CHAPTER 6

MATHEMATICS OF FINANCE
QUICK REVIEW OF THE CHAPTER
Interest. The simple interest on a given principal (P) at a given rate
and the time () is given by
nterest (7)
rt
where [I= Simple interest; P= Principal; r Rate of interest; t Time (in years)

Amount, A=P + I = P +Prt =

P(1 +
rt)
2 Compound Interest. Let the principal P be invested for n years at an annual
m times a year. 1 hen amount at the end of n years will
ale of r% compounded

A-P1 at an annual rate of interest r compounded

amount A at the end of n years
h e compound
ly is

A-P1100
Lompound Interest. CI =
A -P The compounded
amount A ot the
1 Continuously. continuously
Compounded
rate of
interest
r compounded
tncipal P " t s
dt an
annual

n by:
Bven by:

Pe" (in case of single paymen)

9A

A= Pe" dt (in case of annuity) A ot

amount the
compounded
rates.
The
and
next 12 yeas
a
mpounded amount at changing
at c interest r
Ount of
a P for
rate
annual
a t an
s
rate of ininterest
Tate of T2 given by
A P ( 1 + r)"1 (1 + T)
vear
interes
Kate of interest, Der corversion perioisPe
rate of
w h i c h
the

Number
compound

The by
rate
Nominal
Interest.
of
r e c t i v e
Rate
interest, while
te
acual
a t e

f interest.
o f m l e r s i

ey15 called ethe 10 Hominal rate

called
of
the
effective

Quring each year is

7
 UNIVERSITY SERIEG
DELI

CBCSJ
(rog)
[B.Com.
98 Shiv Das Effective
Rate and the No Nominal Kate
between the p, Then, the no
to the nominal
Relationship
interest Teg
Corresponding ninal rate r
com effective rate d
rate of
The effective 1s given by: 11. Deprecia
timesa year
or Balance She

The v a l u e o f
Effective rate, Tot1 value. The dift
(1+1)-1
the t o t a l d e p r e
nominal rate;
.wherer given
m number of convers1On or
compounding periods pe 12. Deprec
depreciated at
i interest rate per period
nth
is compounded continuously, then end of the
When the nominal rate r
Depreciatio

Effective rate, e e
Notes:
0 If interest is compounded annually, effective interest rate for the year will be equal te
interest rate per annum.
() If interest is compounded six monthly, quarterly, monthly or daily, the actual annual re
interest kncwn as effective rate will always begreater than the nominal rate.
7. Present value. The
present value P of amount A due to the end of n
peni
at the rate of r per period is given by
P-
P
A(1 +
r)"
S implea
Q.1. A ma
For
continuous compounding,
) P- Aem (in
the present value is given by 20,400. If th
case of
single payment) A Sol. Using
(it) P
Ae" (in case of annuity)
8. Discount. A
discount is a deduction
allowed
the value of an obligation is known at some future
on adate, the proct
igation
Here A =
its- value at some earlier financial o of find
9. Present date is called
discounted
value of
as bank
discounting
Discount Rate.
a
The present obliga P
discount is value
P= A(l dy"
-
given by
P
WhereP= present value of an obligato p Q.2. Fine
amount to be paid at the end
10.
Nominal Rate of discount rate
per pen
annum, wB
Ln= time (in
Discount. When discount
the stated rate of
Discount,
is Effective Rate of
years)
and
Sol. Here
discount converted more Disco ach y r
rate of discount
discount.
is called
actually obtained frequently
nominal rate of than o
a
and the
during the year is disc
If det
called the fectiv
rae
denotes the Using th
convertible n times effective rate of discount
a normalr a t

1-dut1
year, then to corresponding he

When the Com

nominal rate d is
deff1-ed convertibleC Continuously. 180 Ho
Q.3.
continuously then then dis give comp
Sol
 CHAPTER 6:
rate d converted MATHEMATICS OF FINANCE99
hern the

Nerate dt
nomina

15 Called
continuously equivalent
torce of
count.
and
to a
1 . preciation.
Depreciation is an
allowance made
given
for wear in
Ralance Sheets, normally and tear. estimates, valuations
of a depreciable asset at the end of
Thevalue its useful life
is
erence between and the scran valcalled ethes
the
e differe original cost
scrapP
ot the asset.
a l depreciation
Value. If book value B is
12
1
Depreciated
at the rate of r over i
subject to reducing balance
depreciated time period then the
depreciated v
tth time period is given by
of the D =
B(1- rn
Depreciation value, where B
original book value
Tdepreciation rate
Ln-number of time period (in years)

SOLVED NUMERICALS

Simple and Compound Interest

has balance of
Q1. A man opened a savings account 3 months ago,
now a

t20,400. If the bank pays 8% simple interest, how much money was deposited.

