CHAPTER 6: MATHEMATICS OF
FINANCE
Definition of Mathematics of Finance:
Financial mathematics is a branch of mathematics dealing with financial data analysis, financial problem solving,
and financial market modeling. Financial mathematics is valuable in a variety of businesses and vocations, and it
Financial mathematics includes:
ECONOMIC
The study of how goods and services The study of data, including the
are produced and consumed,
including supply and demand for
goods, is known as economics.
Time Value
of Money
Definition:
The theory of the time value of money (TVM)
states that an amount of money is worth more
now than it will be at a later period due to its
earning potential in the interim.
Item in The Time Value of
Money.
Present Value [PV]
Future Value [FV]
How To Identify The Annuity
is ORDINARY Or DUE?
ORDINARY ANNUITY
When payment is made AT
THE END of the period or
end of the year or 31 Dec
Formula for Ordinary
Annuity :
PVA = PMT (PVIFAi,n)
FVA = PMT (FVIFAi,n)
ANNUITY DUE
When payment made NOW,
TODAY or BEGINNING OF THE
PERIOD of 1st Jan
Formula for Annuity Due
PVA = PMT (PVIFAi,n)(1+i)
FVA = PMT (FVIFAi,n)(1+i)
has numerous applications.
STATISTICS PROBABILITY
Probability is the mathematical
analysis of data, is defined as word for the possibility of an event
statistics. occurring.
Who use Mathematics of
Financial analysts
Finance ?
Bankers
Data scientists
What is Present Value What is Future Value [FV] ?
[PV] ? The value of an asset at a future
Present value (PV), also date is called future value. It is the
known as the present present value multiplied by the
discounted value in accumulation function; it represents
economics and finance, is the nominal future sum of money
the value of an expected that a particular sum of money is
income stream as of the "worth" at a specific time in the
valuation date. future assuming a certain interest
rate, or more broadly, rate of
return.
How To Identify The PV Or FV Is
SINGLE Or ANNUITY?
Single Annuity
Single when payment
Must have two or
one time only or
more same amount
payment for every
year is difference.
every year.
For example, Ali
deposit RM1000 every
For example, Ali lends
year for 5 years for
his friend RM 5000.
his son's education.
Example:
Example
Year 1: RM100
Year 1 : RM100
Year 2: RM 200
Year 2 : RM100
Formula for Single:
Formula for Annuity
PV = PMT (PVIFi,n)
PVA = PMT
FV = PMT (FVIFi,n)
(PVIFAi,n)
FVA = PMT (FVIFAi,n)
RULES
If Interest paid
semiannually
i/2, n x 2
If interest paid
quarterly
i/4, n x 4
If interest paid monthly
i/12, n x 12
 CHAPTER 7: WORKING CAPITAL
MANAGEMENT

Definition For Working Capital Management

Working capital management is an organizational approach for ensuring that a firm works
efficiently by monitoring and maximizing the use of its current assets and liabilities.
Working capital management efficiency can be measured using ratio analysis

Current
assets of
ASSUMPTIONS
the
company. FORMULA
cash Gross working capital = firm’s
investment in current assets
inventories Current assets = Market Sec+ Cash
+Inventories +Receivable
Net working capital = Current
assets – Current liabilities
How to manage the working capital :
1. Involves "Risk-Return Trade-off" between
cash Current Asset & Current Liability.
receivables 2. Affects a firm's Profitability & Liquidity.

Implications of Shortage
and Excess in Working Policies of Working Capital Management
Capital
SHORTAGE Base to the diagram there are
(INADEQUATE) three basic policies or
approaches that the company
Low production level due
can adopt with.
to lack of material.
Delay of payment to
creditors and supplier.
Relaxed Policy Restricted Policy Moderate Policy

EXCESS
(REDUNDANT)
Maintain low
Maintain large
Excessive debtors and amount of CA
amount of
Maintain current
large amount
defective credit policy. couple with
of current
assets withassets with
flexible Mixture of
Low rate of ROI, the stringent credit
flexible credit policy,
credit policy, Relaxed and
policy,
market value of share High
High liquidity& &
liquidity Restricted
Lower investment in
may fall. potentially Low policy.
potentially Low CA enables firm to
Profitability (i.e. low Moderate Risk &
Profitability (i.e. low invest in Fixed
return) from Return,
return) from Asset (i.e. more
investments due to low Maintain
investmentsofdue productive assets),
productivity CAto Liquidity.
which result to High
low productivity
relative to FA. of
Profitability but
CA relative to FA.
Low Liquidity.

Approaches of Working Capital Management

Maturity Matching
Approaches Aggressive Approach Conservative Approach
Approach

The maturity matching Conservative investing

principle states that
current assets should be
financed with short-term
liabilities and fixed assets
Definition should be financed with
long-term liabilities. Fixed
assets have a one-year or
longer useful life, whereas
current assets are typically
depleted in less than a year.
The aggressive method is
a high-risk working
capital financing strategy
in which short-term
funds are used to fund
temporary working
capital as well as a
reasonable portion of
long-term working
capital.
focuses on preserving one's
capital's purchasing power
while minimizing risk. Low-
risk securities such as
Treasuries and other high-
quality bonds, money
markets, and cash
equivalents are often
heavily weighted in
conservative investment
strategies.

This strategy possesses

Result Of This strategy possesses This strategy possesses low
moderate risk and
Approaches moderate return.
high risk and high return. risk and low return.

Diagram Of
Approach