FINANCIAL MATHEMATICS LIST OF FORMULAS. CHAPTER MEASUREMENT OF INTEREST ‘SIMPLE INTEREST +in A(n)= Pxain) accumulation function with spe interest mount function OR fiaure value ($) rincipal OR present value imple interest rate (26) n= investment period (in year) © n= total momths/t2 n= total week/32 Pe oiisase? wie T= amount of imterest earned (RM) 1, =a(n)— (01) Ny ant) aa) ‘during n-th period amount of inerestearmed inn period (RM) aa—1) pels a1) 1, efesve rate of meres forthe period 0) ‘COMPOUND INTEREST a(n)= (1+ i)" Aen) = Pxa(n) {a(n} = accumulation fo with compound interest tn) = amount function OR future value (8) P= principal OR present value = compound interest 4) ‘n= investment period (im year) & n= total months/12 & n= total weoks/52 re I= Pati" ~ ee oitsases 1 = amount of interest earned (RM) ‘uring n-th period 1, = amount of interest earned in! period (RY) an) — a(n 1) a(n —1) 4, 4,= efectve rate of interes for then period (%) © a rate of compound interest and an effective vate of interest are identical Re trisase? oe = discount factor for compound interestDISCOUNT RATE Simple Discount Rat 1-dn A(n) = PXa(n) accumulation function with simple discount ‘amount function OR future value (S) P= principal OR present value d= simple discount rate %6) ‘n= investment period (in year) (otal months/12 total weeks/52 . * o1rsa seo ae 1 amount of interest earned (RM) (nm) — a(n ~1) e™ a 2 uring u-th period 1, = amount of interest earned in n® period (RM) a(n)-a(n-1) a(n) effective rate of imerest forthe n* period (6) P=s(1-an) a PH oifease7 oe Compound Discount Rate An) = P xan) ‘an)= accumulation fi, with compound discount ‘A(n) ~ amount function OR future value (5) P = principal OR present value = compound discount rate (6) ‘n= invesoment period (in year) n= total months/12 n= to1al weeks/S2 I-s-P 1=Pa-ay*—P e ae ortaased 3 1 eonount of interest earned (RM) ot 2 uring n-th periog 1, amount of interest earned inn period (RM) a(n) a(n) » aa) ftv rate of meet forth” period) P=S(i-a)"Equivalency 4 (will produce same P and same $) Isisa—ay? NOMINAL RATES OF INTEREST AND DISCOUNT Nominal Interest Rate | See ae we oe Er mes oe = Ode 2 Eee aden ees £9 = nominal interest 'm = interest consersion period ‘monthly m = 12 quarterly semi-annually m once every m years m= In 2m ote 2 no fH Lhe 203, el tw Let j= S=P(t+ jy" Use j 0 make nominal interest rate identical wth compound interest rate % M1 becomes an investment with compound Inerest rave of j invested for mn years Equivalency 2 (will produce same P and samo S) x Se z = fe Fa =e = 9.2058 Be 8, ol oo f= nominal discount 'm~ tterest conversion periodvm em ve Se te ia a tm ee i Equivatoncy 3 (will produce same P and same 8) FORCES OF INTEREST AND DISCOUNT 4080 Aw alt) 2 Joa When 2,0 then nb Equivalency 4 full produce same Pand sare 8) te} es oer 384.5 Present Value Pa(l+i)? 404i) +i)7 Accumulated Value S=0+i 0+ ease)? DETERMINING TIME PERIODS Exact Simple Imeres Leap Year) _days 366 Exact Simple Interest (Non-Leap Year) p= tetual days 365 Ordinary Simple Interest ‘assume _days 36 Banker's Rule METHOD OF EQUATED TIME Ryty + Ryty tt Rely Ri+R tnt RyCHAPTER? ‘ANNUITIES ANNUITY IMMEDIATE. Present Value NePayment ANNUITY DUE Present Value R No Paymeat RE He te ee) ‘Remember: Ast Term- Term After theLast Term Accumulated Value Rivas!) +4049") a+p*-1 aa 2a! Byanasosarneorasyt] a+a™-a+0 Sot atoratan2 =aya+o" (+i) ile), Before using these formulas, make sure that: + It follows seme payment pattern with ‘same amount of payment thas sume conversion period of every yearPERPETUITIES © Perpetuity és an annuity. whose payments ‘continue forever tll infinity (unknown time) © Monty: has present value, mo accumulated valle since the end time ts unkniown Porpetuity immediate NoPaymet RRR } Rea Ray = RAV 4 +n) eer mana a) Nominal interest in AnnuitiesUNKNOWN FATE OF INTERNE: Nowion Rapheon Horatio Mathod Amey =k) hel) tuna oplatieot Tiel EATEN) boty jah a) ifispretetataal | ee Annuity immediate eee ee. " Pa nL ! — PV wal my AV wth (Lait " We ‘Annuity Due — 44) We anit We Porpetulty immediate Scions I a Wet i Porpotuity Ove GAUL Tn Ta or 1 bay WeANNUITIES PAYABLE MORE FREQUENTLY THAN INTEREST IS CONVERTIBLE taf Annuity Immediate 1 eet RRRRRERRRRRER = : si 04" fo 2 Sa Fem Sa ‘Annuity Due TG Be gu 1 RRRRERRRRERRRR BAD Rae Perpetuity PAYMENTS VARYING IN ARITHMETIC PROGRESSION Annuity Immediate Fre pag Pig P40 m9 RHE I Where P= the payment Q = the increment amount (fixed amount) Us)q, =U U)5, These formulas can only be used when ‘the Ist payment is I and the increment ix 1 per peviodThese formulas can only be used when the Ist payment is n and the decrement is 1 per period Porpetuity * Changing i in the denominator of any of the above formulas to d will produce values for annuities due Continuos payrends CAunumes, PAYMENTS VARYING IN GEOMETRIC PROGRESSION ava te (4k) ik Where k= the percentage of increment Ik = then PV =nw Fopetuty dtc mediate,Where Ris the periodic repayment of oan R= Principal, +1, — tf ae a By = Ra (1+ i)! — Rs, Where Bis che ousanding balance ofthe loan Principal, Principal, = Rif ‘Amortization Schedules Year ] Payment | Interest | Principal | Loan Amount | Paid | Repaid | Balance R I iH Ee ger =on | om ‘Sinking Fund Total payment = Ree + ly Sinking Fund Schedules Tear | Interest] Siting] Interest | Amount | Loan Paid | Fund | on SF | in SF | Balance ha |e | 4, ch Re [ee eF oe TER 4 BONDS AND OTHER SECURITIES Types of Securities 1 Bonds 2. Preferred Stock 3 Common Stock BONDS Basic Formula P= Fray +0 Promiumidiscount Formula P=C+(Fr-Gi Base Amount Formula P=6+(C-Gy" Makeham Formula Pan £(c-n) Where P= the price of a bond = the par value face amount C= redemption vue = coupon rate r= the amount ofthe coupon 18 the modified coupon rate (Fr ~ Cx) 1 the yield re n= the number of coupon payment k-or G = the base amount (Gi = Fr)