Interest Made Simple with Arrays
|
|
- Lesley Thomas Hudson
- 5 years ago
- Views:
Transcription
1 Interest Made Simple with Arrays York University, Toronto 1. Introduction 1.0 A Better Financial Calculator Students of the mathematics of finance seem to be comfortable using calculators to evaluate formulas or numerical expressions. They are typically much less comfortable writing programs in BASIC (or C or Java etc.) even in situations where the calculator solution is tedious and a short program would do the job efficiently. Spreadsheet models, with an emphasis on formulas as opposed to programs, are quite a reasonable and intuitive tool. But spreadsheet formulas seem to be about cells rather than money, time, and interest rates. The ideal tool would be a better calculator. APL and J can be used in calculator mode and therefore should be marketable to students as advanced calculators ideally suited to financial mathematics. This is especially true now that APL and J can be run on a variety of palm-sized computers. This paper presents a few ideas on how students might use J in the mathematics of finance. The emphasis is on using J as a calculator that has lots of memory and can store and compute with arrays. Therefore data will be entered and expressions evaluated but no programs will be presented in the classroom. (However, two utility programs and a few names for J primitives will be used as noted in the next subsection.) 1.1 J Definitions Used in what Follows The J examples below are presented in the plain Courier font. Certain definitions are assumed and these are displayed in Courier italics. The definitions of these italicized functions are given in the Appendix at the end of the paper. In particular, frequent use is made of a dollar format function Df to display numbers in dollar currency format. When dates are part of the input data, the dayno function can be used to compute a day number. All examples in this paper (except for Example 7, which uses the sparse arrays of J version 4.04) can be done with versions of J going back (at least) to J FreeWare, version Simple Interest Made Simple 2.0 Scalar Simple Interest Simple interest is commonly used for short intervals of time, typically less than one year. When the time interval is given in days, it is converted to years by dividing by 365. If P is the principal amount of a loan over a time interval t at annual simple interest rate r then the simple interest I payable and the accumulated loan S (principal plus simple interest) are I = Prt and S = P(1+rt) Example 1: A man borrows $7000 for six weeks at 8% simple interest per annum. How much does he repay at the end of six weeks? P =: 7000 r =: 0.08 t =: 6*7%365 Df S =: P*(1+r*t) $ Example 2: A man borrows $7000 and pays it back at the end of 6 weeks with a single payment of $7165. What annual rate of simple interest r was charged? Interest Made Simple
2 A P =: 7000 t =: 6*7%365 S =: 7165 r =: ((S%P)-1)%t r In A, the equation S = P(1+rt) is solved by hand for r to get r = ((S/P)-1)/t and then J is used to do the arithmetic. B P =: 7000 t =: 6*7%365 r =: arg S =: P const*(1 const + r*t const) Df S 0.08 NB. Re-solve Example 1 $ S^:_1(7165) NB. Solve Example In B, a function S is defined depending on an argument r (and using constants P, 1, and t) such that both Example 1 and Example 2 (its inverse problem) can be solved using S and S-inverse. Although this was a trivial example of an inverse problem, a similar method can be used for more difficult inverse problems. The above are scalar calculations. Arrays can be used in a trivial way to do a list of scalar calculations: Example 3: On a certain day, a bank has 4 loans due as follows: $3000 at 9% for 41 days, $7500 at 8.5% for 87 days, $6000 at 8.7% for 6 weeks, and $19000 at 8.8% for 5 months. Find the four amounts due on that day. P =: r =: %100 t =: (41 87%365),(6*7%365),(5%12) Df S =: P*(1+r*t) $ $ $ $ Arrays can be used in a non-trivial way when a loan is repaid with a series of payments. 2.1 Partial Payments: the Merchants Rule When a loan, made at a simple interest rate, is paid off with a series of partial payments, one way to calculate the interest is the Merchants Rule. In this method, payments are deducted from the principal and, after each payment is made, interest is charged on the reduced principal. Such a problem can be solved with arrays by using the inner (matrix) product (x =: +/. * ). Example 4: Mary borrows $10000 at 9% simple interest. She plans to make weekly payments for 26 weeks. Her first 25 payments will all be $400 with the following exceptions. Her first five payments will be half that amount. She will miss her 6 th and 7 th payments. Her last 4 payments will be increased by 50% (to $600). What will be her final 26 th payment? pmt =: 400 P =: pr-pmt*py r =: 0.09 pd =: 7*i.26 NB. payment days t =: (last pd)-pd rt =: r*t%365 Df S =: P x (1 + rt) $ A
3 B pmt =: 400 P =: pr-pmt*py r =: 0.09*(<:/&i.)/26 25 pd =: 7*i.26 t =: (}.pd) - (}:pd) rt =: r x t%365 Df S =: P x (1 + rt) $ Remark: In A, the time array t is a vector of time intervals from each payment time to the final payment time and the interest rate r is a scalar. In B, the time array t is a vector of time intervals between successive payments and the interest rate r is 0.09 times a matrix of 1's and 0's which is used to apply the interest rate and add up the time intervals. Although B is more complicated than A, it has an advantage that will appear in subsection 3.2: it can be modified slightly to yield the Declining Balance Method instead of the Merchants Rule. For an inverse problem on the same data, the unknown payment becomes an argument of a function. Example 5: Suppose in example 4, Mary wants to increase the size of her normal payment from $400 to a value so that her final payment is reduced to zero. What should her normal payment be? pmt =: arg r =: 0.09 pd =: 7*i.26 NB. payment days t =: (last pd)-pd rt =: r*t%365 S1 =: (pr x 1+rt)const S2 =: (py x 1+rt)const S =: S1 - pmt*s2 Df S 400 NB. Re-solve Example 4 $ Df S^:_1(0) NB. Solve Example 5 $ The Declining Balance Method Another common method for handling partial payments in simple interest problems is the declining balance method. When a payment is made, the loan balance is recalculated to include the simple interest since the previous payment. Because this interest is added to the balance of the loan on which future interest is calculated, the interest