Mathematics of Finances

1. Simple Interest- is calculated by the equation I=Prt where; I = dollar amount of interest earned P= principal amount in dollars r = annual interest rate in decimals t = time in years

EXAMPLE: If $8000 is invested for 2 years at an annual interest rate of 9%, how much interest will be received at the end of the 2-year period? Solution: The interest is I= Prt = 8000 (0.09)(2) = $1440. 2. Future value of an investment or a loan is calculated by: S= P + I where; S = the future value I = interest P = principal r = annual interest rate in decimals t = time in years or S = P + Prt

EXAMPLE: If $6000 is invested for 4 years at an annual interest rate of 8%, how much interest will be received at the end of the 4-year period and what will be the future value of the investment? Solution: The simple interest is I =Prt = 6000 (0.08 )(4) = $1920 The future value is S=P+I= 6000 + 1920 = $7920. 3. Annual Compounding- The interest for each period is added to the principal before interest is calculated for the next year.

S = P (1 + r ) n
where; S = future value P= principal in dollars r = interest rate in decimal n= number of years the

EXAMPLE: If $3000 is invested for 4 years at 9% compounded annually, what is the future value of investment? Solution: The future value is S=$3000 (1+0.09) =$3000 (1.4115816) =$4234.7448 =$4234.74 NOTE: Future Value is a dollar amount. Therefore, it must be rounded to the nearest cent.
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4. Periodic CompoundingFuture Value:

is used when the interest on an investment or a loan is compounded more than once a year.

r S = P (1 + i ) = P 1 + m
n

( mt )

S = future value P = principal or present value i = interest rate per compounding period, n- number of compounding periods - interest(i) is found by the equation i =

r , where r is the nominal interest rate m and m is the number of times compounded per year. This is expressed as a decimal. - n is found by the equation n = m t where m is the number of times compounded per year and t is the number of years invested. -This method can be used when compounding semi- annually (2 times per year), quarterly (4 times per year), monthly (12 times per year) or daily (365 times per year).
What amount must be invested now in order to have $12,000 after 3 years if money is worth 6% compounded semiannually? Find the preset value P. The future value is 0.06 S=$12,000. Use i= =0.03 and n=3(2)=6. 2 S=P (1+i) $12,000=P (1+0.03) 6 = P (1.03) 6 = P (1.1940523) 12,000 = $10,049.81, to the nearest cent. P= 1.1940523
n

EXAMPLE:

Solution:

5. Continuous Compounding- is used to determine the interest that results from compounding continuously. Future Value:

S = P e (r t )

P = principal r = interest rate, t = number of years Example: Find the future value if $1000 is invested for 20 years at 8%, compounded continuously. Solution: The future value is (0.08 )( 20 ) S=$1000*e =$1000 e 1.6 =$1000*(4.95303) =$4953.03
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