# 0.8 Mathematics of finance  (Page 9/9)

 Page 9 / 9

An amount of $500 is borrowed for 6 months at a rate of 12%. Make an amortization schedule showing the monthly payment, the monthly interest on the outstanding balance, the portion of the payment contributing toward reducing the debt, and the outstanding balance. The reader can verify that the monthly payment is$86.27.

The first month, the outstanding balance is $500, and therefore, the monthly interest on the outstanding balance is $\left(\text{outstanding balance}\right)\left(\text{the monthly interest rate}\right)=\left(\text{500}\right)\left(\text{.}\text{12}/\text{12}\right)=5$ This means, the first month, out of the$86.27 payment, $5 goes toward the interest and the remaining$81.27 toward the balance leaving a new balance of $\text{500}-\text{81}\text{.}\text{27}=\text{418}\text{.}\text{73}$ .

Similarly, the second month, the outstanding balance is $418.73, and the monthly interest on the outstanding balance is $\left(\text{418}\text{.}\text{73}\right)\left(\text{.}\text{12}/\text{12}\right)=4\text{.}\text{19}$ . Again, out of the$86.27 payment, $4.19 goes toward the interest and the remaining$82.08 toward the balance leaving a new balance of $\text{418}\text{.}\text{73}-\text{82}\text{.}\text{08}=\text{336}\text{.}\text{65}$ . The process continues in the table below.

 Payment # Payment Interest Debt Payment Balance 1 $86.27$5 $81.27$418.73 2 $86.27$4.19 $82.08$336.65 3 $86.27$3.37 $82.90$253.75 4 $86.27$2.54 $83.73$170.02 5 $86.27$1.70 $84.57$85.45 6 $86.27$0.85 $85.42$0.03

Note that the last balance of 3 cents is due to error in rounding off.

Most of the other applications in this section's problem set are reasonably straight forward, and can be solved by taking a little extra care in interpreting them. And remember, there is often more than one way to solve a problem.

## Classification of finance problems

We'd like to remind the reader that the hardest part of solving a finance problem is determining the category it falls into. So in this section, we will emphasize the classification of problems rather than finding the actual solution.

We suggest that the student read each problem carefully and look for the word or words that may give clues to the kind of problem that is presented. For instance, students often fail to distinguish a lump-sum problem from an annuity. Since the payments are made each period, an annuity problem contains words such as each, every, per etc.. One should also be aware that in the case of a lump-sum, only a single deposit is made, while in an annuity numerous deposits are made at equal spaced time intervals.

Students often confuse the present value with the future value. For example, if a car costs $15,000, then this is its present value. Surely, you cannot convince the dealer to accept$15,000 in some future time, say, in five years. Recall how we found the installment payment for that car. We assumed that two people, Mr. Cash and Mr. Credit, were buying two identical cars both costing $15, 000 each. To settle the argument that both people should pay exactly the same amount, we put Mr. Cash's cash of$15,000 in the bank as a lump-sum and Mr. Credit's monthly payments of $x$ dollars each as an annuity. Then we make sure that the future values of these two accounts are equal. As you remember, at an interest rate of 9%

the future value of Mr. Cash's lump-sum was $\text{15},\text{000}{\left(1+\text{.}\text{09}/\text{12}\right)}^{\text{60}}$ , and

the future value of Mr. Credit's annuity was $\frac{x\left[{\left(1+\text{.}\text{09}/\text{12}\right)}^{\text{60}}-1\right]}{\text{.}\text{09}/\text{12}}$ .

To solve the problem, we set the two expressions equal and solve for $x$ .

The present value of an annuity is found in exactly the same way. For example, suppose Mr. Credit is told that he can buy a particular car for $311.38 a month for five years, and Mr. Cash wants to know how much he needs to pay. We are finding the present value of the annuity of$311.38 per month, which is the same as finding the price of the car. This time our unknown quantity is the price of the car. Now suppose the price of the car is $y$ , then

the future value of Mr. Cash's lump-sum is $y{\left(1+\text{.}\text{09}/\text{12}\right)}^{\text{60}}$ , and

the future value of Mr. Credit's annuity is $\frac{\text{311}\text{.}\text{38}\left[{\left(1+\text{.}\text{09}/\text{12}\right)}^{\text{60}}-1\right]}{\text{.}\text{09}/\text{12}}$ .

Setting them equal we get,

$\begin{array}{l}y{\left(1+\text{.}\text{09}/\text{12}\right)}^{\text{60}}=\frac{\text{311}\text{.}\text{38}\left[{\left(1+\text{.}\text{09}/\text{12}\right)}^{\text{60}}-1\right]}{\text{.}\text{09}/\text{12}}\\ y\left(1\text{.}\text{5657}\right)=\left(\text{311}\text{.}\text{38}\right)\left(\text{75}\text{.}\text{4241}\right)\\ y\left(1\text{.}\text{5657}\right)=\text{23},\text{485}\text{.}\text{57}\\ y=\text{15},\text{000}\text{.}\text{04}\end{array}$

We now list six problems that form a basis for all finance problems. Further, we classify these problems and give an equation for the solution.