is in fact compounded. Because this method involves compound interest, consideration of it is delayed to subsection Demand Loans A demand loan has simple interest deducted automatically from the borrower's account each month. Partial payments may be made at any time and the interest rate is floating and may change at any time. Thus there are given three vectors of dates: the payment dates, the interest payment dates, and the dates at which the interest rate changes. In the solution to the following example, the formula S = P(1+rt) has P and r as vectors and t as a rank-3 array of time intervals and its (i,j,k)-entry is the amount of time that payment i has before interest payment date j at the interest rate k. Each time interval has a start time and an end time so the array t is computed as a difference of end times minus start times. Unlike the previous examples in which multiplication was commutative, the matrix product here requires a specific order of factors: S = P(1+tr) Example 6: Jason borrowed $1800 from his bank on a demand loan on August 15, Interest on the loan, calculated on the unpaid balance, is charged to his account on the 1 st of each month. Jason made a Interest Made Simple
4 payment of $400 on September 18, a payment of $500 on October 9, a payment of $600 on November 13, and repaid the balance on December 18. The rate of interest on the loan on August 15 was 9% per annum. The rate changed to 9.5% on September 24 and to 9.8% on November 21. Calculate the interest payments on the first of each month and the final balance on December 18. NB. input data NB. payments, payment dates P =: 1800 _400 _500 _600 pdt =: ; pdt =: >pdt, ; NB. rates, rate start dates r =: rdt=:> ; ; NB. interest payment dates idt =: ; ; idt =: >idt, ; NB. end of data input; now compute pd =: dayno pdt rd =: dayno rdt id =: dayno idt sd =: pd>./id<./rd NB. starts ed =: pd>./id<./}.rd,_ NB. ends t =: (ed-sd)%365 NB. times Df I =: P x t x r $7.55 $19.71 $28.02 $32.26 $33.63 NB. These are cumulative interest NB. payments. The actual payments NB. on the 1st of each month and on NB. December 18 can be found with NB. summation backscan inverse: Df +/\^:_1 I $7.55 $12.17 $8.30 $4.24 $1.37 NB. Final balance Dec. 18 is: Df (+/P) $ Remark 1: The above calculation is normally done as a tedious sequence of scalar applications of the simple interest formula. These scalar calculations can be mimicked in a spreadsheet model; but the model is tricky to write and not too easy to change for each new demand loan situation. The code above is general to cover any given demand loan data. Remark 2: Note the use of infinity in the computation of the end-days array ed. Given the starting times rd of the interest rates, to get the ends of the interest intervals ed drop the first start date and append an infinite date as the end date of the final interest rate. Thus even in the pragmatic world of simple interest calculations, infinity plays a practical role! Remark 3: Arrays of rank (dimension) greater than two are usually avoided in applied mathematics (by reformulating in terms of matrices) except in areas, such as elasticity or general relativity, that use tensors. So the solution to Example 6 could be viewed as an example of the use of a time-interval tensor in simple interest! 2.4 Demand Loans and Sparse Arrays In the case of a portfolio of demand loans to a list of customers, the difficulty is that the customers need not make their loans and payments at the same time, nor make the same number of payments. One approach would be to use nested (boxed) arrays. Each customer's payments would be a boxed vector as an element of a nested array. The dates of the payments would have to be handled in a similar way and the code above would have to be modified accordingly. Another approach is to use the sparse array facility available in J Let each row represent a customer. Let each column represent a day. There might be 365 columns to cover 1 year. Or there might be 3650 columns to cover 10 years or even columns for 100 years. Most of the array will be zeros so
5 memory use will not be a concern unless the actual payment data set is large. One advantage of this approach is that the payment date information is already contained in the payment array: its column determines the date of any payment. The example below, has two loan customers; but the same formulas work for any number of customers. Example 7: The bank that made the loan to Jason (see example 6 above) also has Iris as a demand loan customer. Iris borrowed $9000 on August 3 of 1999 and made payments of $1000 on the following dates: August 24, 1999, September 11, 1999, October 3, 1999, October 23, 1999, November 16, 1999 and December 12, Find the 1 st -of-the-month interest payments of Iris and Jason for September 1 through December 1. NB. input data NB. Iris payments, payment dates IP =: 9000,6#_1000 Idt =: ; ; Idt =: Idt, ; Idt =: >Idt, ; NB. Jason payments, payment dates JP =: 1800 _400 _500 _600 Jdt =: ; Jdt =: >Jdt, ; NB. rates, rate dates r =: rdt=:> ; ; NB. interest payment dates idt =: ; idt =: >idt, ; NB. end of data input NB. Compute Iris, Jason daynumbers Id =: (dayno Idt) - dayno Jd =: (dayno Jdt) - dayno NB. create sparse array of 0 s P =: 1 $ NB. Insert Iris payment P =: IP(<"1(0,.Id))}P NB. Insert Jason payments P =: JP(<"1(1,.Jd))}P NB. all days are payment days pd =: i.{:$p rd =: (dayno rdt) - dayno id =: (dayno idt) - dayno sd =: pd>./id<./rd NB. starts ed =: pd>./id<./}.rd,_ NB. ends t =: (ed-sd)%365 NB. times Df $.^:_1 I=:P x t x r $35.75 $90.67 $ $ $7.55 $19.71 $28.02 $32.26 NB. Above are cumulative interest pmts NB. Sept 1 to Jan 1, Df +/\^:_1 "1 $.^:_1 I $35.75 $54.92 $46.59 $35.47 $7.55 $12.17 $8.30 $4.24 Remark 1: The dollar format function Df does not work on sparse arrays so $.^:_1has been used to convert the sparse array I to the non-sparse form. Remark 2: Once you have decided to use a sparse array to hold the payment data for the loan customers then you might want to do the above calculation in a rather different way. The payment data is recorded on a daily basis (every day is a payment day but on most days the payment happens to be zero) so there is really no need to calculate time intervals. Just calculate the daily interest every day to get cumulative inter- Interest Made Simple
