) mo increase 77 . 385 $ 89 . 1459 $ 66 . 1845 $ :
4
= − = a

Part B): Follow the exact process as presented in Example 5.2.3,
Steps 5) and 6), to obtain Brian’s overall projected savings
of 20 . 748 , 105 $ .

In our next example, a mortgage is initially taken out for a
term of 20 years. Three years into the term, the mortgage is
refinanced in order to obtain a lower interest rate.

Ex 3.2.5: In buying a new home, the Pickles financed
00 . 000 , 159 $ for 20 years at
year
r
%
2 . 6 = . Three years later, 15-
year rates dropped to
year
%
875 . 4 . The Pickles decide to refinance
the remaining balance and the associated 00 . 1500 $ refinancing
closing costs at the lower rate. How much do they save overall by
completing this transaction?
170

( ) { }
∴ =

+ −
=
= =

mo D
D
r yrs T
year
55 . 1157 $
1 1 12
) 00 . 000 , 159 ($ 062 . 0
20 . 6 @ 20 :
) 20 ( 12
12
062 . 0
%
1
a


( ) ( ) { }
( )
{ }
( ) { }
∴ =
⇒ − + −
+ =
⇒ − + − + =
48 . 741 , 145 $
1 1
062 . 0
55 . 1157 $ 12
1 000 , 159 $
1 1
12
1 :
36
36
12
062 . 0
36
12
062 . 0
36
12 12
2
PO
PO
r
D
A PO
j
r
j
r
j
a


( ) { }
∴ =

+ −
=
= =

mo D
D
r yrs T
year
81 . 1154 $
1 1 12
) 48 . 241 , 147 ($ 04875 . 0
875 . 4 @ 15 :
) 15 ( 12
12
04875 . 0
%
3
a


Notice that the monthly payment actually drops a little bit, and we
have compressed the overall term by two years! Using our
standard methodology, the overall savings is

19 . 274 , 28 $
)} 81 . 1154 ($ 180 ) 55 . 1157 ($ 36 { ) 55 . 1157 ($ 240 :
4
= + − a
.

Our last example illustrates the devastating cumulative effects of
making partial mortgage payments over a period of time.
Hopefully, this is a situation that most of us will strive to avoid.

Ex 5.2.6: Teresa bought a new home for a purchase price of
00 . 000 , 450 $ . She made a 00 . 000 , 90 $ down payment and
financed the remainder at
year
%
7 for a term of 30 years. Three
years into the loan, Teresa was cut to half-time work for a period
of 24 months.
171
Teresa was able to negotiate with her lending institution a partial
mortgage payment (half the normal amount) for the same period.
At the end of the 24 months, Teresa was able to go back to full-
time employment and make full house payments. A) Calculate her
mortgage balance at the end of five years. B) Calculate the
revised remaining term if the original payment is maintained. C)
Calculate the revised payment needed in order to amortize the
loan via the original schedule.

First, we need to calculate Teresa’s original payment:

( ) { }
∴ =

+ −
=
= =

mo D
D
r yrs T
year
09 . 2395 $
1 1 12
) 00 . 000 , 360 ($ 07 . 0
00 . 7 @ 30 :
) 30 ( 12
12
07 . 0
%
1
a
.

At the end of three years, the mortgage balance is

( ) ( ) { }
( )
{ }
( ) { }
∴ =
⇒ − + −
+ =
⇒ − + − + =
03 . 217 , 348 $
1 1
07 . 0
09 . 2395 $ 12
1 000 , 360 $
1 1
12
1 :
36
36
12
07 . 0
36
12
07 . 0
36
12 12
2
PO
PO
r
D
A PO
j
r
j
r
j
a
.

We use the same formula the second time in order to calculate the
effects of making a monthly half payment of 54 . 1197 $ for a
period of two years on a partially-amortized loan having a starting
balance 03 . 217 , 348 $ .

( ) ( ) { }
( )
{ }
( ) { }
∴ =
⇒ − + −
+ =
⇒ − + − + =
84 . 627 , 369 $
1 1
07 . 0
54 . 1197 $ 12
1 03 . 217 , 348 $
1 1
12
1 :
24
24
12
07 . 0
24
12
07 . 0
24
12 12
3
PO
PO
r
D
A PO
j
r
j
r
j
a

172
A) Teresa’s revised mortgage balance at the end of five years is
84 . 627 , 369 $ , a sum which is 84 . 9627 $ more than she originally
borrowed.

At the end of five years, the original payment of 08 . 2395 $ comes
back into play, a payment that must pay off a balance of
84 . 627 , 369 $ over a yet-to-be-calculated number of years.

( ) { }
( ) { }
( ) { }
( ) { } ( )
( ) ( )
( )
years T
T
T
rA
D
T T
T
T
T
r
02748 . 33
30505 . 2 005816 . 0 12
09975 . 0 ln 1 ln 12
09975 . 0 1 90025 . 1 1
95 . 873 , 25 $ 1 1 96 . 740 , 28 $
1 1 12
) 84 . 627 , 369 ($ 070 . 0
08 . 2395 $
1 1 12
:
12
070 . 0
12
12
070 . 0
12
12
070 . 0
12
12
070 . 0
12
12
070 . 0
12
12
4
=
− = ⋅ −
⇒ = + ⋅ −
⇒ = + ⇒ = + −
⇒ = + −

+ −
=
+ −
=
− −



a


B) With the original payment, Teresa will not pay off her mortgage
until another 33 years have passed. When added to the five years
that have already transpired, this mortgage will require 38 years to
amortize assuming no other changes occur.

To bring Teresa back on schedule, we will need to calculate a
revised mortgage payment that allows her to amortize the balance
of 84 . 627 , 369 $ in 25 years.

( ) { }
∴ = ⇒
+ −
=
= =

mo D D
r yrs T
year
45 . 2612 $
1 1 12
) 84 . 627 , 369 ($ 07 . 0
00 . 7 @ 25 :
) 25 ( 12
12
07 . 0
%
5
a


C) Teresa’s revised mortgage payment is mo 45 . 2612 $ ,
mo 36 . 317 $ more than her original payment of 08 . 2395 $ .
Playing catch up is costly!
173
3.3 Car Loans and Leases

Nowadays, most car loans are set up on declining-balance
amortization schedules. The mathematics associated with car
loans set up on a declining-balance amortization schedule is
identical to the mathematics associated with home mortgages.
Two major differences are that the term is much shorter for a car
loan and that the annual interest rate is often less. Let’s start off by
computing a car payment.

Ex 3.3.1: Bob bought a 2004 SUV having a sticker price of
00 . 000 , 45 $ . The salesperson knocked % 12 off, a ‘deal’ that
Bob gladly agreed too. After factoring in a % 7 state sales tax on
the agreed-to sales price, Rob put 00 . 2000 $ down and financed
the balance for 66 months at
year
%
4 . The lending institution
happens to be a subsidiary of the car manufacturer. A) Calculate
Bob’s car payment. B) Calculate the interest paid to the lending
institution assuming the loan goes full term.

A)
( ) { }
∴ =

+ −
=
= =
∴ =
∴ = ⋅
= +
∴ = ⋅
=

mo D
D
r yrs T
nced AmountFina
Tax ice Sales
ice Sales
year
46 . 682 $
1 1 12
) 00 . 372 , 40 ($ 04 . 0
00 . 4 @ 5 . 5 :
00 . 372 , 40 $
00 . 372 , 42 $ ) 00 . 600 , 39 ($ ) 07 . 1 (
Pr
00 . 600 , 39 $ ) 00 . 000 , 45 ($ ) 88 . 0 (
Pr :
66
12
04 . 0
%
2
1
a
a


B)
∴ =
⇒ − =
60 . 4670 $
00 . 372 , 40 $ ) 46 . 682 ($ 66 :
3
IPS
IPS
PV
PV a

174
The fascinating thing about Example 5.3.1 is that total interest
60 . 4670 $ to be paid to the lending institution (part of the car
conglomerate) just about equals 00 . 5400 $ , the dollar amount
‘knocked off’ the original sales price. Could this be a classic case
of pay me now or pay me later?

A real danger in financing large amounts for expensive
vehicles is that vehicles—unlike houses—depreciate over time.
This means that there may be a period of time within the term of
the loan where the actual balance remaining on the loan exceeds
the current value of the vehicle itself. Such a period of time is
properly characterized as a financial ‘danger zone’ since insurance
proceeds paid via the ‘totaling’ of a fully-insured vehicle in the
danger zone will not be enough to retire the associated loan. Thus,
the once proud owner is not only stuck with a trashed vehicle, but
also a partially unpaid debt and, most assuredly, significantly
higher insurance premiums in the future. Motorized vehicles, as
much as Americans love ‘em, are definitely a major family money
drain.

So, by how much does a vehicle typically depreciate? The
standing rule of thumb is between % 15 and % 20 per year where
the starting value is the manufacturers suggested retail price. The
% 15 figure is a good number for higher-priced vehicles equipped
with desirable standard options such as air conditioning and an
automatic transmission. The % 20 figure is usually reserved for
cheaper stripped-down models having few customer-enticing
features. Either percentage figure leads to a simple mathematical
model describing car depreciation. Let SRP be the suggested
retail price of a particular car model, P be the assumed annual
depreciation rate (as a decimal fraction), and t be the number of
years that have elapsed since purchase. Then the current vehicle
value ) (t V V = can be estimated by
t
P SRP t V ) 1 ( ) ( − ⋅ =
where SRP is the manufacturers suggested retail price; P is the
annual depreciation rate; t be the number of years since
purchase.

175
Note: Some estimators say that one must immediately reduce a
vehicle’s value from resale value to wholesale value as soon as it
leaves the showroom. That amount is roughly equivalent to a
normal year’s depreciation, which increases the exponent up by
one in the previous model
1
) 1 ( ) (
+
− ⋅ =
t
P SRP t V .

Ex 3.3.2: Project the value of Bob’s SUV over the life of the
corresponding loan with and without immediate ‘Showroom
Depreciation’. Use an annual depreciation rate of 15 . = P and
calculate the two values at six-month intervals.
Looking back at the previous example, we see
that 00 . 000 , 45 $ = SRP . The results obtained via the two vehicle-
depreciation models are shown in the table below.

DEPRECIATION OF BOB’S SUV
Time in
months
With
Showroom
Depreciation
Without
Showroom
Depreciation
0 $38,250.00 $45,000.00
6 $35,264.00 $41,487.00
12 $32,512.00 $38,250.00
18 $29,975.00 $35,264.00
24 $27,635.00 $32,512.00
30 $25,478.00 $29,975.00
36 $23,490.00 $27,635.00
42 $21,656.00 $25,478.00
48 $19,966.00 $23,490.00
54 $18,408.00 $21,656.00
60 $16,971.00 $19,966.00
66 $15,647.00 $18,408.00

One can argue about ‘with’ or ‘without’ showroom depreciated, but
even with no depreciation, Bob’s SUV drops about 00 . 3500 $ of
its sticker price in the first six months. The important thing to note
is that the table values are the insurance value of the vehicle—i.e.
the cash that an insurance company will pay you if the vehicle is
totally destroyed. Yes, you may be able to sell it for more; but what
if it is involved in an accident? The table value will be your legal
compensation.
176


Let’s see how Bob’s SUV loan progresses towards payout
during the same 66-month term. We will compute the remaining
balance at six-month intervals using the now-familiar formula

( ) ( ) { } 1 1
12
1
12 12
− + − + =
j
r
j
r
j
r
D
A PO .

The results are:


AMORTIZATION OF
BOB’S SUV LOAN
Time in
months
Remaining
Loan Balance
0 $40,372.00
6 $37,057.16
12 $33,675.47
18 $30,225.58
24 $26,706.12
30 $23,115.68
36 $19,452.83
42 $15,716.11
48 $11,904.27
54 $8,015.06
60 $4,047.67
66 $0.26


Note the few cents remaining on the loan balance. Increasing the
monthly loan payment to an even 00 . 683 $ will easily eliminate
that problem (caused by rounding errors)—an approach most
lending institutions would take.

Now for the moment of truth! We will merge the last two
tables into a new table in order to compare depreciated value to
current loan balance line-by-line.
177

BOB’S SUV LOAN, A LOAN ON THE EDGE!
Time in
months
With
Showroom
Depreciation
With No
Showroom
Depreciation
Remaining
Loan
Balance
0 $38,250.00 $45,000.00 $40,372.00
6 $35,264.00 $41,487.00 $37,057.16
12 $32,512.00 $38,250.00 $33,675.47
18 $29,975.00 $35,264.00 $30,225.58
24 $27,635.00 $32,512.00 $26,706.12
30 $25,478.00 $29,975.00 $23,115.68
36 $23,490.00 $27,635.00 $19,452.83
42 $21,656.00 $25,478.00 $15,716.11
48 $19,966.00 $23,490.00 $11,904.27
54 $18,408.00 $21,656.00 $8,015.06
60 $16,971.00 $19,966.00 $4,047.67
66 $15,647.00 $18,408.00 $0.26
The above table shows a loan on the edge! If we factor in
showroom depreciation, the insurance value of the vehicle is
actually less than the balance remaining on the loan for about the
first two years. We could term that period of time a financial
danger zone since the insurance proceeds from a totaled vehicle
will not be enough to pay off the loan in full. If we don’t factor in
showroom depreciation, we are in reasonably good shape
throughout the same two years—a big if. So, we might conclude
that Bob is not in too great of danger. But, how about Mr. Harvey,
whose story is in our next example.

Ex 3.3.3: Mr. Robert Harvey bought a new Camry for his son
John, who planned to use it while attending college. The original
Camry sticker price of 00 . 995 , 24 $ was discounted by 00 . 1500 $
due to a Toyota advertised sale. State and county sales taxes then
added % 6 to the remaining purchase price. Mr. Harvey made a
00 . 1000 $ down payment and financed the balance for five years
at
year
%
5 . 3 , figuring the car would be paid off when John graduated.
Alas, fate had a different plan because poor John totaled it
seventeen months later. Project the unpaid loan balance, if any,
after insurance proceeds are received.
178

( ) { }
∴ =

+ −
=
= =
∴ = − =
∴ = ⋅
= +
∴ = −
=

mo D
D
r yrs T
nced AmountFina
Tax ice Sales
ice Sales
year
85 . 434 $
1 1 12
) 00 . 904 , 23 ($ 035 . 0
50 . 3 @ 5 :
70 . 904 , 23 $ 00 . 000 , 1 $ 70 . 904 , 24 $
70 . 904 , 24 $ ) 00 . 495 , 23 ($ ) 06 . 1 (
Pr
00 . 495 , 23 $ 00 . 1500 $ 00 . 995 , 24 $
Pr :
60
12
035 . 0
%
2
1
a
a


At the seventeen-month point, we need to calculate both the
remaining wholesale value of the Camry (which hopefully equals
the insurance proceeds) and the remaining balance on the loan.
Also, as a rule, the Toyota Camry holds its resale value rather
well. Thus, we will be optimistic and use 13 . 0 = P in conjunction
with showroom depreciation. Notice the rescaling of the time t to
months.

( ) ( ) { }
( )
( ) { }
36 . 302 $
82 . 549 , 17 $ 18 . 852 , 17 $ :
82 . 549 , 17 $
1 1
035 . 0
) 85 . 434 ($ 12
1 00 . 904 , 23 $
1 1
12
1 :
18 . 852 , 17 $ ) (
) 87 . 0 ( 00 . 995 , 24 $ ) (
) 1 ( ) ( :
5
17
17
12
035 . 0
17
12
035 . 0
17
12 12
4
3
12
29
12
12
=
⇒ − =
=
⇒ − + −
+ =
⇒ − + − + =
=
⇒ ⋅ =
⇒ − ⋅ =
+
Balance Settlement
Balance Settlement
PO
PO
r
D
A PO
t V
t V
P SRP t V
j
r
j
r
j
t
a
a
a

179
Mr. Harvey escaped by the skin of his teeth. After the loan balance
is paid off, he will have pocketed 36 . 302 $ . But wait, Mr. Harvey
will have to come up with an additional down payment because
John now needs another car. Life on the edge!

The last story might have been significantly different if
another model of automobile was involved. Let’s assume that the
purchase price, discount, taxes, and loan conditions remain
identical but the make and model of car is one for which 20 . 0 = P .
Then, starting again at Step 3, we have


30 . 2973
82 . 549 , 17 $ 52 . 576 , 14 $ :
82 . 549 , 17 $ :
52 . 576 , 14 $ ) (
) 80 . 0 ( 00 . 995 , 24 $ ) (
) 1 ( ) ( :
5
17
4
3
12
29
12
12
− =
⇒ − =
=
=
⇒ ⋅ =
⇒ − ⋅ =
+
Balance Settlement
Balance Settlement
PO
t V
t V
P SRP t V
t
a
a
a
.

In this scenario, Mr. Harvey still owes 30 . 2973 $ to the lending
institution once insurance proceeds are received. Plus, he’ll need
some additional cash for a new down payment on a replacement
vehicle. Hence, by signing on to this ‘deal’, Mr. Harvey rolled on
the edge and eventually fell off.

Our next example is taken from an advertisement in a local
newspaper.
Ex 3.3.4: A Ford dealership is advertising a brand new 2004
Freestar for a sales price of 00 . 483 , 17 $ , which is 00 . 5000 $ less
than the manufacturers suggested retail price. Ford will finance the
whole amount—with nothing down for qualified buyers—for 84
months at
year
%
89 . 5 . The advertised payment is mo 00 . 269 $ .
Analyze this deal for correctness, true cost and “edginess’.
180
We first need to add in the % 7 State-of-Ohio sales tax to get the
true amount financed; then, we compute the monthly payment.

( ) { }
∴ =

+ −
=
= =
∴ =
∴ = ⋅
= +
∴ =

mo D
D
r yrs T
nced AmountFina
Tax ice Sales
ice Sales
year
29 . 272 $
1 1 12
) 81 . 706 , 18 ($ 0589 . 0
89 . 5 @ 7 :
81 . 706 , 18 $
81 . 706 , 18 $ ) 00 . 483 , 17 ($ ) 07 . 1 (
Pr
00 . 483 , 17 $ Pr :
84
12
0589 . 0
%
2
1
a
a


Notice that we are only about 00 . 3 $ away from the advertised
payment; hence we will accept the dealership’s calculations as
valid. Note: the small difference is probably due on how we interpreted
the stated rate of
year
%
89 . 5 —as either an effective annual rate
eff
r or an
actual annual rate r .

Next, let’s compute the sum of all interest payments during the life
of the loan.


55 . 4165 $
81 . 706 , 18 $ ) 29 . 272 ($ ) 84 (
12 :
3
=
⇒ − ⋅ =
⇒ − =
IPS
IPS
IPS
PV
PV
A TD PV a


An important thing to note here is that the dealership is gaining
back 80% of the advertised rebate 00 . 5000 $ in interest charges.
The hook is the lure of no money down.

Lastly, let’s examine loan ‘edginess’ in terms of remaining loan
balance versus the depreciated value of the Freestar. Considering
the size of the initial rebate, assume that the initial showroom
discount has already occurred.
181
Hence, the appropriate depreciation model is
t
P SRP t V ) 1 ( ) ( − ⋅ = ; and, since the Freestar has desirable
features, we will use 15 . 0 = P . Table 5.7 shows the frightful
results—a Freestar on the edge for nearly four years!

A FREESTAR ON THE EDGE
Time in
months
With no
Showroom
Depreciation
Remaining
Loan
Balance
0 $17,483.00 $18,706.81
6 $16,118.52 $17,610.61
12 $14,860.55 $16,487.42
18 $13,700.75 $15,319.19
24 $12,631.47 $14,121.99
30 $11,645.64 $12,889.11
36 $10,736.75 $11,619.46
42 $9,898.79 $10,311.96
48 $9,126.23 $8,965.48
54 $8,413.97 $7,557.85

Our last example in this section examines a vehicle lease.
A lease is a loan that finances the corresponding amount of
vehicle depreciation that transpires during the term of the loan. At
the end of the period, the vehicle is returned to the dealership. All
leases have stipulations where the amount of miles aggregated on
the vehicle must remain below (usually 12,000 miles) per year.

Ex 3.3.5: A Grand Cherokee is advertised for a ‘red tag’ sales
price of 00 . 888 , 21 $ after rebates. The corresponding red-tag
lease payment is mo 00 . 248 $ plus tax for a term of 39 months
with 00 . 999 $ due at signing. From the information just given,
analyze this transaction.

The sales price of 00 . 888 , 21 $ represents about 20% off and may
actually be a little bit below wholesale. But, what does it matter, for
the vehicle is going to eventually be returned to the dealership and
resold as a ‘premium’ used car!
182
Predicting the original manufacturers suggested retail price (SRP),
we have
∴ = ⇒ = ⋅ 00 . 360 , 27 $ 00 . 888 , 21 $ ) 80 . 0 ( :
1
SRP SRP a

Next, we predict the depreciation during the 39 month term of the
lease using the showroom depreciation model with 15 . 0 = P .

∴ = ⇒ ⋅ =
⇒ − ⋅ =
+
44 . 713 , 13 $ ) 39 ( ) 85 . 0 ( 00 . 360 , 27 $ ) 39 (
) 1 ( ) ( :
12
51
1
2
V V
P SRP t V
t
a


Once the depreciation is calculated, we can determine the actual
amount financed and the interest charged.

45 . 2496 $ 55 . 7175 $ 00 . 9672 $ :
00 . 9672 $ ) 00 . 248 ($ 39 :
55 . 7175 $ 00 . 999 $ 55 . 8174 $
) 00 . 999 ($ 44 . 713 , 13 $ 00 . 888 , 21 $ :
5
4
3
= − =
= ⋅ =
= − =
⇒ − − =
IPS
PS
PV
PV
AF
AF
a
a
a
.

The difference
IPS
PV is due to the applied interest rate over the
term of 39 months, which we will now determine by:

∴ = ⇒ = + ⇒ = +
⇒ = = +
⇒ = + ⇒ = + ⋅
⇒ = + ⋅ ⇒ + ⋅ =
% 2 . 9 007679 . 1 ) 1 ( 00765 . 0 ) 1 ln(
298556 . 0 ) 3479 . 1 ln( ) 1 ln( 39
3479 . 1 ) 1 ( 00 . 9692 $ ) 1 ( 55 . 7175 $
) 1 ( ) 1 ( :
12 12
12
39
12
39
12
12 12
6
r
FV PV PV FV
r r
r
r r
T
r
T
r
a


Notice the sky-high interest rate of % 2 . 9 = r , a rate that is
approaching low-end credit-card rates!

In closing Article 3.3, we will leave it to the reader to verify the
following statement: To avoid living on the edge when signing
up for an automobile loan, make a down payment equivalent
to the first year’s depreciation, including showroom
depreciation.
183
3.4 The Annuity as a Mortgage in Reverse

An annuity can be thought of as a mortgage in reverse where the
annuitant (the one receiving the payment) becomes the lender and
the institution from which the annuity ‘is purchased’ becomes the
borrower. Thus, monthly annuity payments are computed via the
same methods used for computing monthly mortgage payments.

With the last statement in mind, we proceed with just one
comprehensive example that addresses both annuity creation and
annuity usage.

Ex 3.4.1: Mike, age 25, receives 00 . 000 , 10 $ as an inheritance.
Using his inheritance money as an initial deposit, Mike wisely
decides to open a company-sponsored 401K account. For 42
years, he makes an annual payroll deposit of 00 . 2000 $ which the
company matches. A) Project the value of Mike’s 401K account at
age 67 assuming an average effective annual rate of return of
year eff
r
%
9 = . B) If the total value in Mike’s 401K account is used to
buy a thirty-year-fixed-payment annuity paying
year
r
%
5 = at age
67, calculate Mike’s monthly retirement payment. C) If Mike dies at
age 87, how much is left in his 401K account?

A) Annuity Creation Phase

Step 1 is the construction of a monetary-growth diagram.

42
9
0
1
? ) ( 41 00 . 000 , 10 $ :
%
00 . 4000 $
=
=

=
→ × →
t
r
t
FV
year
eff
a

Step 2 is projecting the Future Value of Mike’s 401K

( ) ( ) { }
( ) ( ) { }
84 . 287 , 987 , 1 $ 65 . 382 , 763 , 1 $ 19 . 905 , 223 $
1 09 . 1
09 . 0
00 . 4000 $
09 . 1 00 . 6000 $
1 1 1 ) ( :
401
43 42
401
1
401
2
= + =
⇒ − + =
⇒ − + + + − =
+
K
K
t
eff
eff
t
eff S K
FV
FV
r
r
D
r D L FV a
.
184
B) Annuity Payment Phase

Using the formula
( ) { }
T
r
rA
D
12
12
1 1 12

+ −
= for monthly payments
needed to amortize a mortgage, we obtain


( ) { }
mo D
D
D
18 . 668 , 10 $
77617 . 0
36 . 280 , 8 $
1 1 12
) 84 . 287 , 987 , 1 ($ 05 . 0
) 30 ( 12
12
05 . 0
=
⇒ =

+ −
=



C) Balance Left in Annuity at the End of 20 Years

( ) ( ) { }
( )
{ }
( ) { }
∴ =
⇒ − + −
+ =
⇒ − + − + =
89 . 815 , 005 , 1 $
1 1
05 . 0
18 . 668 , 10 $ 12
1 84 . 287 , 987 , 1 $
1 1
12
1
240
240
12
05 . 0
240
12
05 . 0
240
12 12
PO
PO
r
D
A PO
j
r
j
r
j


When Mike dies at age 87, he leaves 89 . 815 , 005 , 1 $ in non-
liquidated funds. Hopefully his annuity is such that any unused
amount reverts to Mike’s estates and heirs as specified in a will.

185
4. The Calculus of Finance

4.1 Jacob Bernoulli’s Differential Equation

A question commonly asked by those students struggling
with a required mathematics course is, “What is this stuff good
for?” Though asked in every mathematics course that I have
taught, I think business calculus is the one course where this
question requires the strongest response. For in my other
classes—pre-algebra, algebra, etc.—I can argue that one is
learning a universal language of quantification. Subsequently, to
essentially ask ‘of what good is this algebraic language?’ is to miss
the whole point of having available a new, powerful, and exact
means of communication. To not have this communication means
at my disposal could be likened to not being able to speak English
in a primarily English-speaking country. To say that this would be
a handicap definitely is an understatement! Yet this is precisely
what happens when one doesn’t speak mathematics in a
technological world bubbling over with mathematical language:
e.g. numbers, data, charts, and formulas. I have found through
experience that the previous argument makes a good case for pre-
algebra and algebra; however, making a similar case for business
calculus may require more specifics in a day when Microsoft
EXCEL rules. In this article, we will explore one very essential
specific in the modern world of finance, namely the growth and
decay of money by the use of differential equations, one of the
last topics encountered in a standard business calculus course.

Jacob Bernoulli (1654-1705) was nestled in between the
lifetimes of Leibniz and Newton, the two co-founders of calculus.
Jacob was about 10 years younger than either of these men and
continued the tradition of ‘standing on the shoulders of giants’.

One of Jacob’s greatest contributions to mathematics and
physics was made in the year 1696 when he found a solution to
the differential equation below, which bears his name.
n
y x g y x f
dx
dy
) ( ) ( + =
Of particular interest in this article is the case for 0 = n :
186

) ( ) ( x g y x f
dx
dy
+ = .

The solution is obtained via Bernoulli’s 300-year-old methodology
as follows.

Step1: Let ) (x F be such that ) ( ) ( x f x F − = ′

Step 2: Formulate the integrating factor
) ( x F
e

Step 3: Multiply both sides of ) ( ) ( x g y x f
dx
dy
+ = by
) ( x F
e to
obtain

| |
) ( )] ( [
) ( ) (
) ( ) ( ) (
) ( ) (
x g e y x f e
dy
dy
e
x g y x f e
dx
dy
e
x F x F x F
x F x F
⋅ = − +

⇒ + =

Where the left-hand side of the last equality is the derivative of a
product

| | y e
dx
d
x g e y x f e
dy
dy
e
x F x F x F x F
⋅ = ⋅ = − +

) ( ) ( ) ( ) (
) ( )] ( [
.
Step 4: To complete the solution, perform the indefinite
integration.

| |
| | ∴ + ⋅ ⋅ = =
⇒ + ⋅ = ⋅
⇒ ⋅ = ⋅
− −


) ( ) ( ) (
) ( ) (
) ( ) (
) ( ) (
) (
) (
x F x F x F
x F x F
x F x F
Ce dx x g e e x y y
C dx x g e y e
x g e y e
dx
d



187
4.2 Differentials and Interest Rate

Everyone will agree that a fixed amount of money p will
change with time. Even though 00 . 000 , 10 $ = p is stuffed under
a mattress for twenty years in the hopes of preserving its value,
the passage of twenty years will change p into something less
due to the ever-present action of inflation (denoted by i in this
article), which can be thought of as a negative interest rate. So
properly, ) (t p p = where t is the independent variable and p is
the dependent variable.

Let dt be a differential increment of time. Since
) (t p p = , dt will induce a corresponding differential change dp
in p via a first-order linear expression linking dp to dt :

dt t K dp Kdt dp ) ( = ⇒ = .

The exact form of the proportionality expression ) (t K will depend
on whether principle is growing, decaying, or whether there is a
number of complementary and/or competing monetary-change
mechanisms at work. Any one of these mechanisms may be time
dependent in and of itself necessitating the writing of K
as ) (t K K = . The simplest case is the monetary growth
mechanism where
0
rp K = , the product of a constant interest rate
r and the initial principle
0
p . This implies a constant rate of dollar
increase with time for a given
0
p , which is the traditional simple-
interest growth mechanism. Thus


0 0
) 0 ( : p p dt rp dp = = .

The preceding is a first-order linear differential equation written in
separated form with stated initial condition. It can be easily solved
in three steps:
188


) 1 ( ) ( :
) 0 ( :
) ( :
0 0 0
3
0 0
2
0
1
rt p p rt p t p
p C p p
C rt p t p
+ = + =
= ⇒ =
+ =
a
a
a
.

One might recognize the last expression as the functional form of
the simple interest formula. The same differential equation can be
written as


0 0
) 0 ( : p p rp
dt
dp
= = after division by dt .

This form highlights the differential-based definition of the first
derivative. In words it states that the ratio of an induced differential
change of principle with respect to a corresponding, intrinsic
differential change in time is constant, being equal to the applied
constant interest rate times the initial principal, also constant.
Simple examination of both sides of the above differential equation
reveals common and consistent units for both sides with


year
dollars
rp
year
dollars
dt
dp
≡ ≡
0
& .

The expression ) (t p
dt
dp
′ ≡ is known as the Leibniz form of the
first derivative, equal to the instantaneous change of principle with
respect to time—which one could immediately liken to an
instantaneous “velocity” of money growth.

4.3 Bernoulli and Money

Returning to dt t K dp ) ( = , we have for the general case
that ) ( ) ( ) ( ) ( t d t p t r t K + ⋅ = where ) (t r is a time-varying
(variable) interest rate, ) (t p is the principal currently present, and
) (t d is an independent variable deposit rate.
189
Substituting into dt t K dp ) ( = gives

| |
0
) 0 ( : ) ( ) ( ) ( p p dt t d t p t r dp = + ⋅ =
or

0
) 0 ( : ) ( ) ( ) ( p p t d t p t r
dt
dp
= + ⋅ =

where
0
) 0 ( p p = is the amount of principal present at the onset of
the process.

Translating the differential equation into words, the instantaneous
rate of change of principal with respect to time equals the sum of
two independently acting quantities: 1) the product of the variable
interest rate with the principal concurrently present and 2) a
variable direct-addition rate. The preceding differential equation is
applicable in the business world if the principal p is continuously
growing (or declining) with time. When the interest rate is fixed
0
) ( r t r ≡ and the independent direct-addition rate is
zero 0 ) ( ≡ t d , the differential equation reduces to


0 0
) 0 ( : p p p r
dt
dp
= = .

Solving using separation of variables gives

t r
t r C
e p t p p p
e e t p C t r p
dt r
p
dp
0
0
0 0
3
0
2
0
1
) ( ) 0 ( :
) ( ) ln( :
:
= ⇒ =
= ⇒ + =
=
a
a
a
.

The final expression
t r
e p t p
0
0
) ( = is the familiar Continuous-
Interest Formula for principle growth given a starting principal
0
p
and constant interest rate
0
r .
190
Returning to the general differential equation


0
) 0 ( : ) ( ) ( ) ( p p t d t p t r
dt
dp
= + ⋅ = ,

we see that it is Bernoulli in form with the solution given again by
an atrocious expression


| |
) ( ) ( ) (
) ( ) (
) ( ) (
t F t F t F
Ce dt t d e e t p
dt t r t F
− −
+ ⋅ ⋅ =
− =




Upon comparison with the general solution developed in detail
earlier. The initial condition
0
) 0 ( p p = will be applied on a case-
by-case basis as we explore the various and powerful uses of the
above solution in the world of finance. Depending on the
complexity of ) (t r and ) (t d , the coupled solution


| |
0
) ( ) ( ) (
) 0 ( : ) ( ) (
) ( ) (
p p Ce dt t d e e t p
dt t r t F
t F t F t F
= + ⋅ ⋅ =
− =
− −




may or may not be expressible in terms of a simple algebraic
expression.. Thus, since interest rates are unpredictable and out
of any one individual’s control (I have seen double-digit swings in
both savings-account rates and mortgage rates in my lifetime), we
will assume for the purpose of predictive analysis that the interest
rate is constant throughout the time interval of interest
0
) ( r t r ≡ .
This immediately leads to

| |
0
) 0 ( : ) ( ) (
0 0 0
p p Ce dt t d e e t p
t r t r t r
= + ⋅ ⋅ =


,

a considerable simplification.

The last result is our starting point for concrete applications in
investment planning, mortgage analysis, and annuity planning.

191
4.4 Applications

4.4.1 Growing a Nest Egg

Case 1: If
0
) ( d t d ≡ , a constant annual deposit rate, then the last
expression for ) (t p further simplifies to
| |
0 0
) 0 ( : ) (
0 0 0
p p Ce dt e e d t p
t r t r t r
= + =


.
This can be easily solved to give
| | 1 ) (
0 0
0
0
0
− + =
t r t r
e
r
d
e p t p
after applying the boundary condition
0
) 0 ( p p = .

Notice that the above expression consists of two distinct
terms. The term
t r
e p
0
0
corresponds to the principal accrued in a
continuous interest-bearing account over a time period t at a
constant interest rate
0
r given an initial lump-sum investment
0
p .
Likewise, the term | | 1
0
0
0

t r
e
r
d
results from direct principal
addition via annual metered contributions into the same interest-
bearing account. If either of the constants
0
p or
0
d is zero, then
the corresponding term drops away from the overall expression.
The following two-stage investment problem illustrates the use of
| | 1 ) (
0 0
0
0
0
− + =
t r t r
e
r
d
e p t p .

Ex 4.4.1: You inherit 00 . 000 , 12 $ at age 25 and immediately
invest 00 . 000 , 10 $ in a corporate-bond fund paying
year
%
6 . Five
years later, you roll this account over into a solid stock fund
(whose fifty-year average is
year
%
8 ) and start contributing
00 . 3000 $ annually. A) Assuming continuous and steady interest,
how much is this investment worth at age 68? B) What percent of
the final total was generated by the initial 00 . 000 , 10 $ ?
192
A) In the first five years, the only growth mechanism in play is that
induced by the initial investment of 00 . 000 , 10 $ . Thus, the
amount at the end of the first five years is given by
58 . 498 , 13 $ 00 . 000 , 10 $ ) 5 (
) 5 ( 06 . 0
= = e p .

The output from Stage 1 is now input to Stage 2 where both
growth mechanisms act for an additional 38 years.

34 . 666 , 528 $ ) 38 (
11 . 869 , 375 $ 22 . 797 , 148 $ ) 38 (
) 1 (
08 . 0
3000
58 . 498 , 13 ) 38 (
) 38 ( 08 . 0 ) 38 ( 08 . 0
=
⇒ + =
⇒ − + =
p
p
e e p


B) The % of the final total accrued by the initial 00 . 000 , 10 $ is
% 1 . 28 281 .
34 . 666 , 528 $
22 . 792 , 148 $
= =

Note: The initial investment of 00 . 000 , 10 $ is generating % 1 . 28 of
the final value even though it represents only % 8 of the overall
investment of 00 . 000 , 124 $ . The earlier a large sum of money is
inherited or received by an individual, the wiser it needs to be
invested; and the more it counts later in life.