Sol. Using the formula of Simple Interest

P=
A
A P(1+ rt) 1+rt

t =3 months 12 4 ears
ere A=20,400, r= 8% =
0.08,

20,400 20, 400 20,400

P- 1.02
1+0.08x 1+0.02
4
10% per
months at
(money deposited)- R20,000 1 year 6
2 Find the compound interest R40,000 for on
semi-annually
inum, when the interest is compounded
-annually

L Here A= 740,000, r
=
10% p.a. 2 5%

years x 2
3 half years
n1 years
sing the
the formula, A - P(1+" x (1.05)3
40,000
40,000 (1 +0.05) 40,0006,305 15
w o r

Com40,000 x 1.1576 R46,305 if

money

Compour
746,305- itself

A P= double
CI
-

=
to
rest, principal

it take for a
oes
t e r e e d

Let princip p.a.

en?, r=18%1 P.a.0.18
A 2P
Cpal be P then Amount
 CBCS| DELHI UNIVERSITY ES
100ShivDas [B.Com. (Prog)
the formula: A
=
P(1 +
r)"
Using
2P= P(1 +0.18)" 2 (1.18)"
Taking logarithms on both sides, we
get
log 2 = log(1.18)" log 2 n log 118
0.3010
log2 0.0719.1o04.19 years (approx.)
log1.18
Q. 4. An account fetches interest at the rate of 15% per annum
continuously. Tanu deposits 1,500 each year in the account. How compound
be in her account after 15 years? Given e3= 9.487. much
Sol. Here P = R1,500, n= 15 years, r= 15% = 0.15
Required amount due in 15 years is given by

A -

Pe"dt= 1500015t dt
15
0.15t 1,500
1,500 0.15 0.15 x15
-10,000[e225 -

1] =

10,00019.487-1]
10,000 x
8.487= 84,870
The
Q.5. A sum
required amount is k84,870
of R60,000 is invested in a
scheme
6%0 per annum which provides for intert
annum compounded half-yearly the first three years and at
for
compounded continuously
amount receivable for the next two
Sol. Here P=R60,000maturity.
on years. Calcut
2010M

6% p.a. 3%
half yearly =0.03 half
113 years=3 2=6 half x yearly
T25% P.a. years
M22years compounded continuously =
0.05
Amount received on maturity
P(1+n" e
60,000(1 +0.03)6 x 0.05x2
60,000(1.03)6 x e0.10
=

60,000 x
1.194 x
Q. 6. A 1.1052
is R79,176.52
certain
A 1 0 1 . J

sum ot
pounded money invested
Sol. Herequarterly.
co of 9%
n= , How long will it take for atthe rate of intere a
nterest
n d e ( 0 0 A

Let Principal be P r9% compounded money to doud

then amount
A =2P quarterly= 0.09 qua
Using the formula, A P(1
r
=
+ compou
2P P(1 +0.09)
Taking logarithms on both sides, 2 (1.09)
we
log2= log(1.09)4 get
log2-4n log 1.0
 CHAPTER 6: MATHEMATICS OF
FINANCE 101
log2
0.3010
4x0.0374
0.30102.01 years approx.
0.1496
201 years

n 4log1.09 the rate of interest is assumed to

hove solution
above be 9% per
finterest
of is
15 taken
taken interest as o9% per annum
as
per quarler,
f the rate becom
me
compounded quarterly
H o w e v a
will

equation () =
4n log(1.0225)
henog 2-log[1.0225
pr
0.3010 7.7979
10.0386
=
= 0.0386 n or 7.8 years
0.3010
pound interest on a certain sum ot money for two years is 126
0 7T h e c
interest for two years at the same rate is 120. Find the rate of
d simple
2010 E
=
2 years
R126; S.l. =R120;
interest. n

Sol.Here C.I. = .wherelr is the rate of interest per rupee pa.

CIL PI(1+ - 1 )
126 PI(1
+ r)-1]
Prt
)
=

and S.l 120 2Pr

x 2 = 2Pr
120Pr

Dividing () by (17),
we get

126 PI1+7-1
2_(1+r+
120 2Pr2r-1) Das

20 2r
21 r(+2)
212+2r 20 2r

2r 20r + 40 =
42
21 r+2
20 2 10%
2 100
=

20 10
20r=42 40 2 becomes
{6,655
in 3 years
[2010 E
interest

at compound
A Certain sum of money
Find the rate
of interest.
76,655
= 6b65.5

in four years.
Sol T
interest
7,320.50-
= of

6,655 in one year

rate
the
1.Interest as r%
per
annum is

6,650 x 00
665.5
E
10 per
.
r
665.5 itselt 2011 R
100= 10% p.a. quadruple

6,650 sum
to
for a
9. It will take how may
a n y
years

Simple Interest.
Let
.
the principal lP DE X.
imount, A = 4X

ple Interest (S.I.)=

A -P = 0.1
Rate ot interest, r= 10% P.a
 DELHI
UNNIVERSITY SERIES
CBCSJ
102Shiv Das [B.Com. (Prog)
Let the time be
denoted by ' 4x x(1 +0.1t)
A P(1+ r) 3 0.1t
41+0.1t

s0 years
Time,t 0.1
Thus, the sum would quadruple itself @10o per year in 30 years
Q. 10. How long will it take R700 to amount to R2,270 at 8% comn
8 %compounde
semi-annually? A - 2,270 2011
Sol. Given: P= R700 r= 8
Let time () be x years
p.a. =0.08

A-P1+m () ..wherelm= Number of conversion periods

per ye
Here m= 2 because interest is
compounded semi-annually
Putting the various values in
(), we get
2270= 700 1+ 0.08 2270
2 700 (1 +0.04)2
2270
700(1.04)2
Taking logarithm on both sides
log 2270- log 700
2r log(1.04) =

