Mathematics of Finance

Speaker: Tien Dat

Contents

 Compound interest
 Geometric series
Compound interest

What happens when a How to calculate the amount

lump sum is invested ? accumulated over a period of
time?
Definition

COMPOUND INTEREST IS THE INTEREST

AN INVESTOR EARNS ON HIS
ORIGINAL INVESTMENT PLUS ALL THE
INTEREST EARNED ON THE INTEREST
THAT HAS ACCUMULATED OVER TIME
Let’s first look at
simple interest
EXAMPLE

The interest you earn each year

You send 10,000$ with 5% is 500$ which turn to 1,500$ at
simple interest for 3 years the end of year 3
INSTEAD

You send 10,000% for a 5% In total you earn $1,576.25 in

interest compounded three years with compound
annually interest
Comparison

The amount of interest

A difference’s $76.25
become larger and larger
CORE IS SCALE
FACTOR
SLOVING PROBLEM
SOLUTION

Sentence A SENTENCE B
Interest is (r/k)% If m=
100𝐾
then
𝑟
=
1
𝑟 100𝑘 𝑚
there are kt periods in t 𝑚𝑟𝑡
years And kt = so
100
𝐾𝑡 𝑟𝑚𝑡 𝑛/100
𝑟 1 𝑚
so S=P 1 + S=P 1 +
1 100
=P 1+
100𝑘 𝑚 𝑚
GEOMETRIC
SERIES
Contents

 Describing Geometric Progressions

 Sums of Geometric Progressions
 Problem Solving
 Describing

In a geometric progression, the The ratio between a term in the

first number is called the "initial sequence and the term before it
term." is called the "common ratio."
Describing

• describing how each

term relates to the one
before.
• Since in a geometric
progression, each term
is given by the product
of the previous term and
the common ratio
 Sums of Geometric Progressions

Find The sum of the first 10 term of this

THE PROBLEM Geometric Progressions
 When the number of terms
we want to add is large, it 3, 15, 75, 375, 1875,….
can be difficult to add
them all one at a time.
 Solution

Let the sum of the first 10 terms of the

given series be A, Then multiplying A by 5, we get
 Solution

Taking (1)-(2) gives So the answer is

 We have this

Sums of Geometric
Progressions
Note: 𝑆𝑁 is sum of this Geometric Progressions
 Problem sloving

 A person borrows $100000 at the beginning of a year and agrees to

repay the loan in ten instalments at the end of year. Interest is
charged at a rate of 6% compounded annually
 Find the annual repayment
 Solution
After first years, person A
N+Nr - A=N(1+r)-A
still have to pay
Note:
N=100000$
R=6%
A: the annual
repayment
And so After the second and third year

 Second year and the money still have to

 Third year and the money still have to pay
pay
𝐴 N 1 + 𝑟 3- 𝐴 1+𝑟 3 −1
2 2
N 1 + 𝑟 − 1+𝑟 −1 𝑟
𝑟
So we have
𝐴
 N 1+𝑟 𝑛 - 1+𝑟 𝑛 −1
𝑟

 Which mean when the money have to pay

turn to zero :
After n year the  A=N 1 + 𝑟 𝑛
.r / 1 + 𝑅 𝑁
-1
money still have
to pay is
The answer

A= $13 586.80
THANKS FOR LISTENNING