TOPIC : Basics of Financial Mathematics

MATHS SEMINAR
- Saachi Ahuja
01 Abstract
02 Question

STNETNOC
03 Introduction

04 Interest
05 Types Of Interest
06 Formula's
07
Question along with explanation
08 Conclusion
09 Bibliography
10 Thank You slide
 Abstract
Introduction on financial Mathematics

Interest

Simple Interest
Types Of Interest
Compound Interest

Formulas of compound interest

Explore slide
 Question

Interest is recorded as an expense to the borrower and income to the lender.

Explain the types of interest and justify which is more profitable.
 Introduction
Role of Financial Mathematics
Financial mathematics has a large number of applications in all
economic activities where there is a flow and exchange of goods and
services, exchange of currency, payment of money from companies to
their employees, in short, a fundamental importance in the various tasks
of our daily life where an interaction between people and companies
converges.

It is very important that the entrant to acquire this type of knowledge

understand the implications that "the variations of the value of money
over time".
Interest - It is the additional money besides the original money paid by the borrower to the
money lender (bank, financial agency or individual) in lieu of the money used by him.

Principal- The money borrowed (or the money lent)

Amount- The sum of principal and the interest

Thus, amount = principal + interest

Rate- It is the interest paid on Rs. 100 for a specified period.

 Types Of Interest

Simple Interest- It is the interest Compound Interest - The difference

calculated on the original money between the final amount and them
(principal) for any given time and (original) principal is called compound
rate. interest.

Interest = Amount - Principal

In simple interest, interest for all In Compound interest, interest for all
years is same years is different.

SI is smaller than CI CI is larger than SI

Interest is on principal Interest is on previous principal

If Principal= Rs. ,rate = R% per annum and time = n years then,

i) amount after n years ii) amount after n years

(compounded monthly) (compounded annually)

iii) amount after n years iv) amount after n years

(compounded half-yearly) (compounded quarterly)
For ₹ 10000 at 10% per annum. What will be compounded interest after 4 years ?
Principal = Rs.10,000
Rate= 10 % p.a.
Time= 4 years

Question solved via Simple Interest Question solved via Compound Interest

To find the amount we have the formula, To find the amount we have the formula,
n
Interest=P*R*T/100 Amount (A)=P(1+(r/100))
4
Amount=10,000 (1+(10/100))
Simple Interest = 10,000*10*4/100
A=10,000 (1+1/10)) 4
= 4,00,000/100 A=10,000 (11/10) 4
= 4,000 A=10,000 (14,641/10,000)
A=14,641
Amount = principal + interest
Compound Interest = amount - principal
Amount =14,000
CI= 14,641 - 10,000
SI= 4,000 CI= 4,641
 Conclusion
Hence, with the help of the question it is clear that Compound Interest is more
profitable.

Why is Compound Interest more profitable?

Compound interest makes a sum of money grow at a faster

rate than simple interest, because in addition to earning
returns on the money you invest, you also earn returns on
those returns at the end of every compounding period, which
could be daily, monthly, quarterly or annually.
That’s why compound interest causes your wealth grow faster.
 Rates Of Interest
Equivalent Nominal Effective
Annual Equivalent Rate is a figure which
shows what the interest rate on an
account would be if interest was paid for a
full year and compounded.
When interest is compounded more than
once in a year, the given Annual rate is
called nominal rate.
The rate of interest actually earned is
called effective rate
via the example, nominal rate = 4% while
effective rate is 4.06% and equivalent rate
=4.06%
Explore Slide
Example- Consider an amount of Rs. 10,000
invested at 4% interest compounded quarterly.
Now this interest of 4% is divided into four parts of
1% each. An interest of 1% as charged at the end of
one quarter.
Calculation for finding 1% interest at the end of
each quarter
Rs. 10,000 (1+ 1/100)=10,100
Rs. 10,100 (1+ 1/100)= 10,101
Rs. 10,101 (1+ 1/100)=10,102.02
Rs. 10,102.2 (1+ 1/100)=10,103.03
Hence the total would be 10,406.05
This is equivalent interest rate of 4.06%
compounded annually because:
Taking rate as x
x/100*P=C.I
x/10,000=40605
x=4.06%
 YHPARGOILBIB
01 Applied Maths book by M.L Aggarwal

02 Techoo

03 Topper

04 Corporatefinanceinstitute.co
m
THANK
Have a nice day
YOU