3.3560-2.8451 2x(0.0170)
X
0.5109 0.5109 0.034x
0.034 15.05
years =15 years 11
Q.11. A man
wants to invest days (approx.)
10% per annum 5,000 for 4 years. He
may invest it at compound interest,
amount ar
may invest the a
10.5%% p.a.
Which investment will compound accruing at the end
or
ohe u a r t e r or

Sol. First alternative: give him betterinterest accruing at theeae

enu ach ye
result? o 2011
P=R5,000
t=4 years
T= 10% p.a. =
0.1
m4
A-P14m (interest compounded quarter

A 5,000 1011
4 5000(1 +0.025)16
5,000(1.025)16-
-

Second alternative
P=t5,000 R7,422.53 (approx.)
t=4 yearTs T=
10.5% p.a.
A= P14 m=1 (interer
=
0.105 anually
 CHAPTER 6: MATHEMATICS OF FINANCE 103

A 3 0 0 01/ + 0 5 )
a g

0.105 5,000(1.105)* = R7,454.51 (approx)

1 better result.
dalternative
would give him
bank for b years at 8% per annum, and
secon d 740,000 from a
he
at
80 per annum compounded continuously,
Rao bont to a friend Find or loss to Rao on this
the gain
a m e amoune
time.
time.
h es ä m e

same
neriod of
period
of
2011 E
for the
from the Bank
T= 8% p.a. = 0.08
e.Borowing
t= 6 years
pa740,000 Compounded
annually)
i n t e r e s t 1s

1 (since

40,001,008
A-P1 =
R63,475 (approx.)
= 40,000(1.08)°
40,000(1+ 0.08)°
friend
to the
e IL Lending t=6years
P=40,000
xb

A-P1 = 40,000/1-008

continuously
r =8% p.a. compounded
continuously
O08 rupee
compounded
per
40,000.e00Sx6
A Pet table of e)
=

x 1.6161 (from the

40,000 x e48 =
40,000

t64,644 (approx)
R1169 invest the amount
Güin =R64,644 763,475 for 5 years.
He may or
tne
13 to invest R10,000 of each quarter
Wants tne end atat
the
interest accruing interest accruing
compound 2012 E
compound
tor hehe may invest at 10.5% per
annum

better return
ot each caWhich
year investment will give him = 0.1
r= 10% p.a.
rincipal, P= F10,000 Kate,
he, t= 5 years
quarteriy)
compounded

(interest

A-P1 r

m
Where
m=4

(1.025)20
10,000
0.025)20
15 (1 +

=10,000 1 1 0 , 0 0 0

0,000x 1.638616 716,386.16 10.5% p.a.

(1nterest
=
0.105

c o m p o u n d e da n n u a l l y

the a,P=10,000 =

r
Kate,
f 5
years
0,105 x3
APl1+ 10,000
alternas.10.000(1.6474467)=T16474.467 (app
10,000(1.1
Second atiye would give him better e
 DELHI UNIVERSITY SEDIIES
104Shiv Das [B.Com. (Prog:) CBCS]

Q. 14. If interest is compounded continuously, at what

principal P double in 10 years? Tale

rate compounded continuos
Sol. Let r be the annual interest nuously
Then, 2P= Pel0r elr=2

Taking logarithm of both sides, get

we

10r log e= log 2

4 . 3 4 3 r = 0.3010
10(0.4343) r= 0.3010
0.3010
4.343
0.0693 or 6.93%
Annual rate of interest compounded continuously= 6.93%
Q.15. Mr. A borrowed R20,000 from a Bank for 6 years 8% Der .
compounded quarterly and 18,000 from a friend 8% com
continuously for the same period of time. Find his total liability after sire
six ye
Sol. Borrowing by Mr. A from the bank (It is
bank);
same
thing as
money lent b
Given: Principal (P,)= z20,000,
Rate of interest (7)= 8% p.a. = 0.08
Time ()=6 years
No. of conversion periods in a
year (m,)=4Since interest is compounded que
Amount (A,) -

P[1+ m
-20,000 1+ O0884x6 = R20,000(1 +0.02)

=R20,000(1 +0.02)24
Borrowing by Mr. A,
-R20,000(1.02)24- 732,168.74 (app.)
from a
friend (It is
friend):
Given:
same
thing as moIey by
Principal (P) =18,000
Rate ot interest
Time () 6 (r)=8% compounded
Interest is
years continuously =0.06

mount
compouned continuously
(A) =

P2. en
= R18,000.e05x6
e048
=

18,000.
R18,000(1.6161)
-

Total liability after

6 29,089.80 (app.)
years =

32,168.74+ 29,089.80
Q. 16. Rohit
deposited R15,000 inR61,258.54 or
R61,259 (app-)
compounded
during secondhalf-yearly
bank for 3
during
a
years
i n t e r e s t
@
ter

Find the balanceyear

and at
10%
first year,
12% offeringd q
years. compounded
after 3 compou thir
Sol. Given:
Principal continuously au
Rate of interest for (P) R15,000
=

Time ()=l year first year (r)- 6%

p.a.= 0.06
 CHAPTER 6:
MATHEMATICS OF FINANCR 105
Since interest is
2

f interest tor second year (r) 12%

p.a. =
0.12
compounded half yearly
T i m e
( 2 ) 1 y e a r

Since interest is
mt,4

Kat
interest (3) tor third year= 10% p.a. compounded quarterly
Time( 3 ) 1year

Interest
is compounded continuouslu

Balance after 3 years (A)

