ALL INDIA SENIOR SCHOOL

CERTIFICATE EXAMINATION 2022-23

APPLIED MATHMATICS PROJECT ON

VARIOUS APPLICATION OF FINANCIAL MATHMATICS ON
BANKING AND INSUARANCE SECTOR

GUIDED BY: SUBMITTED BY:

Mr. Pabitra Kumar Mishra Tushar Khandelwal

PGT Mathmatics Class- XII Commerce

Board Roll no.:12653007

DAV PUBLIC SCHOOL,

CHANDRASEKHRPUR BHUBANESWAR
 DECLARATION

I Tushar Khandelwal hereby declare that this applied

mathematics project is the original piece of my research work,
which is carried out by me under the active supervision of my
teacher, Mr. Pabitra Kumar Mishra. The information has been
collected from genuine and authentic sources. I assure that
this work has not been copied from any other sources.

Tushar Khandelwal
XII Commerce
 CERTIFICATE

This is to verify that Tushar Khandelwal of Class XII commerce

has completed his project and has shown atmost sincerity and
dedication in completion of this project.
I verified that this project is up to my expectations and is as
per the guidelines issued by CBSE.

Mr. Pabitra Kumar Mishra

PGT Mathematics
 ACKNOWLEDGEMENT

I would like to convey my helpful thanks to Mr. Pabitra Kumar

Mishra, my Applied Mathematics teacher who guided me
throughout this project work and has given me valuable
suggestion and guidance for completion of this project. He
helped me out to understand and execute important details of
the project. I eve my gratitude to him for helping me
completing the project.

Tushar Khandelwal
XII Commerce
 SINKING FUND
A sinking fund helps companies that have floated debt in the
form bonds gradually save money and avoid a large lump-sum
payment at maturity. Some bonds are issued with the
attachment of a sinking fund feature. The prospectus for a
bond of this type will identify the dates that the issuer has the
option to redeem the bond early using the sinking fund.
A sinking fund adds an element of safety to a corporate bond issue
for investors. Since there will be funds set aside to pay off the
bonds at maturity, there's less likelihood of default on the
money owed at maturity. In other words, the amount owed at
maturity is substantially less if a sinking fund is established

Financial Impact
Lower debt-servicing costs due to lower interest rates can
improve cash flow and profitability over the years. If the
company is performing well, investors are more likely to invest
in their bonds leading to increased demand and the likelihood
the company could raise additional capital if needed.
Other Types of Sinking Funds
Sinking funds may be used to buy back preferred stock. Preferred stock
usually pays a more attractive dividend than common equity shares

Real World Example of a Sinking Fund

Let's say for example that Reliance Industries issued

Rs.20 billion in long-term debt in the form of bonds.
Interest payments were to be paid semiannually to
bondholders. The company established a sinking fund
whereby Rs.4 billion must be paid to the fund each year
to be used to pay down debt. By year three, Reliance
Industries had paid off Rs.12 billion of the Rs.20 billion
in long-term debt.
The company could have opted not to establish a
sinking fund, but it would have had to pay out Rs.20
billion from profit, cash, or retained earnings in year five
to pay off the debt. The company would have also had
to pay five years of interest payments on all of the debt.
If economic conditions had deteriorated or the price of
oil collapsed, Reliance might have had a cash shortfall
due to lower revenues and not been able to meet its
debt payment.
 Equated Monthly Installment

An equated monthly installment (EMI) is a fixed payment

amount made by a borrower to a lender at a specified date each
calendar month. Equated monthly installments are applied to
both interest and principal each month so that over a specified
number of years, the loan is paid off in full. In the most
common types of loans—such as real estate mortgages, auto
loans, and student loans—the borrower makes fixed periodic
payments to the lender over several years to retire the loan.

How an Equated Monthly Installment (EMI)

Works ?
EMIs differ from variable payment plans, in which the borrower
can pay higher amounts at his or her discretion. In EMI plans
borrowers are usually only allowed one fixed payment amount
each month.

