Math C1 – Matrices and Vectors

1. Matrices

[Matrix = A number scheme written between rectangular brackets. The numbers in the matrix,
ordered horizontally in rows and vertically in columns, are called the entries of the matrix.]

 Aij = the number that we find in the i-th row and the j-th column of a matrix

o Transpose of a matrix: If A is a m x n matrix, then its transpose AT is a n x m matrix. It has

the number aji at the position (i, j).
o Zero matrix: A zero matrix is a matrix, usually indicated by the capital letter O, of which all
entries are equal to zero.
o Square matrix: A matrix containing an equal number of rows and columns is called a square
matrix.
o Diagonal entries: Entries 11, 22, 33, etc. Only square matrices have diagonal entries.
o Identity matrix: A square matrix of which all diagonal entries equal one and all non-diagonal
entries equal zero. Indicated by the letter I.

2. Vectors

[Vector = A matrix consisting of one column only, indicated by a lowercase letter]

 Dimension of a vector = The number of entries, which is the order of the vector

o Zero vector: A zero vector is a vector, usually indicated by 0, of which each entry is equal to
zero.
o Unit vector: A unit vector is a vector with one entry equal to 1, while all the other entries. The
unit vector of which the i-th entry equals 1 is indicated by ei.

3. Operations on vectors

o Scalar multiplication of a vector and a number: The product of a vector x and a number c is
the vector cx, which we obtain by multiplying each entry of x by c.
o Sum of vectors: The sum of two vectors x and y of the same dimension is the vector x + y,
which we obtain by taking the sum of each pair of corresponding entries of x and y. By taking
the difference of each pair of corresponding entries of x and y, we obtain the difference x-y of
the vectors x and y.
o Linear combination: 7t + 12r is a linear combination of vectors t and r.

4. Operations on matrices

o Sum of matrices: The sum of two matrices A and B of the same order is the matrix A + B,
which we obtain by taking the sum of each pair of corresponding entries of the two matrices.
By taking the difference of each pair of corresponding entries of A and B, we obtain the
difference A-B of the matrices A and B. These operations are defined only for matrices of the
same order.
o Scalar multiplication of a matrix and a number: The product of a matrix A and a number c is
the matrix cA, which we obtain by multiplying each entry of the matrix A by c.
 5. The product of a Matrix and a Vector

[The product of an m x n matrix A and a vector x of dimension n is defined as the vector Ax, of which
the i-th entry equals the product of the i-th row of A and vector x. This latter product results from
multiplying the entries of the row by the corresponding entries of the vector and then taking the sum
of these products. The vector Ax has dimension m.]

 The dimension of vector x must equal the number of columns of matrix A, whereas the dimension
of vector Ax equals the number of rows of matrix A.
 m x n * n x 1  n * n the same?  yes: result is m x 1

6. Properties of the matrix-vector product

 A(x+y) = Ax + Ay
 A(cx) = cAx

7. The product of two matrices

[The product of a matrix A and a matrix B is the matrix AB, of which the entry at position (i, j) is the
product of the i-th row of A and the j-th column of B. The product of matrix AB can only be
determined if the number of columns of A equals the number of rows of B]

 Check if: m x k * k x n  k * k the same?  yes: result is m x n

o Power of a matrix: For a square matrix A we write A2 and for AAA A3, etc.

8. Properties of the matrixproduct

 AI = IA = A
 (AB)T = BTAT

EXTRA NOTES
Math C2 – Systems of linear equation
1. Systems of linear equation

[System of linear equation = A m x n system of linear equations is a system consisting of m linear

equations in n variables]

 aij denotes the coefficient of variable xj in the i-th equation.

 A system of linear equations is said to be in the standard form, when the system is rearranged in
such that all terms containing a variable are on the left-hand side in the same order, and the constant
terms are on the right-hand side.