=
P1+ ersts
m)

15,000 1+ 1+
=
R15,000(1 +0.03)2 (1 +0.03) (1)
=
R15,000(1.03) (1.03)4 (1.1052)
= R15,000(1.03) (1.1052)
=
R15,000(1.19405)(1.1052) R19,794.96 (app.) =

3
Thus, the balance after years
R19,794.96 (app.) =

and the bill is renewed after

Q.17. A man borrows T50 from a moneylender 210. After how much time the amount of bill will
increase
half year at an
become R7,500? 2014
Sol. Suppose it takes t years for the amount of bill to become R7,500
Then,7,500 750(1 + 0.21)2
been multiplied by 2
Since bill is renewed every half-year, t has
Dividing by 750

10 (1.21)
Iaking logarithms on both sides,we get
log10- 2t log 1.21
1 = 0.1656t
1 21(0.0828) or

t 01656 =6.04 (app.) to become 7500.

Thus, it takes about amount of bill
about 6 years for the 9o converted
s will become 20,000at 2014
18. In how many quarters 10,200
quarterly? Amount,
A = 20,000

Given: Principal, P = R10,200; quarterly

O Interest, r = 9% = 0.09 interest is

compounded
i m e in yeas

N0.of conversion in a year, m

= 4.|Since

lime, t= ? perno
O d s

Formula: 2 0 , 0 0 0 =1 0 , 2 0 0 / 1

A-Pl1+ 100-(1.0225)"
20,000 51
10,200 (1 +0.0225)
 DELHI UNIVERSITY SERIES
CBCS|
106 Shiv Das [B.Com. (Prog.)
both sides, w e get
Taking logarithms on
log 100- log 51
=
4t 1.0225
log 2-1.7076 =
4t
(0.0098)
0.2924
0.2924 0.0392t t=
0.03927.46 years (app)
Time in quarters = 746 x 4= 29.84 or 30 quarters (app.)

Q. 19. Mr. X deposited R10,000 in a Bank for 3 years offering inte.

compounded half yearly during first year, @ 12% compoundete
during second year and 10% compounded continuously durino rterh
Compute his balance after 3 years. third year.
Sol. Required balance after 3 years is 2008 R, 2014
S, Amount 10,000 1+0 101210
=

10,000(1.03)2 (1.03) eD.10

= 10,000(1.03) 010

Q.20. Mr.
=

X deposits
10,000(1.03)6 (1.1052) F13196.67
rate of 10%
R10,000 in a bank for 3 years. Bank offers
interest at the
p.a. compounded
and 13% p.a. quarterly, 12% p.a. compounded semi-annualy
after 3
compounded annually for 3 years respectively. Find the
years and total interest earned. balance
Sol. Given:
Principal (P) R10,000 = 2015
Rate of Interest (r) =
10% p.a. =
0.1
Time
=4
(t1)=1 year
Again, Rate of interest (r)= 12% -|Since interest is compounded quar terly
Time(t2)=1 year p.a. 0.12 =

m22
Again, Rate of interest Since
13% p.a. =0.13 interest is compounded sem
nnualy

Time (t3)=1 year (ra)=

1
Balance after 3
years (A) - lnterest is compounded annu
P1+
1+ 1+ 3 Xt3
m3
-

10,000 1
10,000(1 0.025)1+
=

+
(1 1015
10,000(1.025) (1.06)- +0.06)2
=

Total interest (1 +0.13)

Q. 21. A earned= A P (1.13) -

R14,014.76 (approx)
=

person
interest per annum has
k5,000 R(14,014.76
to be
10,000) 4,014.70
annum
compound compounded deposited
half in offers
bank. One offers a
years. Which annually.
bank must
be Calculate the yearly,
chosen while another vecf 9% P

bothban
the
returns
bannks yea
rer
as to in both the
get maxim ar
 CHAPTER 6: MATHEMATICS OF
ed it
if iinvested
n v e s t e d in the first bank: FINANCE 107
obtained
mount
pzt3,000, r= 8%, 1 2x100U04 half yearly

3 3x2=6 (half-years)

A=Pl +1
A 3000 (1 +
0.04) A= 3000
R3,796 (ap (1.04)
A3000(1.2653)=
:tainedifinvested in the'second bank:
Amounto
9
i 100 0.09,
P=R3,000,
n 3

+0.09)3 A 3,000 (1.09)

A 3,000 (1 73,885
=

A 3,000 (1.2950)
mestment must be done 1n the second bank for maximum return.
a 2. If interest is compounded quarterly at 12% p.a., how much time is
a sum of money
to double itself?
ired for 2015
beP
Sol Let the principal Rate of interest () = 12% p.a. = 0.12
:Amount= 2P (Given)
Time() Since interest is compounded quarterly
m