6 est amounts for each customer and each day and then select the actual interest payment days from this and take differences. Overall, this approach requires about the same amount of J code as the above approach. 3. Compound Interest Made Simple 3.0 A Traditional Approach Compound interest is usually specified as a nominal annual rate compounded a certain number of times per year. For example, 12% compounded monthly is 1% per month so one dollar grows over one year by a factor of (1.01) 12 = If the loan interval is a whole multiple of the interest conversion period (one month in the previous example) then formulas for accumulated loans, and for the accumulation (or present value) of sequences of payments can be readily developed. In APL and J there are concise expressions for these formulas and that partially accounts for the great success that APL has enjoyed over the years in the actuarial profession. Example 8: Igor borrows $30000 at 12% compounded quarterly for the first four years and 12.5% compounded quarterly thereafter. He makes quarterly payments of $1000 for 3 years followed by quarterly payments of $2000 for 3 more years. What is his balance owing one quarter-year after his last payment? If he pays this balance, how much interest has he paid? P =: 30000,(12#_1000),12#_2000 i =: ((16#0.12),9#0.125)%4 Df P x */\. 1+i NB. balance $ Df P x _1+*/\. 1+i NB. interest $ Examples like the previous one show students the power of J (or APL) in mathematics of investment and should be ample justification for acquiring, studying, and using J (or APL). However, such examples are already well known to the APL community and hence to most readers of this paper. Therefore, this paper will explore some of the less well known aspects of compound interest and will show how certain feature of J are well adapted to these kinds of calculations. 3.1 Compound to Simple Interest Consider a loan at simple interest of 0.05 for the first year, 0.07 for the second year, and 0.08 for the third year. The simple interest rate for the three-year period is the sum of these rates, = 0.20, and each dollar borrowed must be repaid with $1.20 at the end of three years. If the same rates were used but interest were compounded annually, then each dollar would be repaid with (1.05)(1.07)(1.08) = $ and the interest rate for the three year period is The compound sum of the rates 0.05, 0.07, 0.08 is and this can be related to ordinary sum as follows: add 1, take logs, take the sum, take inverse log, and subtract 1. In other words, let laug(x) = log(1+x). (Thus laug is the log of augmented x.) Then: compound sum = laug -1 sum laug The relation between simple interest and compound interest can be expressed very concisely in J. The compound sum above is thought of as sum under laug. The under conjunction &. can be used to apply any function (such as sum) under another function such as laug as shown in the following example. J automatically computes laug -1. Example 9: In Example 8 above, compute the balance remaining if the interest rate had been simple interest. Then use laug to convert the calculation to compound interest. P =: 30000,(12#_1000),12#_2000 i =: ((16#0.12),9#0.125)%4 Df P x 1+(+/\.) i NB. simple $ Df P x 1+(+/\. &. laug) i NB. comp. $
7 Example 10: A mutual fund has annual growth for the years 1999, 1998,..., 1995 of 18%, 16%, -12%, 7%, -8% respectively. What were the average compound rates of growth over the last year, last two years,..., last 5 years. i =: _12 7 _8 am =: +/ % # NB. arithmetic mean 100*am &. laug \ i% The Declining Balance Method Now that compound interest has been studied, it is time to return to the declining balance method. This method is very commonly used for loans with partial payments made over short intervals of time with simple interest used to compute the new balance after each payment is made. Since the interest is included in the new balance, the method usually results in higher interest charges than if the Merchants Rule were used. The key change in the J code is to replace a matrix product (x =: +/. * ) with a new matrix product (xl =: +/&.laug. * ) so that the summation is done under laug. Example 11: Redo Example 4 with the Declining Balance Method. (modified solution B) pmt =: 400 P =: pr-pmt*py r =: 0.09*(<:/&i.)/26 25 pd =: 7*i.26 t =: (}.pd) - (}:pd) xl =: +/&.laug. * NB. New product rt =: r xl t%365 Df S =: P x (1 + rt) $ Remark: The Merchants Rule and the Declining Balance Method are usually presented as two rather distinct methods of doing partial payments problems with simple interest. The calculations are done in quite different ways. The spreadsheet models are very different. But the above approach with J shows the surprisingly close relation between the methods. Roughly speaking, the Declining Balance Method is the Merchants Rule under laug. 3.3 Pure Compound Interest The Declining Balance Method, when used in simple interest situations, involves a mixture of simple and compound interest methods. Another approach to partial payments over short time intervals is to use pure compound interest. Historically, this was not practical because compound interest accumulation factors were looked up in tables and the tables could not possibly have been complete enough to have all possible fractional times. Hence simple interest, which is far easier to calculate manually, was used for fractions of an interest period. Now that computers are used for these calculations, there is no computational reason to avoid the fractional exponents that are required in compound interest calculations. However, as the next example reminds us, there is a penalty to pay for using compound interest: the convexity of the graph of the compound interest accumulation function implies that for time intervals less than one interest period, the compound interest is less than the simple interest. Therefore, a company charging compound interest for short time intervals will be charging less interest than if they use simple interest. Example 12: Do Example 4 again using compound interest on every time interval. NB. Use A slightly modified pmt =: 400 P =: pr-pmt*py Interest Made Simple