The benefit of an EMI for borrowers is that they know precisely

how much money they will need to pay toward their loan each
month, which can make personal budgeting easier. The benefit to
lenders (or investors the loan is sold to) is that they can count
on a steady, predictable income stream from the loan interest.
Equated Monthly Installment (EMI) Formula
The EMI can be calculated using either the flat-rate method or
the reducing-balance (aks the reduce-balance) method.
The EMI flat-rate formula is calculated by adding together the
principal loan amount and the interest on the principal and
dividing the result by the number of periods multiplied by the
number of months.
The EMI reducing-balance method is calculated using this
formula:

EMI = P * [( r * (1 + r)^n)) / ((1 + r)^n - 1)]

where:
P = Princiapl amount borrowed
r = Periodic monthly interest rate
n = Total number of monthly payments

Examples of Equated Monthly Installment

(EMI)

To demonstrate how EMI works, let's walk through a

calculation of it, using both methods. Assume an individual
takes out a mortgage to buy a new home. The principal amount
is Rs.500,000, and the loan terms include an interest rate of
3.5% for 10 years.

Using the flat-rate method to calculate the EMI, the

homeowner's monthly payments come out to Rs.5,625, or
(Rs.500,000 + (Rs.500,000 x 10 x 0.035)) / (10 x 12).

Using the EMI reducing-balance method, monthly payments

would be approximately Rs.4,944.29, or Rs.500,000 * [(0.0029
* (1 + 0.0029)^120) / ((1 + 0.0029)^120 - 1)].
Compound Annual Growth Rate

What Is the Compound Annual Growth Rate

(CAGR)?

The compound annual growth rate (CAGR) is the rate of

return (RoR) that would be required for an investment to grow
from its beginning balance to its ending balance, assuming the
profits were reinvested at the end of each period of the
investment’s life span.

How to Calculate Compound Annual Growth

Rate (CAGR)?

CAGR=((BV/EV)n1−1)×100

where:EV=Ending value

BV=Beginning value

n=Number of years

To calculate the CAGR of an investment:

1. Divide the value of an investment at the end of the period

by its value at the beginning of that period.
2. Raise the result to an exponent of one divided by the
number of years.
3. Subtract one from the subsequent result.
4. Multiply by 100 to convert the answer into a percentage .
What the CAGR Can Tell You
The compound annual growth rate isn’t a true return rate, but
rather a representational figure. It is essentially a number that
describes the rate at which an investment would have grown if
it had grown at the same rate every year and the profits were
reinvested at the end of each year.

In reality, this sort of performance is unlikely. However, the

CAGR can be used to smooth returns so that they may be
more easily understood compared to alternative methods.

Example of How to Use CAGR

Imagine you invested $10,000 in a portfolio with the returns
outlined below:

 From Jan. 1, 2018, to Jan. 1, 2019, your portfolio grew to

$13,000 (or 30% in year one).
 On Jan. 1, 2020, the portfolio was $14,000 (or 7.69% from
January 2019 to January 2020).
 On Jan. 1, 2021, the portfolio ended with $19,000 (or
35.71% from January 2020 to January 2021).

We can see that on an annual basis, the year-to-year growth

rates of the investment portfolio were quite different as shown in
the parentheses.

On the other hand, the compound annual growth rate smooths

the investment’s performance and ignores the fact that 2018 and
2020 were vastly different from 2019. The CAGR over that period
was 23.86% and can be calculated as follows:

CAGR=($10,000/$19,000)31−1×100=23.86%

The CAGR of 23.86% over the three-year investment period can

help an investor compare alternatives for their capital or make
forecasts of future values. For example, imagine an investor is
comparing the performance of two uncorrelated investments.
 Bonds
A bond is a fixed-income instrument that represents a loan made by
an investor to a borrower (typically corporate or governmental).
A bond could be thought of as an I.O.U. between the lender and
borrower that includes the details of the loan and its payments.
Bonds are used by companies, municipalities, states, and
sovereign governments to finance projects and operations.
Owners of bonds are debtholders, or creditors, of the issuer.

Bond details include the end date when the principal of the loan
is due to be paid to the bond owner and usually include the
terms for variable or fixed interest payments made by the borrower.

Who Issues Bonds?