A-P1 m 2P-P12
1.034*
2 (1 +0.03)#
=

laking logarithm of both sides

log2= log (1.03)4 0.3010 4t(0.0120)
log 2 4t log(1.03)
t a 3 =6.27 years (approx.)
t
0.3010 0.0480t 0.0480 les
2.03 (approx). Thus, Princip au s due

calculator, (1.03)24 is equal to and the

calculator

itself gits Difference

between logarithm
OXmately. four places ony
values upto
to the fact that t h e logarithm table gives
at
two years
at 12 o per annum,
(2016
anount of 2,000 after
pounding is done:
) Annually
(i) Semi-annually

u) Quarterly
oL. As
i o ) Monthly.

we
know,
nount
.where ADicipal
Princip
decimal
form)

interest (in in
a
ye
Kateof
compounded

is

A-Pl1+ m) Time in yemes interest i n t e r e s t

times

N u m b e r of
t - 2years

uiven: P- 2,000, r=
12% p.a.
= 0.12,
annually,
n

compounded

est is
2,000 (1 +0.12)
A 2,0001+00.12
80
2.000 (1 1212= 72,508.c
 DELHI UNIVERSITY SEPI
ERIES
108Shiv Das [B.Com. (Prog:) CBCS]

When the interest is compounded semi-annually, 1=2

(i)
A 2,000|1+ 2,000 (1 +0.06)4

2,000 (1.06) =
2,524.95 (app.)
(ii) When the interest is compounded quarterly, m 4

A 2,000 1+ 2,000 (1 +0.03)3

4
2,000 (1.03) 2,533.54 (app.)
(i) When the interest is compounded monthly, m = 12

12 12x2
A -2,001: 2.000(1 +0.014
2,000 (1.01)24 R2,539.47 (app.)
Q.24. How much should be invested at 6% p.a. that
amount will be
so
after 4yeas
25,000 when the interest is
compounded:
() quarterly;
(ii) Semi-annually.
Sol. Given: Rate of interest
() 6% = =
0.06; Time ()= 4 years;
Amount (A) R25,000 =

Case I: Interest
compounded
Let the Principal be quarterly,
P and m4.
As we know, Amount (A) =

P|1
25,000 P 1
25,000= Pi(1 +0.015)16
25,000 P(1.015)16
25,00025,000
i1.0156 1.26899
.
P= 19,700.71 (app)
Case I1: Interest
compounded
Let the
Principal be Pzsemi-annually,
and
As m2 2
we
know, Amount
(A) =
P,| 1+
25,000=Pzl1006
2
25,000=P2(1 +0.03)s
P2 25,000 25,000
(1.03) 1.26677 25,000 P2(1.03)
P2-19,735,23 (n
 A sumo f gmoney wested
able
at 20%o p.a. AIHEMATCS OF FINANCE
for
e
interest were payable semi-ann
nteres

semi-annually instead
two years.
of
It
would yield
109
be PP
um be Sum here means the annually. Find the
20%-0.2; Principal)
sum

the
Let interest (r)=
Rate of
s t compounded seml-annually, m-2Time (-2 years 2017
m
Amount(A) P|1+ P1.02
-P(1 +0.1)P(1.1 -

interest compounded annually, m=1 P(14641)

-P1 (1.92
Givent Ag-A2 482
-

P(1+0.2) P(1.2 -
=
P(1.44)
P14641)- P(1.44) = 482

P(14641 -144) =
482
0.0241P 482

Thus, the
P-O02420,000
sum is 20,000.
i va s
ominal and Effective Rate of Interest
. State the relationship between nominal and effective rate of interest:
) If compounding is n times in a year;
I f compouding is continuous. (2017
s Relationship between the effective rate and the Nominal rate of Interest.
e
ompound rate of interest (annual) is called the nominal rate of Interest, the
1s caled
a l rate by which the money grows during each year
ctive rate of
interest.
) The effective to the nominal
rate r

rate of interest r corresponding

ofnverted n times a year is given by
Nominal rate
opoundins
penods peryear

Effective rate, -(1-1 where

i Interest rate per
pernod

then
- (1+ i " - 1
) When continuously,

the no nal rate r is compounded

Efective
tective arate, -1 for the year
i l be
equal
to

rate rate
interest annual

effective
annually, the actual
aunded or daily, ra
monthly
nounal
ilerest
than the
the
than
no
Ompounded six monthly,
q u a r t e r l y ,

greater
be
inter always
 Q.27.Which is better investment, 3o per year compounded
unded mon
per year simple interest? monthly or
3
Sol. Here r=3%= 0.03, m12 (conversion periods per year
U.03
i- 12 00025
Effective rate, r (1+)-1-(1+0.0025)12- 1
= (1.0025)2- 1- 1.0304 1=0.0304 3.04%
Hence, the Simple Interest of 3.10 per year is the better
Q.28. A bank pays 6 per cent per annum compounded investment
placed in savings account and the quarterly interest is leftquarterly.
in the
1f tsam
much money is in the account after three account
interest?
years? What is the effective rae
Sol. HereP -
78.000
n 3 years 3 4 12 quarters
= x =

6% pa. -15% quarters 0.015

i-

CL- PI+)"-1]
= 8.000[(1+0.015)-1]
= 8,000[(1.015)12- 1

Effective
=8,8,000[1.195
=

000x 0.195= R1,560D a s

rate of
-

1 -I: (q015-116

interest
=

(1.015)-1=0.06136 per rupee p.a.