2. Linear systems as vector equations

o Coefficient matrix: We call a matrix, in which we collect the coefficients of the system, the
coefficient matrix of the system.
o Vector of constants: We call a vector, in which we collect the constant terms of the system,
the vector of constants of the system.
o Augmented coefficient matrix: If we add the vector of constants as final column to the
coefficient matrix, we get the so-called augmented coefficient matrix, which is written as [A|
b].
o Vector equation: Every m x n system of linear equations (in standard form) can be written as
Ax = b, where A is the coefficient matrix of the system, x is the vector of unknowns, and b is
the vector of constants.

[(In)consistent systems and the number of solutions =

If a system has no solutions, then the systems is called inconsistent.
If a system has at least one solution, then the system is called consistent.
A consistent system has either precisely one solution, or infinitely many solutions. If it has precisely
one solution, then it is called uniquely solvable]

3. Solving a system of linear equations

 Linear system with a unique solution:

o Elementary operations:
1: multiplying or dividing an equation by a nonzero number
2: interchanging (the positions of) equations
3: adding or subtracting a multiple of one equation to or from another equation
o Gaussian elimination: A process during which we use these operations to find the solution of
a system of linear equations
o Reduced matrix:
1: the left-most non-zero entry in each row is 1
2: every column containing a leading one has zeros elsewhere
3: every leading one is to the right of the leading one in the row above (if any)
o Zero row: A row with only zeroes in a matrix, corresponds with the equation: 0x+oy=0. As
this equation is satisfied for all values of x and y, it is called a redundant equation. Such rows
are always put at the lowest position of the reduced matrix.
  Linear system with an infinite number of solutions:
o Leading variable: Variable that corresponds with a column containing a leading one (ie. P)
o Free variable: Variable that is nonleading (ie. 0.2Y)
o Reduced form: Solving a system for the leading variables in terms of the free variables (ie.
Q= 3 + 0.2Y)  After you have the reduced form, you can determine the values of the
leading variables  Fill in 0 for the free variables and solve for the leading variables  Can
you solve it for all possible values for the free variables?  Yes = infinitely many solutions.
o Endogenous variable: The endogenous variables of an economic model should coincide with
the leading variables of the system, because the values of the leading variables are explained
by the model. Will be placed before the exogenous variables.
o Exogenous variable: The exogenous variables should coincide with the free variables,
because the values of the free variables are determined outside the model. Will be placed after
the endogenous variables.

 Inconsistent linear systems:

[Consistency of a system = A system of linear equations is consistent if and only in the system’s
reduced augmented coefficient matrix contains NO row of the form [ 0 … 0 | a ], where a ISN’T equal
to zero. A consistent system of equations has a unique solution of there are NO free variables, and
infinitely many solutions of there are free variables]

EXTRA NOTES
 Math C3 – The Inverse Matrix
1. Invertible matrices

[Inverse matrix = A matrix A-1 is called the inverse matrix of the square matrix A if A-1A = AA-1 =
I. A matrix is called invertible if it has an inverse]

 In order to prove that a square matrix A is invertible, it is sufficient to find a matrix C such that CA
= I or AC = 1. In both cases this matrix C is the inverse of A

 If the square matrix A is invertible, then the system Ax=b has a unique solution, which is given by
x=A-1b for all choices of b. If A is not invertible, then the system has either infinitely many solutions
or no solution.

2. Finding the inverse of a matrix

 By reducing the matrix [ A | I ], we find the inverse of A, or we come to the conclusion that A is
not invertible. If the matrix is invertible, the reduction process leads to [ I | A-1 ].

3. The determinant

[The determinant = a number calculated from the entries of the matrix, that if it is not equal to 0
proves that the matrix is invertible, while if it is equal to 0 proves that the matrix has no inverse]

 A B Det = AD – BC
C D

 Submatrix: The submatrix corresponding with the entry aij of the square matrix A, is the matrix
Aij which is obtained by removing A from the i-th row and the j-th column.

 The determinant of an n x n matrix can be found as the sum det A = a11 x det A11 – a12 x det A12
+ a1n x det A1n. Apart from the sign, each term in this sum is the product of an entry of the first row
of A and the determinant of the corresponding submatrix. The signs of the terms are alternately plus
and minus, beginning with plus. We say that we have evaluated the determinant by expansion along
the first row.