Holding the annual contribution rate to 00 . 3000 $ over a
period of 38 years is not a realistic thing to do. As income grows,
the corresponding annual retirement contribution should also
grow. One mathematical model for this is


0 0 0
) 0 ( : p p e d p r
dt
dp
t
= + =
α


where the constant annual contribution rate
0
d in the previous
model
0
d has been replaced with the expression
t
e d
0
0
α
, allowing
the annual contribution rate to be continuously compounded over
a time period t at an average annual growth rate
0
α .
193
The above equation is yet another example of a solvable
Bernoulli-in-form differential equation per the sequence

| |
| |
| |∴ −

+ =
⇒ = + ⋅ ⋅ =
⇒ = + ⋅ ⋅ =




t t r t r
o
t r t r t r
t r t t r t r
e e
r
d
e p t p
p p Ce dt e e d t p
p p Ce dt e d e e t p
0 0 0
0 0 0 0
0 0 0 0
0 0
0
0
) (
0
0 0
) (
) 0 ( : ) (
) 0 ( : ) (
α
α
α
α
.

Ex 4.4.2: Repeat Ex 4.4.1 using the annual contribution model
t
e t d
03 . 0
3000 ) ( = .

A) Stage 1 remains the same with 58 . 498 , 13 $ ) 5 ( = p . The
Stage 2 calculation now becomes

71 . 500 , 215 , 1 $ ) 38 (
49 . 708 , 066 , 1 $ 22 . 797 , 148 $ ) 38 (
) (
03 . 08 . 0
3000
58 . 498 , 13 ) 38 (
) 38 ( 03 . 0 ) 38 ( 08 . 0 ) 38 ( 08 . 0
=
⇒ + =
⇒ −

+ =
P
p
e e e p


The final annual contribution is 31 . 9380 $ 00 . 3000 $
) 38 ( 03 . 0
= e
with the total contribution throughout the 38 years is given by the
definite integral


83 . 676 , 212 $ | 00 . 000 , 100 $
00 . 3000 $
38
0
03 . 0
38
0
03 . 0
=
=

t
t
e
dt e
.

B) The % of the final total accrued by the initial 00 . 000 , 10 $ is
% 2 . 12 122 .
71 . 500 , 215 , 1 $
22 . 792 , 148 $
= =

Most of us don’t receive a large amount of money early in our
lives. That is the reason we are a nation primarily made up of
middle-class individuals. So with this in mind, we will forgo the
early inheritance in our next example.
194

Ex 4.4.3: Assume we start our investment program at age 25 with
an annual contribution of 00 . 3000 $ grown at a rate of % 5
0
= α
per year. Also assume an aggressive annual interest rate of
% 10
0
= r (experts tell us that this is still doable in the long term
through smart investing). A) How much is our nest egg worth at
age 68? B) How does an assumed average annual inflation rate of
% 3 throughout the same time period alter the final result?

A) Direct substitution gives

11 . 896 , 906 , 3 $ ) 43 (
) (
05 . 0 10 . 0
3000
) 43 (
) 43 ( 05 . 0 ) 43 ( 10 . 0
=
⇒ −

=
p
e e p


B) Inflation is nothing more than a negative growth rate (or interest
rate) that debits the given rate. For a % 3 average annual inflation
rate, the true interest
0 T
r and income growth rates
0 T
α are given
by the two expressions

02 . 0 % 2 % 3 % 5
07 . 0 % 7 % 3 % 10
0 0 0
0 0 0
= = − = − =
= = − = − =
i
i r r
T
T
α α


Sadly, our true value after 43 years in terms of today’s buying
power is

35 . 454 , 075 , 1 $ ) 43 (
) (
02 . 0 07 . 0
3000
) 43 (
) 43 ( 02 . 0 ) 43 ( 07 . 0
=
⇒ −

=
p
e e p


4.4.2 Paying for the Nest

Both mortgage loans and annuities are, in actuality,
investment plans in reverse where one starts with a given amount
of principle
0
) 0 ( p p = and chips away at this initial amount until
that point in timeT when 0 ) ( = T p . The governing equation for
the case where the interest rate
0
r is fixed throughout the
amortization period T is
195
| | 1 ) (
0 0
0
0
0
− + =
t r t r
e
r
d
e p t p
where
0
d now becomes the required annual payment.

Applying the condition 0 ) ( = T p leads to

1
0
0
0 0
0

=
t r
t r
e
e p r
d .
The fixed monthly payment
0
m is given by

{ } 1 12 12
0
0
0 0 0
0

= =
t r
t r
e
e p r d
m

The continuous-interest-principal-reduction model does an
excellent job of calculating nearly-correct payments when the
number of compounding or principal recalculation periods exceeds
four per year. Below are three other mortgage-payment formulas
based on the continuous-interest model.
First Month’s Interest:
12
0 0
p r

Total Interest I Payment :



= 1
1
0
0
0
0
T r
T r
e
Te r
p I
Total Amount Paid I p A + =
0
:
1
0
0
0 0

=
T r
T r
e
e Tp r
A

Ex 4.4.4: 00 . 000 , 250 $ is borrowed for 30 years at % 75 . 5 .
Calculate the monthly payment, total repayment , and total interest
repayment assuming no early payout.

62 . 1457 $
) 1 ( 12
) 00 . 000 , 250 ($ 0575 . 0
) 30 ( 0575 . 0
) 30 ( 0575 . 0
0
=

=
e
e
m
50 . 745 , 524 $
) 1 (
) 00 . 000 , 250 )($ 30 ( 0575 . 0
) 30 ( 0575 . 0
) 30 ( 0575 . 0
=

=
e
e
A
196

51 . 745 , 274 $ 00 . 000 , 250 $ 50 . 745 , 524 $
0
= − = − = p A I

Many people justify an initially-high mortgage payment
due to the fact that ‘the mortgage is being paid off in cheaper
dollars.” This statement refers to the effects of inflation on future
mortgage payments. Future mortgage payments are simply not
worth as much in today’s terms as current mortgage payments. In
fact, if we project t years into the loan and the continuous annual
inflation rate has been
0
i throughout that time period, then the
present value of our future payment
PV
m is

t i
T r
T r
PV
e
e
e P r
m
0
0
0
) 1 ( 12
0 0 −

= .

To illustrate using Ex 4.4.4, the present value of a payment made
21 years from now, assuming
year
i
%
0
3 = is
31 . 776 $ 62 . 1457 $
) 21 ( 03 . 0
= =

e m
PV
. Thus, under stable
economic conditions, our ability to comfortably afford the mortgage
should increase over time. This is a case where inflation actually
works in our favor. Continuing with this discussion, if we are
paying off our mortgage with cheaper dollars, then what is the
present value of the total amount paid
PV
A ? A simple definite
integral—interpreted as continuous summing—provides the
answer

) 1 (
) (
1
0
0 0 0
0
0
0
0
) (
0 0
0
0 0


=


=


∫ T r
T i r T r
t i
T
T r
T r
PV
e i
e e P r
dt e
e
e P r
A

Returning again to Ex 4.4.4, the present value of the total 30-year
repayment stream is 90 . 999 , 345 $ =
PV
A .
197
Ex 4.4.5: Compare
0
m , A, and
PV
A for a mortgage where
00 . 000 , 300 $
0
= p if the fixed interest rates are: % 6
30
=
years
r ,
% 75 . 5
20
=
years
r , and % 0 . 5
15
=
years
r . Assume a steady annual
inflation rate of % 3
0
= i and no early payout. In this example, we
dispense with the calculations and present the results in the table
below.

FIXED RATE MORTGAGE COMPARISON FOR A
PRINCIPAL OF 00 . 000 , 300 $
0
= P
Terms r M A
PV
A
30 = T 6.00% $1797.05 $646,938.00 $426,569.60
20 = T 5.75% $2103.57 $504,856.80 $379.642.52
15 = T 5.00% $2369.09 $426,436.20 $343,396.61

The table definitely shows the mixed advantages/disadvantages of
choosing a short-term or long-term mortgage. For a fixed principal,
long-term mortgages have lower monthly payments. They also
have a much higher overall repayment, although the total
repayment is dramatically reduced by the inflation factor. The
mortgage decision is very much an individual one and should be
done considering all the facts within the scope of the broader
economic picture.

Ex 4.4.6: Our last example is an annuity problem. Annuities are
simply mortgages in reverse where monthly payouts are made,
instead of monthly payments, until the principal is reduced to zero.
You retire at age 68 and invest money earned via Ex 4.4. 3 in an
annuity paying
year
%
5 . 4 to be amortized by age 92. What is the
monthly payout to you in today’s terms? The phrase, ‘in today’s
terms”, means we let 35 . 454 , 075 , 1 $
0
= =
PV
p p . Thus,
79 . 106 , 6 $
) 1 ( 12
) 35 . 454 , 075 , 1 )($ 045 . 0 (
24 ) 045 . 0 (
24 ) 045 . 0 (
0
=

=
e
e
m .
198
The monthly income provided by the annuity looks very
reasonable referencing to the year 2005. But, unfortunately, it is a
fixed-income annuity that will continue as fixed for 24 years. And,
what happens during that time? Inflation! To calculate the present
value of that monthly payment, say at age 84, our now well-known
inflation factor
year
i
%
3 = is used to obtain
80 . 3778 $ 79 . 106 , 6 $
) 16 ( 03 .
0
= =

e m .

In conclusion, the power provided by the techniques in this
short section on finance is nothing short of miraculous. We have
used Bernoulli-in-form differential equations to model and solve
problems in inflation, investment planning, and installment
payment determination (whether loans or annuities). We have also
revised the interpretation of the definite integral as a continuous
sum in order to obtain the present value of a total repayment
stream many years into the future. These economic and personal
issues are very much today’s issues, and calculus still very much
remains a worthwhile tool-of-choice (even for mundane
earthbound problems) some 300 years after its inception.



199


Appendices
200
A. Greek Alphabet

GREEK LETTER
Upper Case Lower Case
ENGLISH NAME
Α α Alpha
Β β Beta
Γ γ Gamma
∆ δ Delta
Ε ε Epsilon
Ζ ζ Zeta
Η η Eta
Θ θ Theta
Ι ι Iota
Κ κ Kappa
Λ λ Lambda
Μ µ Mu
Ν ν Nu
Ξ ξ Xi
Ο ο Omicron
Π π Pi
Ρ ρ Rho
Σ σ Sigma
Τ τ Tau
Υ υ Upsilon
Φ φ Phi
Χ χ Chi
Ψ ψ Psi
Ω ω Omega

201
B. Mathematical Symbols

SYMBOL MEANING
+ Plus or Add
- Minus or Subtract or Take Away
±
Plus or Minus (do both for two
results)
÷ Divide
/ Divide
· Multiply or Times
^ Power raising
• Scalar product of vectors
{ }or[ ] or ( ) Parentheses
=
Is equal to

Is defined as
≠ Does not equal
≅ Is approximately equal to
≈ Is similar too
> Is greater than
≥ Is greater than or equal to
< Is less than
≤ Is less than or equal to
. , , etc t x
Variables or ‘pronumbers’
) (x f or y
Function of an independent variable
x
→ Approaches a limit
. , , , etc dy dt dx differentials
) (x f ′ or y′ First derivative of a function
) (x f ′ ′ or y ′ ′ Second derivative of a function
202

SYMBOL MEANING
1
a,
2
a
Step 1, Step 2, etc.
B A ⇒ A implies B
B A ⇐ B implies A
B A ⇔ A implies B implies A
! Factorial

=
n
i 1
Summation sign summing n terms


Sign for indefinite integration or anti-
differentiation

b
a
Sign for definite integration

=
n
i 1
Product sign multiplying n terms
Sign for square root
n

Sign for
th
n root

Infinity symbol or the process of
continuing indefinitely in like fashion
|| Parallel
⊥ Perpendicular
∠ Angle
÷ Right angle
∆ Triangle
U Set union
I Set intersection
203

SYMBOL MEANING
A x ∈ Membership in a set A
A x ∉ Non-membership in a set A
B A ⊂ Set A is contained in set B
B A ⊄ Set A is not contained in set B
φ The empty set
∴ QED: thus it is shown
∀ For every
∋ There exists
π The number Pi such as in 3.1…
e The number e such as in 2.7…
ϕ
The Golden Ratio such as in 1.6…

204
C. My Most Used Formulas

Formula Page Ref

1. ______________________________________________

2. ______________________________________________

3. ______________________________________________

4. ______________________________________________

5. ______________________________________________

6. ______________________________________________

7. ______________________________________________

8. ______________________________________________

9. ______________________________________________

10. ______________________________________________

11. ______________________________________________

12. ______________________________________________

13. ______________________________________________

14. ______________________________________________

15. ______________________________________________

16. ______________________________________________

17. ______________________________________________

18. ______________________________________________



205

The Handbook of Essential Mathematics
Air Force Publication 2006 For Public Release: Distribution Unlimited

2

Forward
Wright-Patterson Air Force Base (WPAFB) has enjoyed a lengthy and distinguished history of serving the Greater-Dayton community in a variety of ways. One of these ways is through the WPAFB Educational Outreach (EO) Program, for which the Air Force Research Laboratory (AFRL) is a proud and continuous supporter, providing both technical expertise (from over 2000 practicing scientists and engineers) and ongoing resources for the various programs sponsored by the WPAFB Educational Outreach. The mission of the WPAFB EO program is To form learning partnerships with the K-12 educational community in order to increase student awareness and excitement in all fields of math, science, aviation, and aerospace; ultimately developing our nation’s future scientific and technical workforce. In support of this mission, the WPAFB EO aspires to be the best one-stop resource for encouragement and enhancement of K-12 science, math and technology education throughout the United States Air Force. It is in this spirit that AFRL offers The Handbook of Essential Mathematics, a compendium of mathematical formulas and other useful technical information that will well serve both students and teachers alike from early grades through early college. It is our sincere hope that you will use this resource to either further your own education or the education of those future scientists and engineers so vital to preserving our cherished American freedoms.

LESTER MCFAWN, SES Executive Director Air Force Research Laboratory

3

Introduction
Formulas! They seem to be the bane of every beginning mathematics student who has yet to realize that formulas are about structure and relationship—and not about memorization. Granted, formulas have to be memorized; for, it is partly through memorization that we eventually become ‘unconsciously competent’: a true master of our skill, practicing it in an almost effortless, automatic sense. In mathematics, being ‘unconsciously competent’ means we have mastered the underlying algebraic language to the same degree that we have mastered our native tongue. Knowing formulas and understanding the reasoning behind them propels one towards the road to mathematical fluency, so essential in our modern high-tech society. The Handbook of Essential Mathematics contains three major sections. Section I, “Formulas”, contains most of the mathematical formulas that a person would expect to encounter through the second year of college regardless of major. In addition, there are formulas rarely seen in such compilations, included as a mathematical treat for the inquisitive. Section I also includes select mathematical processes, such as the process for solving a linear equation in one unknown, with a supporting examples. Section II, “Tables”, includes both ‘pure math’ tables and physical-science tables, useful in a variety of disciples ranging from physics to nursing. As in Section I, some tables are included just to nurture curiosity in a spirit of fun. In Sections I and II, each formula and table is enumerated for easy referral. Section III, “Applications in Personal Finance”, is a small textbook within a book where the language of algebra is applied to that everyday financial world affecting all of us throughout our lives from birth to death. Note: The idea of combining mathematics formulas with financial applications is not original in that my father had a similar type book as a Purdue engineering student in the early 1930s. I would like to take this opportunity to thank Mr. Al Giambrone—Chairman of the Department of Mathematics, Sinclair Community College, Dayton, Ohio—for providing requiredmemorization formula lists for 22 Sinclair mathematics courses from which the formula compilation was partially built.
John C. Sparks March 2006

4

... And Wright. Made it so— Silvered chariot streaking On tongues of fire leaping— And I will soon be sleeping Above your dreams. tranquil moon To my right— Evening sky.O Icarus...... With a whoosh to my back And no wind to my face.O Icarus. The clouds glide by. Their fields far below Of gold-illumed snow... August 2001: John C..Dedication The Handbook of Essential Mathematics is dedicated to all Air Force families O Icarus… I ride high. Pale yellow. Sparks 100th Anniversary of Powered Flight 1903—2003 5 . Folded hands In quiet rest— Watching..

20.26. Signed Numbers 1.3.27.Table of Contents Section I: Formulas with Select Processes Index to Processes 1. Partial Fractions 1. What is a Function? 1. Complex Numbers 1.9. Subtraction. Algebra 1. What is a Variable? 1.25. Binomial Theorem 1. Order of Operations 1. The Seven Parentheses Rules 1. Factor Formulas 1. Rules for Radicals 1.24. Boolean Algebra 1.15.7.14.23.2. Three Meanings of ‘Equals’ 1. Determinants and Cramer’s Rule 1. Theory of Polynomial Equations 1. Quadratic Equations & Functions 1.16.4. Laws of Inequality 1.6.1.18. Divisibility Tests 1.21. Laws of Equality 1.12. Rules for Fractions 1. Arithmetic Series 1.5. Geometric Series 1.10. Rules for Exponents 1.17. Rules for Logarithms 1.22.8.11. Division. Function Algebra 1. Variation Formulas Page 06 13 13 14 15 16 18 19 20 21 22 24 26 27 27 28 30 31 32 33 34 36 37 39 40 41 41 42 43 6 . Cardano’s Cubic Solution 1.19. Field Axioms 1.13.

12. Cross Products 4. Rectangular to Polar Coordinates 64 3.5.9. Basic Definitions and Properties 4. Fundamental Definition-Based Identities 58 3. Congruent Triangles 2.3.13.6. Heron’s Formula 2. Golden Ratio 2. Distance and Line Formulas 2. Elementary Vector Algebra 4.5.10.8. Trigonometry 57 3.1.7. Planar Figures 2. Line and Plane Equations 4. Classical and Analytic Geometry 2. Half Angle Identities 60 3.10.13. Polar Form of Complex Numbers 63 3. Conic Sections 44 44 44 45 46 47 47 49 50 52 53 54 55 3.11.14.5. Pythagorean Identities 58 3. Dot Products 4.6.2. Double Angle Identities 60 3. Solid Figures 2. Sum and Difference Identities 58 3. Angles and Lines 2. General Triangle Formulas 60 3.4.8. Degree/Radian Relationship 62 3. Arc and Sector Formulas 62 3.1. Similar Triangles 2. Basic Definitions: Functions & Inverses 57 3.4. Negative Angle Identities 58 3.2.4.7. Trigonometric Values from Right Triangles 64 4.3.3.2.12. Miscellaneous Vector Equations 65 65 65 66 67 67 7 . Triangles 2. Formulas for Conic Sections 2. The Parallel Postulates 2. Addition of Sine and Cosine 63 3.Table of Contents cont 2. Pythagorean Theorem 2.1.9.11.

4. Probability Formulas 7.8. Fundamental Theorem of Calculus 5.2. Laplace Transform: General Properties 5.3.11. Simple Interest 81 6.7. Sampling Distribution of the Proportion 87 87 88 89 90 91 92 8 .8.1. Probability and Statistics 7. Basic Differentiation Rules 5.10.5. Lines and Approximation 5. Markup and Markdown 86 6. Money and Finance 80 6. Annuity Formulas 86 6. Transcendental Antidifferentiation 5.6. Measures of Dispersion 7.5.3.5. Present Value of a Continuous “ “ 83 6. Basic Concepts of Statistics 7. Select Elementary Differential Equations 5.2. Sampling Distribution of the Mean 7.4.Table of Contents cont 5.12.3. Laplace Transform: Specific Transforms 68 68 69 70 70 71 72 73 73 75 75 76 77 78 6.2.13.1.7. Effective Interest Rates 82 6. What is a Differential? 5.1. Loan Amortization 85 6. What is Interest? 80 6. Present-to-Future Value Formulas 82 6. Measures of Central Tendency 7. What is a Limit? 5.9. Present Value of a “ “ with Initial Lump Sum 83 6. Compound and Continuous Interest 81 6. Geometric Integral Formulas 5.12.6. Interpretation of Definite Integral 5. Transcendental Differentiation 5. Basic Antidifferentiation Rules 5. Elementary Calculus 5.11.6. Types or Retirement Savings Accounts 84 6.4.9.13.10. Calculus of Finance 86 7. Present Value of a “Future Deposit Stream” 82 6.

What is Interest? 1.2. Metric System 2. Medical Abbreviations in Allied Health 2.4. American Names for Large Numbers 1. Unit Conversion Table 2.8.5. Simple Interest 1.2.9. Physical Sciences 2. Selected Magic Squares 1. Compound Interest 1.7. Temperature Conversion Formulas 2. Conversion Factors in Allied Health 2.6.9. Continuous Interest 1.10. Date and Day of Year 94 94 96 96 97 97 97 101 102 103 104 105 2.3. Properties of Earth and Moon 2. Prime Numbers less than 1000 1.11.8.Table of Contents cont Section II: Tables 1. Factors of Integers 1 through 192 1. Wind Chill Table 2.3. Numerical 1. Standard Normal Distribution 1.2.5. Heat Index Table 2.3.5.1.7. Nine Elementary Memory Numbers 1. British System 106 106 107 108 108 109 109 112 113 114 Section III: Applications in Personal Finance 1. Roman Numeral and Arabic Equivalents 1.4.6. Two-Sided Student’s t Distribution 1. Thirteen-by-Thirteen Multiplication Table 1.4.1. Effective Interest Rate 118 118 120 122 124 129 9 . The Random Digits of PI 1. The Algebra of Interest 1.1.

4.5. Loan Amortization 3.4.1. The Annuity as a Mortgage in Reverse 153 153 162 173 183 4. Summary 135 135 138 142 147 151 3. Mathematical Symbols C. Growth of a Deposit Stream 2. Differentials and Interest Rate 4.2. The Algebra of the Nest Egg 2. Jacob Bernoulli’s Differential Equation 4.3.3.2. Bernoulli and Money 4. Car Loans and Leases 3.3. Applications 185 185 187 188 191 Appendices A. The Calculus of Finance 4. Greek Alphabet B.1.Table of Contents cont 2. My Most Used Formulas 200 201 204 10 .4. The Two Growth Mechanisms in Concert 2. Your Home Mortgage 3.2. The Algebra of Consumer Debt 3.1. Present and Future Value 2. Growth of an Initial Lump Sum Deposit 2.

Section I Formulas with Select Processes 11 .

9 1.11.6 1. Order of Operations with Parentheses Rules 7.11 1.7 7.14 1.6 5.18. Quadratic Equations by Formula 12.19. Cardano’s Cubic Solution Process 14.Index to Processes Process Where in Section I 1.16.19. Three-by-Three System 16.16. Linear Equation Solution Process 4.9 1.19. Complex Number Multiplication 9. Quadratic Trinomial Factoring Process 3.3.0 1. Two-by-Two System 15.3 1.12 1.12. Median Calculation 12 .6 1.3 1.10. Quadratic Equations by Factoring 13. Process of Constructing Inverse Functions 11.8 1.4 2.14.9.10 1.6 1.11. Cramer’s Rule. Complex Rationalization Process 2.15. Linear Inequality Solution Process 5. Removal of xy Term in Conic Sections 17.6 1.12. Complex Number Division 10. The Linear First-Order Differential Equation 18. Order of Operations 6.22.0 1. Logarithmic Simplification Process 8.22.8. Cramer’s Rule.

subtraction. In English. z . she. 0.−. or things such as John. Specific numbers such as 12 . Algebra 1. z and other mathematical pronouns as a new part of speech. with the addition of x.1. whose real nature has been confused by such words as variable and unknown: perhaps the most horrifying description of x ever invented! Actually. or it. − 45 . The verb of being is called equals or is. 13 . the mathematical equivalent to a pronoun in English. What is a Variable? In the fall of 1961. To see how the concept of pronouns and nouns applies to algebra. what is x ? x is merely a nonspecific number. and division denoted respectively by +. we have both proper nouns and pronouns where both are distinct and different parts of speech. Arithmetic. pronouns add increased flexibility to the English language. mathematical pronouns—such as x. serve as the arithmetical equivalent to proper nouns in English. . y. x is very easily understood in terms of a language metaphor. see Appendix B for a list of symbols used in this book—greatly expand our capability to quantify in a general fashion by adding flexibility to our language of arithmetic. So. Hence. The four action verbs are addition. is called algebra. and a plethora of proper nouns. 123 769 . etc. I first encountered the monster called x in my high-school freshman algebra class.⋅. which can be thought of as a precise language of quantification having four action verbs.4512 . In Summary: Algebra can be defined as a generalized arithmetic that is much more powerful and flexible than standard arithmetic. Ohio. we first examine arithmetic. and Toyota. Likewise.1. Pronouns are nonspecific persons or entities such as he. places. 23 5 .÷ . English pronouns greatly expand our capability to describe and inform in a general fashion. The letter x is still a monster to many. a verb of being. Proper nouns are specific persons. A more user-friendly name for variable or unknown is pronumber. multiplication. 3. y . z . 3 denoted by = . The increased capability of algebra over arithmetic is due to the inclusion of the mathematical pronoun x and its associates y.00045632 .

Field Axioms The field axioms decree the fundamental operating properties of the real number system and provide the basis for all advanced operating properties in mathematics. Let a. a + b is a unique real number a ⋅ b is a unique real number Commutative a+b = b+a a ⋅b = b⋅a Associative ( a + b) + c = a + (b + c) 0⇒ a+0 = a (ab)c = a (bc) 1 ⇒ a ⋅1 = a Identity Inverse a ⇒ a + (−a) = 0 ⇒ (−a) + a = 0 a ≠ 0⇒ a⋅ ⇒ 1 ⋅a =1 a 1 =1 a Distributive or Linking Property a ⋅ (b + c) = a ⋅ b + a ⋅ c a = b&b = c ⇒ a = c Transitivity a > b&b > c ⇒ a > c a < b&b < c ⇒ a < c Note: ab = a (b) = ( a )b are alternate representations of a ⋅ b 14 . b & c be any three real numbers (pronumbers).1.2. The field axioms are as follows. Properties Closure Addition + Multiplication .

3.1.2. Divisibility Tests Condition That Makes it So The last digit is 0.6.4. or 8 The sum of the digits is divisible by 3 The last two digits are divisible by 4 The last digit is 0 or 5 The number is divisible by both 2 and 3 The number formed by adding five times the last digit to the “number defined by” the remaining digits is divisible by 7** The last three digits are divisible by 8 The sum of the digits is divisible by 9 The last digit is 0 11 divides the number formed by subtracting two times the last digit from the “ “ remaining digits** The number is divisible by both 3 and 4 13 divides the number formed by adding four times the last digit to the “ “ remaining digits** The number is divisible by both 2 and 7 The number is divisible by both 3 and 5 17 divides the number formed by subtracting five times the last digit from the “ ” remaining digits** 19 divides the number formed by adding two times the last digit to the “ “ remaining digits** 23 divides the number formed by adding seven times the last digit to the “ “ remaining digits** 29 divides the number formed by adding three times the last digit to the remaining digits** 31 divides the number formed by subtracting three times the last digit from the “ “ remaining digits** 37 divides the number formed by subtracting eleven times the last digit from the “ “ remaining digits** Divisor 2 3 4 5 6 7 8 9 10 11 12 13 14 15 17 19 23 29 31 37 **These tests are iterative tests in that you continue to cycle through the process until a number is formed that can be easily divided by the divisor in question. 15 .

4.1. 1. Demonstration that division-by-zero is undefined a = c ⇒ a = b ⋅ c for all real numbers a b a If = c . then multiplying both sides by x gives x 2 = xy ⇒ x 2 − y 2 = xy − y 2 ⇒ ( x − y )( x + y ) = y ( x − y ) Dividing both sides by x − y where x − y = 0 gives x + y = y ⇒ 2y = y ⇒ 2 = 1. 0 an algebraic impossibility 1. Subtraction. Alternate representation of a ÷ b : a ÷ b ≡ Division Properties of Zero Zero in numerator: a ≠ 0 ⇒ Zero in denominator: Zero in both: 0 =0 a a is undefined 0 0 is undefined 0 1.4.4.2. 16 . 1.4.4. Let x = y .4. then a = 0 ⋅ c ⇒ a = 0 for all real numbers a .5. The last equality is a false statement.3. Signed Numbers Definitions: Subtraction: Division: a − b ≡ a + (−b) 1 a ÷b ≡ a⋅ b a b 1.4. Demonstration that attempted division-by-zero leads to erroneous results. Division.1.

both the middle and rightmost numbers decrease in the expected logical fashion. Table for Multiplication of Signed Numbers: the italicized words in the body of the table indicate the resulting sign of the associated product. Signed Number Multiplication: ( − a ) ⋅ b = −( a ⋅ b) a ⋅ (−b) = −(a ⋅ b) (− a) ⋅ (−b) = (a ⋅ b) 1.4. Demonstration of the algebraic reasonableness of the laws of multiplication for signed numbers.4. In both columns.7.4. Multiplication of a ⋅ b Sign of b Sign of a Plus Minus Plus Plus Minus Minus Minus Plus 1.1.6. (4) ⋅ (5) = 20 (4) ⋅ (4) = 16 (4) ⋅ (3) = 12 (4) ⋅ (2) = 8 (4) ⋅ (1) = 4 (4) ⋅ (0) = 0 (4) ⋅ (−1) = −4 (4) ⋅ (−2) = −8 (4) ⋅ (−3) = −12 (4) ⋅ (−4) = −16 (4) ⋅ (−5) = −20 (−5) ⋅ (4) = −20 (−5) ⋅ (3) = −15 (−5) ⋅ (2) = −10 (−5) ⋅ (1) = −5 (−5) ⋅ (0) = 0 (−5) ⋅ (−1) = 5 (−5) ⋅ (−2) = 10 (−5) ⋅ (−3) = 15 (−5) ⋅ (−4) = 20 (−5) ⋅ (−5) = 25 (−5) ⋅ (−6) = 30 17 .8.

5.5.2. 1.1.4.5.11.6.7. 1.5.1.5.5.5.8.5. 1.5. 1. b d Fractional Equality: 1. Fractional Equivalency: c ≠ 0 ⇒ = = b bc cb a c a+c 1.5. ac = ⇔ ad = bc bd a ac ca 1.3. Let Rules for Fractions a c and be fractions with b ≠ 0 and d ≠ 0 .10. Subtraction (like denominators): −= bb b 1. 1.5. Addition (unlike denominators): a c ad cb ad + cb += + = b d bd bd bd Note: bd is the common denominator a c a−c 1. Addition (like denominators): += bb b 1.5. a c ad cb ad − cb −= − = b d bd bd bd a c ac Multiplication: ⋅ = b d bd a c a d ad Division: c ≠ 0 ⇒ ÷ = ⋅ = b d b c bc a a c a1 a Division (missing quantity): ÷c = ÷ = ⋅ = b b 1 b c bc a b = a ÷ c = ad Reduction of Complex Fraction: c b d bc d a −a a Placement of Sign: − = = b b −b Subtraction (unlike denominators): 18 .9.5.

B = a −b b−a Three Distinct Linear Factors: P( x) A B C = + + ( x − a )( x − b)( x − c) x − a x − b x − c The numerators A. 1. P(a) P(b) .1.6. C are given by P(a ) P(b) . Two Distinct Linear Factors: P( x) A B = + ( x − a )( x − b) x − a x − b The numerators A.6.B = . Partial Fractions Let P (x) be a polynomial expression with degree less than the degree of the factored denominator as shown. N Distinct Linear Factors: P( x) ∏ (x − a ) i i =1 n =∑ i =1 n Ai with Ai = x − ai P(ai ) ∏ (a j =1 j ≠i n i − aj) 19 . (a − b)(a − c) (b − a )(b − c) P (c ) C= (c − a )(c − b) A= 1.6. B are given by A= 1. B.1.3.6.2.

7.7. 0 −n 16 = 32 ÷ 2 = 2 ⋅ 2 ⋅ 2 ⋅ 2 = 2 4 8 = 16 ÷ 2 = 2 ⋅ 2 ⋅ 2 = 2 3 4 = 8÷ 2 = 2⋅2 = 2 2 = 4÷2 ≡ 2 1 2 1 2 1 4 1 8 1 16 = 1÷ 2 = = [1 ] ÷ 2 = 4 = [1 ] ÷ 2 = 2 1 21 ≡ 2 −1 1 22 1 23 1 24 ≡ 2 −2 ≡ 2 −3 ≡ 2 −4 1 = 2 ÷ 2 ≡ 20 = [1 ] ÷ 2 = 8 20 .9.7. Definition of Zero Exponent: a ≡ 1 1.1. Distributed over a Simple Product: ( ab) = a b n n m pn n mn Distributed over a Complex Product: ( a b ) = a n b pn an a 1.7.7. Demonstration of the algebraic reasonableness of the definitions for a and a via successive divisions by 2 .3.1.5.7. Definition of Radical Expression: n 1. Distributed over a Simple Quotient:   = n b b  am  a mn  1.6.10. Distributed over a Complex Quotient:  p  = pn b b   1 1. Definition of Negative Exponent: ≡ a−n n a 1 n a ≡ an 1 1. 1.12.7.7.8.7. 1.2. Multiplication: ( a ) = a 1. Subtraction: m = a a nm nm 1. Definition when No Exponent is Present: a ≡ a 0 1.7.7.4.11. Notice the power decreases by 1 with each division.7.7. Rules for Exponents Addition: a a n m = a n+ m an n−m 1.7.

8.8. 21 .8.6.10.2. 1. Rules for Radicals Basic Definitions: Complex Radical: Associative: n n a ≡ a n and am = a n m 1 2 a ≡ a ≡ a2 1 (n a )m = n a m = a n n n m Simple Product: Simple Quotient: a n b = n ab a na = b b n n Complex Product: a m b = nm a mb n n 1.8.8. 1. Complex Quotient: Nesting: nm a nm a m = m bn b n a = nm a am a = n b b an−m b n Rationalizing Numerator for n > m : 1. 1. 1.3.8.8. then the associated surd is given by a m b .8.7.8.8.11.8. Complex Rationalization Process: am = bn a n − m a a a (b − c ) = ⇒ b + c (b + c )(b − c ) a a (b − c ) = b2 − c b+ c a+ c a2 − c Numerator: = b b( a − c ) 1.4. Definition of Surd Pairs: If a ± b is a radical expression. 1.8.9.8. 1.1.8. 1. 1. Rationalizing Denominator for n > m : 1.12.5.1.

13. Power Reduction to an Integer plus a Radical: a 2 + ab + b 2 = (a + ab + b)(a − ab + b) 22 .9.9.9. 1. Sum of Cubes: a + b = ( a + b)(a − ab + b ) 3 3 2 2 3 3 2 2 1. Perfect Square: a ± 2ab + b = (a ± b) 1.1.6. Difference of Squares: a − b = ( a + b)(a − b) Expanded Difference of Squares: 2 2 (a + b) 2 − c 2 = (a + b + c)(a + b − c) 2 2 1. 1. Difference of Cubes: a − b = ( a − b)(a + ab + b ) 1.9.9.9. Power Reduction to a Radical: x 2 − a = ( x − a )( x + a ) 1.10.9.9.4.5.11.9.8. Sum of Squares: a + b = ( a + bi )(a − bi ) i complex 2 2 2 1.3. 1.9.1.7.9.9.2. Difference of Fourths: a 4 − b 4 = (a 2 − b 2 )(a 2 + b 2 ) ⇒ a 4 − b 4 = (a − b)(a + b)(a 2 + b 2 ) 1. Power Reduction to an Integer: a 4 + a 2 b 2 + b 4 = (a 2 + ab + b 2 )(a 2 − ab + b 2 ) 1.9.12. Factor Formulas Simple Common Factor: ab + ac Grouped Common Factor: = a(b + c) = (b + c)a ab + ac + db + dc = (b + c)a + d (b + c) = (b + c)a + (b + c)d = (b + c)(a + d ) 1. General Trinomial: x 2 + (a + b) x + ab = ( x 2 + ax) + (bx + ab) = ( x + a ) x + ( x + a )b = ( x + a )( x + b) 1.9.9.

c are integers. M ⋅ N = ac Step 2: Substitute for b . 2 a : MN = 2 ⋅ (−7) = −14 & M + N = −13 ⇒ M = −14.9. N such that M +N =b . N with both M + N = b and M ⋅ N = ac then the quadratic trinomial is prime. 2 Step 1: Find integers M .1. Quadratic Trinomial Factoring Process Let ax + bx + c be a quadratic trinomial where the three coefficients a.9.14. N = 1 a : 2 x 2 − 3x − 7 = 2 x 2 − 14 x + x − 7 a : 2 x ( x − 7) + 1 ⋅ ( x − 7) = ( x − 7)(2 x + 1) 3 2 1 23 . ax 2 + bx + c = ax 2 + ( M + N ) x + c Step 3: Factor by Grouping (1. b. Example: Factor the expression 2 x − 13 x − 7 .2) ax 2 + Mx + Nx + c = M ⋅N   (ax 2 + Mx) +  Nx + = a  M M   ax x +  + N  x +  = a a   M   x + (ax + N ) ∴ a  Note: if there are no pair of integers M .