2. 29. What is effective rate of interest?
=
6.136%%
Which is better investment-9% converted
annually?2 monthly or 9.1 %
converted2010
Sol. Effective rate of interest.
The actual rate
during each year is called effective rate of interest. by which the money
&

Efectiverate, a-(1-1
given ofnominal rate
- (1+)-1 where no compounding penosperyr
Nhich investment is better. 1he ettective
rate nverte
monthly is given by corresponding to 9 cu

112 -1-(1.0075)12-1-0.0938- 9.38

The effective rate corresponding to 9.1% converted
semi-annually.
- 1 0.0-1-(1.0455-1 - 0.09307
The first investment
is better. 9.316
 cHAPTR MATHUMAnes OF INANCH
annum com 111
YS penent Per
the
ded
quarterly. I
Aank
i ns a v i n g s v o u n t
interest is left in the tI8000 is
acount, how
AN
awount after three years? Also, caleulate the effective rate of
ChenP tI800
t 3 years r6% p.a. 006
2011
mterest is compounded quarterly)
e-4(sNe
At 18.00100
-18.0001+ 0.015)-T21,521 (approx.)
interest
rate of
Sihctve

-1-1-1
- (1+0.015)-1-(1.015) -1
annum
-
6.14% (approx.)
0.06136 per rupee per at the rate of 6% per
annum and
interest to its depositors
31. A bank gives
rate
twice a year.
Calculate the effective
credited to the account 12013
Se interest is the bank.
dinterest paid by where
Effective
r
rate of interest
Given nominal rate
of interes
of conversion penods

S,-1-1
mNumber

twice a year
Given: r= 6% p.a. = 0.06
is credifed
iv
*interest

m2 T(1+0.03)-1-(1.03)-1

100
2 -1
1.0609 -1-0.0609 6.09% the bank is 6.09% p.a.
paid by quarten
of interest compounded 2014
Thus, the effective rate
9% per year
Which s is better investment,
32.
9,25%% effective? q u a r t e r )

Sol. It investment: interest

is
compounded

T=9% p.a. = 0.09 | 5 i n c e

m4
1-1-(1+ 1

(1+0.0225) -1 (app)
(1.0225)-1 (app.) = 9,31% first
c a s e

0931-1 =0.0931 or
the
in
monthly
Ind Investment nded
g r e a t e r
2016

value
of r
i15
s
B
T9.25% better
since
the
12% per
year
is

1250
Q.3 W h i e e n t

better
i n v e s t m e n t ,

compounded semi-annuai
I m o n t h l y

15
er
year
Sol. Option compou
I: 12% per year
Wehaon
We have, 12
r =12% 0.12
 DELHl UNIVERSITY SERIEc
(P'rog) CBCS|
112Shiv Das [B.Com.

Effective rateofinterest(r)=(1+ 12
+0.01)12-1 (1.01)12-1
-= (1
1.1268 (app.) - 1 = 0.1268 (app.)

- 12.68% (app-)
semi-annually
Option I1: 12.5% per year compounded
We have, m=2
r = 12.5% = 0.125

Effectiverate of interest (r)-(1+-1=(1+ -1

=(1 +0.0625)2-1 (1.0625)2- 1

=
1.1289 (app.) -
1 =0.1289 (apP)
- 12.89% (app.)

Since r, under Option II is higher than r, under Option I, Option II is bete

i.e, Investment at 12.5% per year is better.
Q. 34. Explain the concept of effective rate of interest. A savings accout
opened 3 months ago now has a balance of 20,400. If the bank pays 8% sinpe
interest, then how much money was deposited?
Sol. Effective rate of interest. Let r denote the effective rate 2012
correspondng
nominal rate r, converted in times a 1 year (/m)
(Effectiverate), T,= |1 -1-(1+" -1 8
Here A -
20,400, r= 8% p.a.
100 0.08 p.a.
=

t (time) =

3 months= 12 4
Let the money
deposited be P
Using the formula, I = Prt

I=P x0.08 x 2P
0.02P P
A P+I 100 50

20,400=P +50 51P

20,400= 50
P
(Money deposited) =20,400 x50
Q.35. A money lender 51 720,000
per month, payable charges 'interest at the rate of 3 100 rupe
in
advance. What effective rate rupee per pees nnun

does he cnaib
Sol. Since the
month, payable money lender
charges interest at the rate 3 per
in advance, therefore 9 7t o ro

treated as intere on
3 may be
month. Consequently,
interest rate per month is
effective rate re per annum
h u s , the equivae

is given 07 1hus
by
 CHAPTER 6:
MATHEMATICS OF FINANCE 113

-1-
(1.031)12-1-1.4424 (app.) -1
(app.)
- 0.4424 (app)44.24%
Present Value
hence when interest of
value of t500 due 10 years
Q.36. Find the present
100 1s compounded
(i) continuously
() half yeariy
Here A=500
Sol.()
r- 10% p.a, 5% half yearly =0.05 half yearly
years
n10
10 x 2 - 20 half years
Using the tormula,
Present value, P A(lt
P=500(1 +0.05) 500(1.05)
both sides, we get
laking logarithms on