8 r =: 0.09 pd =: 7*i.26 NB. payment days t =: (last pd)-pd Df S =: P x (1+(*&(t%365))&.laug r) $ Discussion This paper has shown how a computer running J can be used as a powerful calculator to solve a variety of problems in mathematics of finance. The language features of J enable us to express the solutions to complex problems in concise language that is formula-oriented rather than program-oriented. That will be attractive to students who find calculators to be more user-friendly than programming languages. Also, this paper has exhibited a relationship between simple interest and compound interest that, while perhaps widely known, is not widely reported in textbooks. Perhaps that is partially because the relationship is awkward to express in natural language or in mathematical notation. Perhaps it is partially because the relationship is not seen to be of practical use. J allows a natural way of expressing this relationship, which leads to practical applications of it. To fully appreciate the examples in this paper, the reader should do each example by hand using traditional actuarial methods and a financial calculator and then do each example on a spreadsheet. You should find that the J approach is more convenient and (if you are comfortable with J, with arrays, and with the relation between compound and simple interest) more conceptual than the traditional or spreadsheet approaches. Bibliography PETR ZIMA, ROBERT L. BROWN, Mathematics of Finance, McGraw-Hill Ryerson Limited, 4 th edition, J FreeWare is available at: ftp://archive.uwaterloo.ca/languages/j J version 4.04 is available at: Appendix The following J functions are used above. last =: {: NB. last item arg =: ] NB. argument const =: "_ NB. constant function x =: +/. * NB. matrix product laug =: >: NB. log of aug NB. Dollar formatter for arrays f2 =: (' '&,)"1@(0.2&":) j =: ' ' ns =: (}:<}.)@(e.&j,0:) Df =: ((1:+j.@ns)#!.'$'])"1@f2 NB. Day number for any post-1601 date dayno =: 3 : 0 "1 ('d';'m';'y') =. y. dn =. 365*dy =. (y-1601) dn =. dn+(-/<.dy% ) ly =. -/0= y md =. 28+(3,ly, ) dn+(+/(m-1){.md)+d )
3.1 Simple Interest. Definition: I = Prt I = interest earned P = principal ( amount invested) r = interest rate (as a decimal) t = time
3.1 Simple Interest Definition: I = Prt I = interest earned P = principal ( amount invested) r = interest rate (as a decimal) t = time An example: Find the interest on a boat loan of $5,000 at 16% for
More information4: Single Cash Flows and Equivalence
4.1 Single Cash Flows and Equivalence Basic Concepts 28 4: Single Cash Flows and Equivalence This chapter explains basic concepts of project economics by examining single cash flows. This means that each
More informationAppendix A Financial Calculations
Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options, Second Edition By Andrew M. Chisholm 010 John Wiley & Sons, Ltd. Appendix A Financial Calculations TIME VALUE OF MONEY
More informationChapter 3 Mathematics of Finance
Chapter 3 Mathematics of Finance Section R 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
More informationFinancial Maths: Interest
Financial Maths: Interest Basic increase and decrease: Let us assume that you start with R100. You increase it by 10%, and then decrease it by 10%. How much money do you have at the end? Increase by 10%
More informationSection 5.1 Simple and Compound Interest
Section 5.1 Simple and Compound Interest Question 1 What is simple interest? Question 2 What is compound interest? Question 3 - What is an effective interest rate? Question 4 - What is continuous compound
More informationSequences, Series, and Limits; the Economics of Finance
CHAPTER 3 Sequences, Series, and Limits; the Economics of Finance If you have done A-level maths you will have studied Sequences and Series in particular Arithmetic and Geometric ones) before; if not you
More informationMTH6154 Financial Mathematics I Interest Rates and Present Value Analysis
16 MTH6154 Financial Mathematics I Interest Rates and Present Value Analysis Contents 2 Interest Rates 16 2.1 Definitions.................................... 16 2.1.1 Rate of Return..............................
More informationBefore How can lines on a graph show the effect of interest rates on savings accounts?
Compound Interest LAUNCH (7 MIN) Before How can lines on a graph show the effect of interest rates on savings accounts? During How can you tell what the graph of simple interest looks like? After What
More informationUnit 9 Financial Mathematics: Borrowing Money. Chapter 10 in Text
Unit 9 Financial Mathematics: Borrowing Money Chapter 10 in Text 9.1 Analyzing Loans Simple vs. Compound Interest Simple Interest: the amount of interest that you pay on a loan is calculated ONLY based
More informationUnit 9 Financial Mathematics: Borrowing Money. Chapter 10 in Text
Unit 9 Financial Mathematics: Borrowing Money Chapter 10 in Text 9.1 Analyzing Loans Simple vs. Compound Interest Simple Interest: the amount of interest that you pay on a loan is calculated ONLY based
More informationYear 10 General Maths Unit 2
Year 10 General Mathematics Unit 2 - Financial Arithmetic II Topic 2 Linear Growth and Decay In this area of study students cover mental, by- hand and technology assisted computation with rational numbers,
More informationIntroduction to the Hewlett-Packard (HP) 10B Calculator and Review of Mortgage Finance Calculations
Introduction to the Hewlett-Packard (HP) 0B Calculator and Review of Mortgage Finance Calculations Real Estate Division Faculty of Commerce and Business Administration University of British Columbia Introduction
More informationMTH302- Business Mathematics
MIDTERM EXAMINATION MTH302- Business Mathematics Question No: 1 ( Marks: 1 ) - Please choose one Store A marked down a $ 50 perfume to $ 40 with markdown of $10 The % Markdown is 10% 20% 30% 40% Question
More informationActuarial Society of India
Actuarial Society of India EXAMINATIONS June 005 CT1 Financial Mathematics Indicative Solution Question 1 a. Rate of interest over and above the rate of inflation is called real rate of interest. b. Real
More informationFinance 197. Simple One-time Interest
Finance 197 Finance We have to work with money every day. While balancing your checkbook or calculating your monthly expenditures on espresso requires only arithmetic, when we start saving, planning for
More informationELEMENTS OF MATRIX MATHEMATICS
QRMC07 9/7/0 4:45 PM Page 5 CHAPTER SEVEN ELEMENTS OF MATRIX MATHEMATICS 7. AN INTRODUCTION TO MATRICES Investors frequently encounter situations involving numerous potential outcomes, many discrete periods
More information6.1 Simple Interest page 243
page 242 6 Students learn about finance as it applies to their daily lives. Two of the most important types of financial decisions for many people involve either buying a house or saving for retirement.
