Business Mathematics

Books:
1) Business Mathematics: Dr. Amarnath Dikshit – Himalaya Publishing House
2) Business Mathematics: J. K. Singh – Himalaya Publishing House

Mathematics of Finance:
Simple Interest, Compound Interest, Annuity, Sinking fund, Annuity due, Perpetuity, Effective rate of Interest, Loan
Amortization table
Sequence and Series:
Arithmetic Progression (AP), Geometric Progression (GP) and Harmonic Progression (HP)

Interest is defined as the cost of borrowing money, It can be classified as simple interest or compound
interest.

Simple interest is calculated on the principal, or original, amount of a loan.

Compound interest is calculated on the principal amount and also on the accumulated interest of
previous periods, and can thus be regarded as “interest on interest.”

The formula for calculating simple and compound interest in a year is:
Simple Interest = P x i x n
Compound Interest = [P (1 + i)n] – P
where P = Principal, i = annual interest rate in percentage terms, and
n = number of compounding periods for a year.

Interest is calculated multiple times in a year

‘i’ and ‘n’ have to be adjusted that is, “i” has to be divided by "t" number of times interest is to be
calculated per year and “n” has to be multiplied by "t,".

Example: if simple interest is charged at 5% on a Rs. 10,000 loan that is taken out for a three-year
period, What would be the amount of interest if it is charged on a simple interest and compound interest
basis?
Module - 1
Numerical Problems
EX: 1 You deposit Rs.1000 into an account that earns 5% simple annual interest, and your friend deposits Rs.
1000 into an account that earns 5% interest compounded annually. Copy the following table and calculate
the values. Show your work
Years Simple Interest Account Balance Compound Interest Account Balance
1 ? ?
5 ? ?
10 ? ?
20 ? ?
EX: 2 Atul deposited Rs. 70,000 with a bank at 13% rate of simple interest for 8 years. If he deposits the same
sum for the same period at the same rate of compound interest, find the difference of interests.
EX: 3 Gujarati borrowed Rs. 12000 from ICICI Bank on compound interest. The rate of interest is fixed at 12% for
7 years. What sum will Gujarati pay to clear the debt at the end of the period? [26528.40]
EX: 4 Mr. AB has invested Rs 10,00,000 in Urban Bank at compounding interest rate of 10% for a period of five
years. Calculate the amount of interest for Mr. AB. [610500]
EX: 5 Richard deposits Rs. 3000 in State Bank of India for 3 years which earns him an interest of 8%.
What is the amount he gets after 1 year, 2 years and 3 years? [3240, 3499.2, 3779.1]
EX: 6 Mr. Krissh deposited Rs. 12000 in a firm at 8% rate of interest for 5.5 Years. Interest is calculated half
yearly. What amount of Compound Interest will he get on maturity? [6474]
EX: 7 Find the compound interest on Rs. 10000 in 2 years at 4% per annum, the interest being compounded half
yearly. [824]
EX: 8 A person deposits Rs.25000 for 4 years at 12% rate of compound interest. If interest is calculated monthly,
find the amount of compound interest. {FVIF(n=48, i=0.01} = 1.6122 [15305]
EX: 9 If Rs.1200 amounts to Rs.1488 after 3 years, find the simple rate of interest. 8%
EX: 10 A trust deposited some amount as fixed deposit at 10% rate of compound interest with a commercial bank.
If the total amount received after 3years is Rs.3,32,750, finds the amount deposited by the trust. 25000
EX: 11 The difference between the compound interest and simple interest on a certain sum at 10% per annum for
2 years is Rs.631.Find out sum.
EX: 12 The basic salary of an employee is Rs. 15000. He contributes 10% of his basic per month to provident fund.
His employer also contributes 8%. If interest credited to provident fund account is 12% per annum, find
the amount of interest after one year. Also, find total amount.
EX: 13 A man lent Rs. 72,000 for 5 years and Rs. 76,000 for 4 years to two persons at the same rate(R) of interest.
He received RS. 5600 more as interest from one than what he received as interest from the other. What is
the rate of interest per annum?
EX: 16 Mr Amit borrowed Rs. 60,000 at 18% rate of simple interest and instantly lends the same at 16% rate of
compound interest. Find his profit or loss at the end of four years.
Ex: 26 You deposit $17,000 each year for 10 years at 7%. Then you earn 9% after that. If you leave the money
invested for another 5 years how much will you have in the 15th year? [$361374]
Ex: 28 If you deposit $45,000 into an account earning 4% interest compounded quarterly, how much would you
have in 5 years? [$54908.55]
Ex: 29 How much would you pay for an investment which will be worth $16,000 in three years? Assume interest
is 5%. [13821]
Ex: 17 Which alternative would you choose: (a) an annuity of Rs.5000 at the end of each year for 30 years: b) an
annuity of Rs.6,600 at the end of each year for 20 years : c) Lump sum payment of Rs.1,00,000 at the end of
10 years .d) Rs.50,000, in cash right now ? In each case , the time value of money is 10 per cent.
.