10. B ≠ 0 Reciprocal: AB CD Means & Extremes: = ⇒ CB = AD if A ≠ 0.5.10. Laws of Equality Let A = B be an algebraic equality and C . In that algebraic mistakes can be made when producing the equivalency chain. Linear Equation Solution Process Start with the general form L( x ) = R ( x ) where L(x) and R (x) are first-degree polynomial expressions on the left-hand side and right-hand side of the equals sign. 1.10. The Concept of Equivalency When solving equations.10. The final equation in the chain should be an expression of the form x = a . The goal of any equation-solving process is to use the Laws of Equality to create a succession of equivalent equations where each equation in the equivalency chain is algebraically simpler than the preceding one. 1. the final answer must always be checked in the original equation.5. 1. AB = provided C ≠ 0 CC n n Exponent: A = B provided n is an integer 11 = provided A ≠ 0.10. Subtraction: A − C = B − C 1.2.10.6.7. 24 . B ≠ 0 AB Zero Product Property: A ⋅ B = 0 ⇔ A = 0 or B = 0 1. the no-brainer form that allows the solution to be immediately determined. the Laws of Equality—with the exception of 1. D be any quantities.10.1.10.10.10. Division: 1. When using 1. one must check for extraneous solutions and delete them from the solution set.10.8. Multiplication: A ⋅ C = B ⋅ C 1.4.10. which produces equations with extra or ‘extraneous’ solutions in addition to those for the original equation—are used to manufacture equations that are equivalent to the original equation.9.10.3.10. 1. Equivalent equations are equations that have identical solutions. However. equivalent equations are not identical in appearance. 1.1.5. Addition: A + C = B + C 1.

a Step 4: Check solution in original equation. Step 3: use either 1.Step 1: Using proper algebra.2 on an as-needed basis to create an equivalent equation of the form ax = b . Example: Solve 4{3[7( y − 3) + 9] + 2( y − 9)} − 1 = 5( y − 1) − 3 .10.10. independently combine like terms for both L(x ) and R (x ) Step 2: Use 1.10.10.4 to create the final equivalent form x = b from which the solution is easily deduced.1 and 1.3 or 1. a : 4{3[7( y − 3) + 9] + 2( y − 9)} − 1 = 5( y − 1) − 3 ⇒ 4{3[7 y − 21 + 9] + 2 y − 18} − 1 = 5 y − 5 − 3 ⇒ 4{3[7 y − 12] + 2 y − 18} − 1 = 5 y − 8 ⇒ 4{21y − 36 + 2 y − 18} − 1 = 5 y − 8 ⇒ 4{23 y − 54} − 1 = 5 y − 8 ⇒ 92 y − 216 − 1 = 5 y − 8 ⇒ 92 y − 217 = 5 y − 8 a : 92 y − 217 = 5 y − 8 ⇒ 92 y − 5 y − 217 = 5 y − 5 y − 8 ⇒ 87 y − 217 = −8 ⇒ 87 y − 217 + 217 = −8 + 217 ⇒ 87 y = 209 a : 87 y = 209 ⇒ 209 y= ∴ 87 3 2 1 a : Check the final answer y = 209 in the original equation 87 4{3[7( y − 3) + 9] + 2( y − 9)} − 1 = 5( y − 1) − 3 . 4 25 .

Linear Inequality Solution Process Start with the general form L( x ) > R ( x ) where L(x) and R (x) are as described in 1.10 modifying per the checks below. 26 .10.11. Replacing each side of the inequality with its reciprocal also reverses the direction of the original inequality. 1. Laws of Inequality Let A > B be an algebraic inequality and C be any quantity.10. Follow the same four-step process as that given in 1. One must remember that in of the four cases.4. x < a . The final answer will have one the four forms x > a .3. Subtraction: A − C > B − C 1. x has infinitely many solutions as opposed to one solution for the linear equation.11. Multiplication: C > 0 ⇒ A⋅C > B ⋅C C < 0 ⇒ A⋅C < B ⋅C AB > CC 1.11. Division: AB C <0⇒ < CC 11 1. one must reverse the direction of the original inequality sign.2.1.10.1. Reciprocal: < provided A ≠ 0.11.11.11.5. When multiplying or dividing by a negative C . Addition: A + C > B + C 1. Reverse the direction of the inequality sign when multiplying or dividing both sides of the inequality by a negative quantity. and A ≥ B . A ≤ B . and x ≤ a .6. x ≥ a . B ≠ 0 AB C >0⇒ Similar laws hold for A < B . 1. Reverse the direction of the inequality sign when replacing each side of an inequality with its reciprocal.11.

The result or product from this process or action is the single number 4 . then a final division can be performed. Once single numbers have been achieved for both the numerator and the denominator. For example. Step 5: If a fraction bar is present. Equals is the mathematical equivalent of the English verb “is”. Equals states the product (either intermediate or final) that results from a process or action. 27 . treating each as totally-separate problem until a single number is achieved.1. Then perform steps 1 through 3 (again. A simple but subtle use of equals in this fashion is 2 = 2 . 2. we are adding two numbers on the lefthand side of the equals sign. first perform steps 1 through 3 on an as-needed basis within the innermost set of parentheses until a single number is achieved. simultaneously perform steps 1 through 4 for the numerator and denominator. Here. This can be illustrated by the expression 2003 = MMIII . 3. Here. 1. the fundamental verb of being.13. on an as-needed basis) for the next level of parentheses until all parentheses have been systematically removed. in the expression 2 + 2 = 4 . which appears on the right-hand side of the equals sign. the two diverse symbols on both sides of the equals sign refer to the same and exact underlying quantity. Equals implies an equivalency of naming in that the same underlying quantity is being named in two different ways. Three Meanings of ‘Equals’ 1.12. addition can be viewed as a process or action between the numbers 2 and 2 . Order of Operations Step 1: Perform all power raisings in the order they occur from left to right Step 2: Perform all multiplications and divisions in the order they occur from left to right Step 3: Perform all additions and subtractions in the order they occur from left to right Step 4: If parentheses are present.

14.1. 1.5 (5) ⋅ (−12) : Correct per 1. The Seven Parentheses Rules 1.14. 1.14.⋅.14.1.14. 1.14.14.−.14.14. 1. 1. 1. though not needed.4.1 thru 4 5 ⋅ (−)12 : Incorrect per 1. 1.14. 1.14.14.14. 1. Consecutive processing signs +. The rightmost processing sign and the number to the immediate right of the rightmost sign are both enclosed within the same set of parentheses. 1.2.5 − 5 ⋅ 12 : Does not need parentheses to achieve separation since the 5 serves the same purpose. 1. emphasize the negative 5 per 1.8.÷ are separated by parentheses.5 − (5 ⋅ 12) : The optional parentheses emphasize the fact that the final outcome is negative per 1. More than one number can be written inside a set of parentheses depending on what part of the overall process is emphasized.14. 1. 1.6. Nested parentheses are typically written using the various bracketing symbols to facilitate reading.6 28 .4 5 ⋅ −12 : Properly written as 5 ⋅ (−12) . Parentheses may enclose a signed or unsigned number by itself but never a sign by itself.5.14.7.14. Demonstrating the Seven Basic Parentheses Rules 5 + −12 : Properly written as 5 + (−12) .1.5.4 5 + − − 12 : Properly written as 5 + [−(−12)] .14. 1.1.1. When parentheses separate numbers with no intervening multiplication sign.14.3.14.14. a multiplication is understood. Any use of parentheses would be optional (−5) ⋅ 12 : The optional parentheses. Three or more consecutive processing signs are separated by nested parenthesis where the rightmost sign will be in the innermost set of parentheses.14. 1.4. The same is true if just one plus or minus sign separates the two numbers and the parentheses enclose both the rightmost number and the separating sign.

7. the expression would be properly read as the single number 412 .14.14. Without the intervening parentheses. 1. 7(−5) : The mandatory parentheses indicate that 7 is multiplying − 5 . 1. the expression is properly read as the difference 7 − 5 . (−32)(−5) : The mandatory parentheses indicate that − 32 is multiplying − 5 . 4(18 − {−8} + 2 3 ) + 6 ⋅ 9 = 2(9 2 − 8 2 ) 4(18 − {−8} + 8) + 6 ⋅ 9 = 2(81 − 64) 4([18 + 8] + 8) + 6 ⋅ 9 = 2(17) 4(26 + 8) + 6 ⋅ 9 = 34 4(34) + 6 ⋅ 9 = 34 136 + 6 ⋅ 9 = 34 136 + 54 = 34 190 = 34 2 × 95 95 =∴ 2 × 17 17 29 . (−32) ⋅ (−5) also signifies 1. Demonstration of Use of Order-of-Operations with Parentheses Rules to Reduce a Rational Expression.14. The expression the same.4(12) : The mandatory parentheses indicate that 4 is multiplying12 .7.14.9. Without the parentheses.7. 1.

Logarithm of the Base to a Power: log b b = p p 1.9.15.15.6. Definition of Logarithm to Base b > 0 : y = logb x if and only if b y = x 1.15.15. =p Notation for Logarithm Base 10 : Logx ≡ log10 x Notation for Logarithm Base e : ln x ≡ log e x log a N Change of Base Formula: log b N = log a b Product: log b ( MN ) = log b N + log b M log b p M N p 1. 30 .1. and exponents become coefficients.15.10.15.15.3.2. Logarithm of the Same Base: log b b = 1 1.7. making the manipulation of these expressions easier in some instances.15. Logarithmic Simplification Process Let X = An B m . Rules for Logarithms 1.8.15. 1.15. Quotient: log b    = log b M − log b N  p log b N 1. Logarithm of One: log b 1 = 0 1.4. Power: log b N = 1.12.11.15.15. 1. then Cp  An B m  log b ( X ) = log b  p C log b ( X ) = log b A n B m log b ( X ) = log b n log b ( X ) = n log b ( A) + m log b (B ) − p log b (C )∴ ( ) () (A ) + log (B ) − log (C ) ⇒ m p b b  ⇒   − log b C p ⇒ Note: The use of logarithms transforms complex algebraic expressions where products become sums.5.15. Base to the Logarithm: b 1. quotients become differences.1. 1.

16. 1. Subtraction: ( a + bi ) − (c + di ) = ( a − c ) + (b − d )i 1.4.2.5. Process of Complex Number Division a + bi = c + di (a + bi )(c + di ) = (c + di )(c + di ) (a + bi )(c − di ) = (c + di )(c − di ) (ac + bd ) + (bc − ad )i = c2 − d 2 ac + bd  bc − ad  + i c2 − d 2  c2 − d 2  31 .16. Definition of Complex Modulus: a + bi = a 2 + b2 1.16. Process of Complex Number Multiplication (a + bi )(c + di ) = ac + (ad + bc)i + bdi 2 = ac + (ad + bc)i + bd (−1) ac − bd + (ad + bc)i 1.16.16.9.3.16. Definition of Complex Number: Numbers of the form a + bi where a. Definition of Complex Conjugate: a + bi = a − bi 1.1.16. Definition of the imaginary unit i : i is defined to be the solution to the equation x + 1 = 0 .16.7. b are real numbers 1. Properties of the imaginary unit i : 2 i 2 + 1 = 0 ⇒ i 2 = −1 ⇒ i = − 1 1.16. Addition: ( a + bi ) + (c + di ) = ( a + c ) + (b + d )i 1.16.8. Complex Numbers 1.1.6.

then two different functions are being discussed. it is independent because any specific input value can be freely chosen. 32 . g . The variable x is the independent or input variable. a simple y will be used to represent the output variable f (x) when it is well understood that a function process is indeed in place. ‘let f be a function’. Notice that the complex symbol f (x) reinforces the fact of that output values are created by direct action of the function process f upon the independent variable x .1.17. With this statement in mind. What is a Function? The mathematical concept called a function is foundational to the study of higher mathematics. etc. the entire input-output process—start to finish— comes into discussion. also called the dependent variable since the value f (x) is entirely determined by the action of the processing rule upon x . f . h. The set of all possible output values is called the range and is denoted by Rf . When a mathematician says. Two more definitions are noted. often in terms of their relationship to each other. If two different function names are being used in one discussion. The set of all possible input values for a function f is called the domain and is denoted by the symbol Df . the function then processes the input value via the processing rule in order to create the output variable f (x) . Once a specific input value is chosen. Function names are usually lower-case letters. Function Name f x Input Side Processing Rule f (x) Output Side The above figure is a diagram of the general function process for a function named f . Sometimes. let us define in a working sense the word function: A function is any process where numerical input is transformed into numerical output with the operating restriction that each unique input must lead to one and only one output.

4. Division:  ( x ) = g g ( x)  1. Inverse Property: f [ f −1 −1 be the inverse for f ( x)] = f −1 [ f ( x)] = x 1. −1 −1 Step 4: Verify by the property f ( f ( x)) = f ( f ( x )) = x .6: Find f 1 −1 −1 ( x) for f ( x) = x 3 + 2 .18.  ( x ) = f f ( x)  ( f o g )( x) = f [ g ( x)] ( g o f )( x) = g[ f ( x)] 1. Addition/Subtraction: ( f ± g )( x) = f ( x) ± g ( x) 1.18.1.3. and let f 1.18.6.18.5. Process for Constructing Inverse Functions Step 1: Start with f ( f ( x )) = x .1. −1 Step 3: Solve for y in terms of x .7. −1 ( x) with y to form the equality f ( y ) = x .18. a : f ( f −1 ( x)) = ( f −1 ( x)) 3 + 2 = x a : ( y)3 + 2 = x a : ( y)3 + 2 = x ⇒ y =3 x−2 a : f −1 ( f ( x)) = 3 ( x 3 + 2) − 2 = 3 x 3 = x a : f ( f −1 ( x)) = 4 4 3 2 ( 3 ( x − 2) + 2 = ( x − 2) + 2 = x ) 3 33 .18.18. Function Algebra Let f and g be functions. the process equality that must be in place for an inverse function to exist. Multiplication: ( f ⋅ g )( x) = f ( x) ⋅ g ( x) 1. The resulting y is f ( x ) .2. Composition: f f ( x)  g  g ( x) .18.18. Step 2: Replace f 1. Demonstration of 1.

Solution of Quadratic Equations by Formula To solve a quadratic equation using the quadratic formula—the more powerful of two common methods for solving quadratic equations—apply the following four steps. Quadratic Equations & Functions 1. 1.19.2.19. If. the quadratic equation reduces to a linear equation. the quadratic equation is called incomplete.1. Solutions are obtained by either factoring or by use of the quadratic formula.19. Quadratic Formula with Development: c b ax 2 + bx + c = 0 ⇒ x 2 +   x = − ⇒ a a 2 2 b cb b x2 +  x + 2 = − + 2 ⇒ a 4a 4a a   b  b 2 − 4ac x +   = ⇒  4a 2   2a   b 2 − 4ac b ⇒ x+  = ± 2a  2a  x= − b ± b 2 − 4ac ∴ 2a 2 1. As with all real-world applications. 2 34 . c ≠ 0 . b ≠ 0. All quadratic equations have exactly two solutions if complex solutions are allowed. quadratic equations can have up to two real solutions. Definition and Discussion A complete quadratic equation in standard form (ready-to-besolved) is an equation having the algebraic structure ax 2 + bx + c = 0 where a ≠ 0. within the context of a particular problem complex solutions are not admissible. Step 1: Rewrite the quadratic equation so it matches the standard form ax + bx + c = 0 .19. If a = 0 . the number of admissible solutions depends on context.3. If either b = 0 or c = 0 .1.

9.4.19.19.&c . b.19.6. 1. Step 3: Apply the formula and solve. Step 4: Check your answer(s) in the original equation.19.19.9.14. Step 1: Rewrite the quadratic equation in standard form Step 2: Factor the left-hand side into two linear factors using the quadratic trinomial factoring process 1. Solution of Quadratic Equations by Factoring To solve a quadratic equation using the factoring method.10. Solution Discriminator: b 2 − 4ac b 2 − 4ac > 0 ⇒ two real solutions b 2 − 4ac = 0 ⇒ one real solution of multiplicity two b 2 − 4ac < 0 ⇒ two complex (conjugates) solutions 1.5. 2 1.7. Definition of Quadratic Function: b b 2 − 4ac  f ( x) = ax + bx + c = a x + − 2a  4a  −b 1. Step 4: Check answer(s) in the original equation Note: Use the quadratic formula when a quadratic equation cannot be factored or is hard to factor. Vertex for Quadratic Function:   2a .8. apply the following four steps. Quadratic-in-Form Equation: aU + bU + c = 0 where U is an algebraic expression of varying complexity. Solution when a = 0 & b ≠ 0 : bx + c = 0 ⇒ x = −c b 1. Axis of Symmetry for Quadratic Function: x = 2a  − b 4ac − b 2  1.19. Step 3: Set each linear factor equal to zero and solve. 4 a     2 2 35 .19.Step 2: Identify the two coefficients and constant term a. 1.

After this substitution. This leads to (u in-form in u .3 to solve for u 3 3 32 ) + qu 3 − p3 = 0 . Step 4: Use the quadratic formula 1.19. Cardano’s Cubic Solution Let ax + bx + cx + d = 0 be a cubic equation written in standard form with a ≠ 0 3 2 Step 1: Set x = y − b .20.1. which is quadratic27 u3 = − q + q2 + 4 27 p3 2 p to obtain 3u 3 Step 5: Solve for u & v where v = u= 3 − q + q2 + 2 4 27 p3 &v = − − q − q2 + 2 4 27 p3 Step 6: Solve for x where x = y − b b ⇒ x =u−v− 3a 3a 36 . the above cubic 3a  c b2  3 becomes y + py + q = 0 where p =  −  and a 3a 2    2b 2 bc d  q= − 2+  3 a 3a  27 a Step 2: Define u & v such that y = u − v and p = 3uv 3 Step 3: Substitute for y & p in the equation y + py + q = 0 .

5. Lastly. a root for 1.21.e. then any rational roots for the equation P ( x) = 0 p must have the form q where p is a factor of the constant 1. The equation P ( x ) = 0 has exactly N roots if one counts complex solutions of the form a + bi .2. If a + bi is P(x) with P(a + bi ) = 0 . then P (x) has at least one real root. 1. Complex Conjugate Pair Root Theorem: Suppose P (x) has all real coefficients. 1. 1.. then P(a − bi) = 0 . Note: This result is used to form a rational-root possibility list.21. the graph of P (x ) will have up to N − 1 turning points (which includes both relative maxima and minima). This solution may be real or complex (i. Rational Root Theorem: If coefficient a0 and q is a factor of the lead coefficient a n . The Eight Basic Theorems 1.6. Numbers Theorem for Roots and Turning Points: If P (x) is a polynomial of degree N . 37 . Fundamental Theorem of Algebra: Every polynomial P(x) of degree N ≥ 1 has at least one solution x0 for which P( x0 ) = 0 .21.21.3. If a+ b is a root for P(x) with P(a + b ) = 0 . Irrational Surd Pair Root Theorem: Suppose P (x) has all rational coefficients. Theory of Polynomial Equations Let P( x) = an x n + a n−1 x n−1 + .21.1. then the equation P ( x) = 0 has up to N real solutions or roots. has the form a + bi ).21. P(x) has all integer coefficients. then P(a − b ) = 0 .4. + a 2 x 2 + a1 x + a0 be a polynomial written in standard form.21..1. Real Root Theorem: If P (x ) is of odd degree having all real coefficients.

1.21. Factor Theorem: If c is any number with P (c ) = 0 . then ( x − c) is a factor of P(x) . Note: this result is extensively used to evaluate a given polynomial P (x) at various values of x . b) be an interval on the x axis with P(a ) ⋅ P(b) < 0 . 1. reduced polynomial having degree one less than P (x ) . 38 . then the remainder R is equal to P (c) . Likewise. the number of negative real solutions equals the number of coefficient sign variations in P (− x) or that number decreased by an even number. The converse P ( x) = ( x − c) ⋅ Q ( x ) ⇒ P (c ) = 0 is also true. Turning Point Theorem: Let a polynomial P(x) have degree N . Case d < 0 : If the roots of Q(x) alternate in sign— with the remainder R ”in sync” at the end—then P (x ) has no root x0 < d . Case d > 0 : If both R and all the coefficients of Q (x) are positive.7. The number of positive real solutions equals the number of coefficient sign variations or that number decreased by an even number.21.9. b) such that P( x0 ) = 0 .12. 1.11. Then the number of turning points for a polynomial P(x) can not exceed N − 1 . Note: Coefficients of zero can be counted either as 1.8. The Four Advanced Theorems (a. Remainder Theorem: If P (x ) is divided by ( x − c ) . Descartes’ Rule of Signs: Arrange P (x) in standard order as shown in the title bar. Root Location Theorem: Let ( x − d ) to obtain P ( x) = ( x − d ) ⋅ Q( x) + R .21. Root Bounding Theorem: Divide P (x ) by positive or negative—which ever way helps in the subsequent determination.10.1. 1.21.21. Then there is a value x0 ∈ (a.21. then P (x) has no root x0 > d . This means P( x) = ( x − c) ⋅ Q( x) where Q(x) is a new.

22.z = abj dek ghl D 39 .22. Determinants and Cramer’s Rule 1.22.22.y= .1.4.2.22. Cramer’s Rule for a Two-by-Two Linear System Given ax + by = e cx + dy = f e f D b d with D = ab ≠0 cd e f D Then x = and y = a c 1. Two by Two Determinant Expansion: ab = ad − bc cd 1. Three by Three Determinant Expansion: ab d g e h c e f =a h i f d −b i g f d +c i g e = h a(ei − fh) − b(di − fg ) + c(dh − eg ) = aei − ahf + bfg − bdi + cdh − ceg 1.3. Cramer’s Rule for a Three-by-Three Linear System ax + by + cz = j a Given dx + ey + fz = k with D = d g gx + hy + iz = l jb ke lh D c f i a d g j k l D c f i b e h c f ≠0 i Then x = .1.

Binomial Theorem Let n and r be positive integers with n≥r.23.23.23.. 1.23..1.5.23.2.3. D ≠ 0 ⇒ xi has a unique solution Dxi ≠ 0.5. D ≠ 0 ⇒ xi = 0 Dxi = 0..6. Definition of n! : n!= n( n − 1)(n − 2). + an = a k + a k +1 + a k + 2 + a k +3 .4. Summation Symbols: ∑a i =0 n i =k n i = a0 + a1 + a2 + a3 + a4 + . 1. Formula for the 40 . Combinatorial Symbol:   = r  n  n! r!(n − r )! 1.7. + a n n  n ( a + b) n = ∑   a n − i b i  i =0  i  ∑a i 1. Sum of Binomial Coefficients when a = b = 1 : ∑  i 1  i =0 n n  n −i i 1 = (1 + 1) n = 2 n n (r + 1)th Term:  a n − r b r r  1.23.. Solution Types in xi = Dxi D Dxi = 0.23.22.. D = 0 ⇒ xi has infinite solutions Dxi ≠ 0.1 .. Binomial Theorem: 1.1. Special Factorials: 0!= 1 and 1!= 1 1.23. D = 0 ⇒ xi has no solution 1.

1.23.8. Pascal’s Triangle for  

n  : n = 10  r

1 11 121 13 31 14 6 41 1 5 10 10 5 1 1 6 15 20 15 6 1 1 7 21 35 35 21 7 1 1 8 28 56 70 56 28 8 1 1 9 36 84 126 126 84 36 9 1 1 10 45 120 210 252 210 120 45 10 1

1.24. Arithmetic Series
1.24.1. Definition:

S = ∑ (a + ib) where
i =0

n

b is the common

increment 1.24.2. Summation Formula for S :

S=

(n + 1) [2a + nb] 2

1.25. Geometric Series
1.25.1. Definition:

G = ∑ ar i where r is the common ratio
i =0
n

n

1.25.2. Summation Formula for G :

G = ∑ ar i ⇒ rG = ∑ ar i +1 ⇒
i =0 i =0

n

G − rG = ∑ ar i − ∑ ar i +1 = a − ar i +1 ⇒
i =0 i =0

n

n

G=

a(1 − r ) 1− r

i +1

1.25.3. Infinite Sum Provided 0 < r < 1 :

∑ ar
i =0

i

=

a 1− r

41

1.26. Boolean Algebra
In the following tables, the propositions or False (F). 1.26.1. Elementary Truth Table:

p & q are either True (T)

p
T T F F

and = ∧ : or = ∨ : negation = ~: implies =⇒, ⇔ q ~p ~ q p∧q p∨q p⇒ q p ⇔ q
T F T F F F T T F T F T T F F T T T T F
e

T F F T

T F F T

1.26.2. Truth Table for the Exclusive Or ∨ :

p
T T F F

q
T F T F

p∨q
F T T F

e

1.26.3. Modus Ponens: Let p ⇒ q & p = T . Then, q = T . 1.26.4. Chain Rule: Let p ⇒ q & q ⇒ r . Then ( p ⇒ 1.26.5. Modus Tollens: Let p ⇒ q & q = F . Then (~ q ⇒ ~ p ) = T . 1.26.6. Fallacy of Affirming the Consequent: Let p ⇒ q & q = T .Then ( q ⇒ p ) = F . 1.26.7. Fallacy of Denying the Antecedent: Let p ⇒ q & p = F . Then (~ p ⇒ ~ q ) = F . 1.26.8. Disjunctive Syllogism for the Exclusive Or: Let p ∨ q = T & q = F . Then
e

r) = T .

p =T

42

1.26.9. Demonstration that the English double-negative in the slang expression “I don’t got none” actually affirms the opposite of what is intended. Step 1 1 2 3 4 5 Phrase I do not have any I do have none I do not have none I don’t have none I don’t got none I have some Comment The original proposition p as intended Assume p = T Negation of

p : (~ p ) = F

Proper contracted form of 3:

(~ p ) = F

Slang version of 3 Logical consequence of 3:

(~ p ) = F ⇒ ~ (~ p) = T

1.27.

Variation or Proportionality Formulas

1.27.1. Direct: y = kx

k x 1.27.3. Joint: z = kxy
1.27.2. Inverse: y =

kx y n 1.27.5. Direct to Power: y = kx k 1.27.6. Inverse to Power: y = n x
1.27.4. Inverse Joint: z =

43

2. Geometry
2.1. The Parallel Postulates

2.1.1.Let a point reside outside a given line. Then there is exactly one line passing through the point parallel to the given line. 2.1.2.Let a point reside outside a given line. Then there is exactly one line passing through the point perpendicular to the given line. 2.1.3.Two lines both parallel to a third line are parallel to each other. 2.1.4.If a transverse line intersects two parallel lines, then corresponding angles in the figures so formed are congruent. 2.1.5. If a transverse line intersects two lines and makes congruent, corresponding angles in the figures so formed, then the two original lines are parallel.

2.2. Angles and Lines

αβ

α

β

α + β = 180 0 α + β = 90
0

α + β = 900

2.2.1.Complimentary Angles: Two angles .

α, β

with

44

1.Acute Triangle: A triangle where all three interior angles α .6. β with α + β = 180 0 2.3.3. c are equal to another 2.2. γ is greater than 90 2. β . γ in any triangle is equal to 180 0 2.2. β . b.Scalene Triangle: A triangle where no two of the three side-lengths a.7.Obtuse Triangle: A triangle where one interior angle 0 from the triad α .2.2.5. β .4. γ is equal to 90 2. Triangles b γ 0 a α + β + γ = 180 α c β 2. β formed when a straight line is intersected by a line segment is equal to 180 0 2. c are identical a = b = c or all three 0 angles α . β .3.γ are equal with α = β = γ = 60 0 45 .Supplementary Angles: Two angles α.2.Isosceles Triangle: A triangle where exactly two of the side-lengths a. γ are acute 2.2.3.5.3.3.Right Angle: An angle exactly equal to 90 2.3.Equilateral Triangle: A triangle where all three sidelengths a.2.3.3.6. b.Right Triangle: A triangle where one interior angle from the triad α .4.3.Triangular Sum of Angles: The sum of the three interior angles α . b. c are equal to each other 2.2. β .Linear Sum of Angles: The sum of the two angles α.Acute Angle: An angle less than 90 0 0 0 2.Obtuse Angle: An angle greater than 90 2.

Side-Side-Side (SSS): If the three side-lengths are identical.Congruent Triangles: Two triangles are congruent (equal) if they have identical interior angles and side-lengths. Example (SSA): b & a & β = e & d & ϕ Example (AAS): α & β & a = φ &ϕ & d 46 .11. Included Side: The side that is between two given angles 2.3.4. Example: b & c & a = e & f & d 2.2.3. These other cases are of the form Angle-Angle-Side (AAS) or Side-Side-Angle (SSA). then the two triangles are congruent.Side-Angle-Side (SAS): If any two side-lengths and the included angle are identical. Example: b & α & c = e & φ & f 2.4. Opposite Angle: The angle opposite a given side 2.10. Opposite Side: The side opposite a given angle 2.3.4.8.Three Attributes Identical: If any three attributes— side-lengths and angles—are equal with at least one attribute being a side-length. Example: α & c & β = φ & f & ϕ 2.12.13.1.Similar Triangles: Two triangles are similar if they have identical interior angles. Included Angle: The angle that is between two given sides 2.4.3. then the triangles are congruent.9. then the two triangles are congruent. Congruent Triangles Given the congruent two triangles as shown below b γ a e ω d α c β φ f ϕ 2.4.2.4. then the two triangles are congruent.3.3. 2.3. 2.Angle-Side-Angle (ASA): If any two angles and the included side are identical.

5. n is the number of sides.1.5.6. s is the length of a side 2 s 47 .1.Minimal Condition for Similarity: If any two angles are identical (AA).Ratio laws for Similar Triangles: Given similar triangles as shown above.6.5.2.2. then the triangles are similar. P is the perimeter. Suppose α = φ & β = ϕ Then α + β + γ = 180 0 & φ + ϕ + ϖ = 180 0 ⇒ α = 180 0 − β − γ = 180 0 − ϕ − ϖ = φ bca == efd 2. Similar Triangles Given the two similar triangles as shown below b γ c a e ω d α β φ f ϕ 2.Square: A = s : P = 4 s .6. 2. then 2. Planar Figures A is the planar area.2.Degree Sum of Interior Angles in General Polygon: D = 180 0 [n − 2] n=5 n=6 n = 5 ⇒ D = 5400 n = 6 ⇒ D = 7200 2.

Triangle: A = 1 2 bh .4.6.7.Parallelogram: A = bh .3. B & b are the two parallel bases and h is the altitude 1 2 b h B 2.6. base and height b & h are the h b 2. a & b are the half lengths of the major & minor axes a b 48 .Circle: A = πr : P = 2πr where r is the radius.Trapezoid: A = ( B + b)h .6.2.6.6.6. the diameter.5. 2 r 2. b & h are the base and altitude h b 2.Rectangle: A = bh : P = 2b + 2h .Ellipse: A = πab . or P = πd where d = 2r .8. b & h are the base and altitude h b 2.6.

7.7. r & t & h are the radius.7.2.Cube: A = 6s 2 : V = s 3 . the radius and length 2 2 r &l are r l 2.4. s is the length of a side s 2.Sphere: A = 4πr : V = 2 4 3 πr 3 . slant height. and altitude h t r 49 . Solid Figures A is total surface area.3.Cylinder: A = 2πr + 2πrl : V = πr l .7.2.Cone: A = πr + 2πrt : V = 2 1 3 πr 2 h .7. r is the radius r 2.1. V is the volume 2.

1.2. x z y 50 .8.7.5. and a hypotenuse (long side) BC of length z . a second side AB of length y . and altitude h t s 2.Statement: Let a right triangle ∆ABC have one side AC of length x . s & t & h are the side. slant height.8.Traditional Algebraic Proof: Construct a big square by bringing together four congruent right triangles.2. Pythagorean Theorem 2.8. Then z2 = x2 + y2 B y A z ¬ x C 2.Pyramid (square base): A = s + 2 st : V = 2 1 3 s2h .

M .4.Generating Formulas for Pythagorean triples: Let m.Visual (Pre-Algebraic) Pythagorean Proof: The idea is to observe that the two five-sided irregular polygons on either side of the dotted line have equivalent areas.Pythagorean Triples: 2 2 Positive 2 integers L.The area of the big square is given by A = ( x + y ) 2 . 2. n with m > n > 0 be integers. N such that L = M + N 2.8.8. and L = m 2 + n 2 51 .5.3.8. or equivalently by  xy  A = z 2 + 4  . N = 2mn . Taking away three congruent right triangles from each area leads to the desired Pythagorean equality. x2 + y 2 = z 2 ⇒ z 2 = x2 + y 2 ∴ 2. Then M = m 2 − n 2 . 2 Equating:  xy  ( x + y ) 2 = z 2 + 4  ⇒ 2 2 2 x + 2 xy + y = z 2 + 2 xy ⇒ .

2.2.Heron’s Formula: A = ¬x s ( s − a )( s − b)( s − c) 2.1. Heron’s Formula Let s = 1 2 (a + b + c) be the semi-perimeter of a general triangle and A be the internal area enclosed by the same. a h b c−x c 2.9.9.9.Derivation Using Pythagorean Theorem: a : Create two equations for the unknowns h and x E1 : h 2 + x 2 = b 2 E 2 : h 2 + (c − x ) 2 = a 2 1 a : Subtract E 2 from E1 and solve for x x 2 − (c − x ) 2 = b 2 − a 2 ⇒ 2cx − c 2 = b 2 − a 2 ⇒ 2 x= 3 c2 + b2 − a2 2c 2 a : Substitute the value for x into E1 c2 + b2 − a2  2 h +  =b 2c   2 a : Solve for h h= 4 4c 2 b 2 − c 2 + b 2 − a 2 4c 2 [ ] 2 ⇒ 52 .

2  2c  2b  2a  A = s − s − s − {s} ⇒ 2  2  2  A = ( s − c)( s − b)( s − a) s ⇒ A = s ( s − a)( s − b)( s − c) ∴ 2.10. Golden Ratio 2. Solving for x leads to φ = 1.1. Definition: Let p = 1 be the semi-perimeter of a rectangle whose base and height are in the proportion shown.10.6181 . defining the Golden Ratioφ .h= h= h= 5 {2cb − [c 2 {a + b 2 − a 2 }{2cb + c 2 + b 2 − a 2 4c 2 2 ] [ ]} ⇒ 2 − [c − b] c + b] − a 2 ⇒ 4c 2 2 }[ { } {a + b − c}{a + c − b}{c + b − a}{c + b + a} 4c 2 a : Solve for area using A = 1 ch . 1− x x 1− x 1 x 1 = x 1− x =φ x 53 . 2 A= 1c 2 A= 6 {a + b − c}{a + c − b}{c + b − a}{c + b + a} ⇒ 4c 2 {a + b − c}{a + c − b}{c + b − a}{c + b + a} 16 a+b+c a : Substitute s = and simplify.

