Mathematics

for Finance

Presenters:
Chadro, Abdul
Mutuc, John Michael
Noda, Cyra
Unida, Miguel
Zamora, Marisol
Financial Mathematics
 isthe application of mathematical
methods to financial problems.
(Equivalent names sometimes used are
quantitative finance, financial
engineering, mathematical finance, and
computational finance.) It draws on tools
from probability, statistics, and economic
theory.
Simple and Compound
Interest
Interest
 is defined as the cost of borrowing money
as in the case of interest charged on a
loan balance.

 can also be the rate paid for money on

deposit.

 Interest can be calculated in two ways,

simple interest or compound interest.
 Simple interest
 isused commonly in variable rate consumer lending
and in mortgage loans where a borrower pays
interest only on funds used
 calculated on the principal, or original, amount of a
loan.
A = total amount accrued in
Formula: account
A=P×R×T P = amount invested (principal)
R = interest rate (as a decimal)
T = number of years money is
invested
Example 1:
 A loan of $10,000 has been issued for 6-years. Compute
the amount to be repaid to the lender if simple interest is
charged @ 5% per year.
Solution:
P = $1,000; r = 5%; t = 5
By putting the values of P, r and t into the simple interest
formula:

= $10,000 × 5% × 6
= $10,000 × .05 × 6
= $3,000

At the end of sixth year, the amount of $13,000 ($10,000

principal + $3,000 accumulated interest) will be repaid to
the lender.
 Steve invested $ 10,000 in a savings bank
account that earned 2% simple interest. Find
the interest earned if the amount was kept in
the bank for 4 years.

 Ryan bought $ 15,000 from a bank to buy a

car at 10% simple Interest. If he paid $ 9,000 as
interest while clearing the loan, find the time
for which the loan was given.

 In how much time will the simple interest on

$3,500 at the rate of 9% p.a be the same as
simple interest on $4,000 at 10.5% p.a for 4
years?
Compound interest
 isInterest computed on the principal
amount to which interest earned to-date
has been added.
 calculated on the principal amount and
also on the accumulated interest of
previous periods, and can thus be
regarded as “interest on interest.”
Formula for compound amount:
S = P(1 + R) t

Formula for compound interest:

A = S- P

A = total amount accrued in account

S = compound amount
P = amount invested (principal)
R = interest rate (as a decimal)
T = number of years money is invested
Example:
Miguel have deposited $100 with a bank for five
years at a rate of 5% per year compounded
annually. Find the interest.

= $100 × (1 + 5%)5 Formula used:

= $100 × (1 + .05)5
= $100 × (1.05)5 S = P(1 + R) t
= $100 × 1.276 A = S- P
= $127.6

Interest earned over 5-year period:

= $127.6 – $100
= $27.6
A principal of $2000 is placed in a savings
account at 3% per annum compounded
annually. How much is in the account and
its interest after one year, two years and
three years?
Consumer Loan
- An amount of money lent to an individual
for personal, family, or household
purposes.
- Consumer loans are monitored by
government regulatory agencies for their
compliance with consumer protection
regulations such as the Truth in Lending
Act.
Types of Consumer Loans
•Student loan •Auto loans
•Mortgages •Personal loans
•Credit cards
Credit Card
 are
a safe and flexible method of
payment. It provides fast access to extra
cash if needed, however you still have to
remember that it is a loan that needs to
be paid back.
Calculate your Payoff Time
Example:
Formula:
Let’s say that your balance is
$8000, monthly payment is
$300 and the APR (annual
percentage rate) is 17.5%.
Substituting these numbers
 where into the equation gives
 n is the number of payments
 Pv is the credit card
balance
 P is the periodic payment
 R is the interest rate
 R is often defined as APR/12.
If so, the number of
payments n is in months.
Example
 Compute the payoff time

The balance of Ivan is P10000, his monthly

payment is P700 and the APR (annual
percentage rate) is 12.4%.
 Answer: 15.54
Stocks

- is a type of security that signifies ownership

in a corporation and represents a claim on
part of the corporation's assets and
earnings.
-

Calculate your Total Stocks Return

 Formula:  Example:
 Lets say that the initial
share price (P0 ) of 1000
pesos then the ending
share price is 1500 pesos
and the additional
dividends of 100 then it
gives :
 60% of total stock return
0.6 = 1500 – 1000 + 100
1000
Bonds
 A debt instrument issued by government or
private financial institutions who need to raise
cash borrow money in the public market and
subsequently pays interest on that loan to
investors
 Each bond can be characterized by several
factors. These include: Face Value , Coupon
Rate ,Coupon, Maturity, Call Provisions, Put
Provisions, and Sinking Fund Provisions
Bond Issuers
 Bonds are issued by borrowers to raise
funds for long-term investments; the main
issuers of bonds are:
 Corporations
 Municipalities
 Foreign Entities
When you buy this,
 the
bonds that you bought will be paid
back to you in full amount of principal at
maturity, and there is much less risk of loss
than there is with stocks.
Mutual Funds
 an investment vehicle made up of a pool
of funds collected by an authorized and
registered person from many investors for
the purpose of investing in securities such
as stocks, bonds, money market
instruments and similar assets
 When you buy this, your money is pooled
together with other investors like you, and
this combined together makes up a fund.
 An investment strategy will be applied by
a bank or a fund manager to make your
money earn interest.
Homeowner
- A person who owns his/her primary
residence.
- Homeownership gives the owner a stake
in his/her neighborhood or town's long-
term stability, as we as a significant
investment.
- The U.S. federal government thus
attempts to encourage homeownership
by allowing owners to deduct the interest
on their mortgages from their taxable
income.
 Thehomeownership rate is computed by
dividing the number of owner-occupied
housing units by the total number of
occupied housing units.
THANK YOU!