More informationMathematics for Economists
Department of Economics Mathematics for Economists Chapter 4 Mathematics of Finance Econ 506 Dr. Mohammad Zainal 4 Mathematics of Finance Compound Interest Annuities Amortization and Sinking Funds Arithmetic
More informationNominal and Effective Interest Rates
Nominal and Effective Interest Rates 4.1 Introduction In all engineering economy relations developed thus far, the interest rate has been a constant, annual value. For a substantial percentage of the projects
More information3: Balance Equations
3.1 Balance Equations Accounts with Constant Interest Rates 15 3: Balance Equations Investments typically consist of giving up something today in the hope of greater benefits in the future, resulting in
More information3. Time value of money. We will review some tools for discounting cash flows.
1 3. Time value of money We will review some tools for discounting cash flows. Simple interest 2 With simple interest, the amount earned each period is always the same: i = rp o where i = interest earned
More informationYear 10 GENERAL MATHEMATICS
Year 10 GENERAL MATHEMATICS UNIT 2, TOPIC 3 - Part 1 Percentages and Ratios A lot of financial transaction use percentages and/or ratios to calculate the amount owed. When you borrow money for a certain
More informationThe three formulas we use most commonly involving compounding interest n times a year are
Section 6.6 and 6.7 with finance review questions are included in this document for your convenience for studying for quizzes and exams for Finance Calculations for Math 11. Section 6.6 focuses on identifying
More information3. Time value of money
1 Simple interest 2 3. Time value of money With simple interest, the amount earned each period is always the same: i = rp o We will review some tools for discounting cash flows. where i = interest earned
More information2.6.3 Interest Rate 68 ESTOLA: PRINCIPLES OF QUANTITATIVE MICROECONOMICS
68 ESTOLA: PRINCIPLES OF QUANTITATIVE MICROECONOMICS where price inflation p t/pt is subtracted from the growth rate of the value flow of production This is a general method for estimating the growth rate
More informationA MATRIX APPROACH TO SUPPORT DEPARTMENT RECIPROCAL COST ALLOCATIONS
A MATRIX APPROACH TO SUPPORT DEPARTMENT RECIPROCAL COST ALLOCATIONS Dennis Togo, University of New Mexico, Anderson School of Management, Albuquerque, NM 87131, 505 277 7106, togo@unm.edu ABSTRACT The
More informationActivity 1.1 Compound Interest and Accumulated Value
Activity 1.1 Compound Interest and Accumulated Value Remember that time is money. Ben Franklin, 1748 Reprinted by permission: Tribune Media Services Broom Hilda has discovered too late the power of compound
More informationEconomic Simulations for Risk Analysis
Session 1339 Economic Simulations for Risk Analysis John H. Ristroph University of Louisiana at Lafayette Introduction and Overview Errors in estimates of cash flows are the rule rather than the exception,
More informationMTH6154 Financial Mathematics I Interest Rates and Present Value Analysis
16 MTH6154 Financial Mathematics I Interest Rates and Present Value Analysis Contents 2 Interest Rates and Present Value Analysis 16 2.1 Definitions.................................... 16 2.1.1 Rate of
More informationDay 3 Simple vs Compound Interest.notebook April 07, Simple Interest is money paid or earned on the. The Principal is the
LT: I can calculate simple and compound interest. p.11 What is Simple Interest? What is Principal? Simple Interest is money paid or earned on the. The Principal is the What is the Simple Interest Formula?
More informationCopyright 2016 by the UBC Real Estate Division
DISCLAIMER: This publication is intended for EDUCATIONAL purposes only. The information contained herein is subject to change with no notice, and while a great deal of care has been taken to provide accurate
More informationLesson Exponential Models & Logarithms
SACWAY STUDENT HANDOUT SACWAY BRAINSTORMING ALGEBRA & STATISTICS STUDENT NAME DATE INTRODUCTION Compound Interest When you invest money in a fixed- rate interest earning account, you receive interest at
More informationThe Theory of Interest
Chapter 1 The Theory of Interest One of the first types of investments that people learn about is some variation on the savings account. In exchange for the temporary use of an investor's money, a bank
More informationMaximum Likelihood Estimation
Maximum Likelihood Estimation The likelihood and log-likelihood functions are the basis for deriving estimators for parameters, given data. While the shapes of these two functions are different, they have
More informationThese terms are the same whether you are the borrower or the lender, but I describe the words by thinking about borrowing the money.
Simple and compound interest NAME: These terms are the same whether you are the borrower or the lender, but I describe the words by thinking about borrowing the money. Principal: initial amount you borrow;
More informationUnit 8 - Math Review. Section 8: Real Estate Math Review. Reading Assignments (please note which version of the text you are using)
Unit 8 - Math Review Unit Outline Using a Simple Calculator Math Refresher Fractions, Decimals, and Percentages Percentage Problems Commission Problems Loan Problems Straight-Line Appreciation/Depreciation
More informationTIME VALUE OF MONEY. Lecture Notes Week 4. Dr Wan Ahmad Wan Omar
TIME VALUE OF MONEY Lecture Notes Week 4 Dr Wan Ahmad Wan Omar Lecture Notes Week 4 4. The Time Value of Money The notion on time value of money is based on the idea that money available at the present
More informationChapter 14 : Statistical Inference 1. Note : Here the 4-th and 5-th editions of the text have different chapters, but the material is the same.
