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Difference Equations VS Differential Equations
Difference Equations VS Differential Equations
Difference Equations VS Differential Equations
VS
DIFFERENTIAL EQUATIONS
ELEMENTS OF FINANCE
AN APPLICATION
INTEREST AND CAPITAL GROWTH
• IF WE WANT TO ENSURE THE FINAL CAPITAL C, SO WE SHOULD KNOW WHAT THE PRINCIPAL
P SHOULD BE.
EXAMPLE
IF I AM OFFERED A GIFT OF EITHER PHP 6,000 NOW OR PHP 10,000 IN SEVEN YEARS TIME,
WHICH SHOULD I ACCEPT, GIVEN THE FIXED INTEREST RATE OF 8%.
INCOME GENERATION
• SO, WHAT PRINCIPAL P IS REQUIRED TO PROVIDE AN ANNUAL INCOME I FOR THE NEXT N
YEARS?
EXAMPLE
• WHAT IS THE PRESENT VALUE OF N ANNUITY GENERATING PHP 10,000 A YEAR FOR THE NEXT
SEVEN YEARS, GIVEN THE FIXED INTEREST RATE OF 8%?
EXERCISE
SUPPOSE YOU HAVE WON A COMPETITION AND THAT YOU ARE GIVEN THE CHOICE BETWEEN
PHP 180,000 NOW OR PHP 10,000 AT THE START OF EACH YEAR, FOR THE REST OF YOUR LIFE.
ASSUME THAT THE BANK HAS A CONSTANT INTEREST RATE OF 6% AND THAT YOU CURRENTLY
HAVE NO DEBTS. WHICH OPTION SHOULD YOU CHOOSE IF YOU THINK YOU WILL LIVE
(a) UNTIL 65;
(b) (B) UNTIL 100;
(c) (C) FOREVER?
(d) NOTE: IGNORE (A) IF YOU ARE OVER 65.
FOR DIFFERENCE EQUATIONS, WE LOOK AT THE DYNAMIC OF, SAY, ECONOMY, USING WHAT ARE KNOW AS
DISCRETE-TIME MODELS.
HOWEVER, WE MAY ALSO CONSIDER SOME GIVEN TIME-PERIOD, SAY, ONE YEAR; AND INSTEAD OF CONSIDERING A
SEQUENCE OF VALUES TAKEN OVER SUCCESSIVE CALENDAR YEARS, WE LOOK AT THE VALUES TAKEN OVER THE PERIOD
OF ONE YEAR IMMEDIATELY PRECEDING TIME T, WHERE T IS A CONTINUOUSLY VARYING PARAMETER. HERE, WE LOOK AT
CONTINUOUS-TIME MODELS.
EXAMPLE