1.05
logP- log 500-20 log
0.0212- 2.6990-0.4240
x
22/50
2.6990-20

P=Antilog 2.2750= T188.40

0.10 and n
10%
) Here A 500, r-
Present value, P A 0.36788I85
ng the formula, 500el-500x
P500 erl0 10 to accept
Hence P- 7183.94 The
creditor agreed
6 months.
immediate
amount of T820 falls due in
to defer the payment
ot ofother half for one
otner
12011 K
half and
at will ent ot is worth 5 P.a
Sol D e gain if money after 6
months
Sol. First Alternattoe to be
made
of T820 has
oU talls due in 6 months, L.e. payment
r - 5 %p a =005

A-820, t - 6months yea

ut the present value be P'i
A P(1+ r)
820-PC1 0.025)

820-P1-o05 P - 0 5 rsoo

820 1.025P
114 Shiv Da 8.Com (hog) CBCS) DELH UNIVERSITY SERIs
Second Alternative,
The ereditor receives halt the amount immediately, te, 410.
opresent value of R410 is t410
The creditor receives 4t0 atter 1 year.
Now A- 410 5% p.a. 0.05
Let
the present value of t410 be P t-1year
A-P(1+r)
410-P(1.05)
410Pl1+(0.051
410
P 1.05 k590.48 (approj
Total present valueR410 + R390.48 T800.48
Therefore, the creditor would gain by 48 paise.
Q 38. In return of
promise to pay
a

agrees to pay T12,000 now, 25,000 the end of 7

K60,000
at the end of 10 years, a pene
the end of 12 at years and a final paymeste
years. If the rate of interest is 6% per annum
should the final effective, whe
payment be?
Sol. Let the final
payment be Rx 2011
Future value of R60,000 r6% p.a. =0,06
the end of at 12 years
60,000(1+ 0.06)- 60,000(1.06) 67,416
(The sum of t60,000 has to be
paid at the end of 10 The final
made at the end of 12 years. 1Therefore future value years
of T60,000 after 2 years has
has e payment
found out).
Future value of R12,000 after 12 years
12,000(1+ 0.06)
12,000 (1.06)
24,146 (approx.)
Future value of 25/000 at the end of 12
years
25,000(1 +0.06)
=25,000(1.06
= T33,456 (approx.)

(The sum of
k25,000
has has
made at the end ot 12 to be paid
at the end of 7
years. The tinal
tound out).
years. 1herefore, the future value of R25,000 s nahas
yeas
Let the final
atte
payment be Rx.
Now,
767A16 R24,146 +
R33,A56 +x
67,41657,602 +
x =

Z67A16-57,602=
Thus, the final payment 9,814
should
Q 39. A student is awarded be 79,814.
him:
a
scholarship and two options
Ptons are placed
() to receive 1,100 now or
(i receive 100 at the
Which option p.m.
be chosen it
end of each of
next 12
the rate of interest is 12%%mont
Sol. Present value of k100 paid at the p.a-
end of 1t month 10 1.01
112% pa
-1% pef
pe
 CHAPTER 6: MATHEMATICS
OF FINANCE 115
value of
K100 paid at the end of 2nd month= 100
Present (1.01
value of R100 paid at the end of 12th month100
Present

the present
value
01 L.01 (1.01)
Sum of all

100(1.01)1001
101 1-10 0.01 (1.01)2 J

x0.11255
0.01 1125,50-1,125.5>1,100
end of each month.
should choose T100 per month the
at
Therefore, the student due at end of 3 years if money
is
value of 2,000
Q.40. Find the present 2016
worth 6% compounded semiannually.
Sol. We have, Amount (A) R2,000
=

of Interest (7)= 6% 0.06

=

Rate
Time()=3 years semi-annually)
m=2 (Since interest is compounded
0.06
2,000-P12
A-P1 2.000 P(1.03)
2.000 P(1+0.03)
: P=40 2,000 1,6740.90(app) is worth

(1.03 1.1947(app.)- 3 years,

if money
at the end of
R2,000 due
Therefor Present Value of
is 1,674.90(app-)
pounded semi-annually
at 89
resent Value and Discount R10,000
due in
3 years
on
discount

.41.1Find the and 0.04

present value =

ate of discount
s e m i - a n n u a l l y
semi-annually.

convertibie> a 8%
5o1. Here A 71,000; 8% p.a.
p.a.
= 4%

3 years-3x 2
6 half years
FTesent value is given oy
A 000(1-0.04)6-
=A(1-d" 1,000x (0.96)
782.76
x 0.78276-
Discount-1,000-782.76
D isco.,000 7217.24
TL,600in

of

Depreciation
value

scrap

o aa
1epreciate
depreciate
t
to
s
will
42. Acomputer
10 er
costing
20,000

years. Find
d the rate of depreciato
 CBCS] DELHI UNIVERSITY SERIES
116Shiv Das [B.Com. (Prog)
R1,600; B 20,000; n= 10 years
Sol. Here D =

Using the formula, D B(1 r)" = -

1,600= 20,000(1 - 1)10 or

16 200(1-rl0
Taking logarithms on both sides, we get
log 16- log 200+ 10 log(1 -

)
1.2041 23010 + 10 log(1 - r)
1.2041 -2.3010= 10 log(1 - r)

