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    This document provides an overview of key concepts in financial mathematics including simple interest, interest rates, and methods for calculating accumulated amounts. It discusses operations with simple interest such as calculating interest using various time periods. Numbers and divisors and precomputed vs postcomputed interest are also explained. Calculating effective interest rates from given values is demonstrated through examples.

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    This document provides an overview of key concepts in financial mathematics including simple interest, interest rates, and methods for calculating accumulated amounts. It discusses operations with simple interest such as calculating interest using various time periods. Numbers and divisors and precomputed vs postcomputed interest are also explained. Calculating effective interest rates from given values is demonstrated through examples.

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    12 views19 pages

    Financial Mathematics

    Uploaded by

    ilyasosiraj
    This document provides an overview of key concepts in financial mathematics including simple interest, interest rates, and methods for calculating accumulated amounts. It discusses operations with simple interest such as calculating interest using various time periods. Numbers and divisors and precomputed vs postcomputed interest are also explained. Calculating effective interest rates from given values is demonstrated through examples.

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    of 19

    FINANCIAL

    MATHEMATICS
    BUSINESS ADMINISTRATION – FSJES SOUISSI /2023-2024
    TABLE OF CONTENTS
    Chapter 1: Simple Interest
    1- Operations with Simple Interest
    2- Commercial Discount with Simple Interest
    3- Operations in Current Accounts and Interests
    Chapter 2: Compound Interest
    1- Capitalization
    2- Discounting
    3- Compound Interest Discount
    4- Equivalence of Sets of Bonds or Capitals
    TABLE OF CONTENTS
    Chapter 3: Annuities
    1- End-of-Period Annuities
    2- Beginning-of-Period Annuities
    3- Evaluation of a Series of Annuities
    WHY UNDERSTAND FINANCIAL
    MATHEMATICS?

    oMaking responsible and informed financial decisions


    oUnderstanding concepts like budgeting, saving, investing …
    oAvoiding pitfalls, planning for emergencies …
    Basic Concepts
    INTEREST
    Interest is the compensation for money placed in an investment, paid by the borrower to the lender. It is
    also referred to as the rent on borrowed money. Interest is considered simple when it is calculated at each
    period based solely on the initial sum borrowed or lent.

    INTEREST RATE

    The interest rate represents the interest earned by a capital of 1 dirham (Dh) invested for one year. The
    amount of interest I depends on the invested or borrowed principal P (the initial amount of money), the
    interest rate r, and the duration of the investment t.
    The formula : I=P×r×t
    P: principal amount
    r: the interest rate
    t: represents the time period.
    I. Operations with Simple Interest
    1. Calculating interest

    The calculation of simple interest can vary depending on the unit of time used (year, month, or day)
    Annually: Example: Suppose you invest 10,000 DH at a simple
    interest rate of 5% per annum for 30 days.
    Monthly: Formula :
    Principal (P) = 10,000 DH ​
    Daily: Rate (r) = 5% or 0.05 (as a decimal) DH
    Time (t) = 30 days
    NUMBERS AND DIVISORS
    METHOD
    The method of numbers and divisors is used when the duration of the
    placement is expressed in days.

    Number
    𝑃× r × t 𝑃× r × t÷𝑟 𝑃× t 𝑁
    𝐼= 𝐼= 𝐼= 𝐼=
    360 360 ÷ 𝑟 360 ÷ 𝑟 𝐷
    Divisor
    The Numbers and Divisors Method allows us to calculate the global interest of
    different placements with different durations but under the same interest rate
    Example
    Suppose you have three different amounts invested for various daily periods at
    an annual interest rate of 10%.
    Investment 1: 5000 DH for 45 days
    Investment 2: 8000 DH for 60 days
    Investment 3: 3000 DH for 30 days
    Calculate the global interest for these investments using the numbers and
    divisors method.
    Solution
    Formula:
    𝑁 𝑃× t
    𝐼= 𝐼=
    𝐷 360 ÷ 𝑟

    𝐼 =¿ ¿
    (5000 × 45)+(8000 × 60)+(3000× 30)
    𝐼=
    360 ÷ 0 , 1
    𝐼=220.8 3 DH
    2. Calculating the Accumulated amount
    Finding out how much money you'll have in total after adding the original
    amount you started with and the extra money you earned through simple
    interest over a certain period.

    Formula :

    𝐴=𝑃 +
    𝑁
    𝐷
    𝐴=𝑃 +
    𝑃 ×𝑡
    𝐷
    𝐴=
    𝐷𝑃 𝑃 ×𝑡
    𝐷
    +
    𝐷
    𝐴=
    𝐷𝑃 +( 𝑃 ×𝑡 ) 𝐴= 𝑃 𝐷+𝑡
    𝐷 𝐷 [
    Example
    Question:
    An investor deposits an amount of 10000 DH in a bank account that pays a simple
    interest of 5% p.a. What will the deposit have accumulated to after 3 years?
    Solution:
    P= 10000 DH
    5% 3)
    r= 5%
    t= 3 𝐴=11500 𝐷𝐻
    Example
    Question:
    Adam takes out a loan of 5000 DH from his bank for an interest rate of 4% per annum
    over a period of 70 days. How much will Adam need to give back to the bank?

    Solution: 𝐴= 𝑃
    [ 𝐷+𝑡
    𝐷 ]
    [ ]
    P= 5000 DH 360
    + 70
    4%
    r= 4% 𝐴=5000
    360
    t= 70 4%
    𝐴=𝑃 + 𝐼 𝐴=5038.88 𝐷𝐻
    3. Precomputed Interest, Postcomputed
    Interest and Effective Rate
    Precomputed interest refers to the interest that is calculated and included in the
    total amount at the beginning of the loan or investment period.

    Post-computed interest refers to the interest that is calculated and added to the
    principal at the end of the loan or investment period.

    Effective interest rate represents the actual annual interest rate paid or earned
    on an investment or loan, taking into account the effect of compounding interest
    within a given time period.
    Example
    You make a deposit of 10000 DH at your bank, with an annual percentage rate of
    10% over a period of one year.

    Option.1 Option.2
    Beginning of the period End of the period

    Interest Interest + Principal

    Precomputed Interest Postcomputed Interest

    Effective Rate
    Solution
    Principal: 10000 – 1000 = 9000

    Interest:1000 E

    Interest = Principal x Effective Rate x t E


    1000 = 9000 x E x 1
    E
    E = (9000/1000)

    E =11.11%
    Example
    You invest 8000 Dirhams for 2 years and receive a precomputed interest of 1200
    Dirhams at the beginning of the period. Calculate the Effective Interest Rate.

    Given:
    P =8000 Dirhams t =2 years I = 1200

    𝑰 =𝑷 ×𝒓 × 𝒕
    Calculating the interest rate:

    𝑰 =𝟖𝟎𝟎𝟎×𝒓 × 𝟐 𝑰 =𝟏𝟐𝟎𝟎
    𝟏𝟐𝟎𝟎=𝟖𝟎𝟎𝟎 ×𝒓 ×𝟐

    𝒓 =𝟕 .𝟓 %
    P

    1200

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