Chapter 14 : Statistical Inference 1 Chapter 14 : Introduction to Statistical Inference Note : Here the 4-th and 5-th editions of the text have different chapters, but the material is the same. Data x
More informationOptions. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan Options
Options An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2014 Definitions and Terminology Definition An option is the right, but not the obligation, to buy or sell a security such
More informationPart 2. Finite Mathematics. Chapter 3 Mathematics of Finance Chapter 4 System of Linear Equations; Matrices
Part 2 Finite Mathematics Chapter 3 Mathematics of Finance Chapter 4 System of Linear Equations; Matrices Chapter 3 Mathematics of Finance Section 1 Simple Interest Section 2 Compound and Continuous Compound
More informationApplications of Exponential Functions Group Activity 7 Business Project Week #10
Applications of Exponential Functions Group Activity 7 Business Project Week #10 In the last activity we looked at exponential functions. This week we will look at exponential functions as related to interest
More information4: SINGLE-PERIOD MARKET MODELS
4: SINGLE-PERIOD MARKET MODELS Marek Rutkowski School of Mathematics and Statistics University of Sydney Semester 2, 2016 M. Rutkowski (USydney) Slides 4: Single-Period Market Models 1 / 87 General Single-Period
More informationExcelBasics.pdf. Here is the URL for a very good website about Excel basics including the material covered in this primer.
Excel Primer for Finance Students John Byrd, November 2015. This primer assumes you can enter data and copy functions and equations between cells in Excel. If you aren t familiar with these basic skills
More informationSurvey of Math Chapter 21: Savings Models Handout Page 1
Chapter 21: Savings Models Handout Page 1 Growth of Savings: Simple Interest Simple interest pays interest only on the principal, not on any interest which has accumulated. Simple interest is rarely used
More informationMy Notes CONNECT TO HISTORY
SUGGESTED LEARNING STRATEGIES: Shared Reading, Summarize/Paraphrase/Retell, Create Representations, Look for a Pattern, Quickwrite, Note Taking Suppose your neighbor, Margaret Anderson, has just won the
More informationChapter 9, Mathematics of Finance from Applied Finite Mathematics by Rupinder Sekhon was developed by OpenStax College, licensed by Rice University,
Chapter 9, Mathematics of Finance from Applied Finite Mathematics by Rupinder Sekhon was developed by OpenStax College, licensed by Rice University, and is available on the Connexions website. It is used
More informationSimple and Compound Interest
Chp 11/24/08 5:00 PM Page 171 Simple and Compound Interest Interest is the fee paid for borrowed money. We receive interest when we let others use our money (for example, by depositing money in a savings
More informationThe Theory of Interest
Chapter 1 The Theory of Interest One of the first types of investments that people learn about is some variation on the savings account. In exchange for the temporary use of an investor s money, a bank
More informationAssignment 3 Solutions
ssignment 3 Solutions Timothy Vis January 30, 2006 3-1-6 P 900, r 10%, t 9 months, I?. Given I P rt, we have I (900)(0.10)( 9 12 ) 67.50 3-1-8 I 40, P 400, t 4 years, r?. Given I P rt, we have 40 (400)r(4),
More informationOur Own Problems and Solutions to Accompany Topic 11
Our Own Problems and Solutions to Accompany Topic. A home buyer wants to borrow $240,000, and to repay the loan with monthly payments over 30 years. A. Compute the unchanging monthly payments for a standard
More informationMathematics of Finance
CHAPTER 55 Mathematics of Finance PAMELA P. DRAKE, PhD, CFA J. Gray Ferguson Professor of Finance and Department Head of Finance and Business Law, James Madison University FRANK J. FABOZZI, PhD, CFA, CPA
More informationINTRODUCTION AND OVERVIEW
CHAPTER ONE INTRODUCTION AND OVERVIEW 1.1 THE IMPORTANCE OF MATHEMATICS IN FINANCE Finance is an immensely exciting academic discipline and a most rewarding professional endeavor. However, ever-increasing
More informationSample Investment Device CD (Certificate of Deposit) Savings Account Bonds Loans for: Car House Start a business
Simple and Compound Interest (Young: 6.1) In this Lecture: 1. Financial Terminology 2. Simple Interest 3. Compound Interest 4. Important Formulas of Finance 5. From Simple to Compound Interest 6. Examples
More informationEconomics 135. Bond Pricing and Interest Rates. Professor Kevin D. Salyer. UC Davis. Fall 2009
Economics 135 Bond Pricing and Interest Rates Professor Kevin D. Salyer UC Davis Fall 2009 Professor Kevin D. Salyer (UC Davis) Money and Banking Fall 2009 1 / 12 Bond Pricing Formulas - Interest Rates
More information7-4. Compound Interest. Vocabulary. Interest Compounded Annually. Lesson. Mental Math
Lesson 7-4 Compound Interest BIG IDEA If money grows at a constant interest rate r in a single time period, then after n time periods the value of the original investment has been multiplied by (1 + r)
More informationInterest Compounded Annually. Table 3.27 Interest Computed Annually
33 CHAPTER 3 Exponential, Logistic, and Logarithmic Functions 3.6 Mathematics of Finance What you ll learn about Interest Compounded Annually Interest Compounded k Times per Year Interest Compounded Continuously
More informationUnit 9: Borrowing Money
Unit 9: Borrowing Money 1 Financial Vocab Amortization Table A that lists regular payments of a loan and shows how much of each payment goes towards the interest charged and the principal borrowed, as
More informationm
Chapter 1: Linear Equations a. Solving this problem is equivalent to finding an equation of a line that passes through the points (0, 24.5) and (30, 34). We use these two points to find the slope: 34 24.5
More informationJacob: The illustrative worksheet shows the values of the simulation parameters in the upper left section (Cells D5:F10). Is this for documentation?