 Rules:
o If we interchange two rows in a matrix, then its determinant changes sign.
o The determinant of a matrix equals the determinant of its transpose.
o WARNING: For two square matrices A and B of the same order, det (A + B) is generally not
equal to det A + det B.
o For two square matrices A and B of the same order, it holds that det AB = det A x det B
o For a square n x n matrix A we have det(cA) = c^n x detA
o For an invertible matrix C, 1 = det I = det CC^-1 = det C x det C^-1, so det C^-1 = 1 / det C

EXTRA NOTES
Math C4 – Financial Mathematics
1. Future and present value: single deposits or receipts

 Future value of a single amount = If the interest rate is r per year, an amount K that is available
now has after t years a future value of K x (1 + r)^t]
 Exponential growth occurs when an amount is multiplied by a constant factor per time unit, say
factor g, such an exponential growth process can be described by means of the sequence of numbers a,
a x g, a x g^2, etc. The sequence is called a geometric sequence with first term a and growth factor g..
 Present value of a single amount = If the interest rate is r per year, an amount F that is (or should
be) available t years from now has a present value of F x (1+r)^-t

2. Future and present value: Periodic deposits or receipts

 The sum of a finite number of terms of a geometric sequence: The sum Sn of the first n terms of a
geometric sequence with first term a and growth factor g is given by Sn = a x ((g^n – 1)/(g-1))
equivalently Sn = a x ((1-g^n)/(1-g)) , with the basic expression most useful when g > 1 and the
equivalent version most useful when g<1.
 The future value of periodic amounts: The future value of an annuity of A per year, for t years in
succession, with an interest rate of r per year, and each deposit at the end of the year equals:
A/r x ((1+r)^t-1)
 The present value of periodic amounts: The present value of an annuity of A per year, for t years in
succession, with an interest rate of r per year, and each payment at the end of the year equals:
A/r x (1-(1/(1+r)^t))

3. Some other topics in financial mathematics

 The annuity mortgage: At the end of each year, a constant amount A must be paid at the bank.
Such a mortgage is called an annuity mortgage. The constant annual amount A consists of an interest
part and a repayment part. As time proceeds, an increasing part of the mortgage is paid off, so that the
interest due on the remaining debt goes down. The interest part for A gets smaller over time, while the
repayment part gets larger.
 Determine A:
Present value = A/r x (1-(1/(1+r)^t)
 Suppose that a loan of K is repaid as annuity. If the amount should be paid off in t years,
the interest rate is r per year and each payment is made at the end of the year, then the annuity
A follows as rK / 1-(1+r)^-t

 Net present value and the internal rate of return: For a project with an initial investment cost of A0
and returns of A1, … An in the successive years, the internal rate of return is a rate r such that the
project’s net present value (-A0 + A1/1+r + A2/(1+r)^2 + etc. equals zero
 For any interest rate smaller that the IRR, the project’s net present value would be positive
and so the project would be profitable.
 A project is profitable if its net present value is positive and/or its prevailing interest rate is
smaller than the IRR.

 Models with an infinite horizon: The sum of an infinite geometric sequence with first term a and
growth factor g is given by S = a / 1-g. The sum is only defined when 0 < g < 1.

 Interest periods and effective interest rates:

  Effective interest rate: If the annual interest rate is r and interest is compounded n times a year
(equally spread over the year) at the rate of r/n per period, then after one year an amount K will have
increased to K x (1+ r/n)^n. This corresponds with an annual growth factor of (1 + r/n)^n, and an
effective yearly interest rate of (1 + r/n)^n -1.
 For a given annual interest rate, the effective yearly interest rate increases if the number of
periodic interest payments increases.
 As the number of periods n tends to infinity, the effective yearly interest rate approaches
e^0.06 = 0.0618365
 If the annual interest rate is r and interest is compounded n times a year (equally spread
over the year) at the rate of r/n per period, then after t years an amount K will have increased
to K x ( 1 + r/n ) ^nt.

EXTRA NOTES