Mathematics for Economic Analysis, 4ECON007C Semester 1, 2017-2018

Tutorial 2 Mathematics of Finance

Key terms Notes Key terms Notes

Index/power/exponent Discounting
Common logarithm Effective rate of interest
Natural logarithm Annual percentage rate
Interest compounding Limit
Discounting Continuous function
Annuity, ordinary Future value of ordinary
annuity annuity

1) Solve the equations: a) y = log7 49 b) log8 x = 2/3 c) loga 9 = 2 d) 2x = 8x 1 e) 6x = 37

2H) The inverse demand and supply functions for a certain good are given by the equations P = 100eQ
and P = eQ. Find the equilibrium price and quantity.

3) $2,500 is invested at a nominal rate of 5% for 8 years. Determine its future value if the interest is
compounded: a) annually; b) semi-annually; c) quarterly; d) continuously.

4H) Find the future value of a principal of $10,000 set out at an annual interest rate of 12% for 2 years
when compounded: a) quarterly; b) monthly; c) continuously.

5) Anvar wants to invest a certain amount of money. There are two options before him: an account that
pays 4% a year compounded quarterly and an account that pays 3.6% a year for the first two years and
4.8% a year thereafter, compounded monthly throughout. Can you find which account Anvar should
choose for a period of three years and why?

6H) Midwest Bank offers a return of 5% compounded annually for each and every year. The rival BFB
offers a return of 3% the first year and 7% in the second and subsequent years (both compounded
annually). Which bank would you choose to invest in if you decide to invest a principal for a) 2 years;
b) 3 years?

7H) A price of machinery depreciates in value by 5% a year. Determine its value in three years time if
its current value is $50,000.

8H) You buy a new Captiva for $22,000. The value of the car decreases by 12.5% each year.
a) Write an exponential decay model for the value of the car. Use the model to estimate the value
after 3 years.
b) Graph the model and estimate when the car will have a value of $8,000.

9) Find the present value of a future payment of $15,000 due in 5 years at 4% interest rate
compounded: a) annually; b) semi-annually; c) continuously.

10H) A department store has its own credit card facilities for which it charges interest at a rate of 2%
each month. Explain briefly why this is not the same as an annual rate of 24%. What is the annual
percentage rate?

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Mathematics for Economic Analysis, 4ECON007C Semester 1, 2017-2018

11) Determine the APR if the nominal rate is 7% compounded continuously.

12) Current annual consumption of energy is 78 billion units and this is expected to rise at a fixed rate of
5.8% each year. The capacity of the industry to supply energy is currently 104 billion units.
a) If the supply remains steady, after how many years will demand exceed supply?
b) What constant rate of growth of energy production would be needed to satisfy demand for the next
50 years?

13H) If the world population grows consistently at 2.6 percent, how long will it take to double?

14) A companys sales have been growing consistently over time from $23.2 million in 2007 to $32.27
million in 2013.
a) Express sales (S) as a natural base exponential function of time (t);
b) Indicate the annual rate of growth of sales (G).

15H) The population of Uzbekistan increased from 20.7 million in 1991 to 26.1 million in 2005. If the
population increases at the same rate, in how many years from 2005 will it reach 40 million people?

x2 + 3
x3
(
16) Evaluate the limits: a) lim x - 2x + 3
2
) bH) lim
x3 2x - 2
c) lim+
x0 x
3
d) lim-
x0
3
x
5 x -16
2
x - 2x - 24
2
2 x 35 x9 5
e) lim fH) lim g) lim h) lim i) lim
x x x-4 x + 4 x6 x-6 x 3 x 4 x 3 x10 4

x +x
2
x x
jH) lim 4 kH) lim 5 lH) lim
x0 x + x x
x 2 x1 x -1

5, 000
17H) The population of a certain small city t years from now is predicted to be N(t) = 40, 000 - .
t +3
Graph this function and find lim N . Discuss what your finding means.
t

18) Check whether the following functions are continuous at the specified points:
a) f (x) = 5x2 8x + 9 at x = 1 b) f (x) = (x 3)/(x2 9) at x = 3

19) Sketch the graphs of the following functions, and determine whether they are continuous. What is
(are) the point(s) of discontinuity?
x 1, x 0 1, x 0

a) 3x + y 2 = 0 bH) 4x + 2y = 1 c) f x x 2,0 x 3 dH) f x 1,0 x 1
4 x , x 3 1, x 1

20) Anvar has $6500 amount deposit note from Asaka Bank. The deposit is payable in one year at 6%
interest. Anvar needs cash to pay tuition fee, so four months before the deposit is due, he sells the note
(loan) to Karim. If Karim wants a return of 9% on his investment, how much should Karim pay Anvar
for the note?

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Mathematics for Economic Analysis, 4ECON007C Semester 1, 2017-2018

21) Find each of these sums:

1) 1 + 1 1.046 + 1.0462 + 1.0463 + + 1.04621

2) 1 + 1 1.05 + 1.052 + 1.053 + + 1.0514

3h) 1 + 1 1.14 + 1.142 + 1.143 + 1.1410

22) Find the future value of the ordinary annuities with the given payments and interest rates.

1) R = 12 000, 6.2% interest compounded annually for 8 years.

2h) R = 865, 6% interest compounded semiannually for 10 years.

3h) R = 1200, 8% interest compounded quarterly for 10 years.

23) Find the final amount in each of these retirement accounts, in which the rate of return on the account
and the regular contribution change over time.

1) $400 per month invested at 4%, compounded monthly, for 10 years; then $600 per month invested at
6%, compounded monthly, for 10 years.

2h) $1000 per quarter invested at 4.2%, compounded quarterly, for 10 years; then $1500 per quarter
invested at 7.4%, compounded quarterly, for 15 years.

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