PROJECT TEMPLATE: DISCRETE CHANGE IN THE INFLATION RATE (The attached PDF file has better formatting.) {This posting explains how to simulate a discrete change in a parameter and how to use dummy variables
More informationFinancial Mathematics
3 Lesson Financial Mathematics Simple Interest As you learnt in grade 10, simple interest is calculated as a constant percentage of the money borrowed over a specific time period, for the complete period.
More informationJWPR Design-Sample April 16, :38 Char Count= 0 PART. One. Quantitative Analysis COPYRIGHTED MATERIAL
PART One Quantitative Analysis COPYRIGHTED MATERIAL 1 2 CHAPTER 1 Bond Fundamentals Risk management starts with the pricing of assets. The simplest assets to study are regular, fixed-coupon bonds. Because
More informationThe Time Value. The importance of money flows from it being a link between the present and the future. John Maynard Keynes
The Time Value of Money The importance of money flows from it being a link between the present and the future. John Maynard Keynes Get a Free $,000 Bond with Every Car Bought This Week! There is a car
More informationKey Terms: exponential function, exponential equation, compound interest, future value, present value, compound amount, continuous compounding.
4.2 Exponential Functions Exponents and Properties Exponential Functions Exponential Equations Compound Interest The Number e and Continuous Compounding Exponential Models Section 4.3 Logarithmic Functions
More informationCHAPTER 3. Compound Interest
CHAPTER 3 Compound Interest Recall What can you say to the amount of interest earned in simple interest? Do you know? An interest can also earn an interest? Compound Interest Whenever a simple interest
More informationSAMPLE. Financial arithmetic
C H A P T E R 6 Financial arithmetic How do we determine the new price when discounts or increases are applied? How do we determine the percentage discount or increase applied, given the old and new prices?
More information21.1 Arithmetic Growth and Simple Interest
21.1 Arithmetic Growth and Simple Interest When you open a savings account, your primary concerns are the safety and growth of your savings. Suppose you deposit $100 in an account that pays interest at
More informationA Note on Capital Budgeting: Treating a Replacement Project as Two Mutually Exclusive Projects
A Note on Capital Budgeting: Treating a Replacement Project as Two Mutually Exclusive Projects Su-Jane Chen, Metropolitan State College of Denver Timothy R. Mayes, Metropolitan State College of Denver
More informationSimple Interest: Interest earned on the original investment amount only. I = Prt
c Kathryn Bollinger, June 28, 2011 1 Chapter 5 - Finance 5.1 - Compound Interest Simple Interest: Interest earned on the original investment amount only If P dollars (called the principal or present value)
More informationMath116Chap10MathOfMoneyPart2Done.notebook March 01, 2012
Chapter 10: The Mathematics of Money PART 2 Percent Increases and Decreases If a shirt is marked down 20% and it now costs $32, how much was it originally? Simple Interest If you invest a principle of
More informationJournal of College Teaching & Learning February 2007 Volume 4, Number 2 ABSTRACT
How To Teach Hicksian Compensation And Duality Using A Spreadsheet Optimizer Satyajit Ghosh, (Email: ghoshs1@scranton.edu), University of Scranton Sarah Ghosh, University of Scranton ABSTRACT Principle
More informationTexas Instruments 83 Plus and 84 Plus Calculator
Texas Instruments 83 Plus and 84 Plus Calculator For the topics we cover, keystrokes for the TI-83 PLUS and 84 PLUS are identical. Keystrokes are shown for a few topics in which keystrokes are unique.
More informationTHE UNIVERSITY OF TEXAS AT AUSTIN Department of Information, Risk, and Operations Management
THE UNIVERSITY OF TEXAS AT AUSTIN Department of Information, Risk, and Operations Management BA 386T Tom Shively PROBABILITY CONCEPTS AND NORMAL DISTRIBUTIONS The fundamental idea underlying any statistical
More informationIntroductory Financial Mathematics DSC1630
/2018 Tutorial Letter 202/1/2018 Introductory Financial Mathematics DSC130 Semester 1 Department of Decision Sciences Important Information: This tutorial letter contains the solutions of Assignment 02
More informationTheory of the rate of return
Macroeconomics 2 Short Note 2 06.10.2011. Christian Groth Theory of the rate of return Thisshortnotegivesasummaryofdifferent circumstances that give rise to differences intherateofreturnondifferent assets.