Ex: 18 Mr. Raghu deposits Rs10000 in a bank now. The interest rate is 10% and compounding is done semi
annually. What will the deposit grow to after 10 years? If the inflation rate is 8% per year what will be the
value of deposit after 10 years in terms of the current rupee?
Ex: 19 What is the minimum amount which a person should be ready to accept today from a debtor who
otherwise has to pay a sum of Rs.5000 today and Rs.6000, 8000, 9000 and 10000 at the end of the year
1,2,3 and 4 respectively from today. Rate of interest may be taken at 14%.
Ex: 22 How much would you have to deposit today to have $10,000 in five years at 6% interest compounded
semiannually? [$7440.94]
Ex: 23 What is the present value of an income stream which provides Rs. 1000 at the end of year one, Rs. 2500 at
the end of year two and Rs. 5000 during each of the years 3 through 10, if the discount rate is 12%?
Ex: 24 If you get payments of $15,000 per year for the next ten years and interest is 4%, how much would that
stream of income be worth in present value terms? [$121663.50]
Ex: 25 You are considering the purchase of two different insurance annuities. A will pay you $16,000 at the
beginning of each year for 8 years. B will pay you $12,000 at end of each year for 12 years. Assuming your
money is worth 7%, and each costs you $75,000 today, which would you prefer? [$102228 and $95312]
Ex: 20 XYZ Bank pays 16% interest and compounds interest quarterly. If one puts Rs.10000 initially into a saving
account, how much will it have grown in 9 years? {FVIF(n=36, i=0.04) = 4.1039} [41039]
EX: 15 Find the EMI on a loan of Rs. 75,000 to be repaid in equal monthly installments. Interest is charged at 12%
pa on loan outstanding at the beginning of each month and time span of 5 years.
Ex: 30 Mr. Daruwala borrows from Bank for 5 years worth Rs. 10,00,000 to buy a new car named Honda city. If
Mr. Daruwala wants to pay an equal annual installment at the end of every year, and if the rate of interest is
10%, Calculate the amount of installment every year. Also prepare Loan amortization schedule.
Ex: 31 A customer has approached the bank for vehicle loan of Rs.1000000/=. The bank offers vehicle loan for a
period of 12 months and charges interest at 12% p.a. However the customer has to repay the loan in
equated monthly installments. What will be the size of EMI? Work out the loan amortization schedule.
Ex: 32 You have 100,000 to invest at 4% interest. If you wish to withdraw equal annual payments for 4 years, how
much could you withdraw each year and leave $0 in the investment account? [27548]
Ex: 33 If your company borrows 300,000 at 8% interest and agrees to repay the loan in 10 equal semiannual
payments to include principal plus interest, how much would those payments be? [36897]
Ex: 34 Find the EMI on a loan of Rs. 75,000 to be repaid in equal monthly installments. Interest is charged at 12%
pa on the loan outstanding at the beginning of each month and the time span of 5 years.
Ex: 35 Construct an amortization schedule for a 3-year loan of $20,000 if interest is 9%.
Ex: 36 Rajasthan Royals borrows Rs.7,50,000 loan to purchase house. The rate of interest is 11% & repayment
period is 20 yrs. Calculate monthly equal installment if the interest is calculated on yearly basis.
Ex: 37 A loan of Rs. 12820 is to be repaid in three EMIs. The first being half of the second and one third of the
third. The rate of compound interest be 10% per annum payable annually. Find the three EMIs.
Ex: 38 Anurag Limited borrows Rs.2,000,000 at an interest rate of 12 percent. The loan is to be repaid in 5 equal
annual installments payable at the end of each of the next 5 years. Prepare the loan amortization schedule.