11. a 2 = b 2 + ( ab ) 2 ⇒ a 2 = b 2 + ab ⇒ a 2 − ab − b 2 = 0 ⇒ a = φb B B 36 0 a b a ab 1080 C a 72 0 b 72 0 D A C A a 2. Midpoint Formula:  Line Formulas  x1 + x2 y1 + y2  . y1 ) and ( x 2 . Point/Slope Form: y − y 1 = m( x − x 1 ) 2. y 2 .11.5. Slope of Line: m = 54 . b) are the x and y Intercepts:  m  2.6. General Form: Ax + By + C = 0 2. 2-D 2 36 0 36 0 Distance 2 Formula: D = ( x 2 − x1 ) + ( y 2 − y1 ) and 2.11.10. Two examples are shown below. Golden Triangles: Triangles whose sides are proportioned to the Golden Ratio. Distance and Line Formulas Let ( x1 .11.4. 3-D Distance Formula: For the points ( x1 .2.11.11.  2 2 y 2 − y1 x2 − x 1 2.11. z 2 ) .2. D = ( x 2 − x1 ) 2 + ( y 2 − y1 ) 2 + ( z 2 − z1 ) 2 2. Slope/Intercept Form: y = mx + b where −b  . y 2 ) be two points where x 2 > x1 . z1 ) ( x2 .7. y1 . 2.0  and (0.2.1.11.3.

k ) : I) If a > b . k ) & (h + c. Hyperbola Centered at ( h. Slope Relationship between two Parallel Lines L1 and L2 having slopes m1 and m 2 : m1 = m 2 2. General: Ax + Bxy + Cy + Dx + Ey + F = 0 2. the two foci are on the line y = k and are ( x − h) ( y − k) + =1 2 a b2 c2 = a2 − b2 .4. b) are the x and y intercepts 2. k + c) where c = b − a . Slope Relationship between two Perpendicular Lines L1 and L2 having slopes m1 and m 2 : m1 = 2.12.8.1.12.11.12. k ) where c 2 = a 2 + b 2 . Intercept/Intercept where (a. k ) : ( x − h) 2 ( y − k ) 2 ( y − k ) 2 ( x − h) 2 − = 1 or − =1 a2 b2 b2 a2 ( x − h) 2 I) When is to the left of the minus sign. Formulas for Conic Sections 2 2 2. Circle of Radius r Centered at ( h. Slope m : −1 m2 Slope of Line Perpendicular to a Line of −1 m 2. II) If b > a .11.9.2. k − c) & ( h.2. 55 . the two foci are on the line x = h and are 2 2 2 given by ( h. given by (h − c.11.11.11.12.10.0) and Form: xy + =1 ab (0. k ) : ( x − h) 2 + ( y − k ) 2 = r 2 2.12. the two a2 foci are on the line y = k and are given by (h − c. k ) where 2. Ellipse 2 Centered 2 at (h.3. k ) & (h + c.

2 II) For ( x − h) . Parabola Length p : (h.5. the focus is (h + p. k + c) where c 2 = b 2 + a 2 .12. k ) and Focal ( y − k ) 2 = 4 p( x − h) or ( x − h) 2 = 4 p( y − k ) 2 I) For ( y − k ) . k ) and the directrix is given by the line x = h − p . Step 4: Reduce. k − c) & (h. y obtained in Step 2 into Ax + Bxy + Cy + Dx + Ey + F = 0 . with Vertex at 2. the two b2 foci are on the line x = h and are given by ( h. Transformation Process for Removal of Term in the General Conic Equation xy Ax 2 + Bxy + Cy 2 + Dx + Ey + F = 0 : B Step 1: Set tan(2θ ) = and solve for θ .12. The final result should be of the form A′( x ′) 2 + C ′( y ′) 2 + D ′( x ′) + E ′( y ′) + F ′ = 0 . 56 . k + p ) and the directrix is given by the line y = k − p .6. A−C Step 2: let x = x ′ cos θ − y ′ sin θ y = x ′ sin θ + y ′ cos θ 2 2 Step 3: Substitute the values for x.II) When ( y − k )2 is to the left of the minus sign. the focus is ( h. 2.

1.3. cos(α ) = z y 3. Basic Definitions of Trigonometric Functions & Trigonometric Inverse Functions z y α x Let the figure above be a right triangle with one side of length x .1. arctan. The angle α is opposite the side of length. Likewise. sin(α ) = −1 sin(α ) = y cos(α ) = x y x x cot(α ) = y tan(α ) = sec(α ) = 1 x 1 csc(α ) = y sin −1 ( y ) = α cos −1 ( x) = α  y tan −1   = α  x x cot −1   = α  y  1 sec −1   = α  x 1 csc −1   = α  y  Note: sin is also known as arcsin .1. the other inverses are also known as arccos. arc cot. sec(α ) = x z 3. arc sec and arc csc . 57 .1.1. cot(α ) = y z 3.5.2.4.3.1.6.1. csc(α ) = y 3. The six trigonometric functions—where each is a function of α —are defined as follows: Z: Arbitrary Z is 1 Inverse when Z is 1 y z x 3.1. and a hypotenuse of length z . a second side of length y . tan(α ) = x x 3. Trigonometry 3.

Fundamental Definition-Based Identities 3. Sum and Difference Identities 3.3. cos(α − β ) = cos(α ) cos( β ) + sin(α ) sin( β ) 58 . csc(α ) = 1 sin(α ) 1 3. sin(α − β ) = sin(α ) cos( β ) − cos(α ) sin( β ) 3. cos(α + β ) = cos(α ) cos( β ) − sin(α ) sin( β ) 3.2.5.2. tan(α ) = cos(α ) cos(α ) 3.2. cot( −α ) = − cot(α ) 3. sin (α ) + cos (α ) = 1 2 2 3.2.2.4.5.4.5.3.2.1.3. tan( −α ) = − tan(α ) 3.3.3. sec(α ) = cos(α ) sin(α ) 3.2. sin(α + β ) = sin(α ) cos( β ) + cos(α ) sin( β ) 3.5.1.1.2.4. tan(α ) = cot(α ) 3.5.2.3. cot(α ) = sin(α ) 1 3.2. sin( −α ) = − sin(α ) 3. cos( −α ) = cos(α ) 3. 1 + cot (α ) = csc (α ) 2 2 3.1. Negative Angle Identities 3.5.4. Pythagorean Identities 3.3.4. 1 + tan (α ) = sec (α ) 2 2 3.4.3.3.4.4.

0) x x1 = cos(α ) cos( β ) From the figure. sin(α + β )} x 2 = sin( β ) sin(α ) y 2 = sin( β ) cos(α ) sin(β ) α {cos(α ).6.5.5.0) β α ¬ (1. sin(α + β )} is decomposed into two components y the figure below. sin(α )} cos(β ) y1 = sin(α ) cos( β ) (0. each coordinate point using both definitions for the sine and cosine in 3.3.1. and 3. 59 . we have cos(α + β ) = x1 − x 2 ⇒ cos(α + β ) = cos(α ) cos( β ) − sin(α ) sin( β ) ∴ sin(α + β ) = y1 + y 2 ⇒ sin(α + β ) = sin(α ) cos( β ) + sin( β ) cos(α ) ∴ . {cos(α + β ). tan(α + tan(α ) + tan( β ) 1 − tan(α ) tan( β ) tan(α ) − tan( β ) 3.5.Derivation of Formulas for cos(α + β ) of the and sin(α + β ) : In {cos(α + β ).5.1.2.7.1. tan(α − β ) = 1 + tan(α ) tan( β ) β) = 3.

6.3. tan( 2α ) = 2 tan(α ) 1 − tan 2 (α ) 3.3. Half Angle Identities 3.1. cos( 3.6. General Triangle Formulas Applicable to all triangles: right and non-right z β y α θ x 0 3.6.1.3.7.8.7. cos(2α ) = cos (α ) − sin (α ) 2 2 3.1.2. cos(2α ) = 2 cos (α ) − 1 = 1 − 2 sin (α ) 2 2 3. tan( α 2 α 2 )=± 1 − cos(α ) sin(α ) 1 − cos(α ) = = 1 + cos(α ) 1 + cos(α ) sin(α ) 3.7. sin( α 2 )=± )=± 1 − cos(α ) 2 1 + cos(α ) 2 3. Double Angle Identities 3.Law of Sines: (also sin(α ) sin( β ) sin(θ ) = = y x z 60 .3. sin(2α ) = 2 sin(α ) cos(α ) 3.4.1.6.2.8.6.7.Sum of Interior Angles: α + β + θ = 180 2.2.) 3.8.

8.Area Formulas for a General Triangle: xz sin(α ) b) A = yz sin( β ) c) A = xy sin(θ ) a) A = 1 2 1 2 1 2 3.5.3. C a γ b h A β x ¬ x+ y=c y α B For the Law of Sines we have 1h a: = sin(α ) ⇒ h = b sin(α ) b 2h a: = sin( β ) ⇒ h = a sin( β ) a 3 b a a: b sin(α ) = a sin( β ) ⇒ = ∴ sin( β ) sin(α ) The last equality is easily extended to include the third angle γ .Derivation of Law of Sines and Cosines: Let ∆ABC be a general triangle and drop a perpendicular from the apex as shown.4.8.8.Law of Cosines: a) y = x + z − 2 xz cos(α ) 2 2 2 b) x = y + z − 2 yz cos( β ) 2 2 2 c) z = x + y − 2 xy cos(θ ) 2 2 2 3.3. 61 .

3.Area of a Sector: A = 1 2 r 2θ 3. 1 a : Use the Pythagorean Theorem to complete the x2 + h2 = a2 ⇒ 2 [c − b cos(α )]2 + [b sin(α )]2 = a 2 ⇒ c 2 − 2bc cos(α ) + b 2 cos 2 (α ) + b 2 sin 2 (α ) = a 2 ⇒ c 2 − 2bc cos(α ) + b 2 = a 2 ⇒ a 2 = c 2 + b 2 − 2bc cos(α ) ∴ Similar expressions can be written for the remaining two sides. Degree/Radian Relationship 3.1.1. Basic Conversion: 180 0 = π radians 62 .9.For the Law of Cosines we have h = b sin(α ) .9.2. Arc and Sector Formulas r s θ 3.9.10.Arc Length s : s = rθ 3. a : Solve for y and x in terms of the angle α y = cos(α ) ⇒ y = b cos(α ) ⇒ b x = c − y = c − b cos(α ) derivation.10.

12. θ = Tan −1   a iθ iθ 3. Euler’s Famous Equality: e iθ n iπ [r (cos θ + i sin θ )]n = r n (cos[nθ ] + i sin[nθ ]) 63 . Definition of re : re = r (cos θ + i sin θ ) = −1 n inθ 3. Conversion Formulas: From Radians Degrees To Degrees Radians Multiply by 180 0 π π 180 3.2.12. a + bi = r (cos θ + i sin θ ) where b  r = a 2 + b 2 . De-Moivre’s Theorem: ( re ) = r e or 3.3.3.12.12. Addition of Sine and Cosine a sin θ + b cos θ = k sin(θ + α ) where k = a2 + b2 α = sin −1  or    2 2  a +b  b α = cos −1  3.11.    2 2  a +b  a Polar Form of Complex Numbers 3.10.4.1.2.12.

Polar Form Multiplication: r1e iα ⋅ r2 e iβ = r1 ⋅ r2 e i (α + β ) 3.1.14. cos(α ) = 1 − x 3. tan(α ) = 3.13.14. Polar Form Division: r1e iα r = 1 e i (α − β ) iβ r2 r2 e 3.14. Trigonometric Triangles −1 Values from Right In the right triangle below.14.14. y ) ⇔ ( r .5. θ ) x = r cos θ .2.12. csc(α ) = 2 2 x 1− x2 1− x2 x 1 1− x2 1 x 64 .5. sec(α ) = 3. y = r sin θ r = x 2 + y 2 .14.3. cot(α ) = 3. Rectangular to Polar Coordinates ( x. let sin ( x ) = α ⇒ sin(α ) = x = x .4. 1 1 x α 1− x Then 3.12.6.3.θ = tan −1 ( y / x ) 3.

Scalar Multiplication: (α )U = (αu1 . Sum and/or Difference: U ± V 4.Angleθ Between Two Vectors: cos θ = r r | U || V | rr 4. u 2 ± v 2 .Orthogonal Vectors: U •V = 0 rr Product: U • V = u1 v1 + u 2 v 2 + u 3 v 3 of Dot 65 . U = (u1 . v3 ) . u 2 .2.1.0) r 2 2 2 4.2.1.1.Zero Vector: 0 = (0.1. u 3 ) be two vectors.2.2.1.Vector Length: | U |= u1 + u 2 + u 3 r 1r 4.4.3.Definition rr U •V 4.1.6. αu 3 ) r r 4.1.2. u 3 ± v3 ) r 4. Basic Definitions and Properties r r Let V = (v1 .1.3. Elementary Vector Algebra 4.Unit Vector Parallel toV : r V |V | rr 4.Two Parallel Vectors: V || U means there is a r r scalar c such that V = (c)U 4. αu 2 .2. v 2 .0.7. r U θ r V r r rr U ± V = (u1 ± v1 .4.1.Negative Vector: − U = (−1)U r 4.1.5. Dot Products 4.

3.1.4.Interpretation of the Triple Scalar Product: u1 rrr U • (V × W ) = v1 w1 u2 v2 w2 u3 v3 w3 The triple scalar product is numerically equal to the volume of the parallelepiped at the top of the next page 66 .4. Cross Products i rr 4.3.2.Projection of U ontoV : r r [ rr rrr r U • V  r U • V  V projVr (U ) =  r 2 V =  r  r =  |V |  |V |  |V |  r r V | U | cos θ r |V | ] 4.3.Orientation of U × V .3.3.Area of Parallelogram: A =| U × V |=| U || V | sin θ r r r r rr U ×V r V θ r U 4.Definition of Cross Product: U × V = u1 v1 j u2 v2 k u3 v3 4.3. Orthogonal to BothU andV : rr r rr rrr U • (U × V ) = V • (U × V ) = 0 r r 4.4.2.

1. cos β = r .3.1. then ax 0 + by 0 + cz 0 + d D= a2 + b2 + c2 4. then (a. y1 . z − z1 ) = 0 4.The Three Direction Cosines: v3 v1 v2 cos α = r . y 0 . z ) is a point on the line.Distance D between a point & plane: If a point is given by ( x 0 .2.5. z 1 ) . b. z 0 ) and ax + by + cz + d = 0 is a plane.4. then r x − x1 y − y1 z − z1 = = a b c r 4.Definition of Work: constant force F along the r r r r r r r W = F • PQ =| proj PQ ( F ) || PQ | 67 . cos γ = r |V | |V | |V | path PQ : 4.4. c) • ( x − x1 . Line and Plane Equations r Given a point P = ( a.r U r W r V 4.Plane Normal to P Passing Through ( x1 .5. z ) is a point on the plane.5. If ( x.Line Parallel to P Passing Through ( x1 . z 1 ) : If ( x. y1 . y. y. y − y1 . c) 4. Miscellaneous Vector Equations 4. b.2.4.4.

Elementary Calculus 5. Consider the expression 2 x + 3 where the independent variable x is about to be sent on the mission x → −5 . x → −5 68 . we will write lim ( 2 x + 3) = −7 . moving towards target. the output stream targets the value − 7 . which is being used as a processing rule for a function. we are asking if the dynamic output stream from the expression 2 x + 3 targets a numerical value in the modern smart-weapon sense as the equally-dynamic x targets the value − 5 . and programmed to merge eventually with the target. a target acquired and locked. This means x is moving. which leads to the following working definition: Working Definition: A limit is a target in the modern smart-weapon sense. Limits lead to results unobtainable by algebra alone. closing range. So what is a limit? A limit is a numerical target.5. Does the entire expression 2 x + 3 in turn target a numerical value as x → −5 ? A way to phrase this question using a new type of mathematical notation might be t arg et ( 2 x + 3) = ? Interpreting the notation. Independent variables usually find themselves embedded inside an algebraic (or transcendental) expression of some sort. The arrow ( → ) points to a target on the right. x → −5 x → −5 This explanation is reasonable except for one little problem: the word target is nowhere to be found in calculus texts. In the above example. The variable x on the left is targeting 7 in a modern smart-weapon sense. a target that cannot escape from its sights. Hence. Consider the expression x → 7 where x is an independent variable.1. in this case the number 7 . Notice that the quantity x is a true independent variable in that x has been launched and set in motion towards a target. we complete our new notation as t arg et ( 2 x + 3) = −7 . The traditional replacement (weighing in with 300 years of history) is the word limit. What is a Limit? Limits are foundational to calculus and will always be so. Mathematical judgment says yes.

say x . both inequalities state that dx > 0 . a wee x .5. x The two above conditions state dx is small enough to guarantee that both its product and quotient with the original quantity x is still very small and much. In the context of calculus. z etc. Wee is a Scottish word that means very small. much closer to zero than to one (the meaning of the symbol << 1 ) . also called an infinitesimal. Both inequalities imply that dx is also very small when considered independently 0 < dx << 1 . Differentials are designed to be so small that second-order and higher terms involving differentials. What exactly is this dx . This final property distinguishes the differential as a topic belonging to the subject of calculus. tiny. What is a Differential? The differential concept is one of the two core concepts underlying calculus. Lastly.2. limits being the other. Moreover. How small? In mathematical terms. we first must have a variable. One can also think of dx as the final h in a limit process lim where the process abruptly stops just short of target. it is the very small size of dx that makes it. the following two conditions hold: 0 < xdx << 1 and 0 < dx << 1 . y. To have a differential. Once we have a variable. or minuscule numerical amount when compared to the original x . h →0 in effect saving the rapidly vanishing h from disappearing into oblivion! Thinking of dx in this fashion makes the differential a prepackaged or frozen limit of sorts. diminutive. we can create a secondary quantity dx . which brings us to the following very important point: although very small. can be totally ignored in associated algebraic expressions. read ‘dee x’? The quantity dx is a very small. by definition. which is called the differential of the variable x . or minuscule. the quantity dx is never zero. such as 7( dx ) . diminutive. 2 69 . x. tiny. ‘wee’ can be used in similar fashion to help explain the concept of differential.

[ln x ]′ = 1 x 1 x ln a 5.Chain: [ f ( g ( x ))] = f ' ( g ( x )) g ' ( x ) ′ 1 −1 5. 5. Basic Differentiation Rules 5.9.3.3. Inverse: f ( x ) = f ' ( f −1 ( x)) [ ] 5. Transcendental Differentiation 5.3.3.4.3. [e ]′ = e x x x x 5.4.Product: f ( x ) g ( x) ]′ = f ( x) g ' ( x) + g ( x) f ' ( x) ′  f ( x)  g ( x) f ' ( x) − f ( x) g ' ( x) 5.1.4.3.7.3.6.Power: x n  f ( x + h) − f ( x )  f ' ( x) = lim   h →0 h   [ ]′ = nx [ [ [ [ ]′ = 0 n −1 . [log a x ]′ = 5.8.3.Sum/Difference: f ( x ) ± g ( x ) 5.3.Limit Definition of Derivative: 5.Differentiation Process Indicator: []′ 5.3.4.2.Constant: k 5. [a ]′ = a ln a 5.1.11.3.5.3.4.4.Coefficient: af ( x) ]′ = af ' ( x) ]′ = f ′( x) ± g ′( x) 5.10. n can be any exponent n [ ]′ n −1 f ' ( x) . Generalized Power: { f ( x)} = n{ f ( x )} Again. n can be any exponent 5.2.5.5.3. [sin x]′ = cos x 70 .4.Quotient:  = g ( x) 2  g ( x)  ′ 5.3.4.

5.4.6. [sin

−1

1− x 2 5.4.7. [cos x]′ = − sin x −1 −1 5.4.8. [cos ( x)]′ = 1− x 2 2 5.4.9. [tan x ]′ = sec x 1 −1 5.4.10. [tan ( x)]′ = 1+ x2 5.4.11. [sec x ]′ = sec x tan x 1 −1 5.4.12. [sec ( x )]′ = | x | x2 −1

( x)]′ =

1

5.5. Basic Antidifferentiation Rules
5.5.1.Antidifferentiation Process Indicator: 5.5.2.Constant: kdx = kx + C 5.5.3.Coefficient: af ( x )dx = a f ( x ) dx 5.5.4.Power Rule for n ≠ −1 : 5.5.5.Power Rule
n ∫ x dx =

x n +1 +C n +1

for

n = −1 :

1 −1 ∫ x dx = ∫ x dx = ln x + C
5.5.6.Sum:

5.5.7.Difference: 5.5.8.Parts:

∫ [ f ( x) + g ( x)]dx = ∫ f ( x)dx + ∫ g ( x)dx

∫ [ f ( x) − g ( x)]dx = ∫ f ( x)dx − ∫ g ( x)dx

∫ f ( x) g ′( x)dx = f ( x) g ( x) − ∫ g ( x) f ′( x)dx 5.5.9.Chain: ∫ f ′( g ( x )) g ′( x) dx = f ( g ( x )) + C

71

5.5.10. Generalized Power Rule for n ≠ −1 :

[ f ( x )] n ∫ [ f ( x)] f ′( x)dx =

n +1

n +1

+C

5.5.11. Generalized Power Rule for n = −1 :

f ′( x) dx = ln f ( x) + C , n = −1 f ( x)

5.5.12. General Exponential: e

f ( x)

f ′( x)dx = e f ( x ) + C

5.6. Transcendental Antidifferentiation
5.6.1. ln xdx = x ln x − x + C
x x

∫ 5.6.2. ∫ e dx =e + C 5.6.3. ∫ xe dx = ( x − 1)e
x

x

+C

ax +C ∫ ln a 5.6.5. ∫ cos xdx = sin x + C
5.6.4. a dx =
x

∫ 5.6.7. ∫ tan xdx = − ln | cos x | +C 5.6.8. ∫ cot xdx = ln | sin x | +C 5.6.9. ∫ sec xdx = ln | sec x + tan x | +C 5.6.10. ∫ sec x tan xdx = sec x + C 5.6.11. ∫ sec xdx = tan x + C 5.6.12. ∫ csc xdx = − ln | csc x + cot x | +C 5.6.13. ∫ csc xdx = − cot x + C
5.6.6. sin xdx = − cos x + C
2

2

72

a −x dx x 1 5.6.15. ∫ 2 = a tan −1 ( a ) + C a + x2 dx x− 5.6.16. ∫ 2 = 21a ln | x + a | +C a a − x2
2 2

5.6.14.

dx

x = sin −1 ( a ) + C

5.7. Lines and Approximation
5.7.1.Tangent Line at ( a, f ( a )) :

y − f (a) = f ′(a)( x − a) −1 ( x − a) f ′(a) 5.7.3.Linear Approximation: f ( x) ≅ f (a ) + f ′(a )( x − a )
5.7.2.Normal Line at ( a, f ( a )) : y − f ( a ) = 5.7.4.Second Order Approximation:

f ( x) ≅ f (a) + f ′(a)( x − a) +

f ′′(a) ( x − a) 2 2
f ( xn ) f ′( x n )
Equalities:

5.7.5.Newton’s Iterative Formula: x n +1 = x n − 5.7.6.Differential

y = f ( x) ⇒ dy = f ′( x)dx f ( x + dx) = f ( x) + f ′( x)dx

F ( x + dx) = F ( x) + f ( x)dx 5.8. Interpretation of Definite Integral
At least three interpretations are valid for the definite integral. First Interpretation: As a processing symbol for functions, the definite integral

∫ f ( x)dx
a

b

instructs the operator to start the

process by finding F (x ) (the primary antiderivative for f ( x) dx ) and finish it by evaluating the quantity F ( x) | a = F (b) − F ( a ) .
b

This interpretation is pure process-to-product with no context.

73

Second Interpretation: As a summation symbol for differential quantities,

∫ f ( x)dx signals
a

b

to the operator that myriads of

infinitesimal quantities of the form f ( x) dx are being continuously summed on the interval

[a, b] with the summation process starting at x = a and ending at x = b . Depending on the context

for a given problem, such as summing area under a curve, the differential quantities f ( x)dx and subsequent total can take on a variety of meanings. This makes continuous summing a powerful tool for solving real-world problems. The fact that continuous sums can also be evaluated by

∫ f ( x)dx = F ( x) |
a

b

b a

= F (b) − F (a ) is a

key consequence of the Fundamental Theorem of Calculus (5.9.). Third Interpretation: The definite integral interpreted as a point solution
b

∫ f ( x)dx can
a

b

be

y (b) to any explicit differential equation having the general form dy = f ( x) dx : y ( a ) = 0 . In this

interpretation variable
z

∫ f ( x)dx is
a

first modified by integrating over the

subinterval

[ a , z ] ⊂ [ a, b] .

This

leads

to

y ( z ) = ∫ f ( x)dx = F ( z ) − F (a ) . Substituting x = a gives the
a

stated

boundary

condition

y (a ) = F (a ) − F (a ) = 0
b

and

substituting x = b gives y (b) = F (b) − F ( a ) =

∫ f ( x)dx . In this
a

context, the function y ( z ) = F ( z ) − F ( a ) , as a unique solution to

dy = f ( x)dx : y (a) = 0 , can also be interpreted as a continuous running sum from x = a to x = z .

74

2. where each individual quantity has the general 5. and let F (x ) be such that F ′( x ) = f ( x ) .10.10.5.10.10.5. Area Under f ( x ) ≥ 0 on [a.4. The Fundamental Theorem of Calculus Let ∫ f ( x )dx a b b be a definite integral representing a continuous summation process. b sums millions upon millions of consecutive.3. summation (or addition) process on the interval a. b] : A = ∫ [ f ( x) − g ( x)]dx a b 5.1. Area Between two Curves for f ( x ) ≥ g ( x) on [ a . ∫ f ( x )dx a b a can be evaluated by the alternative process b a ∫ f ( x)dx = F ( x) | Note: from form A = F (b) − F (a) .10.9. Geometric Integral Formulas 5. Then. Volume of Revolution about x Axis Using Disks: V = ∫ π [ f ( x)]2 dx a b 5. tiny quantities [] continuous x = a to x = b f ( x)dx . Volume of Revolution about y Axis using Shells: V = ∫ 2πx | f ( x) | dx a b 5.10. b] : A = ∫ f ( x)dx a b 5. Arc Length: s = ∫ a b 1 + [ f ′( x)]2 dx 75 .

11.6. Bernoulli Equation: = f ( x) y + g ( x) y n dx 5.7.10.10.11.3.5.11.6. First Order Linear: 5.7. Falling Body with Drag: − m dv = −mg + kv n dt 5.11.11. Newton’s Law in Three Dimensions: r r d (mV ) = ∑ F dt 76 .1.9.8.11.11. Revolved Surface Area about b y Axis: SAx = ∫ 2π | x | 1 + [ f ' ( x)] 2 dx a 5. b] : W = ∫ F ( x)dx a b 5. ODE Separable if it reduces to: g ( y )dy = f ( x)dx 5. Continuous Principle Growth: dP = rP + c 0 : P (0) = P0 dt 5. Total Work with Variable Force F (x) on [a.2.5.8.11. Newton’s Law in One Dimension: d (mV ) = ∑ F dt 5.11.4. Constant Rate Growth or Decay: dy = ky : y (0) = y0 dt dy 5.10.11. Revolved Surface Area about x Axis: SAx = ∫ 2π | f ( x) | 1 + [ f ' ( x)]2 dx a b 5. Logistic Growth: = k ( L − y ) y : y (0) = y 0 dt 5. Select Ordinary Differential Equations (ODE) dy + f ( x) y = g ( x) dx dy 5.

Definition: L[ f (t )] = ∫ f (t )e 0 − st dt ≡F ( s ) 5. Derivative of the Transform: F ( s ) = ( −t ) f (t ) 5.2.12.4. Transform of the Definite Integral: L[ ∫ f (τ )dτ ] = F ( s ) / s 0 t 77 .12.. General Properties ∞ [ ] 5..12. Linear Operator Property: L[af (t ) + bg (t )] = aF ( s) + bG ( s) (n) 5. Transform of the Derivative: L[ f (t )] = s n F ( s ) − s ( n −1) f (0) − ( n) n s ( n − 2) f ′(0) − .12.5.10.12.5. e F ( x ) ⋅ y = ∫ e F ( x ) ⋅ g ( x)dx + C ⇒ y = y ( x) = e − F ( x ) ⋅ ∫ e F ( x ) ⋅ g ( x)dx + Ce − F ( x ) ∴ 5.11.1. − f ( n −1) (0) 5.3.12. Laplace Transform. Step1: Let Process for Solving a Linear ODE F (x) be such that F ′( x) = f ( x) e F ( x) Step 2: Formulate the integrating factor Step 3: Multiply both sides of dy + f ( x ) y = g ( x ) by e F ( x ) dx  dy  e F ( x )   + e F ( x ) f ( x) y = e F ( x ) g ( x) ⇒  dx  d ye F ( x ) = e F ( x ) ⋅ g ( x) dx ( ) Step 4: Perform the indefinite integration.

8.1. t ⇔ 1 / s n 2 ( n +1) 5.8. t ⇔ n! / s 5.13. e at at ⇔ 1 /( s − a) 2 5.13.12.11. Second Shifting Theorem: f (t − a)U (t − a ) ⇔ e − as F ( s ) 5.13.7.12.12. First Shifting Theorem: e f (t ) ⇔ F ( s − a ) at 5. Transform of the Convolution: ∫ f (τ ) g (t − τ )dτ ⇔ F (s)G(s) 0 t 5. cos(kt ) ⇔ 2 2 s +k s 2 + 2k 2 cos 2 (kt ) ⇔ 5.13. s ( s 2 +4k 2 ) 78 . t e ⇔ n! /( s − a ) k 5. sin (kt ) ⇔ s ( s 2 +4k 2 ) 2ks 5.12.2.13. U (t − a ) ⇔ s 5. t sin( kt ) ⇔ 2 (s +k 2 ) 2 s 5.13. a] e − as and U (t − a) = 1 on ( a.13. 5. ∞] .13.10.5. te ⇔ 1 /( s − a ) n at n +1 5.3. Laplace Transform: Specific Transforms Entries are a one-to-one correspondence between f (t ) and F (s ) .13.7.6.13.6.13.13.9.4.9. 1 ⇔ 1 / s 5. Transform of Unit Step Function U (t − a ) where U (t − a) = 0 on [0.5. sin( kt ) ⇔ 2 s +k 2 2k 2 2 5.

13.17. 5.15. s2 − k 2 (s 2 +k 2 ) 2 k sinh(kt ) ⇔ 2 2 s −k 2k 2 2 sinh (kt ) ⇔ s ( s 2 −4k 2 ) 2ks t sinh(kt ) ⇔ 2 2 2 ( s −k ) s cosh(kt ) ⇔ 2 2 s −k s 2 − 2k 2 cosh 2 (kt ) ⇔ s ( s 2 −4k 2 ) t cos(kt ) ⇔ t cosh(kt ) ⇔ s2 + k 2 ( s 2 −k 2 ) 2 k e at sin( kt ) ⇔ ( s − a) 2 + k 2 k e at sinh( kt ) ⇔ ( s − a) 2 − k 2 e at − e bt 1 ⇔ a−b ( s − a )( s − b) s−a e at cos(kt ) ⇔ ( s − a) 2 + k 2 s−a e at cosh(kt ) ⇔ ( s − a) 2 − k 2 ae at − be bt s ⇔ a−b ( s − a )( s − b) 79 .13.21. 5.12.13. 5. 5. 5.13.20.13.13.5.14. 5.13. 5.13. 5.13.19.13. 5.22.18. 5. 5.13.13.13.13.24. 5.23.16.

As a rent charge for the use of housing accumulates over time. Just as velocity is a rate of distance accumulation (e. when computing % a credit-card charge. the percentageinterest rate r (simply called the interest rate). 60 miles ). either miles or percent. the principal P . likewise. a monthly interest rate of 1. you probably pay or have paid interest. own a car or a home or both. the customary units for interest rate are percent per year. called the principal P . an interest charge for the use of money also accumulates over time. as in the two expressions D = 75 miles ⋅ 2 1 hours = 175miles or hour 3 % = 2 percent ⋅ 3 1 months = 7 percent . month 2 Once the total accumulated interest is computed. the customary units of velocity are miles per hour. percentage interest rate is a hour ‘velocity’ of percent accumulation. or have a credit card or two. it is then multiplied by the amount borrowed. For example. So. Interest is normally stated in terms of a % percentage interest rate such as 8 year .g.5 month may be used. If you are independent. and. what exactly is interest? Interest is a rent charge for the use of money.1. Likewise. When driving in America. in order to obtain the total accumulated interest charge I The total accumulated interest charge I . and the time t during which a fixed principal is borrowed are related by the fundamental formula I = Pr t . Both velocity and percentage interest rate need to be multiplied by time—specified in matching units—in order to obtain the total amount accumulated. What is Interest? Interest affects just about every adult in America. 80 . Money and Finance 6. The reader should be aware that other than customary units may be used in certain situations. in space travel 7 miles is used to sec describe escape velocity from planet earth. This basic formula applies as long as the principal P and the interest rate r remain constant throughout the duration of the accumulation time t .6.

81 .Continuous Annual Inflation Rate i : A = Pe − it Note: inflation rate can be mathematically treated as a negative interest rate. or annually Di : Deposit made at the start of the i th compounding period FV : Future value i : Annual inflation rate L : Initial Lump Sum M : Monthly payment n : Number of compounding periods per year P : Amount initially borrowed or deposited PV : Present value r : Annual interest rate reff : Effective annual interest rate SM : Total sum of payments t : Time period in years for an investment T : Time period in years for a loan 6. monthly.1.3.2. the following apply.2.1.3.Accrued Interest: I = Pr T 6.3.3.2.3.4. α: Annual growth rate as in the growth rate of voluntary contributions to a fund A : Total amount gained or owed D : Periodic deposit rate—weekly.2.Annually Compounded Inflation rt Rate i: A = P(1 − i ) t 6.Total repayment over A = P + Pr T = P(1 + rT ) T: P(1 + rT ) 12T 6.3 and 6. Simple Interest 6.2.2.0. Compound and Continuous Interest r nt 6.Monthly payment over T : M = 6.3.3.Compounded Growth: A = P (1 + n ) 6. thus the use of the negative sign in 6.For the remaining subsections in 6.3.3.Continuous Growth: A = Pe 6.4.

3. 6.5.Continuous Compounding: 6.6.Given P.5.Annual Compounding with reff : FV = PV (1 + reff ) t ⇔ PV = FV (1 + reff ) t 6.4.1.Compound Interest: reff = (1 + n ) − 1 n 6.3.4. 6.Continuous Interest: reff = e − 1 r 6.4.5.6.Compound Interest: r FV = PV (1 + n ) nt ⇔ PV = FV r (1 + n ) nt 6.Simple Interest: reff = T 1 + rT − 1 r 6.2.Periodic Deposit with no Final Deposit Dnt +1 : PV = Dn (1 + r { r nt +1 n ) − (1 + r n )} 82 .Constant Annual Inflation Rate with Yearly Compounding: Replace reff with − i in 6.6. Present-to-Future Value Formulas 6.4. annual interest rate r .1.2.5.4.5. Effective Interest Rates 6. total term t years with nt compounding periods.4.Simple FV FV = PVe rt ⇔ PV = rt e Interest: FV FV = PV (1 + rt ) ⇔ PV = (1 + rt ) 6. A.1.5.5. nt identical deposits D made at beginning of each compounding period.4.2. T : reff = T A −1 P 6. Present Value of a Future Deposit Stream Conditions: n compounding periods per year.5.

1.4.6.6.7. Present Value of a Future Deposit Stream Coupled with Initial Lump Sum Assume the initial lump sum L > D 6. Present Value of a Continuous Future Deposit Stream D rt 6.Annual Deposit with no Final Deposit Dt +1 : PV = ( L − D )(1 + reff PV = ( L − D )(1 + reff ) t + D (1 + reff reff D (1 + reff reff { ) t +1 − (1 + reff )} 6.Periodic Deposit with Final Deposit Dnt +1 : r nt n + r nt +1 n −1 } 6.7.Annual Deposit with Final Deposit Dt +1 : PV = { ) t +1 −1 } 6.6.8.Periodic Deposit with Final Deposit Dnt +1 : PV = Dn (1 + r { r nt +1 n ) −1 } 6.6.Annual Deposit with no Final Deposit Dt +1 : PV = D (1 + reff reff D (1 + reff reff { ) t +1 − (1 + reff )} 6.7.Periodic Deposit with no Final Deposit Dnt +1 : PV = ( L − D)(1 + PV = ( L − D)(1 + r nt n ) ) + Dn (1 + r Dn (1 + r { { r nt +1 n ) ) − (1 + r n )} 6.1.7.Annual Deposit Only: PV = (e − 1) r 83 .4.7.3.2.3.2.Annual Deposit with Final Deposit Dt +1 : ) t + { ) t +1 −1 } 6.8.

9.6.5.000.00 Withdrawals can begin at age 59.4.8.5 Substantial penalty for early withdrawal Limited heir rights ROTH IRA Sponsored by Individual Taxes on contributions paid now.8.2. Types of Retirement Savings Accounts STANDARD IRA Sponsored by Individual Taxes on contributions and interest are deferred until withdrawn $3000/year $6000/year for jointly filing couples Withdrawals can begin at age 59.Annual Deposit plus Lump D rt rt Sum: PV = Le + (e − 1) r 6. must begin at 70. No taxes on any proceeds withdrawn $3000/year $6000/year for jointly filing couples Withdrawals can begin at age 59.8.5 Lesser penalty for early withdrawal Substantial heir rights 401 (K) Sponsored by Company Taxes on contributions and interest are deferred until withdrawn Increases every year.3 D (e rt − e αt ) r −α plus Lump Sum: PV = Le rt + D (e rt − e αt ) r −α 6.5 Substantial penalty for early withdrawal Limited heir rights KEOGH PLAN Plan for self employed Taxes on contributions and interest are deferred until withdrawn Up to 25% of income Withdrawals can begin at age 59. must begin at 70. must begin at 70. Currently $15.3.5 Substantial penalty for early withdrawal Limited heir rights 84 .8.6.5.Increasing Annual Deposit De : αt PV = 6.5.