Bonds are debt instruments and represent loans made to the
issuer. Governments (at all levels) and corporations commonly
use bonds in order to borrow money. Governments need to
fund roads, schools, dams, or other infrastructure. The sudden
expense of war may also demand the need to raise funds.

How Bonds Work

Bonds are commonly referred to as fixed-income securities and
are one of the main asset classes that individual investors are
usually familiar with, along with stocks (equities) and cash
equivalents.

When companies or other entities need to raise money to

finance new projects, maintain ongoing operations, or
refinance existing debts, they may issue bonds directly to
investors. The borrower (issuer) issues a bond that includes
the terms of the loan, interest payments that will be made, and
the time at which the loaned funds (bond principal) must be
paid back (maturity date). The interest payment (the coupon) is
part of the return that bondholders earn for loaning their funds
to the issuer. The interest rate that determines the payment is
called the coupon rate.

Characteristics of Bonds
Most bonds share some common basic characteristics
including:

 Face value (par value) is the money amount the bond will
be worth at maturity; it is also the reference amount the
bond issuer uses when calculating interest payments. For
example, say an investor purchases a bond at a premium
of $1,090, and another investor buys the same bond later
when it is trading at a discount for $980. When the bond
matures, both investors will receive the $1,000 face value
of the bond.
 The coupon rate is the rate of interest the bond issuer
will pay on the face value of the bond, expressed as a
percentage.1 For example, a 5% coupon rate means that
bondholders will receive 5% x $1,000 face value = $50
every year.
 Coupon dates are the dates on which the bond issuer
will make interest payments. Payments can be made in
any interval, but the standard is semiannual payments.
 The maturity date is the date on which the bond will
mature and the bond issuer will pay the bondholder the
face value of the bond.
The issue price is the price at which the bond issuer originally
sells the bonds. In many cases, bonds are issued at par. Yield-
to-Maturity (YTM)
The yield-to-maturity (YTM) of a bond is another way of
considering a bond’s price. YTM is the total return anticipated on
a bond if the bond is held until the end of its lifetime. Yield to
maturity is considered a long-term bond yield but is expressed as
an annual rate. In other words, it is the internal rate of return of an
investment in a bond if the investor holds the bond until
maturity and if all payments are made as scheduled.
Yield-to-Maturity (YTM)
The yield-to-maturity (YTM) of a bond is another way of
considering a bond’s price. YTM is the total return anticipated on
a bond if the bond is held until the end of its lifetime. Yield to
maturity is considered a long-term bond yield but is expressed as
an annual rate. In other words, it is the internal rate of return of an
investment in a bond if the investor holds the bond until
maturity and if all payments are made as scheduled.

FW = (C[1 - (1 + i) ^ (- N * k)])/i + F * (1 + i) ^ (- N * k).

Bond Example
Imagine a bond that was issued with a coupon rate of 5% and
a $1,000 par value. The bondholder will be paid $50 in interest
income annually (most bond coupons are split in half and paid
semiannually). As long as nothing else changes in the interest
rate environment, the price of the bond should remain at its par
value.

However, if interest rates begin to decline and similar bonds

are now issued with a 4% coupon, the original bond has
become more valuable. Investors who want a higher coupon
rate will have to pay extra for the bond in order to entice the
original owner to sell. The increased price will bring the bond’s
total yield down to 4% for new investors because they will have
to pay an amount above par value to purchase the bond.

On the other hand, if interest rates rise and the coupon rate for
bonds like this one rises to 6%, the 5% coupon is no longer
attractive. The bond’s price will decrease and begin selling at a
discount compared to the par value until its effective return is
6%.
 Conclusion

Here, I have come to the end of the

project on the topic various application of
financial mathematics on banking and
insuarance industry. I tried my best to
include all the necessary points that are
required related to the given topic. Some
of the information I wrote in the project
were taken from the internet and I have
also referred to some books. This project
contains information of financial
mathematics like binds, emi, sinking
fund, etc. I do hope that my project will
be interesting and may be even
knowledgeable.
 BIBLIOGRAPHY
 https://www.investopedia.com
 https://www.financeguru.com
 https://www.wikipedia.com
 https://www.groww.com