More informationThe Theory of Interest
The Theory of Interest An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2014 Simple Interest (1 of 2) Definition Interest is money paid by a bank or other financial institution
More information13.3. Annual Percentage Rate (APR) and the Rule of 78
13.3. Annual Percentage Rate (APR) and the Rule of 78 Objectives A. Find the APR of a loan. B. Use the rule of 78 to find the refund and payoff of a loan. C. Find the monthly payment for a loan using an
More informationChapter 21: Savings Models Lesson Plan
Lesson Plan For All Practical Purposes Arithmetic Growth and Simple Interest Geometric Growth and Compound Interest Mathematical Literacy in Today s World, 8th ed. A Limit to Compounding A Model for Saving
More informationCHAPTER 4. The Time Value of Money. Chapter Synopsis
CHAPTER 4 The Time Value of Money Chapter Synopsis Many financial problems require the valuation of cash flows occurring at different times. However, money received in the future is worth less than money
More informationIntroduction. Deriving the ADF For An Ordinary Annuity
The Annuity Discount Factor (ADF): Generalization, Analysis of Special Cases, and Relationship to the Gordon Model and Fixed-Rate Loan Amortization Copyright 1993, by Jay B. Abrams, CPA, MBA Introduction
More informationSAMPLE. MODULE 4 Applications of financial mathematics
C H A P T E R 21 MODULE 4 Applications of financial mathematics How do we calculate income tax? What do we mean by capital gains tax, stamp duty, GST? How do we calculate the interest earned on our bank
More information7.7 Technology: Amortization Tables and Spreadsheets
7.7 Technology: Amortization Tables and Spreadsheets Generally, people must borrow money when they purchase a car, house, or condominium, so they arrange a loan or mortgage. Loans and mortgages are agreements
More informationTD Canada Trust GIC and Term Deposit Product and Rate Information
Canadian GIC Rates - TD Canada Trust http://www.tdcanadatrust.com/gics/gictable.jsp Page 1 of 3 06/09/2008 Skip to content Apply Search Contact Us Login to: EasyWeb My Accounts Customer Service Banking
More informationFinding the Sum of Consecutive Terms of a Sequence
Mathematics 451 Finding the Sum of Consecutive Terms of a Sequence In a previous handout we saw that an arithmetic sequence starts with an initial term b, and then each term is obtained by adding a common
More informationFinance 100 Problem Set 6 Futures (Alternative Solutions)
Finance 100 Problem Set 6 Futures (Alternative Solutions) Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution.
More informationFurther Mathematics 2016 Core: RECURSION AND FINANCIAL MODELLING Chapter 6 Interest and depreciation
Further Mathematics 2016 Core: RECURSION AND FINANCIAL MODELLING Chapter 6 Interest and depreciation Key knowledge the use of first- order linear recurrence relations to model flat rate and unit cost and
More informationComputing interest and composition of functions:
Computing interest and composition of functions: In this week, we are creating a simple and compound interest calculator in EXCEL. These two calculators will be used to solve interest questions in week
More informationTIME VALUE OF MONEY. Charles I. Welty
TIME VALUE OF MONEY Charles I. Welty Copyright Charles I. Welty - 2004 Introduction Time Value of Money... 1 Overview... 1 Present and Future Value... 2 Interest or Interest Rate... 2 APR and APY... 2
More informationMath 1130 Exam 2 Review SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
Math 1130 Exam 2 Review Provide an appropriate response. 1) Write the following in terms of ln x, ln(x - 3), and ln(x + 1): ln x 3 (x - 3)(x + 1) 2 1) 2) Write the following in terms of ln x, ln(x - 3),
More informationArithmetic. Mathematics Help Sheet. The University of Sydney Business School
Arithmetic Mathematics Help Sheet The University of Sydney Business School Common Arithmetic Symbols is not equal to is approximately equal to is identically equal to infinity, which is a non-finite number
More informationAPPM 2360 Project 1. Due: Friday October 6 BEFORE 5 P.M.
APPM 2360 Project 1 Due: Friday October 6 BEFORE 5 P.M. 1 Introduction A pair of close friends are currently on the market to buy a house in Boulder. Both have obtained engineering degrees from CU and
More informationMulti-state transition models with actuarial applications c
Multi-state transition models with actuarial applications c by James W. Daniel c Copyright 2004 by James W. Daniel Reprinted by the Casualty Actuarial Society and the Society of Actuaries by permission
More informationLESSON 2 INTEREST FORMULAS AND THEIR APPLICATIONS. Overview of Interest Formulas and Their Applications. Symbols Used in Engineering Economy
Lesson Two: Interest Formulas and Their Applications from Understanding Engineering Economy: A Practical Approach LESSON 2 INTEREST FORMULAS AND THEIR APPLICATIONS Overview of Interest Formulas and Their
More informationFINANCE FOR EVERYONE SPREADSHEETS
FINANCE FOR EVERYONE SPREADSHEETS Some Important Stuff Make sure there are at least two decimals allowed in each cell. Otherwise rounding off may create problems in a multi-step problem Always enter the
More informationAnalyzing Loans. cbalance ~ a Payment ($)
2. Analyzing Loans YOU WILL NEED calculator financial application spreadsheet software EXPLORE Which loan option would you choose to borrow $200? Why? A. A bank loan at 5%, compounded quarterly, to be
More informationSUMMARY STATISTICS EXAMPLES AND ACTIVITIES
Session 6 SUMMARY STATISTICS EXAMPLES AD ACTIVITIES Example 1.1 Expand the following: 1. X 2. 2 6 5 X 3. X 2 4 3 4 4. X 4 2 Solution 1. 2 3 2 X X X... X 2. 6 4 X X X X 4 5 6 5 3. X 2 X 3 2 X 4 2 X 5 2
More informationIn terms of covariance the Markowitz portfolio optimisation problem is:
Markowitz portfolio optimisation Solver To use Solver to solve the quadratic program associated with tracing out the efficient frontier (unconstrained efficient frontier UEF) in Markowitz portfolio optimisation
More informationCHAPTER 2 TIME VALUE OF MONEY
CHAPTER 2 TIME VALUE OF MONEY True/False Easy: (2.2) Compounding Answer: a EASY 1. One potential benefit from starting to invest early for retirement is that the investor can expect greater benefits from
More informationInterest Rates and Self-Sufficiency NOMINAL, EFFECTIVE AND REAL INTEREST RATES
Interest Rates and Self-Sufficiency LESSON 2 NOMINAL, EFFECTIVE AND REAL INTEREST RATES Understanding interest rates for microenterprise lending requires knowledge of a few financial terms, concepts, and
More informationChapter 6 Analyzing Accumulated Change: Integrals in Action
Chapter 6 Analyzing Accumulated Change: Integrals in Action 6. Streams in Business and Biology You will find Excel very helpful when dealing with streams that are accumulated over finite intervals. Finding
More information