Amount M Pj of j Payment to Principle: 12M − rP  r j −1 M Pj =   (1 + 12 )  12  6. Payoff PO j after the j r PO j = P(1 + 12 ) − j th Payment: 12 M r (1 + 12 ) j − 1 r th { } 6.1. Amount M Ij of j th Payment to Interest: M Ij = M − M Pj 6. Amount of Payment: M = rP 12 r 12 1 − (1 + 12 ) [ rP −12T ] 6. sooner means cheaper Historically.10.7.3. Total Loan Repayment: SM = 12TM 6.4.10.10.10.6. Total Interest Paid: I total = 12TM − P 6. First Month’s Interest: I1st = 6.10.10.10.2.8.6.5. Loan Amortization Assume monthly payments M 6.10. Pros and Cons of Long-Term Mortgages: PROS Increased total mortgage costs are partially defrayed by tax breaks and inflation via payoff by cheaper dollars Allows the borrower to buy more house sooner: with inflation.10. inflation of home purchase prices contributes more to home equity buildup than home equity buildup by mortgage reduction CONS Total mortgage costs are much more over time Home equity buildup by mortgage reduction is much slower for long-term mortgages Mortgage is more vulnerable to personal misfortune such as sickness or job loss 85 .

Markdown Based on Old Price: C + P % ⋅ NP = NP NP = (1 − P%)OP given 6.12.3.5. Markup Based on Old Price: NP = (1 + P %)OP 6.1.2. Percent 6.13. 6.13.12.12. Markup NP = (1 + P%)C Based on Original Cost: 6.1.4.12.12. P % = NP / OP Calculus of Finance Differential Old and New Price: 6. Present Value of Total Mortgage Repayment: APV  rP0 e rT  −it = ∫  rT e dt ⇒ APV = − 1 0 e T ( ri )P0 (e rT − e ( r −i )T ) (e rT − 1) 86 .3.13. Given percent as a decimal equivalent 6. Annuity Formulas Note: Use the loan amortization formulas since annuities are nothing more than loans where the roles of the institution and the individual are reversed.13. General Finance: Equation of Elementary dP = r (t ) P + D(t ) : P(0) = P0 dt 6. Differential Equation for Continuous Principle Growth or Continuous Loan Reduction Assuming a Constant Interest Rate and Fixed Annual Deposits/Payments dP = r0 P ± D0 : P(0) = P0 ⇒ dt D P (t ) = P0 e r0t ± 0 (e rt − 1) r 6.11.6.12.2. Markup Based on Cost plus New Price: 6. Markup and Markdown C : Cost OP : Old price NP : New price P % .

Basic Formula: P= favorable − number − of − ways total − number − of − ways P (U ) = 1 P (Φ ) = 0 A ⊂ U ⇒ 0 ≤ P( A) ≤ 1 P ( A) = 1 − P(~ A) 7. Let A.1.IE Multiplication Law: P ( A ∩ B) = P( A) ⋅ P( B) 87 .1.4. Probability Formulas Let U be a universal set consisting of all possible events.3.1.7. Probability and Statistics 7.2.1.8.Addition Law: P ( A ∪ B) = P( A) + P( B) − P( A ∩ B) P( A ∩ B) P( B) P( A ∩ B) P ( B | A) = P ( A) P( A | B) = 7.Conditional Probability Law: 7.1.Order Relationship: 7.Definition of Independent Events (IE): A∩ B = Φ 7.9.1.1.Multiplication Law: P( A ∩ B) = P( B) ⋅ P( A | B) P ( A ∩ B) = P( A) ⋅ P( B | A) 7.7.1.1.1.1.5.Complement Law: 7. B ⊂ U 7. Let Φ be the empty set consisting of no event.Fundamental Properties: 7.6.

..7.Observation: any attribute of interest associated with the element 7.13.3.2.. Basic Statistical Definitions 7. As such. x2 .2. xN } . The corresponding rank-ordered data set is a re-listing of the individual statistics {x1 .2.2..2.2.2. Brief Discussion Using the Above Definitions Let a set consist of N elements {E1 . x3 .2. Inference: the science of using sample statistics to predict population statistics 7.. x3 . Most data sets will be considered samples. the sample statistics obtained from the sample will be utilized to make inferential predictions for corresponding population statistics characterizing a much larger population. Any statistic is an observation.1. Population Statistic: any statistic associated with a population 7. Inference processes are valid if and only if one can be assured that the sample obtained is a random sample. The data set of all observed statistics is denoted by {x1 .4.. E 3 .2. Data sets can come from either populations or from samples.Statistic: any measurement of interest associated with the element. 88 .2..10.Sample: that population subset that one has the resources to study 7. but not all observations are statistics 7...5.Set: an aggregate of individual items—animate or inanimate 7.2.11. xN } in numerical order from smallest to largest.9.2. Random sample: a sample where all population elements have equal probability of access 7.12. x2 .Population: the totality of elements that one wishes to study by making observations 7.8.Data set: a set whose elements are statistics 7.2.2.Element: a particular item in the set 7.Sample Statistic: any statistic associated with a sample 7.7.Statistics: the science of drawing conclusions from the totality of observations—both statistics and other attributes—generated from a set of interest 7..2.. E N } where there has been observed one statistic of a similar nature for each element.. E 2 .6.

2. Questions: Is my sample a random sample? How close is my prediction? How certain is my prediction? 7.3. Measures of Central Tendency 7. E 2 .Population Mean or Average µ : µ= ∑x i =1 N i 89 . x 2 .. σ Example of Statistical Inference Use x to predict µ .2 through 7.E N } Having known statistics {x1 . s Did E i have equalprobability access? Ei Much larger population having unknown statistics µ.The diagram below supports sections 7...4 by illustrating some of the key concepts.. Smaller sample {E1 ..3..x N } and x.3.1.Sample Mean or Average x : x = 1 N ∑x i =1 1 N N i 7.

1.Mode M : the data value or statistic that occurs most often.Range R : R = xL − xS where xL is the largest data value in the data set and xS is the smallest data value 7.Median ~ : the middle value in a rank-ordered data set 7.4.Sample Standard Deviation s : s= 1 N −1 ∑ (x i =1 N i N i − x) 2 .4.4.4.3. x Step 2: The median ~ is the actual middle statistic if there is an odd number of data points.4.2.4.Multi-Modal Data Set: a data set with two or more modes 7.3.Population Variance: σ 2 7.5.x 7.7.Median Calculation Process: Step 1: Rank order from smallest to largest all elements in the data set. x Step 3: The median ~ is the average of the two middle statistics if there is an even number of data points.4. Standard Deviationσ : 7.3.Sample Coefficient of Variation CVS : CVS = s x 7. 7. Measures of Dispersion 7.Sample Variance: s 7.8.6.Z-Score z i for a Sample Value xi : z i = σ µ xi − x s 90 .4.Population Coefficient of Variation CVP : CVP = 7. 7.3.4.Population σ= 1 N ∑ (x i =1 − µ)2 .3.5.6. 2 7.4.4.3.

7.5.Sampling Error E R : E R = z α ⋅  2 σ    n 7. The number of data points selected is given by n . substitute s .5. σ/ n 7. 7.5.Standard Deviation of x : Infinite Population Finite Population of Count N µ σx = σ n σx = N −n σ N −1 n xi − µ 7.6. The sample is considered a Large Sample if n ≥ 30 . In the small-sample case.5. Sampling Distribution of the Mean The mean x is formed from a sample of individual data points randomly selected from either an infinite or finite population.5.5.2.5. the underlying population is assumed to be normal or nearly so.Large Sample Z-score for xi : z i = When σ is unknown.Sample Size Needed for a Given Error:  zα ⋅σ  .3. a Small Sample if n < 30 . 7.5.Interval Estimate of Population Mean: Large-Sample Case Small-Sample Case σ  x ± zα ⋅   2  n s x ± tα ⋅   2  n Note: No assumption about the underlying population needs to be made in the large-sample case.1. n= 2  ER    2 91 .4. substitute s . When σ is unknown in the large-sample case.Expected Value of x : E (x ) = 7.

5.Sample 2 Size Needed n= z α ⋅ p(1 − p ) 2 ER 2 case 2 2 7.6. proportion unknown: n= zα 4 ER 2 92 .3.6.5.6.Standard Deviation of p : Infinite Population E X ( p) = µ Finite Population of Count N σp = p (1 − p ) n σp = N −n N −1 p (1 − p ) n 7. Sampling Distribution of the Proportion The proportion p is a quantity formed from a sample of individual data points randomly selected from either an infinite or finite population. The sample is considered a Large Sample if both np ≥ 5 and n(1 − p) ≥ 5 . The number of data points selected is given by n .2. 7.6. The proportion can be thought of as a mean formulated from a sample where all the individual values are either zero ( 0 ) or one (1).6.6.1.6..5 in 7.6. n p (1 − p ) n for Given Error: Note: Use p = .Worse for 7.Interval Estimate of Population Proportion: p ± zα ⋅ 2 p (1 − p ) n p (1 − p ) if clueless on the initial size of p .4.7.Sampling Error: E R = z α ⋅ 2 7.Expected Value E X of p : 7.6.

Section II Tables 93 .

Factors of Integers 1 through 192 The standard order-of-operations applies. Numerical 1. and * is used for multiplication. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 INTEGER FOLLOWED BY FACTORIZATION 1 29 Prime 57 3*19 Prime 30 2*3*5 58 2*29 Prime 31 Prime 59 Prime 2^2 32 2^5 60 2^2*3*5 Prime 33 3*11 61 Prime 2*3 34 2*17 62 2*31 Prime 35 5*7 63 3*3*7 2^3 36 2^2*3^2 64 2^6 3*3 37 Prime 65 5*13 2*5 38 2*19 66 2*3*11 Prime 39 3*13 67 Prime 2^2*3 40 2^3*5 68 2^2*17 Prime 41 Prime 69 3*23 2*7 42 2*3*7 70 2*5*7 3*5 43 Prime 71 Prime 2^4 44 2^2*11 72 2^3*3^2 Prime 45 3^3*5 73 Prime 2*3*3 46 2*23 74 2*37 Prime 47 Prime 75 3*5^2 2^2*5 48 2^4*3 76 2^2*19 3*7 49 7*7 77 7*11 2*11 50 2*5^2 78 2*3*13 Prime 51 3*17 79 Prime 2^3*3 52 2^2*13 80 2^4*5 5^5 53 Prime 81 3^4 2*13 54 2*3^3 82 2*41 3^3 55 5*11 83 Prime 2^2*7 56 2^3*7 84 2^2*3*7 94 .1. ^ is used to denote the raising to a power.1.

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 Integer Followed By Factorization 5*17 121 11^2 157 3*7^2 2*43 122 2*61 158 2*79 3*29 123 3*41 159 3*53 2^3*11 124 2^2*31 160 2^5*5 Prime 125 5^3 161 7*23 2*3^2*5 126 2*3^2*7 162 2*3^4 7*13 127 Prime 163 Prime 2^2*23 128 2^7 164 2^2*41 3*31 129 3*43 165 3*5*11 2*47 130 2*5*13 166 2*83 5*19 131 Prime 167 Prime 2^5*3 132 2*61 168 2^3*3*7 Prime 133 7*19 169 Prime 2*7^2 134 2*67 170 2*5*17 3^2*11 135 3^3*5 171 3^2*19 2^2*5^2 136 2^3*17 172 2^2*43 Prime 137 Prime 173 Prime 2*3*17 138 2*3*23 174 2*87 Prime 139 Prime 175 5^2*7 2^3*13 140 2^2*5*7 176 2^4*11 3*5*7 141 3*47 177 3*59 2*53 142 2*71 178 2*89 Prime 143 11*13 179 Prime 2^2*3^3 144 2^4*3^2 180 2^2*3^2*5 Prime 145 5*29 181 Prime 2*5*11 146 2*73 182 2*91 3*37 147 3*7^2 183 3*61 2^4*7 148 2^2*37 184 2^3*23 Prime 149 Prime 185 5*37 2*3*19 150 2*3*5^2 186 2*93 5*23 151 Prime 187 11*17 2^2*29 152 2^3*19 188 2^2*47 3*3*13 153 Prime 189 3^3*7 2*59 154 2*7*11 190 2*5*19 7*17 155 5*31 191 Prime 2^3*3*5 156 2^2*3*13 192 2^7*3 95 .

2.3. Roman Numeral and Arabic Equivalents ROMAN I II III IV V VI VII VIII IX ARABIC 10 11 15 20 30 40 50 60 100 ROMAN ARABIC ROMAN X 101 CI XI 200 CC XV 500 D XX 600 DI XXX 1000 M XL 5000 V bar L 10000 L bar LX 100000 C bar C 1000000 M bar ARABIC 1 2 3 4 5 6 7 8 9 96 . 2 31 73 113 173 227 277 337 397 449 503 577 631 691 757 823 883 953 Prime Numbers less than 1000 3 37 79 127 179 229 281 347 457 509 587 641 761 827 887 967 5 41 83 131 181 233 283 349 401 461 521 593 643 701 769 829 971 7 43 89 137 191 239 293 353 409 463 523 599 647 709 773 839 907 977 11 47 97 139 193 241 359 419 467 541 653 719 787 853 911 983 13 53 149 197 251 307 367 421 479 547 601 659 727 797 857 919 991 17 59 101 151 199 257 311 373 431 487 557 607 661 733 859 929 997 19 61 103 157 263 313 379 433 491 563 613 673 739 809 863 937 23 67 107 163 211 269 317 383 439 499 569 617 677 743 811 877 941 29 71 109 167 223 271 331 389 443 571 619 683 751 821 881 947 1.1.

4343 American Names for Large Numbers NAME thousand million billion trillion quadrillion NUM 10^18 10^21 10^24 10^27 10^30 NAME quintillion sextillion septillion octillion nontillion NUM 10^33 10^36 10^39 10^48 10^63 NAME decillion undecillion duodecillion quidecillion vigintillion 1. Selected Magic Squares 3X3 Magic Square with Magic Sum 15.5.6457 3.4142 1.4.6.2361 NUM MEM 2.1416 2.7182 NUM 2 7 3 5 1. NUM 10^3 10^6 10^9 10^12 10^15 π e φ ln(10) Log (e) MEM 0.3026 0. 1.1.1. The second square below is called a 3x3 Anti-Magic Square: 276 951 438 247 518 936 97 .7321 2. NUM Nine Elementary Memory Numbers MEM 1.6180 2.6.

2.6. the Magic Sum is given by the formula N ( N 2 + 1) 2 98 .1.6. 4X4 Perfect Magic Square with Magic Sum 34: 1 8 11 14 1. 15 10 5 4 6 3 16 9 12 13 2 7 5X5 Perfect Magic Square with Magic Sum 65: 1 23 20 15 7 4 8 16 24 17 5 14 6 3 13 22 12 21 10 19 9 18 2 11 25 Note: For a Magic Square of size NXN.3.

1. 18 10 15 14 7 21 17 13 9 6 22 12 11 16 4 3 24 8 5 25 6X6 Magic Square with Magic Sum 111: 1 32 3 9 34 35 6 12 29 10 26 25 13 14 22 21 23 18 24 20 16 15 17 19 30 11 28 27 31 5 33 4 8 2 7 36 99 .4.6.6.5. Nested 5X5 Magic Square with Outer Magic Sum 65: 1 2 18 21 23 1.

7. 7X7 Magic Square: Magic Sum is 175.1.6. 22 21 13 5 46 38 30 6 8 47 39 7 9 48 1 31 23 15 14 40 32 24 16 2 11 49 31 33 25 17 3 43 42 34 26 18 10 44 36 35 27 19 4 45 37 29 28 20 12 1.6.6. Quadruple-Nested 9X9 Magic Square with Outer Magic Sum 369: 16 81 79 78 77 13 12 11 76 28 65 62 61 26 27 18 75 23 36 53 51 35 30 59 74 24 50 40 45 38 32 58 9 2 6 7 8 25 33 39 41 43 49 57 73 10 60 34 44 37 42 48 22 72 14 63 52 29 31 47 46 19 68 15 64 17 20 21 56 55 54 67 80 1 3 4 5 69 70 71 66 100 .

one.7. Thirteen-by-Thirteen Multiplication Table Different font sizes are used for. or three-digit entries.1. × 1 2 3 4 5 6 7 8 9 10 11 12 13 1 1 2 3 4 5 6 7 8 9 10 11 12 13 2 2 4 6 8 10 12 14 16 18 20 22 24 26 3 3 6 9 12 15 18 21 24 27 30 33 36 39 4 4 8 12 16 20 24 28 32 36 40 44 48 42 5 5 10 15 20 25 30 35 40 45 50 55 60 65 6 6 12 18 24 30 36 42 48 54 60 66 72 78 7 7 14 21 28 35 42 49 56 63 70 77 84 91 8 8 16 24 32 40 48 56 64 72 80 88 96 104 9 9 18 27 36 45 54 63 72 81 90 99 108 117 10 10 20 30 40 50 60 70 80 90 100 110 120 130 11 11 22 33 44 55 66 77 88 99 110 121 132 143 12 12 24 36 48 60 72 84 96 108 120 132 144 156 13 13 26 39 42 65 78 91 104 117 130 143 156 169 Note: The shaded blocks on the main diagonal are the first thirteen squares 101 . two.

Hence. TOP TO BOTTOM 14159 26535 89793 23846 26433 83279 50288 41971 69399 37510 58209 74944 59230 78164 06286 20899 86280 34825 34211 70679 82148 08651 32823 06647 09384 46095 50582 23172 53594 08128 48111 74502 84102 70193 85211 05559 64462 29489 54930 38196 44288 10975 66593 34461 28475 64823 37867 83165 27120 19091 45648 56692 34603 48610 45432 66482 13393 60726 02491 41273 72458 70066 06315 58817 48815 20920 96282 92540 91715 36436 78925 90360 01133 05305 48820 46652 13841 46951 94151 16094 33057 27036 57595 91953 09218 61173 81932 61179 31051 18548 07446 23799 62749 56735 18857 52724 89122 79381 83011 94912 98336 73362 44065 66430 86021 39494 63952 24737 19070 21798 60943 70277 05392 17176 29317 67523 84674 81846 76694 05132 00056 81271 45263 56052 77857 71342 75778 96091 73637 17872 14684 40901 22495 34301 46549 58537 10507 92279 68925 89235 42019 95611 21290 21960 86403 44181 59813 62977 47713 09960 51870 72113 49999 99837 29784 49951 05973 17328 16096 31859 50244 59455 34690 83026 42522 30825 33446 85035 26193 11881 71010 00313 78387 52886 58753 32083 81420 61717 76691 47303 102 . the first 900 digits of PI serve equally well as a random number table. The Random Digits of PI The digits of PI pass every randomness test. PI=3.-.8.READ LEFT TO RIGHT.1.

4522 .4 1.2119 .0069 .4681 .3744 .0951 .0004 .0001 .1 3.0165 .0409 .0062 .6 1.00 0.0030 .3300 .1357 .2776 .09 0.2578 .0183 .0002 .0010 .8 0.4129 .0048 .0268 .0202 .0001 Area starts to fall below 0.1867 .2911 .2 1.1539 .0206 .0548 .0052 .2643 .1292 .1170 .2 3.0212 .0014 .0455 .5 3.4247 .0336 .0028 .0012 .0002 .0066 .0158 .1711 .3263 .08 0.0536 .01 0.0002 .0375 .0003 .0004 .0018 .0015 .1841 .4 3.0010 .0001 .0008 .4090 .3050 .0075 .0630 .0034 .1 0.0045 .2980 .0002 .0197 .0001 .2297 .2358 .0004 .0038 .1635 .1190 .2327 .0618 .6 3.1093 .0192 .0985 .0013 .1250 .1761 .0274 .0068 .1611 .0002 .0143 .0 2.0035 .0132 .5 1.0060 .0187 .0162 .0178 .0096 .0071 .0007 .3015 .0125 .0027 .1056 .0322 .3372 .7 2.0033 .1446 .2946 .0084 .5000 .0329 .0006 .7 .0136 .2843 .0150 . Standard Normal Distribution THE STANDARD NORMAL DISTRIBUTION: TABLE VALUES ARE THE RIGHT TAIL AREA FOR A GIVEN Z Z 0.0002 .0901 .3409 .4325 .1335 .0019 .0004 .0104 .0016 .4920 .0002 .3974 .0032 .0003 .2514 .3156 .0020 .4880 .0139 .1003 .0004 .1515 .0681 .2389 .0006 .07 0.0007 .0014 .0367 .0694 .1660 .2546 .0018 .0294 .1814 .0778 .0001 .0087 .0655 .0040 .2033 .0003 .0003 .0001 .4207 .0026 .3 2.0023 .0007 .0010 .0001 .0116 .4364 .0807 .0 3.3707 .0011 .0078 .1.0001 103 .0019 .0047 .3858 .1423 .0011 .0228 .3821 .3783 .0002 .2420 .0002 .0735 .0010 .0764 .0642 .0001 .0021 .0749 .2809 .0073 .2611 .0351 .1922 .0869 .0154 .1894 .0008 .1788 .0015 .0968 .3446 .0 0.0427 .4641 .1038 .0064 .0505 .4443 .04 0.2061 .1949 .0041 .0007 .0055 .0721 .0023 .2709 .0668 .0005 .1314 .0004 .0013 .4761 .0238 .3 0.3669 .0418 .0101 .3936 .0837 .4051 .0003 .2206 .0005 .3121 .5 2.3556 .4 0.0057 .0001 .0822 .2742 .0244 .2148 .0280 .1151 .0009 .0005 .8 2.0082 .0314 .0099 .0094 .0307 .9 3.0005 .2676 .0119 .0146 .0174 .0031 .0250 .0009 .05 0.0012 .0017 .9 1.8 1.7 1.4761 .0217 .1 2.0113 .0039 .0043 .4960 .03 0.2 0.0392 .2005 .0004 .1074 .6 2.0708 .3228 .0359 .0255 .1469 .0009 .0287 .0049 .0091 .0058 .0465 .0001 Right Tail .9.0009 .4286 .3192 .3 3.2236 .0594 .0110 .1587 .2266 .9 2.4602 .2090 .1271 .3085 .0025 .0582 .0222 .0515 .0024 .3520 .0029 .0089 .0475 .0003 .3483 .0301 .4562 .0344 .0107 .0050 .2451 .02 0.0054 .0006 .1131 .1401 .0011 .2 2.1020 .4404 .0002 .0026 .3594 .0005 .1112 .0232 .4840 .0170 .0559 .0009 .0020 .06 0.0080 .4 2.0022 .0570 .4013 .1736 .2176 .0003 .4168 .0445 .0918 .0436 .3 1.0934 .0002 .5 0.3897 .0 1.7 0.0793 .0002 .0036 .0005 .0485 .1230 .0002 .3336 .0262 .1379 .0013 .6 0.0384 .1562 .3631 .0002 .0122 .1685 .0853 .1 1.2482 .0037 .0003 .0044 .0885 .1210 .0401 .4483 .0016 .0526 .2877 .4800 .0128 .0606 .1977 .0003 .0008 .1492 .0495 .

711 1.753 1.980 1.604 4.714 1.060 2.704 2.861 2.306 2.083 2.179 2.576 ∞ 104 .015 1.920 2.182 2.925 5.355 3.779 2.228 2.080 2.000 1.960 99% 63.898 2.571 2.943 1.701 1.782 1.878 2.977 2.055 3.703 1.160 2.841 4.1.032 3.353 2.447 2.717 1.145 2.797 2.365 2.250 3.725 1.012 2.734 1.761 1.756 2.740 1.833 1.763 2.845 2.771 2.093 2.645 95% 12.895 1.697 1.101 2.045 2.771 1.947 2.303 3.657 9.048 2.131 2.750 2.052 2.660 2.776 2.796 1.671 1.860 1.706 1.699 1. Two-Sided Student’s t Statistic TABLE VALUES ARE T SCORES NEEDED TO GUARANTEE THE PERCENT CONFIDENCE Degrees of freedom: DF 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 40 60 120 90% 6.921 2.499 3.708 1.10.617 2.056 2.787 2.201 2.169 3.684 1.819 2.707 3.110 2.721 1.706 4.658 1.132 2.831 2.262 2.729 1.021 2.746 1.106 3.069 2.074 2.064 2.907 2.120 2.042 2.314 2.812 1.

1.11. Date and Day of Year DATE DAY DATE DAY DATE DAY Jan 1 1 May 1 121 Sep 1 244 Jan 5 5 May 5 125 Sep 5 248 Jan 8 8 May 8 128 Sep 8 251 Jan 12 12 May 12 132 Sep 12 255 Jan 15 15 May 15 135 Sep 15 258 Jan 19 19 May 19 139 Sep 19 262 Jan 22 22 May 22 142 Sep 22 265 Jan 26 26 May 26 146 Sep 26 269 Feb 1 32 Jun 1 152 Oct 1 274 Feb 5 36 Jun 5 156 Oct 6 278 Feb 8 39 Jun 8 159 Oct 8 281 Feb 12 43 Jun 12 163 Oct 12 285 Feb 15 46 Jun 15 166 Oct 15 288 Feb 19 50 Jun 19 170 Oct 19 292 Feb 22 53 Jun 22 173 Oct 22 295 Feb 26 57 Jun 26 177 Oct 26 299 Mar 1 60** Jul 1 182 Nov 1 305 Mar 5 64 Jul 5 186 Nov 5 309 Mar 8 67 Jul 8 189 Nov 8 312 Mar 12 71 Jul 12 193 Nov 12 316 Mar 15 74 Jul 15 196 Nov 15 319 Mar 19 78 Jul 19 200 Nov 19 323 Mar 22 81 Jul 22 203 Nov 22 326 Mar 26 85 Jul 26 207 Nov 26 330 Apr 1 91 Aug 1 213 Dec1 335 Apr 5 96 Aug 5 218 Dec 5 339 Apr 8 98 Aug 8 220 Dec 8 342 Apr 12 102 Aug 12 224 Dec 12 346 Apr 15 105 Aug 15 227 Dec 15 349 Apr 19 109 Aug 19 331 Dec 19 353 Apr 22 112 Aug 22 234 Dec 22 356 Apr 26 116 Aug 26 238 Dec 26 360 ** Add one day starting here if a leap year 105 .

household and metric systems—have rough volume equivalents.3.1 and 2. Weight Conversion Table Apothecary 1grain 15grains 60grains 8drams 12ounces Metric 60mg or 64mg 1g 4g 32g 384g 1dram 1ounce 1pound 2. Physical Sciences Conversion Factors in Allied Health Volume Conversion Table 2. 106 .1.5fluidounce 1fluidounce 8fluidounces 16fluidounces 32fluidounces 60gtts 3tsp 2tbsp 1cup 2cups 2pints 1pint 1quart 2.2. General Comments All three systems—apothecary.1.1. Apothecary 1minim 16minims 60minims 4fluidrams 8fluidrams Household 1drop 1gtt 1tsp 1tbsp Metric 1mL (cc) 5mL (cc) or 4mL 15mL (cc) 30mL (cc) 240mL (cc) 500mL (cc) or 480mL 1000mL (cc) or 960mL 1fluidram 0. Common discrepancies that are still considered correct are shown in italics in both tables 2.1.2.1.1.1.1. the Weight Conversion Table in 2. Since the household system is a volume-only system. 2.2.2 does not include household equivalents.

ss s.s. q2h q4h q. STAT susp tab t. q.d. N/S o. q. Medical Abbreviations in Allied Health MEANING Twice a day Twice a week With Capsule Dilute Double strength Drop Hour Hour of sleep.V.d.d.c. I.m. caps dil.a.w. P% strength A:B strength 107 . at once Suspension Tablet Three times a day P grams per 100 mL A grams per B mL ABBREVIATION b. stat.i...d.. b.d.C. p. s. each Every morning Every day Every hour Every two hours Every four hours Four times a day One half Subcutaneous Immediately.n. I.M.o. S.2.i. at bedtime Intramuscular Intravenous Nothing by mouth Normal saline Once a day. q.h.p.q. c cap. as necessary Every.2. NPO NS. hr h. every day By or through mouth As needed. n.i.i.o p.r. q. DS gtt h.

5 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 31 25 19 13 7 1 -5 -11 -16 -22 -28 -34 -40 10 WIND SPEED (mph) 15 20 25 30 25 19 13 6 0 -7 -13 -19 -26 -32 -39 -45 -51 24 17 11 4 -2 -9 -15 -22 -29 -35 -42 -48 -55 23 16 9 3 -4 -11 -17 -24 -31 -37 -44 -51 -58 22 15 8 1 -5 -12 -19 -26 -33 -39 -46 -53 -60 35 21 14 7 0 -7 -14 -21 -27 -34 -41 -48 -55 -62 40 20 13 6 -1 -8 -15 -22 -29 -36 -43 -50 -57 -64 T E M P 0 F 27 21 15 9 3 -4 -10 -16 -22 -28 -35 -41 -47 2.2. Heat Index Table The number in the body of the table is the equivalent heating temperature at 0% humidity 30 T E M P 0 RELATIVE HUMIDITY (%) 40 50 60 70 80 123 121 118 116 113 111 105 101 92 135 131 128 125 122 119 112 107 96 148 144 140 136 133 129 120 114 100 163 158 154 149 145 141 129 122 106 180 175 169 164 159 154 140 131 112 85 190 184 178 172 166 161 145 136 115 90 199 193 186 180 174 168 152 141 119 F 105 104 103 102 101 100 97 95 90 114 112 110 108 106 104 99 96 89 108 .3.4. Wind Chill Table Grey area is the danger zone where exposed human flesh will begin to freeze within one minute.

9 acres rods 160 acres hectares 0.15898 barrels gal (US) 42 barrels liter 158.496E13 astronomical unit km 1.496E8 atmospheres (atm) feet H2O 33.6146 barrels m3 0.9 TO CONVERT TO 109 .2. Celsius to Fahrenheit: F = 1.94 atmospheres in of Hg 29.1 astronomical unit (AU) cm 1.6.8C + 32 2.2.98692 2 bar dyne/cm 10E6 bar psi (lb/in2) 14. Unit Conversion Table Arranged in alphabetical order MULTIPLY BY acres ft2 43560 2 acres m 4046.5.92 atmospheres mm of Hg 760 atmospheres psi 14. Temperature Conversion Formulas F − 32 2.06 bar MPa 10E-1 barrels (bbl) ft3 5. Fahrenheit to Celsius: C = 1.8 2.4047 acre feet barrels 7758 acre feet m3 1233.7 bar atm .1.5.5038 bar mm Hg 750.5.5 Angstrom (å) cm 10E-8 Angstrom nm 0.

055055853 E-10 1054.78541 277.000418022 251.35 4.419 4.3048 220 231 3.54608 10E-5 10E-9 10E-4 0.39006E-8 1 10E-7 6 12 0.39370 1E-2 9.700 110 .47105 10E-8 745.996 1.TO CONVERT BTU BTU BTU BTU calorie (cal) centimeter (cm) cm darcy dyne dyne erg erg erg fathom feet (ft) feet furlong gallon (US gal) gallon (Imperial) gal gallon gamma gamma gauss gram (g) gram hectare hectare horsepower TO Canadian BTU cal erg joule joule inch m m2 g cm /s2 Newton cal dyne cm joule ft in m yd in3 liter in3 liter Gauss Tesla Tesla pound kg acre cm2 Watt (W) MULTIPLY BY 1.0022046 10E-3 2.184 0.8697E-13 1 10E-5 2.

84 0.737562 0.28084 10E-4 5280 1.TO CONVERT inch (in) inch (in) joule (J) joule kilogram (kg) kilogram kilometer (km) kilometer kilometer Kilometer/hr (kph) kilowatt knot liter liter liter meter meter micron mile mile mm Hg Newton Newton Newton-meter (torque) ounce Pascal Pascal Pascal pint poise poise TO cm mm erg cal g pound m ft mile mile/hr (mph) hp mph cm3 gal (US) in3 angstrom ft cm ft km dyne/cm2 dyne pound force foot-pound-force lb atmospheres psi torr gallon g /cm/s kg /m/s MULTIPLY BY 2.20462 10E3 3280.0237 10E10 3.86923 x10E-6 1.0625 9.224809 0.34102 1.621371 1.4 10E7 0.54 25.125 1 0.26417 61.1 111 .60934 1333.45 x10E-4 7.150779 10E3 0.239006 10E3 2.621371 0.501 x10E-3 0.22 10E5 0.

5 0.2.185 0. Properties of Earth and Moon VALUE 9.453592 4.242198781 3.9144 365.333224 1 2240 2205 1000 2000 907.9x10^6 miles 7926 miles 24 hours 365.TO CONVERT pound mass pound force rod quart stoke slug Tesla Torr Torr ton (long) ton (metric) ton (metric) ton (short or net) ton (short or net) ton (short or net) watt yard yard year (calendar) year (calendar) TO kg Newton feet gallon cm2 /s kg Gauss millibar millimeter hg lb lb kg lb kg ton (metric) J /s in m days s MULTIPLY BY 0.26 days PROPERTY Earth Surface g Moon distance from earth Moon diameter Moon revolution VALUE 32.2 ft/s2 238.4475 16.594 10E4 1.907 1 36 0.393 miles 2160 miles 27 days. 7 hours PROPERTY Distance from sun Equatorial diameter Length of day Length of year 112 .7.15576 x 10E7 2.25 1 14.

1.8. Metric System Basic and Derived Units QUANTITY Length Time Mass Temperature Electrical Current Force Volume Energy Power Frequency Charge Capacitance Magnetic Induction 2.8.2.8. Metric Prefixes NAME meter second kilogram Kelvin ampere Newton Liter joule watt hertz coulomb farad Tesla SYMBOL m s kg K A N L J W Hz C F T UNITS basic unit basic unit basic unit basic unit basic unit kg m s-2 m3 kg m2 s-2 kg m2 s-3 s-1 As C2 s2 kg-1 m2 kg A-1 s-2 PREFIX peta tera giga mega kilo hecto deca deci centi milli micro nano pica FACTOR 10^15 10^12 10^9 10^6 10^3 10^2 10^1 10^(-1) 10^(-2) 10^(-3) 10^(-6) 10^(-9) 10^(-12) SYMBOL E P G M k h da d c m METER EXAMPLE Em Pm Gm Mm km hm dam dm cm mm µ µm n p nm pm 113 . 2.2.

1155 feet 1 league=3 miles 114 .9.92 inches 1 span=9 inches 1 foot=12 inches 1 yard=3 feet 1 fathom=2 yards 1 rod=5.9. British System Basic and Derived Units QUANTITY Length Time Mass Temperature Electrical Current Force Volume Work Power Charge Capacitance Heat 2.9. 2.2.1.5 yards 1 chain=100 links=22 yards 1 furlong=220 yards 1 mile=1760 yards 1 knot mile=6076.2. NAME foot second slug Fahrenheit ampere pound gallon foot-pound horsepower coulomb farad British thermal unit SYMBOL ft s F A lb gal ft-lb hp C F Btu 0 UNITS basic unit basic unit basic unit basic unit basic unit derived unit derived unit derived unit derived unit derived unit derived unit basic unit Uncommon British Measures of Weight and Length WEIGHT Grain=Basic Unit 1 scruple=20 grains 1 dram=3 scruples 1 ounce=16 drams 1 pound=16 ounces 1 hundredweight=100 pounds 1 ton=2000 pounds 1 long ton=2240 pounds LINEAR Inch=Basic Unit 1 hand=4 inches 1 link=7.

gallons=0.000 miles =0.002 AU 1 light year = 5.560 square feet 1 acre=160 square rods 1 square mile = 640 square acres 1 square mile = 1 section 1 township = 36 sections ASTRONOMY 1 astronomical unit (AU) = 93.9.2 U.3.16 cubic feet 1 cord=128 cubic feet 115 .88x10^12 miles =6.S.9. Uncommon British Measures of Liquid and Dry Volume LIQUID Gill=Basic Unit 1 pint=4 gills 1 quart= 2 pints 1 gallon=4 quarts 1 hogshead=63 gallons 1 pipe (or butt)=2 hogsheads 1 tun=2 pipes 2.2.000 miles 1 light second = 186. DRY Pint=Basic Unit 1 quart=2 pints 1 gallon=4 quarts 1 peck=2 gallons 1 bushel=4 pecks Miscellaneous British Measures AREA 1 square chain=16 square rods 1 acre=43.S.3226x10^4 AU 1 parsec (pc) = 3.000.26 light years 1 kpc=1000pc 1 mpc = 1000000pc VOLUME 1 U. liquid gallon= 231 cubic inches I Imperial gallon=1.4.