Ex: 39 Miss Akshara is planning to borrow a loan worth INR 1000000 for five years. She approached SBI and SBI
offered her 15% rate of interest. Calculate the annual installment and prepare loan amortization schedule.
Ex: 40 Preet Ltd is borrowing Rs 50 lakh for a period of 4 years at interest rate of 15% repayable in equal
instalments at the end of each year. Find out the instalment amount, the interest paid each year and total
interest paid for the loan.
Ex: 41 Mr. Gotalawala is planning for her daughter’s marriage after 10 years. He estimated the total expenses for
the marriage Rs. 20,00,000. How much he should invest annually at the end of year in DSP Blackrock
mutual funds which give annual return of 15%?
Ex: 42 You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to
draw out of your savings at the rate of Rs. 10,000 per year. How much would you have to pay in equal
annual deposits until retirement to meet your objectives? Assume interest remains at 9%. [Rs. 1254]
Ex: 43 Mehta is planning for his retirement. He is 40 years old today & would like to have Rs. 600,000 when he
attains the age of 60 years. He intends to deposit a constant amount of money at 12% each year in PPF of
 SBI to achieve his objective. How much money should Mehta invest at the end of each year for the next 20
years to obtain Rs. 600,000 at the end of that period?
EX: 14 Birla Heavy Machinery Pvt. Ltd. purchases a machine for Rs. 450000, the expected life of which is 5 years.
After 5 years, a new machine would cost them 20% more. Birla Heavy Machinery Pvt. Ltd. has decided to
create a sinking fund and invest them at 12% rate of compound interest. Find amount to be transferred
every year to this fund.
Ex: 44 You plan to go abroad for higher studies after working for the next five years and understand that an
amount of Rs.2,000,000 will be needed for this purpose at that time. You have decided to accumulate this
amount by investing a fixed amount at the end of each year in a safe scheme offering a rate of interest at 10
percent. What amount should you invest every year to achieve the target amount?
Ex: 45 You can save Rs.2000 a year for 5 years and Rs.3000 a year for 10 years thereafter. What will these savings
cumulate to at the end of 15 years, if the rate of interest is 10%.
Ex: 46 You can deposit 4000 per year into an account that pays 12% interest. If you deposit such amounts for 15
years and start drawing money out of the account in equal annual installments, how much could you draw
out each year for 20 years? [19964.12]
Ex: 47 Your company must deposit equal annual beginning of year payments into a sinking fund for an obligation
of Rs. 800,000 which matures in 15 years. Assuming you can earn 4% interest on the sinking fund, how
much must the payments be? [38415]
Ex: 48 You deposit Rs. 13,000 at the beginning of every year for 10 years. If interest is being paid at 8%, how much
will you have in 10 years? [203391.33]
Ex: 49 If you deposit Rs.3,000 today at 8 percent rate of interest in how many years (roughly) will this amount
grow to Rs.1,92,000 ? Work this problem using the rule of 72–do not use tables.
Ex: 50 You are getting payments of Rs. 8000 at the beginning of every year and they are to last another five years.
At 6%, what is the value of this annuity? [35720.84]
Ex: 51 How much should be deposited at the beginning of each year for 10 years at the rate of 12% in order to
provide a sum of Rs.50000 at the end of 10 years?
Theory Questions
Q – 1 Distinguish between simple & compound interest. Explain the concept by giving numerical
example.
Q – 2 Explain the concept of EMI with example.
Q – 3 Describe the different methods of calculating compound interest.
Rule of 72:

The Rule of 72 is a great mental math shortcut to estimate the effect of any growth rate, from quick
financial calculations to population estimates. Here’s the formula:

Years to double = 72 / Interest Rate

This formula is useful for financial estimates and understanding the nature of compound interest.
Examples:
 At 6% interest, your money takes 72/6 or 12 years to double.
 To double your money in 10 years, get an interest rate of 72/10 or 7.2%.
 If your country’s GDP grows at 3% a year, the economy doubles in 72/3 or 24 years.
 If your growth slips to 2%, it will double in 36 years. If growth increases to 4%, the economy
doubles in 18 years. Given the speed at which technology develops, shaving years off your
growth time could be very important.

You can also use the rule of 72 for expenses like inflation or interest:
  If inflation rates go from 2% to 3%, your money will lose half its value in 36 or 24 years.
 If college tuition increases at 5% per year (which is faster than inflation), tuition costs will double
in 72/5 or about 14.4 years. If you pay 15% interest on your credit cards, the amount you owe
will double in only 72/15 or 4.8 years!

The rule of 72 shows why a “small” 1% difference in inflation or GDP expansion has a huge effect in
forecasting models.

By the way, the Rule of 72 applies to anything that grows, including population. Can you see why a
population growth rate of 3% vs 2% could be a huge problem for planning? Instead of needing to double
your capacity in 36 years, you only have 24. Twelve years were shaved off your schedule with
one percentage point.

Example:

Equated Monthly Installment:

An Equated Monthly Installment (EMI) is usually a fixed amount of money that you need to pay your bank or
lender every month as repayment of a loan taken, until your loan is totally repaid. It is essentially made up of
two parts, the principal amount and the interest on the principal amount, divided across each month of the loan
tenure.

The EMI is always paid to the bank or lender on a fixed date each month. This could be done though post-dated
cheques issued in favour of the lender or by providing auto debit instructions to your bank for the same.

Let us understand the concept of interest to get an idea about the EMI process.

 The calculated interest on the principal amount (loan amount) is added with the principal itself and then
the repayment amount (EMI) is subtracted from this sum to get at a balance amount.
 The interest is calculated on the last balance amount and the new reducing balance amount is obtained in
the same way.
 This process is continued iteratively until the balance amount reduces to zero. And then the loan is fully
repaid.
Balance amount = Previous balance amount + Interest on the balance amount – Repayment amount.

Formula:

Example:

EMI stands for Equated Monthly Installment. When you take any kind of debt, liability or loan, you have to
repay that amount along with the interest to the lender. We generally apply for a loan because we do not have
that amount of money with us. But we can afford to pay that money with time. Instead of saving the money and
then investing it, we take the money as loan and then repay it.

APGP - 1
Ex: 1 Find the sum of the first 50 terms of the sequence 1, 3, 5, 7, 9, . . . .
Ex: 2 Find the sum of the series 1 + 3・5 + 6 + 8・5 + . . . + 101.
Ex: 3 An arithmetic progression has 3 as its first term. Also, the sum of the first 8 terms is twice the
sum of the first 5 terms. Find the common difference.
Ex: 4 Find the sum of the first 23 terms of the AP 4,−3,−10, . . ..
Ex: 5 An arithmetic series has first term 4 and common difference is 1/2. Find
(i) the sum of the first 20 terms, (ii) the sum of the first 100 terms.
Ex: 6 Find the sum of the arithmetic series with first term 1, common difference 3, and last term 100.
Ex: 7 The sum of the first 20 terms of an arithmetic series is identical to the sum of the first 22 terms. If the
common difference is −2, find the first term.
Ex: 8 Write down the first five terms of the geometric progression which has first term 1 and
common ratio 1/ 2
Ex: 9 Find the 10th and 20th terms of the GP with first term 3 and common ratio 2.
Ex: 10 Find the 7th term of the GP 2,−6, 18, . . .,
Ex: 11 Find the sum of the geometric series 2 + 6 + 18 + 54 + . . . where there are 6 terms in the series.
Ex: 12 Find the sum of the geometric series 8 − 4 + 2 − 1 + . . . where there are 5 terms in the series.
Ex: 13 How many terms are there in the geometric progression 2, 4, 8, . . . , 128 ?
Ex: 14 Find the sum of the first five terms of the GP with first term 3 and common ratio 2.
Ex: 15 Find the sum of the first 20 terms of the GP with first term 3 and common ratio 1.5.
Ex: 16 The sum of the first 3 terms of a geometric series is 37/8 . The sum of the first six terms
is 3367/ 512 . Find the first term and common ratio.
Ex: 17 How many terms in the GP 4, 3.6, 3.24, . . . are needed so that the sum exceeds 35?