-1.0969= 10log(1 -

r)
log(l -r) =-0.10969
log(1-r)= 1.89031
1-r= Antilog(1.89031) =0.7767
r=1-0.7767 = 0.2233 22.33%
Q.43. A machine costing R2,40,000 is depreciated at 18 per cent per annume
reducing balances method. Find the value of the machine after 6 years. Als
find the
depreciation amount for the sixth year. 2010
Sol. Here B= 2,40,000; r= 18% p.a. = 0.18; n=6 years; D=?
Using the formula, D =B(1 r) -

D = 2,40,000 (1 -0.18)
=2,40,000 (0.82)5
= 2,40,000x 0.304

R72,960
Depreciation amount for the 6th year
Depreciation value at the end of 5th year
-

Depreciation value at the end of the6

-B(1--B(1-
2,40,000(1-0.18)-2,40,000(1 -0.18)
=2,40,000[(0.82 - (0.82)1
= 240,000[0.370- 0.304)
=
2,40,000 x 0.066 =
T15,840
Q. 44. A machine depreciates at the rate of 8% of its value at the
a
year. The machine was be ised
when sold was 43,440. Findpurchased
after how
for R1,00,000. The scrap valueew
sold? many number of years the
Sol. Given: B
a2010
R1,00,000; D=
R43,440; 8 % p.a.
U s i n g t h e formula, D = B(1-r
=0.08 p.a.;
43,4401,00,000(1-0.08)"
434440
1,00,000(0.92)

Taking logarithms on both sides, we et 0.4344 (0.92)"

log 0.4344= log (0.92)" log04344n log 092
1.6379= nx 1.9638
-0.3621n * (-0.8362)
+0.6379-nx (-1+0
0.362- 10
0.0362 10 years
years
sold after 10 years.
was
machine
The
 CHAPTER 6: MATHEMATICS OF FINANCE 117
ting 73,00,000 is
is depreciated at 18 percent per annum on
k3,00,000
costing
method. Find the value of the machine after 6 years. Also,
machine

a45.
A
educingbalances metho

for the sixth year.

for
a m o u n t

2011 E
deprectation

C= R3,00,0
indthe Machine,
stof the 18% p.a. =0 0.18
(r)=
deprecation
Rate of at the end
of the 6th year
value
The book = 3,00,00 -0.18)° 3,00,000(0.82)6 91,202 (approx)
=

S, - C(1-)°the end of the 5th year

value at (approx)
The book 3,00,000(l
-

0.189 = 3,00,000(0.82)-R1,11,222
S. C(l- r)
=

amount for the 6th year

Depreciation -91,202= R20,020
Ss-S%
1,11,222
to a scrap value
of 160 in 10
will depreciate 2012 E
asset costing 2,000
Q46. An of depreciation.
Find the rate be %
years. of depreciation
r

Sol. Let the rate

Then160= 2000 (1 r) we get
of both sides,
Taking logarithm r)
2000+ 10 log (1
-

log 160= log

(1 r)
22041=3.3010+ 10 log
-

3.3010
2.2041
10 log (1 r)
=
-

= -1.0969
1 0log (1-r) 1.89031
og (1-r) -0.10969 = 0.7767
=

=
22.350
(1.89031) =

-r= Antilog r=1-

0.7767
0.2233
annum
for the first two
depreciation, 10% per
dte of at the
rate of
. depreciates
next 3 years, bdepre initiaily
e 7 0 , 0 0 0 nachine
e for the machine
ars and then 7o per
annum

value of value
ot
the
macha
value. If the |2013
alculated on m i n i s h i n g

a n d the
depreciated

find th average rate of

p r e c i a t i o n

-01
10% p a .
at the end of fifth year two years
()-
Sol.1Rate of for first
deprecia p.a
=
0/

ime (1,) =2 years, ()=7%

years
Cost (C) 10,000 next
three

for the
Rate of reciation

Time(n 5 years
Book Value of the 3ye at the
at end of
the end
macnu
machine

p s ) C (ne
1- r " (1 - r)
(S)
(1 0.07
-

0,000(1-0.1)2

10,000(0.9)2 (0.93)
10,000 x 0.81 x
0.804357
6,515.29-100001-
T6,515.29(app-) depreciation
b e the average rate of 0651529-( 1 - 1 5
S=C
S-C(1-r
6,515.29
10,000 (1-
118Shiv Das [B.Com. (Prog) CBCS| DELHI UNIVERSITY SERIES

Taking logarithm both sides, we get

log 0.651529= 5 log(1 -) 1.8139 5 log(1 -r)
1.9628= log(l- ) 1-r Antilog 1.9628
1-r=0.9179 r= 1 -0.9179 0.0821
Thus, the average rate of depreciation = 8.21%

Q. 48. A machine costing 80,000 would reduce to R20,000 in 8 years, Find

rate of yearly depreciation, given that
depreciation is calculated usi
dimnishing balance method.
Sol. Let r be the rate of
depreciation.
Given: C= R80,000; Sg 20,000; n =8 years;
We know that, S,= C(1 - r)" where (S, =
Book value at the end of n yen
Substituting the values in S, =
C(1 -1)"
20,000 80,000(1 )
20,000
80,000 (1-13
0.25 (1 r)
= -

Taking logarithm of both the sides,

log0.25 8log(1 - )
1.3979 8log (1- )
1.3979 log (1- )

19247375 log (1-r)

Taking Antilogarithm on both sides,
1-r= Antilog(1.9247375)
1-r-0.8409
r-1-0.8409= 0.1591 15.91%