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Section III Applications in Personal Finance 117 .

On the road: D = 75 miles ⋅ 2 1 hours = 175miles hour 3 In the bank: % = 2 percent month ⋅ 3 1 months = 7 percent 2 $ Once the total accumulated interest is computed.5 month may be used. The reader should be aware that other than customary units may be used in certain situations. When driving in America. an interest change for the use of money also accumulates over time. when computing a credit-card % charge. the customary units of velocity are miles per hour. So. Likewise. as illustrated below. the customary units for interest rate are percent per year. likewise.1. either miles or percent. For example. What is Interest? Interest affects just about every adult in America. called the principal P . own a car or a home or both. you probably pay or have paid interest. Just as velocity ( 60 miles ) is a rate of hour distance accumulation. 118 . As a rent charge for the use of housing accumulates over time. percentage interest rate is a ‘velocity’ of percent accumulation. what exactly is interest? Interest is a rent charge for the use of money. or have a credit card or two.1. in order to obtain the total accumulated interest charge I . a monthly interest rate of 1. The Algebra of Interest 1. people sometimes borrow money when we want or need the items that money can buy. it is then multiplied by the amount borrowed. and. Just as people sometimes borrow housing when shelter is needed. Interest is normally stated in terms of a percentage % interest rate such as 8 year . If you are independent. in space travel 7 miles is used to describe escape sec velocity from planet earth. Both velocity and percentage interest rate need to be multiplied by time—specified in matching units—in order to obtain the total amount accumulated.

00 is borrowed at 9 year for 125 days. Given two identical interest rates. R is a constant velocity. How much are the total interest charges? Using I = Pr t .1. This formula applies as long as the principal P and the interest rate r remain constant throughout the time t .00)( 100 1 years )(3 1 years) = $2800. 2 I = Pr t resembles the formula Note: Notice how much the formula D = Rt .1: Suppose $10. The distinction usually shows up in short duration loans of less than one year where the term is specified in days. while bankers’ interest is computed on the basis of a 360 -day year.000.00 . the percentage interest rate r (hereafter. The variable P in I = Pr t distinguishes the Fundamental Interest Charge Formula in that total interest charges are proportional to both the principal borrowed and the time during which the principal is borrowed. Ex 1. we obtain (after converting percent to its fractional equivalent and months to their yearly equivalent) 8 I = ($10. where D is distance. and terms. the loan where interest is computed on the basis of bankers’ interest will always cost more. B) bankers’ interest as the basis for computation? 119 . and the accumulated time t (called the term) during which a fixed principle is borrowed are related by the Fundamental Interest Charge Formula I = Pr t (also called the Simple Interest Formula).000. Ex 1. the principal P . There are two types of interest: ordinary interest and banker’s interest.1. How much are the total interest charges using A) ordinary interest as the basis for computation. and t is the time during which the constant velocity is in effect. Ordinary interest is computed on the basis of a 365 -day year. principals.The total accumulated interest charge I .00 is borrowed at 7 % year over a 42 month period with no change in either principal or interest rate.2: Suppose % $150.000. to be simply called the interest rate).

however. In actuality. all of it and with the same purchasing power. make up for the loss of purchasing power.Again. the Hummer—many automobile loans are set up just like shorter-term home mortgages. 1. using I = Pr t as our fundamental starting point. purchasing power is not only preserved but actually increased via the application of commercial interest charges. Thus. simple interest was the interest method primarily used to compute changes in an automobile loan. we are to return it in its original condition—i.00)(9 % year % year )( 125 years) = $4623.g.000.2. Simple Interest Simple interest is interest charged according to the formula I = Pr t . but we also must pay back the principal borrowed in full. as a minimum. a bank is a business and should expect a profit (interest) on the sale of its particular business commodity (money).000. Remember. That is the meaning of the word borrowed: we are to return the item used in the same condition that it was originally loaned to us. not only are we to pay the interest charges. 360 Notice bankers’ interest nets $64. When we borrow money via a simple interest contract. When we borrow money. Since money invariably loses some of its purchasing power with the passage of time due to the effects of inflation. At one time.50 .29 365 )( 125 years) = $4687. one can almost always be sure that the amount borrowed is worth less at the end of a specified term than at the beginning. with some automobile prices approaching those of a small house—e. 120 .e. we obtain A) I = ($150. We normally find simple interest being used in loans where the term is relatively short or the principal is a few thousand dollars or less.21 to the bank.00)(9 B) I = ($150. Today. any interest charge levied must.

00 is issued for a term of 15 months at 10 1 % year .00 ∴ Buyers should be aware that sometimes the actual interest rate is more than it is stated to be.00 a : F = P − I = $100.000. A = P + I = P + Pr t = P (1 + rt ) .00(10 year )( 12 years) = $12. Ex 1.00 = $87.035{7}) A $47.00 a:M = 3 2 a : A = P + I = P(1 + rt ) = $38.00 2 121 .2: A Simple Discount Note for $100. We can easily use the simple interest formula to help calculate the monthly payment M for any loan issued on the basis of simple interest.2.310.00 = $9. the borrower prepays all the interest up front from the principal requested.000. as given by the expression F = P − I .5 year simple interest over a term of 7 years.000. the funds F available for use during the term of the loan are in fact less. Here.00 for an SUV at 3.500.310. Thus.000.00 − $12.22 ∴ # months 84 1 a : I = A − P = $47.310.00 = = $563.000.310.00 − $38. This leads to a hidden increase in interest rate if one considers the principal to be those funds F actually transferred to the borrower. % Ex 1.000.500.00(1 + 0. % 15 a : I = Pr t = $100.2. Thus we can easily write an algebraic formula for the total amount A to be returned.1: You borrow $38. A Simple Discount Note is a type of loan where this is indeed the case. This next example illustrates this common sleigh-of-hand scenario.Retiring a simple-interest loan requires the payment of both the principal borrowed and the simple interest charge incurred during its term.500. called the Simple Interest Formula. What is your monthly payment? What is the total interest charge? ⇒ A = $47. Find the ‘hidden’ interest rate.

500. precise formulas allow one to easily calculate the various financial quantities without resorting to the use of extensive financial tables.500. Compound Interest The simple interest formula A = P(1 + rt ) is used in situations where the principal never changes during the term of the loan.00 Notice that the interest rate is increased by 1. This addition creates a new and enlarged principal from which future interest is calculated. But more often than not. Then after one compounding period.00(r )( 12 ) ⇒ 3 109.3. As shown in our last example. r rc = 12 ).g.00 % r= = 11.500. let P be the initial principal and rc be the interest rate during the compounding period (e.00 ⇒ 12. a Simple Discount Note.375. i. but also the type of loan employing the interest rate. the principal will change due to the fact that accrued interest is added to the original principal at regular intervals. we have by the simple interest formula A1 = P + I = P + Prc ⋅ 1 = P(1 + rc )1 = P1 . This will always be the case: not only does interest rate matter.500.00r = 12. Interest during any one compounding period is computed using the simple interest formula. 1.00 = 87. After the second compounding period.e. for an annual interest r applied via monthly compounding periods.4 percentage points by simply changing the type of loan. To see how this works.375.4 year ∴ 109.a : I = Frt ⇒ 15 12. where each interval is called a compounding period. we have 122 .

3.000. the process cycles again with the result A3 = P2 + I = P2 + P2 rc = P2 (1 + rc )1 ⇒ A3 = P(1 + rc ) 2 ⋅ (1 + rc )1 = P(1 + rc ) 3 = P3 . % Ex 1. no addition to the initial principal P must occur (other than that generated by the compounding effect) during the totality of the compounding process (term).0075) 40 = $134.4 ) 4⋅10 ⇒ 1 A = $100. has cycled itself through a specified number of compounding periods). After the third compounding period.00 is deposited at 3 year for 10 years compounded quarterly (four times per year).e. Find the amount A at the end of the term. Both formulas are most commonly used in the case where an initial sum of money is deposited in a financial/investment institution and allowed to grow throughout a period of years under a specified set of compounding conditions.00(1 + 0. If n r is the annual interest rate and n is the number of compounding periods in one year.00(1.86 ∴ 123 . Letting the process continue to the end of n compounding periods leads to the Compound Interest Formula for Total Amount Returned A = An = P (1 + rc ) . r a : A = P(1 + n ) nt ⇒ 03 A = $100. nt In order to use either version of the compound interest formula.834.000. then the amount A after a term of t years is given by the familiar r compound-interest formula A = P (1 + n ) .A2 = P1 + I = P1 + P1 rc = P1 (1 + rc )1 ⇒ A2 = P(1 + rc )1 ⋅ (1 + rc )1 = P(1 + rc ) 2 = P2 . The amount A is the amount to be returned when the compounding process is complete (i.000.1: A lump sum of $100.

young windfalls become old fortunes.3: A grandfather invests $5000. 124 .000.000.% $25. This simple but powerful fact leads to our first Words of Wisdom: If properly managed.01) 240 ⇒ A = $25.00 compounds at 1 period for 240 periods.000. The fund is legally inaccessible until the child reaches the age of 65.81∴ The last example shows the magic of compounding as it operates on an initial principal through a long period of time. Find the amount A at the end of the term.2: An amount of 1 a : A = P(1 + rc ) n ⇒ A = $25.229. A relatively small financial gain received when young can grow into a magnificent sum if left to accumulate over several decades.09) 65 = $1.354.00 in a long-term growth fund for his newly-born granddaughter. Ex 1. but the quantity inside r the parentheses. would become almost indistinguishable from the number 1 as n increases indefinitely.3.313. nt What would be the overall effect of increasing the number of compounding periods n in one year while holding both the annual interest rate r and the term t constant? One can immediately see that the exponent nt would grow in size.1 )1⋅65 ⇒ 1 A = $5.01) 240 = $272. Assuming an % effective interest rate of 9 year compounded annually.000.3.00(1.000. Continuous Interest r Consider the compound interest formula A = P (1 + n ) .00(1 + 0.00(1 + 0.84 ∴ Ex 1.00(1. 1 + n . 1.4. how much will the granddaughter have accumulated by age 65? r a : A = P(1 + n ) nt ⇒ 09 A = $5.

Modern calculators allow calculations such as these to be easily performed on a routine basis. 12 . t = 10 years.6487006 $1.000 .6487192 $1.6485152 $1. Thus. P = $1. Which wins? Or. n 1 10 12 100 365 1000 10000 100000 1000000 A $1. Our exponent is growing larger nt desperately trying to make A an indefinitely large number. and. we’ll first look at a specific example % where r = 5 year .Since 1 = 1 no matter how large n is. subsequently.. 100 . in particular A = 1.000 .6288946 $1. 125 . 365 . The number of compounding periods n in a year will be allowed to increase through the sequence1.n )10 n .000 .64872. In conclusion. the diminishing of 1 + n r n to 1 may negate the effect of having a larger and larger exponent. we can say that the battle ends in a tidy compromise with 1 < A < ∞ .6487210 $1.. 1000 . 100.6470095 $1. and 1.6466684 $1. is there a compromise? To explore this issue. By contrast.6486641 $1.000. our base is nearing the number 1 trying to make A = 1 .00 . stabilizing about one digit to the left of the decimal point for every power of ten. 10 . the amount A becomes more and more certain.6487212 Notice that as n progressively increases without bound. The results are displayed in the table below with the corresponding amount generated by using the simple interest formula A = P (1 + rt ) . we end up with a mathematical tug of war between the two r affected quantities in A = (1 + n ) . 10. 05 A = $1.00(1 + 0.

we first move the limit process inside the parentheses and next to the part of the expression it directly affects to obtain r A = P{lim[(1 + n ) n ]}t . From this.7183 126 . We now investigate A as n → ∞ for the case of a fixed annual interest rate r r and term t in years. first define m = n ⇒ n = rm . A = lim[ P(1 + n ) nt ] .7181 2. we have set up our classic battle n →∞ of opposing forces: the exponent grows without bound and the base gets ever closer to1. we r A = lim[ P(1 + n ) nt ] ⇒ n →∞ r A = P{lim[(1 + n ) n ]}t ⇒ . To analyze this n →∞ expression.7183 2. n →∞ Limit processes are extensively used to derive most of the mathematical tools and results associated with calculus. via a scientific calculator. What is the combined effect? To answer. m value 1 10 100 1000 10000 100000 1000000 1 (1 + m ) m 2 2. n→∞ 1 A = P{ lim [(1 + m ) m ]}rt m →∞ 1 Now all we need to do is evaluate lim[(1 + m ) ] .5937 2. Again. Substituting.7048 2. and we will do m m →∞ this evaluation the modern. we can establish r the towing relationship obtain n → ∞ ⇔ m → ∞ .The process of n progressively increasing without bound is called a limit process and is symbolized by the limit symbol lim . easy way.7169 2.

Correspondingly.76 ∴ 1 127 . Hence.. The following example will illustrate this. the formula gives the account balance A at the end of t years under the condition of continuously adding to the current balance the interest earned in a ‘twinkling of an eye.00e ( 0.) at 8 year for a period of 30 years. m 1 When m gets astronomically large. which allows a person to quickly estimate account balances over a long period of time. .1: An initial deposit of $10.000.000 . one more digit in the 1 expression (1 + m ) m is stabilized.000. our final limit becomes 1 A = P{ lim [(1 + m ) m ]}rt ⇒ m →∞ A = P{e}rt ⇒ A = Pe rt .4.000.231. it is a very important and easily used tool. the expression (1 + m ) converges to the number e = 2. we can simply compute (1 + m ) to the accuracy desired. If more decimal places are m 1 needed. For a fixed annual interest rate r and initial deposit P . Compare the final amounts obtained by using both continuous and compound interest formulas. The last expression A = Pe is known as the Continuous Interest Formula. rt Ex 1. etc.. a : A = Pe rt ⇒ A = $10.’ The continuous interest formula represents in itself an upper limit for the growth of an account balance given a fixed annual interest rate.7183.08⋅30 ) ⇒ A = $110. Notice that each time m is increased by a factor of10 .00 is compounded monthly % (typical turnover for a company 401K account.We will stop the evaluations at m = 1.

00 in 40 years if left with them.000. In the next two examples.4.5 year ∴ 2 1 128 . the continuous interest formula can also be thought of as a fiscal ‘gold standard’ defining the limiting capabilities of the compounding process. Ex 1.00 ⇒ e 40 r = 100 a : ln(e 40 r ) = ln(100) ⇒ 40r ln(e) = ln(100) ⇒ 40r = 4. we explore the use of the continuous interest formula in providing rapid estimates for both interest rate and time needed to achieve a given amount A .2: A brokerage house claims that rt $10.00667) 360 ⇒ A = $109. which.000.605 ⇒ % r = 0. in turn allows one to solve for either r or t . which shows the continuous interest formula a very valuable tool for making estimates when the number of compounding periods in a year exceeds twelve or more.r a : A = P(1 + n ) nt ⇒ .000.00 difference between the two amounts. What interest rate would make this so? a : A = Pe rt ⇒ Pe rt = A ⇒ $10.00(1 + 012 )12⋅30 ⇒ 2 A = $10.000.00(1.000.057 = 11. By providing a quick upper bound for the total amount to be returned.73 ∴ Notice that there is less than $400.00 is ‘guaranteed’ to become $1.08 A = $10. In each example. the natural logarithm (denoted by ‘ ln ’) is first used to release the overall exponent in e .000.000.000e 40 r = $1.487.

e.5.4.09⋅40 ) = $365.The interest rate of 11. Ex 1. but represents an aggressive estimate since the average Dow-Jones-Industrial% Average annual rate of return has hovered around 9 year for the last 40 years.34 .05) t ) = ln(4) ⇒ 0. Effective Interest Rate 2 1 How do we compare one interest rate to another? The question arises since not only does actual interest rate matter.982.05t = 1.3: How long does it take a starting principal % quadruple at 5 year compounded monthly? P to a : A = Pe rt ⇒ 4 P = Pe ( 0. provides a mathematical basis for comparing interest rates having different compounding mechanisms. we have 129 . better yet.05) t = 4 P ⇒ e ( 0. Then were actually able to achieve A = $10. but no million. reff is defined as that annually-compounded interest rate that generates the same amount as the specified interest rate and associated compounding process at the end of t years. or.5 % year may be obtainable.05) t = 4 a : ln(e ( 0.05)t ⇒ Pe ( 0. In the case of the compound interest formula. let buyers be able to figure for themselves. Hence the brochure is making a marketer’s claim! Suppose we actively managed our account for 40 years where we % 9 year . The effective annual interest rate.38629 ⇒ t = 27. which is a tidy sum. type of compounding mechanism). designated reff . Let buyers beware.000.00e ( 0.73 years ∴ 1. but also the way the rate interest is utilized (i.

We definitely need to know the meaning of reff and its use if we are to survive the confusion of numbers tossed our way in modern society.r P (1 + reff ) t = P[(1 + n ) n ]t ⇒ r (1 + reff ) t = [(1 + n ) n ]t ⇒ r 1 + reff = (1 + n ) n ⇒ r reff = (1 + n ) n − 1 . as defined above. is a simple and powerful consumer basis of comparison in that it combines both rate and process information into a single number. we have P (1 + reff ) t = Pe rt ⇒ (1 + reff ) t = [e r ]t ⇒ 1 + reff = e r ⇒ reff = e r − 1 In the case of simple interest. 130 . Banks and other lending institutes are legally required to state effective interest rate in their advertising and on their documents. In the case of continuous interest. we have P (1 + reff ) t = P(1 + rt ) ⇒ (1 + reff ) t = (1 + rt ) ⇒ 1 + reff = t 1 + rt reff = t 1 + rt − 1 The effective interest rate. Stock market returns over a long period of time are normally specified in terms of an average annual growth or interest rate.

5 1 % year % year compounded compounded quarterly? a : reff = e r − 1 ⇒ % reff = e 0. Diagramming the problem in two steps.5 % year compounded quarterly where the % effective interest rate is Reff = 7.713 year . 7.2: Securities valued at $5.00 in 2005. we have a : P = $5.00 →→ A = $80. Ex 1.000.713 year ∴ 4 The better deal is 7. t 131 .075 ) 4 − 1 = 0.00 in 1980 have grown in value to $80.07519 = 7. Assuming continuation of the average annual growth value as already displayed during the past 25 years.Ex 1.5.000.00 →→ A ? 2005− 2045 2 30 years Utilizing the general definition of reff as found in A = P (1 + reff ) allows us to easily solve this problem for each step.000.1: Which is the better deal.5. the effective annual interest rate becomes a powerful economic and forecasting tool in that it can be easily adapted to determine the average annual growth rate for securities or any phenomena where change occurs over a period of years. When viewed as a general concept.000. project the value of these same securities in 2045.25 continuously or 7.0725 − 1 = 0.00 1980 − 2005 1 25 years a : P = $80.07713 = 7.519 year r a : reff = (1 + n ) n − 1 ⇒ 2 % reff = (1 + 0.000.

401.00 ∴ The average annual interest/growth rate of 11.951.223. $2. we have 30 years a : A = P(1 + reff ) t ⇒ $107.a : A = P(1 + reff ) t ⇒ $80.1172 = 11.000.000.5.223.1172) 30 = $2.72 year ) 25 1 ⇒ = 16 ⇒ 1 + reff = 25 16 = 1.72 % year is very good and shows active management of the overall growth process.401.271 year certainly exceeds the % average inflation annual rate of 3 year 1 and shows a steady increase in purchasing power over time.00(1 + 0.00(1 + reff ) 30 ⇒ 10.951.000.85 = (1 + reff ) 30 ⇒ 1 + reff = 30 10.08271 = 8.1172) 30 ⇒ A = $80.271 year ∴ % The final average growth rate of 8.000. What is the average annual growth rate? Diagramming: P = $9.1172 ⇒ a : A = $80.949. The final reward.00 to $107.00(1 + reff (1 + reff 2 ) 25 % reff = 0.00 →→ A = $107.00 = $9949.00 over a period of 30 years.85 = 1.3: A professional’s salary grows from $9949.00 = $5. is well worth it! Ex 1.00(1. Solving.00 .00 .951. 132 .08271 ⇒ % reff = 0.

Comparing reff a : reff = 10 1 + (0.12)10 − 1 ⇒ % reff = 10 1 + 1. What is reff ? a : reff = t 1 + rt − 1 ⇒ reff = 5 1 + (0. Which of the following three deals is most advantageous to you.2 − 1 = 10 2.2 − 1 = 8.251 year ∴ 08 % a : reff = (1 + 0.07 − 1 = 7. Secondly. we will compute the reff for the three cases noting that daily interest (365 compounding periods a year) is for all effects and purposes indistinguishable from continuous interest.00 is lent to a friend at 2 year simple interest for a period of 5 years. the investor: % % 12 year simple interest for the entire time period.5. or 8 year interest compounded quarterly for the entire time period? We analyze problem in two stages.000 to invest for 10 years. we will compute the expected earnings in all three cases.4: % $10.Ex 1.5.1 − 1 = 0.204 year ∴ % a : reff = e 0.02)5 − 1 = 5 1. First. Calculating the associated expected earnings gives 133 . The highest reff will then provide our answer. 7 year interest % compounded daily for the entire time period.4 ) 4 − 1 = 8.243 year ∴ 3 2 1 Quarterly compounding at % 8 year provides the best deal.0192 ⇒ % reff = 1.5: You have $25.000. in the modern spirit of ‘show me the money’.92 year Q 1 Ex 1.

99 ∴ a : A = $25. quarterly compounding at 8 year .08243)10 = $55.00(1 + [0.00 ∴ a : A = P (1 + reff ) t ⇒ A = $25. has the highest expected earnings as predicted by the associated reff .00(1 + 0.00(1 + 0.00(1 + 0.00e 0.200.08 4⋅10 4 ) = $55.001.12] ⋅ 10) = $55.000.199. for this is how the three reff formulas were derived in the first place! 134 .00(1 + 3 alt 0. This would be expected.a : A = P (1 + rt ) ⇒ 1alt 1 A = $25.000.000.08204)10 = $55.82 ∴ a : A = P(1 + reff ) t ⇒ A = $25.000.67 ∴ r a : A = P (1 + n ) nt ⇒ 2 2 alt 3 A = $25.343.32 ∴ a : A = Pe rt ⇒ A = $25.07251)10 = $50.000. The three alternate calculations use the effective annual interest-rate construct formula to arrive at the exact same answers (within a dollar or two) as those produced by the associated compounding formulas.07⋅10 = $50.000.89 ∴ % Case three.344.000.

both time and a process need to be specified. 135 . The value of money right now is called the present value PV . Present and Future Value Money changes its value with time. Smart investing counters inflation in that it enhances the value of money over time. Using the nt above general diagrammatic pattern. This can be diagramed as PV →→ FV . Inflation is a force beyond an individual’s control that lessens the value of money over time. subtract the annual inflation rate from the given annual interest rate. an analysis option. This fact is as certain as the proverbial ‘death and taxes’. time process In order for a present value to become a future value. The time-changed equivalent value in the future is called the future value FV . To account for inflation. Use the modified rate in present-to-future value formulas to project an inflation-adjusted future value.1. t r (1+ n ) nt Replacing P & A with PV & FV respectively leads to PV →→ FV .2. The Algebra of the Nest Egg 2. t r (1+ n ) nt Note: The above formula is not completely correct until one takes in account the effects of inflation. we can diagram the compound-interest formula as follows P →→ A . This is exactly the case in the r familiar compound interest formula A = P (1 + n ) .

Ex 2.870. All interest rates in the formulas below need to be inflation adjusted per radj = r − i if one wants to obtain an inflation-adjusted future value. Coupled present-tofuture-value formulas allow us to estimate total change in monetary value as either investments or durable goods move forwards or backwards in time under a given set of process conditions. Compound Interest: Effective Interest: Continuous Interest: Simple Interest: FV r (1 + n ) nt FV FV = PV (1 + reff ) t ⇔ PV = (1 + reff ) t r FV = PV (1 + n ) nt ⇔ PV = FV = PVe rt ⇔ PV = FV e rt FV (1 + rt ) FV = PV (1 + rt ) ⇔ PV = Notice that the coupled Present-to-Future-Value Formulas allow us to easily move from present value to future value (or visa versa) as long as the compounding process.000. What is the present value of this amount assuming an average annual % compounding rate of 11.115) 35 $1. time period.5 year ? a: PV = 1 FV ⇒ (1 + reff ) t $1.115) 35 PV = 136 .1: Bill wishes to have $1. we present the four coupled Present-to-Future-Value Formulas.000.00 ⇒ (1 + .800.1.54 (1.000. and one of the two values—present or future—is specified.00 in his Individual Retirement Account (IRA) when he retires in 35 years.00 PV = = $39.800.With this last note in mind.800.

etc.115) 35 When inflationary price increases for durable goods are stated in terms of an annually-compounded percentage jump.800. Bill’s wish can be restated in terms of buying power. Our next example illustrates the use of a present-to-future value formula to estimate the future price of a newly-built house.952.800.00 in current buying power by the time he retires in 35 years. $5. This is especially true for single ‘big ticket’ items such as houses. What Bill really wants is $1.42 is the amount needed 35 years from now just to preserve the buying power inherent in $1.064.115) 35 $5.952. Turning to the present value of this new amount 1 assuming the same 11.42 ⇒ (1 + .00 today assuming a long-term steady inflation rate of % i = 3 year .1.03) 35 ⇒ FV = $5.800.064.952. we have a: PV = PV = 2 FV ⇒ (1 + reff ) t $5.5 % year .1. cars. 137 . 2.064.2: Repeat the calculation in Ex.952. Thus a: FV = PV (1 + reff ) t ⇒ FV = PV (1 + i ) t FV = $1.00(1.000.1 if an average inflation % rate i = 3 year acts through the same 35 year time period.147.42 Interpreted. we typically use present-to-future-value formulas to estimate the future price. jewelry. boats.42 = $96.83 PV = (1.064.000.Ex 2.000.

Each compounding process has an associated formula to which a total time and interest rate must be supplied. 2.00 This is some disconcerting news in that the same house will sell for approximately $285.644.000. continuous compounding. estimate the price of a similar model in the same subdivision in 2010.456. If a particular 3-bedroom model in a certain subdivision is priced at $235.76. the bond would fetch $47.4: Calculate the present value of a $100.000.Ex 2.00 four years from now.000.00(1 + 0.2.3: The price of a new house in a certain city increases at an % average rate of 5 year .05) 4 ⇒ FV = $285. If you can afford it. then the Present-to-Future-Value Formulas are sufficient to perform the associated calculations. Waiting costs money! Ex 2. or compounding for a finite number of compounding periods per year. Growth of an Initial lump Sum Deposit If an initial lump-sum deposit is the only means by which monetary growth is achieved.00 = $47.644.76 05 (1 + 0.00 corporate % bond coming due in 15 years at 5 year compounded quarterly. you better buy now.1.000.1.4 ) 60 If redeemed today. 138 .456. 1 1 a : PV = PV = FV ⇒ r (1 + n ) nt $100.00 in 2006. We need only to identify the process by which the growth is occurring: annual compounding via an effective interest rate. a: FV = PV (1 + reff ) t ⇒ FV = $235.

00 invested at age 25 assuming reff = 8 year throughout the 40-year term? Note: the making of a monetary-growth diagram is strongly recommended as a first step for all present-to-future-value problems since pictures engage the use of one’s right brain and the associated spatial problemsolving capabilities.1: What is the future value (non-inflation adjusted) at age % 65 of $13.000.00 into $1.1.08) 40 ⇒ FV = $282.000.000.000.2.000.77 Ex 2.000.000.2022 = 20.417.2022 = 1 + reff ⇒ % reff = 0.2.00 over a 25 year period.00(1 + reff ) 25 ⇒ 100 = (1 + reff ) 25 ⇒ 25 2 100 = 1 + reff ⇒ 1.00 t =0 t = 25 1 reff ? Note that the process mechanism implicitly assumed is annual compounding via the referencing of an unknown reff .Ex 2.2.00 →→ FV ? age 25 age 65 1 % reff =8 year Solving: a: FV = PV (1 + reff ) t ⇒ FV = $13. 2 a: $10.000. Solving: a: $1.000.00(1 + 0.000.00 →→ $1. for Example 2.22 year 139 .000.00 = $10. the associated monetarygrowth diagram is a: $13.000. Hence.2: Calculate the effective annual interest rate needed to turn $10.

24 year 2 The stated continuous interest rate of 9.3: What continuous interest rate is needed to quadruple a given present value in 15 years? Asking for a continuous interest rate rcont means that the continuous interest form of the present-to-future value formula FV = PVe rt should be used.000.4: What is the projected future value (ignoring inflation) of a retirement fund where an initial deposit of $40.000. Ex 2.38629 = 15r ⇒ % r = rcont = 0. Our last example illustrates what happens if more than one deposit is made during the overall investment period. Assume an effective annual interest rate of % reff = 10 year and an anticipated retirement age of 68. Also.000 is made at age 30 and a subsequent deposit of $60. the problem states that the required future value is FV = 4 PV . Annotating this information on the monetary-growth diagram and solving gives a: PV →→ 4 PV t =0 t =15 1 rcont ? a: 4 PV = PVe15 r ⇒ 4 = e15 r ⇒ ln(4) = ln(e15 r ) ⇒ 1. Ex 2.0924 = 9.The effective annual interest rate of reff = 20.24 % year is certainly achievable in today’s markets.22 % year is probably impossible to sustain for an extended period of 25 years.2. however. it is not automatic and will require active management of one’s investments. Even in the go-go high-tech 90s.00 is made at age 40. rates of this magnitude lasted for only six years or so. 140 .2.

1) 38 + $60.361.000 →→ FV ? age 30 ↑ age 68 $60 .433.2.000.132.35 by age 68 if the stated conditions hold throughout the investment period.433. Again.35 over the same 38 years.03) 38 141 .4 a single deposit could be made at age 30 in order to create the same $2.00 invested by the age of 40 becomes $2.73 + $865. (1. $100. How much would such a deposit be? By direct application of the coupled Present-to-Future Value Formulas 2 PV = $2.361.1) 28 ⇒ FV = $1.361.361. Suppose that in Ex 4.4. the monetarygrowth process is understood to be annual compounding.000(1 + reff ) 38 + $60.173.40.259.361.361.000(1. 000 age 40 1 % reff =10 year Solving for the projected future value requires direct addition of two algebraic terms.433.000(1 + reff ) 28 ⇒ FV = $40. by the stating of an effective annual interest rate reff .433. a: $40. the monetary-growth diagram increases in complexity as it is modified to show the $60.88 . a : FV = $40.867.35 To summarize Ex 2.35 = $767.00 deposit (or insertion into the investment process) at age 40.433.496.61 ⇒ FV = $2.000(1.000.35 by age 68.1) 38 a net savings to the investor of $36.2.Understandably. (1.433.999.59 .35 = $63. Calculating the inflation-adjusted future value of $2. we obtain FVadj = $2.

what is the future value of the entire deposit stream? Diagramming.000. Under these conditions. nt be a deposit stream of identicallysized payments made over a period of t years where n is the number of compounding periods per year and r is the annual interest rate.3. In this section. D1 → D → D → D → D ⋅ ⋅ ⋅ → D ↑ → D↑ → FV ? . The more typical way we build our retirement funds is by means of a periodic deposit—either through payroll deduction or direct self-discipline— that accumulates in value year after year. Let Di ≡ D : i = 1. But it is no joke on how the sum is obtained: through discipline. we are talking about a sum jokingly referred to as ‘real money’.2. sacrifice.132. Growth of a Deposit Stream Most of us don’t have an initial lump sum of $40. And. FV = ∑ FVi ⇒ i =1 nt FV = ∑ Di (1 + i =1 r nt +1−i n r nt +1−i n ) ⇒. Suppose that each deposit Di is sequenced to coincide with the beginning of the corresponding compounding period and that the last deposit Dnt begins the last of the nt compounding periods. each deposit Di contributes a portion FVi to the total future value FV where FVi = Di 1 + nt ( r nt +1−i n ) . we will develop and use the equations that determine the future value of a regular deposit stream over an extended period of time.00 (or $63. FV = D ∑ (1 + i =1 nt ) 142 . ↑ ↑ ↑ ↑ 2 3 4 5 nt −1 nt r n r n r n r n r n r n r n Now. and attentive money management.59 ) by which to build a retirement fund. after thirty years or so. Thus.

Suppose we want to conclude our term of t years with one final deposit Dnt +1 as shown in the modified deposit stream D1 → D → D → D → D ⋅ ⋅ ⋅ → D ↑ → D↑ → D ↑ FV ? ↑ ↑ ↑ ↑ 2 3 4 5 nt −1 nt nt +1 r n r n r n r n r n r n r n To do so. − (1 + r n leads to the following formula: FV = Dn (1 + r { r nt +1 n ) )}..The expression D ∑ (1 + i =1 nt r nt +1− i n ) = D (1 + { r1 n ) + (1 + nr )2 + .. + (1 + nr )nt } is a geometric series and can be summed accordingly as D ∑ (1 + i =1 nt r nt −i n ) = Dn (1 + r { r nt +1 n ) − (1 + r n )}. all future values must be adjusted for inflation in order to ascertain true buying power. 143 . the two formulas become Without Final Deposit: FV = No Final Deposit: FV = D (1 + reff reff { D (1 + reff reff { ) t +1 − (1 + reff )} ) t +1 −1 } Similar formulas are developed for the case of continuous compounding in Section III. As discussed previously. Topic 5. add one more D to obtain FV = In the case of annual compounding where Dn (1 + r r n { r nt +1 n ) −1 . } = reff and D is a yearly total (or rate).

00 have grown to a future value of % $1.1: After a term of 30 years. . How % much would be needed? Assume reff = 11 year . Solving. a FV = FV = 2 D (1 + reff reff { ) t +1 − (1 + reff )}⇒ $5000. % reff =11 year a: PV ? →→ $1.87 To summarize.104. A modified monetary-growth diagram can be used to show the periodic annual deposits as follows: a: $5.11) ⇒ . the diagram starts with the first annual deposit of $5000.1 in an amount sufficient to create the same future value of $1.87 over a 30-year term assuming reff = 11 year .00 totaling $150.565.11 FV = $1.000.565.00 → 29 ×( t =0 1 % reff =11 year $5000.00 (1.87 .3.000.104.87 t =0 t =30 1 144 .Ex 2. { } Ex 2.00 ↑ →) FV ? t =30 Here.565.3. % Assume reff = 11 year .565.104.11)31 − (1.00 deposits made at the start of each annual compounding period.104.00 are faithfully made on 1 January of each succeeding each year. 30 annual deposits of $5000.2: Suppose a single lump-sum deposit could be made at the start of the 30-year period in Example 2.3.00 at t = 0 and annotates via multiplication the subsequent 29 annual $5000. what is the projected future value of a retirement fund where 30 annual deposits of $5000.

Sam started this practice with a combined $1200.07 = $86.00 on Mary’s birthday.00 .846.00(12) .3. we slightly modify the monetarygrowth diagram to show the inclusion of the final deposit.00 → 215 ×( t =0 1 % r = 7 year $200.11) 30 Ex 2.104. a: $200.565.874 PV = = $48. he makes ‘bonus deposits’ of $1000.00 ↑ →) + $200.3: Sam contributes $200.00 per month to a college savings account for his daughter Mary. In addition.87 ⇒ $1.a: PV (1 + reff ) t = FV ⇒ 2 PV (1. who just turned 12. The total future value will be the sum of both parallel deposit streams the day Mary turns 18. How much will be in % Mary’s college savings account at that time assuming r = 7 year and monthly compounding? This problem can be thought of as two sub-problems: 1) a monthly deposit stream of 217 individual deposits over a term of 18 years and 2) a parallel yearly deposit stream of 19 individual deposits over a period of 18 years.00 = FVmonth ? t =18 Solving: a : FVmonth = FVmonth FVmonth 2 Dn (1 + nr )nt +1 − 1 ⇒ r $200.07 (1 + 012 )217 − 1 ⇒ = 0.11) 30 = $1.104.00 deposit on the day of Mary’s birth and will ‘cash out’ on Mary’s 18th birthday with a final deposit of $1200.54 (1.250.565. For the monthly deposit stream.71 { } { } 145 .

