Chapter 3 Mathematics of Finance

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Chapter 3 Mathematics of Finance. Section R Review. Chapter 3 Review Important Terms, Symbols, Concepts. 3.1 Simple Interest Interest is the fee paid for the use of a sum of money P , called the principal . Simple interest is given by I = Prt where I = interest
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Chapter 3Mathematics of FinanceSection RReviewChapter 3 Review Important Terms, Symbols, Concepts
  • 3.1 Simple Interest
  • Interest is the fee paid for the use of a sum of money P, called the principal. Simple interest is given by
  • I = Prt where I = interest P = principal, r = annual simple interest rate (decimal form), t = time in yearsBarnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review Important Terms, Symbols, Concepts
  • 3.1 Simple Interest
  • If a principal P (present value) is borrowed, then the amountA (future value) is the total of the principal and the interest:
  • A = P + Prt = P (1 + rt)Barnett/Ziegler/Byleen Finite Mathematics 12eHow much?!Barnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review
  • 3.2 Compound and Continuous Compound Interest
  • Compound interest is interest paid on the principal plus reinvested interest. The future and present values are related by
  • A = P(1+i)nwhere A = amount or future value P = principal or present valuer = annual nominal rate (or just rate)m = number of compounding periods per year, i = rate per compounding period n = total number of compounding periods.Barnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review
  • 3.2 Compound and Continuous Compound Interest
  • If a principal P is invested at an annual rate r earning continuous compound interest, then the amount A after t years is given by
  • A = Pert.Barnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review
  • 3.2 Compound and Continuous Compound Interest (continued)
  • The annual percentage yield APY (also called the effective rate or the true interest rate) is the simple interest rate that would earn the same amount as a given annual rate for which interest is compounded.
  • If a principal is invested at the annual rate r compounded m times a year, then the annual percentage yield is given by
  • Barnett/Ziegler/Byleen Finite Mathematics 12eBarnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review
  • 3.3 Future Value of an Annuity; Sinking Funds
  • An annuity is any sequence of equal periodic payments. If payments are made at the end of each time interval, then the annuity is called an ordinary annuity. The amount or future value, of an annuity is the sum of all payments plus all interest earned and is given by
  • PV = present value of all paymentsPMT = periodic paymenti = rate per periodn = number of periodsBarnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review
  • 3.3 Future Value of an Annuity; Sinking Funds (continued)
  • An account that is established to accumulate funds to meet future obligations or debts is called a sinking fund. The sinking fund payment can be found by solving the future value formula for PMT:
  • Barnett/Ziegler/Byleen Finite Mathematics 12eBarnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review
  • 3.4. Present Value of an Annuity; Amortization
  • If equal payments are made from an account until the amount in the account is 0, the payment and the present value are related by the formulawhere PV = present value of all payments, PMT = periodic payment
  • i = rate per period, n = number of periodsBarnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review
  • 3.4 Present Value of an Annuity; Amortization (continued)
  • Amortizing a debt means that the debt is retired in a given length of time by equal periodic payments that include compound interest. Solving the present value formula for the payment give us the amortization formula
  • Barnett/Ziegler/Byleen Finite Mathematics 12eChapter 3 Review
  • 3.4. Present Value of an Annuity; Amortization (continued)
  • An amortization schedule is a table that shows the interest due and the balance reduction for each payment of a loan.
  • The equity in a property is the difference between the current net market value and the unpaid loan balance. The unpaid balance of a loan with nremaining payments is given by the present value formula.
  • Barnett/Ziegler/Byleen Finite Mathematics 12eBarnett/Ziegler/Byleen Finite Mathematics 12e
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