(2) AP GP HP –
Ex: 1 Find the 9th term of GP 1/4, -1/2, 1, -2 ….
Ex: 2 Which term of the G.P. is 5120? 5, 10, 20 ……
Ex: 3 The 4th and 9th terms of a G.P. are 54 and 13122 respectively. Find the G.P.
Ex: 4 Find the sum of 10 terms of the G.P. 1, 1/2, 1/4, 1/8 …..
Ex: 5 How many terms of G.P. 1 + 4 + 16 + 64 + …. Will make the sum 5461?
Ex: 6 XYZ Ltd. produced 600 units during 3rd year of its operation. The company maintained its constant
growth of production and produced 700 units in the 7th year. Find the initial production in the first
year.
Ex: 7 Mr. X was drawing Rs. 400 a month during 11th year of his service, and Rs. 760 during the 29th
year. The past record shows that his salary has increased annually in A. P Find
1. Starting Salary of X:
2. Annual Increment;
3. Salary at the time of retirement, if X will retire on completion of 40 years of service.
Ex: 8 Mr. X saved Rs. 18500 in 10 years. In each year after the first he saved Rs. 200 more than he did in
the preceding year. How much did he save in the first year?
Ex: 9 A money lender lends Rs. 1500 and charges Rs. 240 as overall interest. The amount was recovered
in 12 equal installment each less by Rs. 10 than the preceding one. Find the amount if first
installment.
Ex: 10 Mr. X borrowed interest free loan of Rs. 12,000 from Y. The loan is to be repaid in ten installments.
Mr. X paid Rs. 800 as first installment and then increases each installment by equal amount over
the preceding installment. What will be the last installment?
Ex: 11 The monthly salary of a person was Rs. 320 for each of the first three years. He next got annual
increments of Rs. 40 per month for each of the following successive 12 years. His salary remained
stationary till retirement when he found that his average monthly salary during the service period
was Rs. 698. Find the period of his service.
Ex: 12 B arranges to pay a debt of Rs. 9600 in 48 annual installments which form an arithmetic series.
When 40 of these installments are paid. B becomes insolvent and his creditor finds that Rs. 2400
still remains unpaid. Find the value of each of first three installments of B. ignore interest.
Ex: 13 A piece of equipment cost a certain factory Rs. 6,00,000. If it depreciates in value, 15% the first
year, 13.5% the next year 12% the third year, and so on. What will be its value at the end of 10
years, all percentages applying to original cost.
Ex: 14 80 coins are placed in a straight line on the ground. The distance between any two consecutive
coins is 10 metres. How far must a person travel to bring then one by one to a basket placed 10
metres behind the first coin.
Ex: 15 Find the 7th term of H.P. 1/3, 1/5, 1/7 …….
Ex: 16 Find the 9th term of H.P. 1/4, 1/9, 1/14 ……

Miscellaneous Example
 Find the 8th term of the series 4,7,10,….
 Which term of the A.P. 28,24,20,16 . . . is 8
 Find the 6th term from the end of the A.P. 17,14,11,…-40
 The 10th term of an A.P. is 30 and 16th term is 60. Find the 1) 18th term 2) General term