000. Ex 2. again.268. Now.07 12 12 % ) − 1 = 7.00 ↑ →) + $1000.00 = FV year ? nt a : FV year = FV year = FV year 2 D (1 + reff reff { ) −1 ⇒ } t =18 $1000.4: Suppose Sam is not happy with the $125. A) How much should this deposit % be.229 year $1000.00 (1 + 0.00 via the single mechanism of monthly deposits. we will first need to compute the effective annual interest rate: reff = (1 + consequently.229 year . instead. would like to accumulate a future value of $160.3.07229 = $38.115.54 Each of the four deposit-stream formulas can also be used to determine the periodic deposit D needed in order to accumulate a specified future value under a given set of conditions. FVtotal = FVmonth + FV year 0.115.For the yearly deposit stream.93 ⇒ { } FVtotal = FVmonth + FV year = $125. assuming monthly compounding and r = 7 year ? B) What single lump-sum deposit made on the day Mary was born would generate an equivalent future value? A) a: D ? → 215 ×( ↑ →) + D ? = FV ? t =0 D? 1 % r = 7 year t =18 146 . a: $1000. we have all the information needed to compute FV year and.64 accumulated by Mary’s 18th birthday and.07229)19 − 1 ⇒ 0.00 → 17 ×( t =0 1 % reff = 7.

000.47 B) a: PV ? →→ $160.005833) 216 = $160.4. 2.47 .957.00 PV = = $45.000. we contribute to this deposit by means of a deposit stream as shown in the monetarygrowth diagram LS → D → D → D↑ → D ⋅ ⋅ ⋅ → D ↑ → D↑ → D ↑ FV ? .551.09 (1.00) . ↑ ↑ ↑ 2 3 4 5 nt −1 nt nt +1 r n r n r n r n r n r n r n 147 .09 and later as a deposit stream of 217 payments. From then on.005833) 216 This example suggests the old maxim of pay me now or pay me later.07($160.551.a: FV = 2 D= D= n (1 + { Dn (1 + r rFV r nt +1 n { r nt +1 n ) −1 ⇒ } ) −1 217 }⇒ −1 0.000. The Two Growth Mechanisms in Concert Sometimes.07 12 (1 + 012 ) { }⇒ D = $368.00 ⇒ $160. One could think of now as a single payment of $45. we may have the opportunity to open up a retirement or college investment account with a respectable lumpsum deposit (denote by LS )—perhaps gained by winning a lottery or receiving an inheritance. each $368.00 t =0 t =18 r a: PV (1 + n ) nt = FV ⇒ 2 1 % r = 7 year PV (1.000.99. totaling $79.

} Ex 2.00 → 138 ×( t =0 1 % r =8 year $2000.00(4) (1 + 0.408 )141 − 1 ⇒ 0.If LS > Di = D (which would surely be the case for 99% of the time).00 to a retirement fund over a period of 35 years that is started with an initial deposit of $5000.00 ↑ →) + $2000.39 + $1.4 ) Dn (1 + r { r nt +1 n ) −1 ⇒ } + $2. ↑ ↑ ↑ ↑ 2 3 4 5 nt −1 nt nt +1 r n r n r n r n r n r n r n Examining this last diagram.989.639.53 = $1.00 and concluded with a final deposit of $2000.00(1 + 0.4.00 + $2000.000.92 { } 148 . one algebraic expression can be easily written for the associated future value by summing the two embedded monetary-growth processes: FV = ( LS − D)(1 + r nt n ) + Dn (1 + r { r nt +1 n ) −1 . What is the future value assuming quarterly % compounding and r = 8 year ? The monetary-growth diagram increases in complexity again.00 = FV ? t =35 Solving: a: FV = ( LS − D)(1 + 2 r nt n 140 ) + 08 FV = $3000.531.08 FV = $47. a: $3000.1: Suppose Bill makes quarterly deposits of $2000. then we could redraw the monetary-growth diagram as follows ( LS − D1 ) + D 1 → D → D → D → D ⋅ ⋅ ⋅ → D ↑ → D↑ → D ↑ FV ? .628.00 .579.

Ex 2.628.2 illustrates the importance of being able to choose the right formula for the right scenario. Hence.045)10 = FV ⇒ FV = $2.42 Ex 2.1.5 year on his 60th birthday.5 year a: PV (1 + reff ) t = FV ⇒ 2 $1.4. “Is this the only way that a monetary-growth diagram can be drawn?” The answer is an emphatic no! These diagrams are offered as a suggested approach for two reasons: 1) they visually imply a flow of money and 2) they have been classroom tested.579. Understanding of the underlying concepts and facility with algebra are the two keys to success.628. What will be the future value of Bill’s retirement account at age 70? a: $1.453.Note: The reader may ask.115.4. Final Deposit & Other-than-Annual Compounding: FV = ( LS − D)(1 + r nt n ) + Dn (1 + r { r nt +1 n ) −1 } 149 . The important thing is to make a monetary-growth diagram that has meaning to you and upon which you can assemble all the relevant information. Bill starts his retirement account on his 25th birthday and stops contributing on his 60th birthday with plans not to withdraw from his account until the age of 70.579. several formulas may have to be used in order to obtain the sought-after answer. Bill is becoming increasingly wary of higher-risk investments as he grows older.S.2: Suppose in Ex 2. In many investment scenarios. government-bond fund paying an effective annual % interest rate of reff = 4. We will now list all four future-value formulas with initial lump sum deposit LS corresponding to the four deposit-stream formulas. Bill rolls his retirement account over into a safe U.4.92(1.92 →→ FV ? t =0 t =10 1 % reff = 4.

00 ↑ →) + $1000.9). at age 45. George used $2000. Ex 2. At the time. What are George’s total holdings at age 60? For the Roth portion a: $1000.3: George graduates from nursing school at age 22 and accepts a sign-on bonus of $7000. He contributes $1000.00 → 38 ×( age 22 1 % reff =12.00 of the money to open up a Roth IRA (see Section I: 6.00 that he promptly invested in tax-free municipals paying an effective annual interest rate of % reff = 4.00 per year making the final deposit at age 60.5 year .4.No Final Deposit & Other-than-Annual Compounding: FV = ( LS − D)(1 + r nt n ) + Dn (1 + r { r nt +1 n ) − (1 + r n )} Final Deposit and Yearly Compounding: FV = ( LS − D)(1 + reff ) ) t + D (1 + reff reff D (1 + reff reff { { ) ) t +1 −1 } )} No Final Deposit and Yearly Compounding: FV = ( LS − D)(1 + reff t + t +1 − (1 + reff Our next example illustrates the integration of a mid-life windfall into one’s retirement program.00 + $1000.00 to go to work at a local hospital. Additionally.00 = FVRoth ? age 60 150 .000. George is a fairly astute investor and was able to achieve an % effective annual interest rate of reff = 12.5 year over the course of 38 years.5 year $1000. George received a small inheritance of $15.

00 into $899.64 over a 38year period.125) + FVRoth FVRoth $1000. George was able to turn contributions totaling $55.00(1.000.029.748. through smart investing. All serious retirement planning should start with a licensed financial consultant in order to devise detailed long-term action plans that meet individual goals.64 To recap.00 38 (1.a: FVRoth = ( LS − D)(1 + reff 2 38 ) t + D (1 + reff reff { ) t +1 −1 ⇒ } FVRoth = $1000.125 $1000.860.41 { { } } For the tax-free-municipals portion a: $15.5 year a: FVtaxfree = PV (1 + reff 2 ) t ⇒ 15 FVtaxfree = $15.5. The important thing in this day of age is to ‘just do it!’ This leads to a second Words of Wisdom: You must first plan smart! Then.23 Finally: FV = FV Roth + FVtaxfree = $899.00(1.00 (1.00(1.94 + $782.125) + 0.000.000.638.125 = $87.125)39 − 1 ⇒ = $1000.125)39 − 1 ⇒ 0.638.00 →→→ FVtaxfree ? age 45 age 60 1 % reff = 4.609. you must do smart in order to achieve that coveted economic security! 151 .045) ⇒ FVtaxfree = $29. 2.47 = $870. Summary This article is not intended to be a treatise on retirement planning.

007 $1.587.877 $204.00 YEARLY DEPOSIT EFFECTIVE ANNUAL INTEREST RATE 5% 7% 9% 11% 13% $27.241 $132.224 $15.640.764 $31.629 $142. } TERM 5 yr 10 yr 15 yr 20 yr 25 yr 30 yr 35 yr 40 yr 45 yr 50 yr GROWTH OF $4000.257 $186.296. Reaching a net worth of one million dollars or more is a matter of both time and average annual interest rate.413.We close this article with the table below.585.345 $511.261 $28.827 $94.290 $87.477.307 $4. a powerful motivational aid that shows the future value of a $4000.093 $70.943 $8.060 $511.997 $4.329.653 $858.134 $111.705 $408.686 $369.475.359 $674.740 $883.613 $63.744 $3.00 yearly deposit for various terms and effective annual interest rates.943 $30.657 $2.557.167 $2.879 $707.743.474.245 $156.227.498 $1.384.520.995 $887. Notice that the shaded million-dollar levels can be reached in four of the five columns.460 $274.552 $179.675 $7.207 $56.972 152 .651 $78.292 $595.295 $598.058 $373.043 $383.759 $289.400 $1.652 $1.453 $283.260 $2. The formula used to construct the table is FV = D (1 + reff reff { ) t +1 −1 .300 $944.438 $1.013 $227.343 $33.

1. The Algebra of Consumer Debt
3.1 Loan Amortization

Very few people buy a house with cash. For most of us, the mortgage is the time-honored way to home ownership. A mortgage is a long-term collateralized loan, usually with a financial institution, where the title-deed to the house itself is the collateral. Once a mortgage is secured, mortgage payments are then made month-by-month and year-by-year until the amount originally borrowed is fully paid, usually within a pre-specified time in years. We call this process of methodically paying back—payment by payment—the amount originally borrowed amortizing a loan. The word ‘amortize’ means to liquidate, extinguish, or put to death. So, to amortize a loan means to put the loan to death. In generations past (especially those in the ‘Greatest Generation’), the final payment in ‘putting a loan to death’ was celebrated with the ceremonial burning of some of the mortgage paperwork. This symbolized the death of the mortgage and the associated transference of the title deed to the proud and debt-free homeowners. Nowadays, we Baby Boomers or Generation Xers don’t usually hang on to a mortgage long enough to have the satisfaction of burning it. Suppose we borrow a mortgage amount A , which is scheduled to be compounded monthly for a term of T years at an annual interest rate r . If no payments are to be made during the term, and a single balloon payment is to be made at the end of the term, then the future value FV A of this single balloon payment is
r FV A = A(1 + 12 )

12T

.

Now, let D = Di : i = 1,12T

be a stream of identically-sized

mortgage payments made over the same term of T years where the first payment is made exactly one-month after mortgage inception and the last payment coincides with the end of the term.

153

Then, the total future value FV D associated with the payment stream is

FVD =

12 D r (1 + 12 )12T − 1 r

{

}

For the mortgage to be paid, the future value of the mortgageamount borrowed must be equal to the total future value of the mortgage-payments made. Hence,

FVA = FVD ⇒ FVD = FVA ⇒ 12D r r (1 + 12 )12T − 1 = A(1 + 12 )12T ⇒ r r 12T rA(1 + 12 ) . ⇒ D= r 12T 12 (1 + 12 ) − 1

{

}

{ {

}

D=

r 12 1 − (1 + 12 )

rA

−12T

}

The last expression is the monthly payment D needed to amortize a mortgage amount A at the end of T years given a fixed annual interest rate. Once D is determined, we can compute the present dollar value of the entire payment stream

PVPS = 12TD
and the present dollar value of all the interest paid via the entire payment stream PVIPS = 12TD − A . Another fundamental quantity associated with a loan, particularly a mortgage loan, undergoing the process of amortization is the actual dollar value of the original loan still unpaid—called the payoff or payout value—after a given number j of monthly payments D have been made. We will denote this payoff value by the algebraic symbol PO j .

154

Recall that the j payment is made at the end of the j compounding period. By that time, the amount borrowed will have
r grown via the compounding mechanism to A 1 + 12

th

th

(

)j .

In like

fashion, the future value of the first monthly payment
r j −1 12

D will have , and the total future value of the first j grown to D(1 + ) 12 D r (1 + 12 ) j − 1 . monthly payments D will have grown to r Hence, the amount of the payoff PO j that corresponds to exactly the first j monthly payments D is

{

}

r PO j = A(1 + 12 ) − j

12 D r (1 + 12 ) j − 1 . r
st th

{

}

For any fixed amortization term T , the payoff amount undergoes a negative change from the j − 1 payment to the j payment as it is incrementally reduced throughout the life of the loan. The negative of this change is the actual dollar amount D Aj of the j
th

payment actually applied to loan reduction (or to principal, see next note). Thus,

D Aj = −(PO j − PO j −1 ) = PO j −1 − PO j ⇒ 12 D r (1 + 12 ) j −1 − 1 r 12 D  rj r −  A(1 + 12 ) − (1 + 12 ) j − 1  ⇒  r   12 D r j −1 rj r r D Aj = A (1 + 12 ) − (1 + 12 ) − (1 + 12 ) j −1 − (1 + 12 ) j ⇒ r 12 D   r r j −1 D Aj =  A − [1 − (1 + 12 )](1 + 12 ) ⇒ r  12 D − rA  r j −1 D Aj =   (1 + 12 )  12 
r D Aj = A(1 + 12 ) j −1

{

}

{

}

[

]

[

]

155

Finally, the dollar amount of the the payment of interest

j th payment D going towards

I is
DIj = D − D Aj .

Note: In this hand book, we have deliberately shied away from the term ‘principal’ in favor of more user-friendly terms that allow the construction of non-overlapping and pneumonic algebraic symbols. Traditionally, the principal P is a capital sum initially borrowed or initially deposited to which a compounding mechanism is applied.

The six loan-amortization formulas presented thus far can be split into two groups: Global Amortization Formulas and Payment Specific Formulas. One must first compute the monthly payment D in order calculate all remaining quantities in either group. Global Amortization Formulas Monthly Payment:

D=

r 12 1 − (1 + 12 )

{

rA

−12T

}

Sum of Payments in Payment Stream: PV PS = 12TD Total Interest Paid in Payment Stream: PV IPS = 12TD − A Payment Specific Formulas Payoff after the j
th

Monthly Payment:
j

r PO j = A(1 + 12 ) −

12 D r (1 + 12 ) j − 1 r

{

}

Amount of j

th

Monthly Payment to Principal:

12 D − rA  r j −1 D Aj =   (1 + 12 )  12 
Amount of j
th

Monthly Payment to Interest: D Ij = D − D Aj

156

64mo ∴ a: PVPS = 12TD ⇒ PVPS = 12 ⋅ 17 ⋅ ($3358.139.24 ⇒ PO180 = $75.064.000.07 PO180 = $400.07 12 1 − (1 + 012 ) { − 204 }⇒ D = $3358. and DI 100 . PV PS . D A100 .00 business-improvement loan is % negotiated with a local bank for an interest rate of r = 7 year and 3.163. Find the quantities D .69 − $1. a process diagram is not needed.163.163.000.64) ⇒ PVPS = $685.000. PO180 .64) . Since these six quantities are a direct single-step application of the associated formulas.578.09 ∴ a: PVIPS = 12TD − A ⇒ PVIPS = $685.09 − $400.00) .07 PO180 = $1. r a: PO j = A(1 + 12 ) − j 4 3 2 .562.61 { } 157 .00(1 + 012 ) 12 D r (1 + 12 ) j − 1 ⇒ r 180 { } − 12($3358. PVIPS .000.09 ∴ The last three quantities are payment specific. a: D = D= 1 r 12 1 − (1 + 12 ) { rA −12T }⇒ 0.Ex $400.07 ⋅ ($400.00 ⇒ PVIPS = $285.015.07 (1 + 012 )180 − 1 ⇒ 0.1: A an amortization term of 17 years.1.

PO180 is also the ‘balloon’ payment needed in order to amortize the loan 2 years ahead of schedule at the end of 15 years. the sum of all monthly payments PV PS . C) Find the payment number J where the amount being applied to principal starts to exceed 90% of the payment.000.05 12 1 − (1 + 012 ) { −84 }⇒ D = $537.39 ∴ Ex 5.00 in order to buy a new SUV.115.24 ∴ a: DI 100 = D − D A100 ⇒ DI 100 = $3358.07)($400.43 ∴ 158 . % The 5 year declining-balance loan (another name for a loan that is 6 being reduced via an amortization schedule) has a term of 7 years.1.00)  0.00) . a: D = 1 r 12 1 − (1 + 12 ) { rA −12T }⇒ D= A) 0.000.09mo ∴ a: PVPS = 12TD ⇒ 2 PVPS = 12 ⋅ 7 ⋅ ($539.24 ⇒ DI 100 = $1524.2: Bill borrows $38.05 ⋅ ($38. A) Calculate the monthly payment D .000. and the sum of all interest payments PV IPS .64 − $1834. B) Calculate D A1 and D I 1 .09) ⇒ PVPS = $45.07 99 D A100 =   (1 + 12 ) ⇒ 12   D A100 = $1834. 5 12 D − rA  r j −1 a: D Aj =   (1 + 12 ) ⇒  12  12($3358.64) − (0.

115.9 D ⇒ 2 12 D − rA  r J −1  12  (1 + 12 ) = 0.67 ⇒ (1.115.004167) J = 60 ∴ Note: Notice the use of the natural logarithm ln when solving for J − 1 .9 D ⇒   C) $381.30 ∴ … a: DI 1 = D − D A1 ⇒ DI 1 = $157.004167) J −1 = $485.2737 ⇒ ( J − 1) ln(1. In theory. 159 .17 ⇒ ln(1.000. one can use any base.43 − $38.43 ∴ … 1 12 D − rA  12 D − rA  r 1−1 a: D A1 =   (1 + 12 ) =  12  ⇒  12    12($539. Taking the logarithm of both sides is the standard technique when solving algebraic equations where the variable appears as an exponent.2737) ⇒ ln(1.30(1.004167) J −1 = 1.64) − (0.a: PVIPS = 12TD − A ⇒ 3 PV IPS = $45.2737) J −1 = ⇒ J − 1 = 58.05)($38.99 ∴ 1 12 D − rA  r j −1 a: D Aj =   (1 + 12 )  12  2 a: D AJ = 0.004167) = ln(1.00 ⇒ PV IPS = $7.000. but ln is a standard key available on most scientific calculators.00)  B) D A1 =  ⇒ 12   D A1 = $381.

we form the ratio  1 rA    r 12T D A1 12  (1 + 12 ) − 1   = rA D r −12T 12 1 − (1 + 12 ) { } 160 . To start.An interesting question associated with loan amortization asks. 12 D − rA  r j −1 D Aj =   (1 + 12 ) ⇒  12  . what percent of the first payment is applied towards principal and what percent pays interest charges? We already have the algebraic machinery in place to answer this question. } Substituting the expression for D into that for D A1 gives D A1 D A1 D A1    rA 12  − rA   12 1 − (1 + r )−12T   12   ⇒ = 12  1 rA  = − 1 ⇒  r 12 1 − (1 + 12 )−12T     1 rA  =   r 12  (1 + 12 )12T − 1   { Next. 12 D − rA  D A1 =   12   Recall that D= r 12 1 − (1 + 12 ) { rA −12T }.

and 30 years. TERM 15 yr 20 yr 30 yr 40 yr 5% .302 .473 .247 − .135 ANNUAL INTEREST RATE 6% 7% 8% 9% . the answer from table lookup is roughly ∆% = . we obtain after algebraic simplification D A1 r −12T = (1 + 12 ) ∴ D Ex 3.1.1% : D D A1 D 20 years ⇒ = 19.202 .4% .302 .25 year and the following D values for T : 15.351 .006875) −180 = .166 .123 ⇒ ∆% = .061 . 20.Finally.091 .407 .368 . 15 years ⇒ D A1 = (1.247 .223 .091 .041 .067 .291 = 29. ‘by what percentage would I have to increase my monthly payment in order to reduce my amortization term from 30 years to 20 years?’ If your % mortgage interest rate is 7 year .123 .3% : 30 years ⇒ A1 = 8.027 The above table helps answer questions such as.124 = 12.48% D D D A1 r −12T The expression = (1 + 12 ) can be used to build a D D A1 for D lookup table for various annual interest rates and typical loan amortization terms where the entries in the body of the table will be the corresponding principal-to-overall-payment ratios the very first mortgage payment.166 .260 .3: Calculate D A1 % for r = 8. 161 .

The aforementioned scenario is not a happy one and should be avoided at all ‘costs’. the lending institution holds the title deed to the home that you and your family occupy. then the mortgager can start the legal process of eviction as a means of recovering the unpaid balance associated with the home mortgage.3. Let’s begin with the most frequently asked question. This is the traditional home mortgage as we Americans know it. the mortgagee is guaranteed a place to live—i. how much is my payment? Ex 3. the house cannot be legally resold or the mortgagee legally evicted. the individual obtaining the mortgage. After eviction occurs.’ The vast majority of all Americans purchase that ‘good old family home’ via a collateralized declining-balance loan where the collateral is the title deed to the house being purchased.1: The Bennett family is in the process of buying a new home for a purchase price of $300. Two terms associated with the word mortgage are: mortgager.2. In return. They plan to put 20% down and finance the remainder of the purchase price via a conventional fixed-interest-rate home mortgage with a local lending institution. 162 . the lending institution will 1) sell the house.00 . Always make sure that the payment you sign up for is a payment that you can continually meet month after month and year after year! The many examples in this article address various aspects of making mortgage payments and the total lifetime costs associated with the mortgage process. as long as there is an unpaid mortgage balance. and 4) return any proceeds left to the mortgagee. the lending institution granting the mortgage. and mortgagee.000. However.2 Your Home Mortgage In his pop hit “Philadelphia Freedom”. 2) recover the unpaid balance.e. 3) recover expenses associated with the sale. Remember. The responsibility of the mortgagee is to make monthly payments on time until that time when the loan is amortized. if the mortgagee fails to make payments. Elton John sings about the ‘good old family home.

0625 ) 12 0. we can determine PVIPS by the formula PVIPS = 12TD − A . and 3) % T = 30 yrs @ r = 7.1 are shown in the next table 163 . The interest-rate range of % 1.30mo ∴ % a:T = 30 yrs @ r = 7.0690($260. The results from Ex 3.25 year . Proceeding with the calculations.00 after the 20% down payment is made. The amount borrowed will be $240.30mo ∴ % a:T = 20 yrs @ r = 6. Compute the monthly payment for each of the three options.0625 ) 12 0. Once PV PS is determined.000.000. 2) T = 20 yrs @ r = 6.000.0725($260.66mo ∴ Of interest would be the present value PV PS = 12TD of all mortgage payments comprising the payment stream for each of the three options.The amortization options % year are as follows: % year 1) T = 15 yrs @ r = 6.0725 ) 12 0.229.25 year 1 D= 12 1 − (1 + 0.2.0625($260.000.00) { −12 ( 20 ) D = $2.25 year 3 D= 12 1 − (1 + 0. we have % a:T = 15 yrs @ r = 6.00) { −12 ( 30 ) }⇒ D = $1773.90 year 2 D= 12 1 − (1 + 0.25 .098.90 .00 year is fairly typical for a term range of 15 years.00) { −12 (15 ) }⇒ }⇒ D = $2.

These considerations have to be factored in when buying a home. whereas the payment that just includes principal and interest is known as the PI payment. The first step will be the subtracting out of the monthly portion of the $3000.00 + $1600.00 The facts displayed in the above table are a real eye-opener for most of us when first exposed.PRESENT VALUE FOR THREE PAYMENT STREAMS PVPS PVIPS TERM A 15 yr $401.592. Section I: 6.00 30 yr $638.60 $260.8 lists some of the pros and cons associated with long-term mortgages.00 $141. taxes. interest. If.00 per year and homeowners insurance is $1600.517.592.10.517.2: Based on income. how much house can he afford assuming 30-year % mortgage rates are r = 6.00 $260.000.5 year ? We are only quoting the 30-year rate since the associated mortgage payment will most likely be the lowest payment available.00 mortgage payment that must be allocated to taxes and insurance.274. how much house can I afford? Ex 3.00mo ∴ 164 . The next example answers the question. The mortgage payment that includes principal.2.00 $243. 1  $4000.00 $260.274. Bill Johnson has been approved for a monthly mortgage payment not to exceed $3000. real-estate taxes are $4000. on the average. The bottom line is that longer-term mortgages with lower monthly payments cost more money—much more money—in the long run.00 20 yr $503.00 for homes in the subdivision where Bill wants to move.00 including real-estate taxes and homeowners insurance.00 $378.000. and insurance is traditionally known as the PITI payment.000.00  a: D = $3000 −  ⇒ 12   D = $2533.

2.00 = 2 065 12 1 − (1 + 0. then Bill would be qualified to buy a house having a purchase price PP of $500.000. A) If the couple follows this plan. Bill qualifies for a $400.00 mortgage.3: Nathan and his wife Nancy purchased a house seven % years ago. if I increase my payment by so many dollars per month.0650( A) −12 ( 30 ) −12 ( 30 ) }{$2533. PP − 0. The next example answers the question.12 ) { 0.000.74 ∴ { 065 12 1 − (1 + 0.00 ⇒ $400. a: $2533. we set $2533.00 PP = Notice that the down payment needed under the above scenario is a hefty $100.00 as shown in the algebraic calculation below. If one assumes that Bill has enough money to make a 20% down payment.12 ) A= 0.00 of this increase for an additional monthly principle payment.00 ⇒ 0.000.000. how many years will they be able to save from the current 23 years remaining on the mortgage? B) How much money will they save in interest charges? 165 .80 PP = $400. The couple’s monthly income has recently increased by $500.00 ⇒ 0. financing $175.00 .00. how much sooner will I be able to pay off my mortgage? Ex 3.00 .000.00 for 30 years at r = 7 year .00 equal to the monthly payment formula and solve for the associated mortgage amount A .000.20 PP = $400.065 A = $400.In the second step.800.00} ⇒ }⇒ In summary. Nathan and Nancy decide to use $250.80 PP = $500.000.

A .070($175.28mo ∴ { } In Step 2. First notice that D= D= r 12 1 − (1 + 12 ) { rA −12T }⇒ 070 12 1 − (1 + 0.12 ) 0.97) { −12( 23) }⇒ . we calculate the balance (payoff) remaining on the mortgage at the end of seven years. we calculate the existing monthly payment by the usual method.00) { −12 ( 30 ) } ⇒ D = $1164. and r is known.In Step 1.507. Increasing the payment to D = $1414.97 ∴ 0. D = $1164. Our approach for the remainder of the problem is to use the existing monthly payment formula D= r 12 1 − (1 + 12 ) { rA −12T } in reverse in order to solve for T when D . % a:T = 30 yrs @ r = 7.12 )84 − 1 ⇒ PO84 = $159.000(1 + 0.12 ) 0.070 { } Keeping the same payment of D = $1164.12 ) 12 D r (1 + 12 ) j − 1 ⇒ r 84 − 12{$1164.28mo will logically result in a compression of the remaining term.28mo ∴ 166 .28} 070 (1 + 0. r a: PO j = A(1 + 12 ) − j 2 070 PO84 = $175.507.070($159.00 year 1 D= 070 12 1 − (1 + 0.507.28mo allows the remaining principle of $159.000.97 to be paid off in 23 years— right on schedule.

6579 ⇒ }= $11.64 years by increasing the payment to D = $1414.97) 070 12 1 − (1 + 0.070($159.507. 4 167 .12 ) −12T {1 − (1 + 070 $16.28 = 0. The difference is the savings.28mo .34209 ⇒ 070 − 12T ⋅ ln (1 + 0. a: D = 3 r 12 1 − (1 + 12 ) { rA −12T } −12T $1414.36 years 070 (1 + 0.12 )−12T = 0.00 years − 15. we calculate the original amount programmed to interest (assuming the full thirty-year schedule) and then recalculate it for the amount actually paid.36 1 − (1 + 0. Nathan and Nancy would compress the original mortgage by A) a: 23.07268 T = 15.12 ) 0.005816) = −1.070 −12T 12 { { ) − 12T ⋅ (0. With this in mind.36 years = 7. Going back to the original question.12 ) = ln (0. To answer part B). we finally proceed to Step 3 where D is increased to D = $1414. interest rate and term at any stage in the amortization process. payment. It also allows one to solve for any one of the four variables provided the other three variables are known.The previous result confirms the power of the existing monthly payment formula in that this formula retains the algebraic linkage amongst principal.28mo .36 years represents 185 payments where the final payment is a small fractional payment that would ceremoniously pay off the mortgage.56 ⇒ }⇒ The answer T = 15.34209 ) ⇒ } = .971.165.

Ex 3.36)($1414.80 B) a: PV IPS (reclaculated ) = 12(7)($1164.2 year .000. 168 .28) 6 5 + 12(15.39mo ∴ In Step 2.28) − $175.00) { −12 ( 30 ) }⇒ D = $1459.140.61 ⇒ Savings = $60. we calculate the payoff at the end of five years. In the next example.a: PVIPS (original ) = 12TD − A ⇒ PVIPS = $419. He would like to pay off his house in 15 years.140.8 − $175. % a:T = 30 yrs @ r = 7.00 ⇒ PVIPS = $244.00 ⇒ PVIPS (recalculated ) = $183.19 Thus Nathan and Nancy will be able to save $60.000.19 in interest charges if they faithfully follow their original plan.4: Brian Smith purchased a house five years ago and % financed $215.000.2.12 ) 0.20 year 1 D= 072 12 1 − (1 + 0.000.072($215.661.661.479. the mortgage initially has a term of 30 years and the mortgagee wishes to amortize it on an accelerated 20 year schedule after five years have elapsed in the original term.00 for 30 years at r = 7. A) By how much should he increase his monthly payment in order to make this happen? B) How much does he save in the long run by following the compressed repayment schedule? Step 1 is the calculation of the existing monthly payment.

89 ∴ { } Brian wants to accelerate the mortgage repayment schedule so that the remaining $202.000. Step 3 is the calculation for Brian’s new payment.66mo ∴ Once the old and revised payments are known.89 is paid off in 15 years.2.20 . A) a: increase = $1845.12 ) 0.12 ) 12 D r (1 + 12 ) j − 1 ⇒ r 60 { } − 12{$1459.89) { −12 (15 ) } ⇒ D = $1845.89 = $385.809. the Pickles financed % year % $159. Steps 5) and 6).5: In buying a new home.072($202.00 refinancing closing costs at the lower rate. 154 year rates dropped to 4.000(1 + 0.77 mo Part B): Follow the exact process as presented in Example 5. The Pickles decide to refinance the remaining balance and the associated $1500. In our next example.2.00 for 20 years at r = 6.809. creates a brand new 15-year mortgage having the same annual interest rate.39} 072 (1 + 0. This. a mortgage is initially taken out for a term of 20 years.12 )60 − 1 ⇒ 0.3.2 year .66 − $1459. Three years later. Three years into the term.r a: PO j = A(1 + 12 ) − j 2 072 PO60 = $215.875 .20 year 3 D= 072 12 1 − (1 + 0.748. the mortgage is refinanced in order to obtain a lower interest rate. Ex 3. in effect. Part A) is easily answered.072 PO60 = $202. to obtain Brian’s overall projected savings of $105. % a:T = 15 yrs @ r = 7.809. How much do they save overall by completing this transaction? 169 .

this is a situation that most of us will strive to avoid. Teresa was cut to half-time work for a period of 24 months.81)} = .19 Our last example illustrates the devastating cumulative effects of making partial mortgage payments over a period of time.741.48 ∴ { } % a:T = 15 yrs @ r = 4.000.000.062 PO36 = $145.% a:T = 20 yrs @ r = 6.875 year 3 D= 0.04875 ) 12 { −12 (15 ) }⇒ D = $1154.55mo ∴ r a: PO j = A(1 + 12 ) − j 2 062 PO36 = $159.00) { −12 ( 20 ) }⇒ { } 36 D = $1157.241. Hopefully.6: Teresa bought a new home for a purchase price of $450.48) 12 1 − (1 + 0.55) + 180($1154. 170 .81mo ∴ Notice that the monthly payment actually drops a little bit.55} 062 (1 + 0. $28.274. and we have compressed the overall term by two years! Using our standard methodology.04875($147.12 )36 − 1 ⇒ 0.12 ) 0.000.062($159.2. Three years into the loan.000(1 + 0. the overall savings is a: 240($1157.00 down payment and financed the remainder at 7 % year 4 for a term of 30 years.20 year 1 D= 062 12 1 − (1 + 0.12 ) 12 D r (1 + 12 ) j − 1 ⇒ r − 12{$1157. She made a $90. Ex 5.00 .55) − {36($1157.

A) Calculate her mortgage balance at the end of five years.09} . { } D = $2395. Teresa was able to go back to fulltime employment and make full house payments.000(1 + 012 ) 12 D r (1 + 12 ) j − 1 ⇒ r 36 { } .07 (1 + 012 )24 − 1 ⇒ 0.03 ∴ .03(1 + 012 ) 3 { } − 12{$1197. C) Calculate the revised payment needed in order to amortize the loan via the original schedule.07($360. At the end of the 24 months. we need to calculate Teresa’s original payment: % a:T = 30 yrs @ r = 7.217.217.07 PO24 = $369.07 24 PO24 = $348.54} .00 year 1 D= .54 for a period of two years on a partially-amortized loan having a starting balance $348.Teresa was able to negotiate with her lending institution a partial mortgage payment (half the normal amount) for the same period.627.84 ∴ { } 171 . the mortgage balance is r a: PO j = A(1 + 12 ) − j 2 12{$2395.00) { −12 ( 30 ) }⇒ . First.07 (1 + 012 )36 − 1 ⇒ − 0. r a: PO j = A(1 + 12 ) − j 12 D r (1 + 12 ) j − 1 ⇒ r .07 PO36 = $360.000.07 12 1 − (1 + 012 ) 0. We use the same formula the second time in order to calculate the effects of making a monthly half payment of $1197. B) Calculate the revised remaining term if the original payment is maintained.07 PO36 = $348.217.03 .09mo ∴ At the end of three years.

84) 070 12 1 − (1 + 0.84 .A) Teresa’s revised mortgage balance at the end of five years is $369. a payment that must pay off a balance of $369.627.00 year 5 D= C) .07 12 1 − (1 + 012 ) 0.08 .36mo more than her original payment of $2395.02748 years 070 − 12T ⋅ ln(1 + 0. % a:T = 25 yrs @ r = 7.84) { −12 ( 25 ) } ⇒ D = $2612.84 over a yet-to-be-calculated number of years. a sum which is $9627.09975) ⇒ }= .070 −12T 12 { ) { − 12T ⋅ (0.07($369. Playing catch up is costly! 172 .12 ) = ln (0.740.08 = 0.45mo . Teresa will not pay off her mortgage until another 33 years have passed. To bring Teresa back on schedule.08 comes back into play.84 in 25 years.09975 ⇒ B) With the original payment. this mortgage will require 38 years to amortize assuming no other changes occur. we will need to calculate a revised mortgage payment that allows her to amortize the balance of $369. At the end of five years.627.84 more than she originally borrowed.873.95 ⇒ 0.005816) = −2.627.12 ) −12T {1 − (1 + 070 $28. the original payment of $2395.12 ) 0.96 1 − (1 + 0. a: D = 4 r 12 1 − (1 + 12 ) { rA −12T } −12T $2395.30505 T = 33.90025 ⇒ (1 + }= $25.070 −12T 12 }⇒ ) = 0.627.070($369.45mo ∴ Teresa’s revised mortgage payment is $2612. When added to the five years that have already transpired.627. $317.

372. Two major differences are that the term is much shorter for a car loan and that the annual interest rate is often less.00 ⇒ B) PVIPS = $4670.00) { − 66 }⇒ D = $682.00 down and financed % the balance for 66 months at 4 year . The salesperson knocked 12% off. The mathematics associated with car loans set up on a declining-balance amortization schedule is identical to the mathematics associated with home mortgages.600. a: Sales Pr ice = 1 (0.3 Car Loans and Leases Nowadays. After factoring in a 7% state sales tax on the agreed-to sales price. A) Calculate Bob’s car payment. Let’s start off by computing a car payment.00 ∴ Sales Pr ice + Tax = (1. B) Calculate the interest paid to the lending institution assuming the loan goes full term.5 yrs @ r = 4.372.46mo ∴ a: PVIPS = 66($682.00 ∴ A) AmountFinanced = $40.04 12 1 − (1 + 012 ) 0.00 year 2 D= . Rob put $2000.00) = $39.3.00 .07) ⋅ ($39.000. most car loans are set up on declining-balance amortization schedules. a ‘deal’ that Bob gladly agreed too.3.00) = $42.46) − $40.04($40.372.60 ∴ 3 173 . The lending institution happens to be a subsidiary of the car manufacturer.88) ⋅ ($45.00 ∴ % a:T = 5.372. Ex 3.600.1: Bob bought a 2004 SUV having a sticker price of $45.000.

So. Then the current vehicle value V = V (t ) can be estimated by V (t ) = SRP ⋅ (1 − P ) t where SRP is the manufacturers suggested retail price.00 . are definitely a major family money drain. Motorized vehicles.The fascinating thing about Example 5. the once proud owner is not only stuck with a trashed vehicle. but also a partially unpaid debt and. 174 . the dollar amount ‘knocked off’ the original sales price. The 15% figure is a good number for higher-priced vehicles equipped with desirable standard options such as air conditioning and an automatic transmission. as much as Americans love ‘em.3. t be the number of years since purchase. and t be the number of years that have elapsed since purchase. Thus. most assuredly. Could this be a classic case of pay me now or pay me later? A real danger in financing large amounts for expensive vehicles is that vehicles—unlike houses—depreciate over time. by how much does a vehicle typically depreciate? The standing rule of thumb is between 15% and 20% per year where the starting value is the manufacturers suggested retail price. The 20% figure is usually reserved for cheaper stripped-down models having few customer-enticing features. P is the annual depreciation rate. Such a period of time is properly characterized as a financial ‘danger zone’ since insurance proceeds paid via the ‘totaling’ of a fully-insured vehicle in the danger zone will not be enough to retire the associated loan. This means that there may be a period of time within the term of the loan where the actual balance remaining on the loan exceeds the current value of the vehicle itself. Let SRP be the suggested retail price of a particular car model. P be the assumed annual depreciation rate (as a decimal fraction).1 is that total interest $4670. significantly higher insurance premiums in the future.60 to be paid to the lending institution (part of the car conglomerate) just about equals $5400. Either percentage figure leads to a simple mathematical model describing car depreciation.

975. but even with no depreciation. Ex 3.975. That amount is roughly equivalent to a normal year’s depreciation.00 $18.00 $21.408.966. you may be able to sell it for more.00 $41. Use an annual depreciation rate of P = .00 $35. The results obtained via the two vehicledepreciation models are shown in the table below.00 $25.490.00 $29.656.00 $16.e.000.264.2: Project the value of Bob’s SUV over the life of the corresponding loan with and without immediate ‘Showroom Depreciation’.00 $18. The important thing to note is that the table values are the insurance value of the vehicle—i.635.656.512.512.00 of its sticker price in the first six months.00 $19.00 $29. Bob’s SUV drops about $3500.00 One can argue about ‘with’ or ‘without’ showroom depreciated.00 $27.00 $19.Note: Some estimators say that one must immediately reduce a vehicle’s value from resale value to wholesale value as soon as it leaves the showroom.00 $21.647.15 and calculate the two values at six-month intervals.00 .00 $23.00 $27.487.3. but what if it is involved in an accident? The table value will be your legal compensation.250.00 $32.264. Looking back at the previous example.00 $15.000.00 $35. we see that SRP = $45.971. which increases the exponent up by one in the previous model V (t ) = SRP ⋅ (1 − P ) t +1 .250. the cash that an insurance company will pay you if the vehicle is totally destroyed.00 Without Showroom Depreciation $45.00 $32.478. Yes. 175 .408.490.00 $38.00 $25.478. DEPRECIATION OF BOB’S SUV Time in months 0 6 12 18 24 30 36 42 48 54 60 66 With Showroom Depreciation $38.00 $23.635.966.

27 48 $8.675.225.68 30 $19.47 12 $30. We will compute the remaining balance at six-month intervals using the now-familiar formula r PO j = A(1 + 12 ) − j 12 D r (1 + 12 ) j − 1 . 176 .Let’s see how Bob’s SUV loan progresses towards payout during the same 66-month term.67 60 $0.26 66 Note the few cents remaining on the loan balance.047.58 18 $26. r { } The results are: AMORTIZATION OF BOB’S SUV LOAN Time in Remaining months Loan Balance $40.12 24 $23.83 36 $15.16 6 $33. Increasing the monthly loan payment to an even $683.706.452. Now for the moment of truth! We will merge the last two tables into a new table in order to compare depreciated value to current loan balance line-by-line.716.115.00 will easily eliminate that problem (caused by rounding errors)—an approach most lending institutions would take.015.11 42 $11.372.00 0 $37.06 54 $4.057.904.

00 $25.00 $41.047.635.00 $37.264. So.00 $32. A LOAN ON THE EDGE! Time in months 0 6 12 18 24 30 36 42 48 54 60 66 With Showroom Depreciation $38.512. Ex 3. fate had a different plan because poor John totaled it seventeen months later.00 due to a Toyota advertised sale.408.250.00 $27.06 $4.00 $25.00 Remaining Loan Balance $40. If we don’t factor in showroom depreciation.478. the insurance value of the vehicle is actually less than the balance remaining on the loan for about the first two years.00 $38.995. Harvey made a $1000.250.408.00 $19.372.47 $30.00 $29.00 $23.67 $0.00 $29.00 $16.057.83 $15.00 $18. how about Mr. But.00 $32.00 With No Showroom Depreciation $45.904.3: Mr. We could term that period of time a financial danger zone since the insurance proceeds from a totaled vehicle will not be enough to pay off the loan in full.264. Alas.00 $21. we might conclude that Bob is not in too great of danger. figuring the car would be paid off when John graduated.68 $19.12 $23. Harvey.647.635.00 $27.27 $8. Project the unpaid loan balance.971. who planned to use it while attending college.487.478. The original Camry sticker price of $24.015.512.706.675.490. Robert Harvey bought a new Camry for his son John.966.00 $35.716.656.452. State and county sales taxes then added 6% to the remaining purchase price. if any.966.58 $26.656.00 $15.00 $18.975.490.5 year .11 $11.00 $35. Mr.225. 177 .975.16 $33. whose story is in our next example.00 was discounted by $1500.BOB’S SUV LOAN.26 The above table shows a loan on the edge! If we factor in showroom depreciation.000. after insurance proceeds are received.00 down payment and financed the balance for five years % at 3.00 $21.00 $23. we are in reasonably good shape throughout the same two years—a big if.3.115.00 $19.

we need to calculate both the remaining wholesale value of the Camry (which hopefully equals the insurance proceeds) and the remaining balance on the loan.87) ⇒ V (t ) = $17.00 = $23.00 ⋅ (0.995.035($23.852.904.904.13 in conjunction with showroom depreciation.995.$24.549.70 ∴ AmountFinanced = $24.06) ⋅ ($23.00) = $24.000.495.904.85mo ∴ At the seventeen-month point.00) 035 12 1 − (1 + 0. Also. Thus. the Toyota Camry holds its resale value rather well.82 5 { } a : SettlementBalance = $17.50 year 2 a: Sales Pr ice = 1 D= 0.18 − $17. a : V (t ) = SRP ⋅ (1 − P) 3 t + 12 12 ⇒ 29 12 V (t ) = $24.18 4 12 D rj r (1 + 12 ) j − 1 ⇒ a : PO j = A(1 + 12 ) − r { } 035 PO17 = $23.549.904.00 − $1500. we will be optimistic and use P = 0.00 = $23.12 )17 − 1 ⇒ 0.00(1 + 0. Notice the rescaling of the time t to months.70 − $1.495.36 178 .00 ∴ Sales Pr ice + Tax = (1.70 ∴ % a:T = 5 yrs @ r = 3.85) 035 (1 + 0. as a rule.12 ) { − 60 }⇒ D = $434.904.82 ⇒ SettlementBalance = $302.852.12 ) 17 − 12($434.035 PO17 = $17.

we have a : V (t ) = SRP ⋅ (1 − P) 3 t +12 12 ⇒ 29 12 V (t ) = $24.00mo .36 . Ford will finance the whole amount—with nothing down for qualified buyers—for 84 % months at 5.549. Mr.3. Analyze this deal for correctness.82 ⇒ SettlementBalance = −2973.89 year .00 .82 a : SettlementBalance = $14. 179 . he’ll need some additional cash for a new down payment on a replacement vehicle. The advertised payment is $269. Then. Harvey still owes $2973.483. Ex 3.52 a : PO17 = $17. Our next example is taken from an advertisement in a local newspaper. taxes.549.20 . But wait. Life on the edge! The last story might have been significantly different if another model of automobile was involved. In this scenario. he will have pocketed $302.80) ⇒ V (t ) = $14. by signing on to this ‘deal’. Mr.576. Harvey rolled on the edge and eventually fell off.00 less than the manufacturers suggested retail price. true cost and “edginess’. Let’s assume that the purchase price.52 − $17.00 ⋅ (0. and loan conditions remain identical but the make and model of car is one for which P = 0. Hence. After the loan balance is paid off. discount. Harvey escaped by the skin of his teeth.Mr.576.4: A Ford dealership is advertising a brand new 2004 Freestar for a sales price of $17. starting again at Step 3. Mr. which is $5000.995.30 5 4 . Plus. Harvey will have to come up with an additional down payment because John now needs another car.30 to the lending institution once insurance proceeds are received.

706.00) = $18. let’s examine loan ‘edginess’ in terms of remaining loan balance versus the depreciated value of the Freestar. a: Sales Pr ice = $17. Lastly.29mo ∴ Notice that we are only about $3.706.00 in interest charges.55 An important thing to note here is that the dealership is gaining back 80% of the advertised rebate $5000.We first need to add in the 7% State-of-Ohio sales tax to get the true amount financed. let’s compute the sum of all interest payments during the life of the loan. a : PVIPS = 12TD − A ⇒ PV IPS = (84) ⋅ ($272. —as either an effective annual rate reff or an Next.0589 ) 12 { −84 }⇒ D = $272.00 ∴ Sales Pr ice + Tax = (1.81∴ % a:T = 7 yrs @ r = 5. Considering the size of the initial rebate.81) 12 1 − (1 + 0.81 ⇒ PV IPS = $4165. then. we compute the monthly payment. The hook is the lure of no money down.706.81∴ AmountFinanced = $18.89 year actual annual rate r . Note: the small difference is probably due on how we interpreted the stated rate of % 5.29) − $18.00 away from the advertised payment.0589($18. 3 180 .706. assume that the initial showroom discount has already occurred. hence we will accept the dealership’s calculations as valid.89 year 2 1 D= 0.07) ⋅ ($17.483.483.

99 $12.706.15 .413.97 Remaining Loan Balance $18.00 due at signing.645.3.23 $8.000 miles) per year. Table 5. A lease is a loan that finances the corresponding amount of vehicle depreciation that transpires during the term of the loan. since the Freestar has desirable features.889.888.487. At the end of the period.7 shows the frightful results—a Freestar on the edge for nearly four years! A FREESTAR ON THE EDGE Time in months 0 6 12 18 24 30 36 42 48 54 With no Showroom Depreciation $17.736.5: A Grand Cherokee is advertised for a ‘red tag’ sales price of $21. Ex 3.42 $15.64 $10.00 $16.965.96 $8.Hence.898. what does it matter.619.81 $17.700.75 $12. From the information just given. But.85 Our last example in this section examines a vehicle lease.610.00 represents about 20% off and may actually be a little bit below wholesale.860.319.118.00 after rebates. All leases have stipulations where the amount of miles aggregated on the vehicle must remain below (usually 12.61 $16.48 $7.52 $14.79 $9.75 $9.311.631.19 $14. the vehicle is returned to the dealership. the appropriate t depreciation model is V (t ) = SRP ⋅ (1 − P) .483.11 $11.888.47 $11.557. The sales price of $21. we will use P = 0. and. for the vehicle is going to eventually be returned to the dealership and resold as a ‘premium’ used car! 181 .126. The corresponding red-tag lease payment is $248.121.00mo plus tax for a term of 39 months with $999.55 $13. analyze this transaction.46 $10.

298556 ⇒ r r ln(1 + 12 ) = 0.44 − ($999. we have a : (0.00 a : PVIPS = $9672.45 5 . which we will now determine by: r r a : FV = PV ⋅ (1 + 12 ) T ⇒ PV ⋅ (1 + 12 ) T = FV ⇒ r r $7175. 51 a : AF = $21.3479) = 0.3479 ⇒ r 39 ln(1 + 12 ) = ln(1.00 ⇒ (1 + 12 ) 39 = 1. we predict the depreciation during the 39 month term of the lease using the showroom depreciation model with P = 0. 1 a : V (t ) = SRP ⋅ (1 − P) t +1 ⇒ 2 V (39) = $27. including showroom depreciation. The difference PV IPS is due to the applied interest rate over the term of 39 months.00) = $9672.360. a rate that is approaching low-end credit-card rates! In closing Article 3.Predicting the original manufacturers suggested retail price (SRP).44 ∴ Once the depreciation is calculated.00 − $7175.00 − $13. 182 .00 ⋅ (0.55 − $999. we can determine the actual amount financed and the interest charged.713.00 ⇒ SRP = $27.00 = $7175.55 ⋅ (1 + 12 ) 39 = $9692.15 .007679 ⇒ r = 9.85) 12 ⇒ V (39) = $13.55 4 3 a : PVPS = 39 ⋅ ($248.80) ⋅ SRP = $21.2% ∴ 6 Notice the sky-high interest rate of r = 9.00 ∴ Next. make a down payment equivalent to the first year’s depreciation.3. we will leave it to the reader to verify the following statement: To avoid living on the edge when signing up for an automobile loan.55 = $2496.2% .360.888.00) ⇒ AF = $8174.888.713.00765 ⇒ (1 + 12 ) = 1.

monthly annuity payments are computed via the same methods used for computing monthly mortgage payments. B) If the total value in Mike’s 401K account is used to buy a thirty-year-fixed-payment annuity paying r = 5 % year at age 67.19 + $1. he makes an annual payroll deposit of $2000.00 which the company matches. age 25.763.65 = $1. how much is left in his 401K account? A) Annuity Creation Phase Step 1 is the construction of a monetary-growth diagram.4.00 as an inheritance. 0. Thus.00 ↑ →) FV ? t = 42 Step 2 is projecting the Future Value of Mike’s 401K a: FV401K = ( LS − D)(1 + reff 2 ) t + D (1 + reff reff { ) t +1 −1 ⇒ } FV401K = $6000.4 The Annuity as a Mortgage in Reverse An annuity can be thought of as a mortgage in reverse where the annuitant (the one receiving the payment) becomes the lender and the institution from which the annuity ‘is purchased’ becomes the borrower.382.3. For 42 years.09)43 − 1 ⇒ . With the last statement in mind.000. calculate Mike’s monthly retirement payment.000. Ex 3.00 (1.987. we proceed with just one comprehensive example that addresses both annuity creation and annuity usage.00 → 41 ×( t =0 1 $4000.1: Mike.09 = $223.84 { } 183 . Using his inheritance money as an initial deposit. receives $10. C) If Mike dies at age 87.905. A) Project the value of Mike’s 401K account at age 67 assuming an average effective annual rate of return of % reff = 9 year .00(1.09 ) + 42 FV401K $4000. Mike wisely decides to open a company-sponsored 401K account. % reff = 9 year a: $10.287.

987.287.B) Annuity Payment Phase Using the formula D = r 12 1 − (1 + 12 ) { rA −12T } for monthly payments needed to amortize a mortgage.84) . Hopefully his annuity is such that any unused amount reverts to Mike’s estates and heirs as specified in a will.05($1.280.89 in nonliquidated funds. 184 .05 PO240 = $1.668.287.815.005.77617 D = $10.18} .05 12 1 − (1 + 012 ) { −12( 30) }⇒ $8. he leaves $1. we obtain D= D= 0.84(1 + 012 ) 12 D r (1 + 12 ) j − 1 ⇒ r 240 { } − 12{$10.05 (1 + 012 )240 − 1 ⇒ 0.987.36 ⇒ 0.668.815.18mo C) Balance Left in Annuity at the End of 20 Years r PO j = A(1 + 12 ) − j .89 ∴ { } When Mike dies at age 87.005.05 PO240 = $1.

Jacob was about 10 years younger than either of these men and continued the tradition of ‘standing on the shoulders of giants’.4.g. and exact means of communication. namely the growth and decay of money by the use of differential equations. In this article. powerful. algebra.1 Jacob Bernoulli’s Differential Equation A question commonly asked by those students struggling with a required mathematics course is. To not have this communication means at my disposal could be likened to not being able to speak English in a primarily English-speaking country. we will explore one very essential specific in the modern world of finance. and formulas. I think business calculus is the one course where this question requires the strongest response. etc. The Calculus of Finance 4. Of particular interest in this article is the case for n = 0 : dy = f ( x) y + g ( x) y n dx 185 . to essentially ask ‘of what good is this algebraic language?’ is to miss the whole point of having available a new. data. I have found through experience that the previous argument makes a good case for prealgebra and algebra. the two co-founders of calculus. charts. however. One of Jacob’s greatest contributions to mathematics and physics was made in the year 1696 when he found a solution to the differential equation below. “What is this stuff good for?” Though asked in every mathematics course that I have taught. For in my other classes—pre-algebra. one of the last topics encountered in a standard business calculus course. To say that this would be a handicap definitely is an understatement! Yet this is precisely what happens when one doesn’t speak mathematics in a technological world bubbling over with mathematical language: e. which bears his name. Subsequently. Jacob Bernoulli (1654-1705) was nestled in between the lifetimes of Leibniz and Newton. numbers. making a similar case for business calculus may require more specifics in a day when Microsoft EXCEL rules.—I can argue that one is learning a universal language of quantification.

Step1: Let F (x ) be such that F ′( x ) = − f ( x ) Step 2: Formulate the integrating factor e Step 3: Multiply both sides of obtain F ( x) dy = f ( x) y + g ( x) by e F ( x ) to dx  dy  e F ( x )   = e F ( x ) [ f ( x ) y + g ( x )] ⇒  dx   dy  e F ( x )   + e F ( x ) [− f ( x)] y = e F ( x ) ⋅ g ( x)  dy  Where the left-hand side of the last equality is the derivative of a product  dy  d F ( x) e F ( x )   + e F ( x ) [− f ( x)] y = e F ( x ) ⋅ g ( x) = e ⋅y dx  dy  . perform the indefinite integration. [ ] Step 4: To complete the solution.dy = f ( x) y + g ( x) . dx The solution is obtained via Bernoulli’s 300-year-old methodology as follows. d F ( x) e ⋅ y = e F ( x ) ⋅ g ( x) ⇒ dx e F ( x ) ⋅ y = ∫ e F ( x ) ⋅ g ( x)dx + C ⇒ y = y ( x) = e − F ( x ) ⋅ ∫ e F ( x ) ⋅ g ( x)dx + Ce − F ( x ) ∴ [ ] [ ] 186 .

The exact form of the proportionality expression K (t ) will depend on whether principle is growing. Thus dp = rp0 dt : p (0) = p0 . the passage of twenty years will change p into something less due to the ever-present action of inflation (denoted by i in this article). Since p = p (t ) . which is the traditional simpleinterest growth mechanism. or whether there is a number of complementary and/or competing monetary-change mechanisms at work. The simplest case is the monetary growth mechanism where K = rp 0 .4. decaying. It can be easily solved in three steps: 187 . Any one of these mechanisms may be time dependent in and of itself necessitating the writing of K as K = K (t ) . Let dt be a differential increment of time. p = p (t ) where t is the independent variable and p is the dependent variable. This implies a constant rate of dollar increase with time for a given p0 . which can be thought of as a negative interest rate. the product of a constant interest rate r and the initial principle p0 . dt will induce a corresponding differential change dp in p via a first-order linear expression linking dp to dt : dp = Kdt ⇒ dp = K (t )dt . So properly.000.2 Differentials and Interest Rate Everyone will agree that a fixed amount of money p will change with time.00 is stuffed under a mattress for twenty years in the hopes of preserving its value. Even though p = $10. The preceding is a first-order linear differential equation written in separated form with stated initial condition.

dt This form highlights the differential-based definition of the first derivative. also constant. 4. intrinsic differential change in time is constant. dt year year The expression dp ≡ p ′(t ) is known as the Leibniz form of the dt first derivative. we have for the general case that K (t ) = r (t ) ⋅ p (t ) + d (t ) where r (t ) is a time-varying (variable) interest rate. dp = rp0 : p(0) = p0 after division by dt .a : p (t ) = p0 rt + C a : p (0) = p0 ⇒ C = p0 a : p (t ) = p0 rt + p0 = p0 (1 + rt ) One might recognize the last expression as the functional form of the simple interest formula. p (t ) is the principal currently present. equal to the instantaneous change of principle with respect to time—which one could immediately liken to an instantaneous “velocity” of money growth.3 Bernoulli and Money Returning to dp = K (t )dt . and d (t ) is an independent variable deposit rate. The same differential equation can be written as 3 2 1 . being equal to the applied constant interest rate times the initial principal. 188 . In words it states that the ratio of an induced differential change of principle with respect to a corresponding. Simple examination of both sides of the above differential equation reveals common and consistent units for both sides with dp dollars dollars ≡ & rp0 ≡ .

Substituting into dp = K (t ) dt gives

dp = [r (t ) ⋅ p(t ) + d (t )]dt : p(0) = p0
or

dp = r (t ) ⋅ p (t ) + d (t ) : p (0) = p0 dt
where p (0) = p0 is the amount of principal present at the onset of the process. Translating the differential equation into words, the instantaneous rate of change of principal with respect to time equals the sum of two independently acting quantities: 1) the product of the variable interest rate with the principal concurrently present and 2) a variable direct-addition rate. The preceding differential equation is applicable in the business world if the principal p is continuously growing (or declining) with time. When the interest rate is fixed r (t ) ≡ r0 and the independent direct-addition rate is zero d (t ) ≡ 0 , the differential equation reduces to

dp = r0 p : p (0) = p0 . dt
Solving using separation of variables gives
1

a:
2

dp = r0 dt p

a : ln( p) = r0 t + C ⇒ p (t ) = e C e r0t . a : p(0) = p0 ⇒ p(t ) = p0 e r0t
The final expression p (t ) = p0 e 0 and constant interest rate r0 .
rt
3

is the familiar Continuous-

Interest Formula for principle growth given a starting principal p0

189

Returning to the general differential equation

dp = r (t ) ⋅ p (t ) + d (t ) : p (0) = p0 , dt
we see that it is Bernoulli in form with the solution given again by an atrocious expression

F (t ) = − ∫ r (t )dt

p (t ) = e − F ( t ) ⋅ ∫ e F ( t ) ⋅ d (t )dt + Ce − F ( t )
Upon comparison with the general solution developed in detail earlier. The initial condition p (0) = p0 will be applied on a caseby-case basis as we explore the various and powerful uses of the above solution in the world of finance. Depending on the complexity of r (t ) and d (t ) , the coupled solution

[

]

F (t ) = − ∫ r (t )dt

p (t ) = e − F ( t ) ⋅ ∫ e F ( t ) ⋅ d (t )dt + Ce − F ( t ) : p (0) = p0
may or may not be expressible in terms of a simple algebraic expression.. Thus, since interest rates are unpredictable and out of any one individual’s control (I have seen double-digit swings in both savings-account rates and mortgage rates in my lifetime), we will assume for the purpose of predictive analysis that the interest rate is constant throughout the time interval of interest r (t ) ≡ r0 . This immediately leads to

[

]

p(t ) = e r0t ⋅ ∫ e −r0t ⋅ d (t )dt + Ce r0t : p(0) = p0 ,
a considerable simplification. The last result is our starting point for concrete applications in investment planning, mortgage analysis, and annuity planning.

[

]

190

4.4
4.4.1

Applications
Growing a Nest Egg

Case 1: If d (t ) ≡ d 0 , a constant annual deposit rate, then the last expression for p (t ) further simplifies to This can be easily solved to give

p(t ) = d 0 e r0t ∫ e − r0t dt + Ce r0t : p(0) = p0 .
p (t ) = p 0 e r0t + d 0 r0t e −1 r0

[

]

[

]

after applying the boundary condition p (0) = p0 . Notice that the above expression consists of two distinct terms. The term p0 e 0 corresponds to the principal accrued in a continuous interest-bearing account over a time period t at a constant interest rate r0 given an initial lump-sum investment p 0 . Likewise, the term
rt

d 0 r0 t e − 1 results from direct principal r0

[

]

addition via annual metered contributions into the same interestbearing account. If either of the constants p 0 or d 0 is zero, then the corresponding term drops away from the overall expression. The following two-stage investment problem illustrates the use of

p (t ) = p 0 e r0t +
Ex

d 0 r0t e −1 . r0
% year

[

]

4.4.1: You inherit $12,000 .00 at age 25 and immediately . Five

invest $10,000 .00 in a corporate-bond fund paying 6

years later, you roll this account over into a solid stock fund % (whose fifty-year average is 8 year ) and start contributing

$3000.00 annually. A) Assuming continuous and steady interest, how much is this investment worth at age 68? B) What percent of the final total was generated by the initial $10,000 .00 ?

191

A) In the first five years, the only growth mechanism in play is that induced by the initial investment of $10,000 .00 . Thus, the amount at the end of the first five years is given by

p (5) = $10,000.00e 0.06 ( 5) = $13,498.58 .
The output from Stage 1 is now input to Stage 2 where both growth mechanisms act for an additional 38 years.

p (38) = 13,498.58e 0.08(38) +

3000 0.08(38) (e − 1) ⇒ 0.08 p (38) = $148,797.22 + $375,869.11 ⇒ p (38) = $528,666.34

B) The % of the final total accrued by the initial $10,000 .00 is

$148,792.22 = .281 = 28.1% $528,666.34
Note: The initial investment of $10,000 .00 is generating

28.1% of

the final value even though it represents only 8% of the overall investment of $124,000 .00 . The earlier a large sum of money is inherited or received by an individual, the wiser it needs to be invested; and the more it counts later in life. Holding the annual contribution rate to $3000.00 over a period of 38 years is not a realistic thing to do. As income grows, the corresponding annual retirement contribution should also grow. One mathematical model for this is

dp = r0 p + d 0 eαt : p (0) = p0 dt
where the constant annual contribution rate d 0 in the previous model d 0 has been replaced with the expression d 0 e
α 0t

, allowing

the annual contribution rate to be continuously compounded over a time period t at an average annual growth rate α 0 .

192

4.500.03t .03t dt = | = $212.03t B) The % of the final total accrued by the initial $10. d0 e r0t − eα 0t r0 − α 0 [ ]∴ Ex 4.000.4. 193 .215.1 using the annual contribution model d (t ) = 3000 e 0.122 = 12. $100.03 p (38) = $148.676.22 = .31 with the total contribution throughout the 38 years is given by the definite integral 0.708.2% $1.03( 38) ) ⇒ 0.08(38) + The final annual contribution is $3000 . The Stage 2 calculation now becomes 3000 (e 0.The above equation is yet another example of a solvable Bernoulli-in-form differential equation per the sequence p(t ) = e r0t ⋅ ∫ e − r0t ⋅ d 0 eα 0t dt + Ce r0t : p(0) = p0 ⇒ p(t ) = d 0 e r0t ⋅ ∫ e (α 0 −r0 ) t p(t ) = po e r0t + [ [ ] ⋅ dt ]+ Ce r0t : p(0) = p0 ⇒ .49 ⇒ P (38) = $1. So with this in mind.792.500.498.08(38) − e 0.71 p (38) = 13.00 is $148. we will forgo the early inheritance in our next example.498.58 . A) Stage 1 remains the same with p (5) = $13.58e 0.08 − .00e 0.71 Most of us don’t receive a large amount of money early in our lives.000 . That is the reason we are a nation primarily made up of middle-class individuals.03 ( 38 ) 38 ∫ $3000.2: Repeat Ex 4.00e = $9380 .83 38 0 .066.797.22 + $1.215.00e 0 0.

075.4.4.3: Assume we start our investment program at age 25 with an annual contribution of $3000.00 grown at a rate of α 0 = 5% per year.07 α T 0 = α 0 − i0 = 5% − 3% = 2% = 0.896. For a 3% average annual inflation rate.02( 43) ) ⇒ 0. the true interest rT 0 and income growth rates α T 0 are given by the two expressions rT 0 = r0 − i0 = 10% − 3% = 7% = 0.05( 43) ) ⇒ 0. investment plans in reverse where one starts with a given amount of principle p (0) = p0 and chips away at this initial amount until p(T ) = 0 . our true value after 43 years in terms of today’s buying power is 3000 (e 0.454.10 − 0.2 Paying for the Nest Both mortgage loans and annuities are.05 p (43) = $3. Also assume an aggressive annual interest rate of r0 = 10% (experts tell us that this is still doable in the long term through smart investing).35 p(43) = 4. The governing equation for the case where the interest rate r0 is fixed throughout the amortization period T is that point in time T when 194 .02 Sadly.07 ( 43) − e 0.10( 43) − e 0.02 p(43) = $1.906. in actuality.11 p (43) = B) Inflation is nothing more than a negative growth rate (or interest rate) that debits the given rate.Ex 4.07 − 0. A) How much is our nest egg worth at age 68? B) How does an assumed average annual inflation rate of 3% throughout the same time period alter the final result? A) Direct substitution gives 3000 (e 0.

00)e 0.0575( 30 ) = $1457.0575( 30) − 1) A= 0.4: $250.0575( 30 ) = $524. First Month’s Interest: r0 p0 12  r Te r0T  I = p0  0r0T − 1  e −1  r Tp e r0T Total Amount Paid A = p0 + I : A = 0 r T 0 e 0 −1 Total Interest I Payment : Ex 4.00)e 0. Below are three other mortgage-payment formulas based on the continuous-interest model.0575(30)($250. e r0t − 1 The fixed monthly payment m0 is given by d0 r0 p0 e r0t m0 = = 12 12 e r0t − 1 { } The continuous-interest-principal-reduction model does an excellent job of calculating nearly-correct payments when the number of compounding or principal recalculation periods exceeds four per year.50 (e 0.4.000. m0 = 0.62 12(e 0. Applying the condition p (T ) = 0 leads to d0 = r0 p0 e r0t .0575($250. and total interest repayment assuming no early payout.75% .0575( 30 ) − 1) 195 .p (t ) = p 0 e r0t + d 0 r0t e −1 r0 [ ] where d 0 now becomes the required annual payment.000. total repayment .000 .745. Calculate the monthly payment.00 is borrowed for 30 years at 5.

under stable economic conditions.745.31 .62e −0.00 = $274. Thus. Future mortgage payments are simply not worth as much in today’s terms as current mortgage payments. then the present value of our future payment m PV is m PV = r0 P0 e r0T e −i0t .90 .4. if we are paying off our mortgage with cheaper dollars.745.4. if we project t years into the loan and the continuous annual inflation rate has been i0 throughout that time period. 196 .4. the present value of the total 30-year repayment stream is APV = $345. the present value of a payment made % i0 = 3 year is 21 years from now. Continuing with this discussion. our ability to comfortably afford the mortgage should increase over time. In fact.50 − $250.” This statement refers to the effects of inflation on future mortgage payments.I = A − p0 = $524.999.51 Many people justify an initially-high mortgage payment due to the fact that ‘the mortgage is being paid off in cheaper dollars. This is a case where inflation actually works in our favor.03( 21) = $776. then what is the present value of the total amount paid APV ? A simple definite integral—interpreted answer T as continuous summing—provides the APV  r0 P0 e r0T  −i0t r0 P0 (e r0T − e ( r0 −i0 )T ) = ∫  r0T e dt = −1  i0 (e r0T − 1) 0e Returning again to Ex 4. r0T 12(e − 1) To illustrate using Ex 4.4.000. assuming m PV = $1457.

5: Compare m0 . 3 in an % annuity paying 4.61 T = 20 5.045) 24 − 1) 197 . until the principal is reduced to zero.75% .00 Terms r 6. r20 years = 5.35 .454.569. we dispense with the calculations and present the results in the table below.106.436.642.6: Our last example is an annuity problem.075.Ex 4. Thus. although the total repayment is dramatically reduced by the inflation factor. and APV for a mortgage where p0 = $300. What is the monthly payout to you in today’s terms? The phrase. Ex 4.00 if the fixed interest rates are: r30 years = 6% .80 $379.045)($1. A .75% 5.00 $426. The mortgage decision is very much an individual one and should be done considering all the facts within the scope of the broader economic picture.20 $343.57 $2369. ‘in today’s terms”. long-term mortgages have lower monthly payments.35)e ( 0. instead of monthly payments.938. Annuities are simply mortgages in reverse where monthly payouts are made. In this example. They also have a much higher overall repayment.4. 12(e ( 0.5 year to be amortized by age 92.79 .000.60 $504.4. Assume a steady annual inflation rate of i0 = 3% and no early payout. and r15 years = 5. means we let p0 = p PV = $1. m0 = (0.52 $426.05 $2103.00% The table definitely shows the mixed advantages/disadvantages of choosing a short-term or long-term mortgage. For a fixed principal.856.4.454.09 A APV T = 30 T = 15 $646.045) 24 = $6. You retire at age 68 and invest money earned via Ex 4. FIXED RATE MORTGAGE COMPARISON FOR A PRINCIPAL OF P0 = $300.075.396.000.00% M $1797.0% .

In conclusion. our now well-known % inflation factor i = 3 year is used to obtain m0 = $6. And. unfortunately.79e −. and installment payment determination (whether loans or annuities).106. the power provided by the techniques in this short section on finance is nothing short of miraculous. what happens during that time? Inflation! To calculate the present value of that monthly payment. We have used Bernoulli-in-form differential equations to model and solve problems in inflation. say at age 84. 198 . But. and calculus still very much remains a worthwhile tool-of-choice (even for mundane earthbound problems) some 300 years after its inception. These economic and personal issues are very much today’s issues.The monthly income provided by the annuity looks very reasonable referencing to the year 2005. it is a fixed-income annuity that will continue as fixed for 24 years. We have also revised the interpretation of the definite integral as a continuous sum in order to obtain the present value of a total repayment stream many years into the future.80 . investment planning.03(16 ) = $3778.

Appendices 199 .

A. Greek Alphabet GREEK LETTER Upper Case Α Β Γ ∆ Ε Ζ Η Θ Ι Κ Λ Μ Ν Ξ Ο Π Ρ Σ Τ Υ Φ Χ Ψ Ω Lower Case α β γ δ ε ζ η θ ι κ λ µ ν ξ ο π ρ σ τ υ φ χ ψ ω ENGLISH NAME Alpha Beta Gamma Delta Epsilon Zeta Eta Theta Iota Kappa Lambda Mu Nu Xi Omicron Pi Rho Sigma Tau Upsilon Phi Chi Psi Omega 200 .

dy. etc.B. Mathematical Symbols SYMBOL + - MEANING Plus or Add Minus or Subtract or Take Away Plus or Minus (do both for two results) Divide Divide Multiply or Times Power raising Scalar product of vectors Parentheses Is equal to Is defined as Does not equal Is approximately equal to Is similar too Is greater than Is greater than or equal to Is less than Is less than or equal to Variables or ‘pronumbers’ Function of an independent variable ± ÷ / · ^ • { } or[ ] or ( ) = ≡ ≠ ≅ ≈ > ≥ < ≤ x. f (x) or y → dx. f ′(x) or y ′ f ′′(x) or y ′′ x Approaches a limit differentials First derivative of a function Second derivative of a function 201 . dt . t . etc.

a A⇒ B A⇐B A⇔ B ! 1 2 ∑ i =1 n ∫ ∫ a b n ∏ i =1 n ∞ || Sign for n th root Infinity symbol or the process of continuing indefinitely in like fashion Parallel Perpendicular Angle Right angle Triangle Set union Set intersection ⊥ ∠ ¬ ∆ U I 202 .SYMBOL MEANING Step 1. A implies B B implies A A implies B implies A Factorial Summation sign summing n terms Sign for indefinite integration or antidifferentiation Sign for definite integration Product sign multiplying n terms Sign for square root a. etc. Step 2.

SYMBOL x∈ A x∉ A A⊂ B A⊄ B MEANING Membership in a set A Non-membership in a set A Set A is contained in set B Set A is not contained in set B The empty set QED: thus it is shown For every There exists The number Pi such as in 3.7… The Golden Ratio such as in 1.1… The number e such as in 2.6… φ ∴ ∀ ∋ π e ϕ 203 .

18. 4. 11. 9. 7. 14. 2.C. 12. 5. 13. 16. 6. 15. 1. 8. 10. My Most Used Formulas Formula Page Ref ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ 204 . 3. 17.

205 .

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