## Classification of problems and equations for solutions

If $2,000 is invested at 7% compounded quarterly, what will the final amount be in 5 years? Classification: Future Value of a Lump-sum or FV of a lump-sum. Equation: $\text{FV}=\text{2000}{\left(1+\text{.}\text{07}/4\right)}^{\text{20}}$ . How much should be invested at 8% compounded yearly, for the final amount to be$5,000 in five years?

Classification: Present Value of a Lump-sum or PV of a lump-sum.

Equation: $\text{PV}{\left(1+\text{.}\text{08}\right)}^{5}=5,\text{000}$

If $200 is invested each month at 8.5% compounded monthly, what will the final amount be in 4 years? Classification: Future Value of an Annuity or FV of an annuity. Equation: $\text{FV}=\frac{\text{200}\left[{\left(1+\text{.}\text{085}/\text{12}\right)}^{\text{48}}-1\right]}{\text{.}\text{085}/\text{12}}$ How much should be invested each month at 9% for it to accumulate to$8,000 in three years?

Classification: Sinking Fund Payment

Equation: $\frac{m\left[{\left(1+\text{.}\text{09}/\text{12}\right)}^{\text{36}}-1\right]}{\text{.}\text{09}/\text{12}}=8,\text{000}$

Keith has won a lottery paying him $2,000 per month for the next 10 years. He'd rather have the entire sum now. If the interest rate is 7.6%, how much should he receive? Classification: Present Value of an Annuity or PV of an annuity. Equation: $\text{PV}{\left(1+\text{.}\text{076}/\text{12}\right)}^{\text{120}}=\frac{\text{2000}\left[{\left(1+\text{.}\text{076}/\text{12}\right)}^{\text{120}}-1\right]}{\text{.}\text{076}/\text{12}}$ Mr. A has just donated$25,000 to his alma mater. Mr. B would like to donate an equivalent amount, but would like to pay by monthly payments over a five year period. If the interest rate is 8.2%, determine the size of the monthly payment?

Classification: Installment Payment.

Equation: $\frac{m\left[{\left(1+\text{.}\text{082}/\text{12}\right)}^{\text{60}}-1\right]}{\text{.}\text{082}/\text{12}}=\text{25},\text{000}{\left(1+\text{.}\text{082}/\text{12}\right)}^{\text{60}}$ .

#### Questions & Answers

what is the stm
is there industrial application of fullrenes. What is the method to prepare fullrene on large scale.?
Rafiq
industrial application...? mmm I think on the medical side as drug carrier, but you should go deeper on your research, I may be wrong
Damian
How we are making nano material?
what is a peer
What is meant by 'nano scale'?
What is STMs full form?
LITNING
scanning tunneling microscope
Sahil
how nano science is used for hydrophobicity
Santosh
Do u think that Graphene and Fullrene fiber can be used to make Air Plane body structure the lightest and strongest. Rafiq
Rafiq
what is differents between GO and RGO?
Mahi
what is simplest way to understand the applications of nano robots used to detect the cancer affected cell of human body.? How this robot is carried to required site of body cell.? what will be the carrier material and how can be detected that correct delivery of drug is done Rafiq
Rafiq
what is Nano technology ?
write examples of Nano molecule?
Bob
The nanotechnology is as new science, to scale nanometric
brayan
nanotechnology is the study, desing, synthesis, manipulation and application of materials and functional systems through control of matter at nanoscale
Damian
Is there any normative that regulates the use of silver nanoparticles?
what king of growth are you checking .?
Renato
What fields keep nano created devices from performing or assimulating ? Magnetic fields ? Are do they assimilate ?
why we need to study biomolecules, molecular biology in nanotechnology?
?
Kyle
yes I'm doing my masters in nanotechnology, we are being studying all these domains as well..
why?
what school?
Kyle
biomolecules are e building blocks of every organics and inorganic materials.
Joe
anyone know any internet site where one can find nanotechnology papers?
research.net
kanaga
sciencedirect big data base
Ernesto
Introduction about quantum dots in nanotechnology
what does nano mean?
nano basically means 10^(-9). nanometer is a unit to measure length.
Bharti
do you think it's worthwhile in the long term to study the effects and possibilities of nanotechnology on viral treatment?
absolutely yes
Daniel
how to know photocatalytic properties of tio2 nanoparticles...what to do now
it is a goid question and i want to know the answer as well
Maciej
characteristics of micro business
Abigail
for teaching engĺish at school how nano technology help us
Anassong
How can I make nanorobot?
Lily
Do somebody tell me a best nano engineering book for beginners?
there is no specific books for beginners but there is book called principle of nanotechnology
NANO
how can I make nanorobot?
Lily
what is fullerene does it is used to make bukky balls
are you nano engineer ?
s.
fullerene is a bucky ball aka Carbon 60 molecule. It was name by the architect Fuller. He design the geodesic dome. it resembles a soccer ball.
Tarell
what is the actual application of fullerenes nowadays?
Damian
That is a great question Damian. best way to answer that question is to Google it. there are hundreds of applications for buck minister fullerenes, from medical to aerospace. you can also find plenty of research papers that will give you great detail on the potential applications of fullerenes.
Tarell
how did you get the value of 2000N.What calculations are needed to arrive at it
Privacy Information Security Software Version 1.1a
Good
If March sales will be up from February by 10%, 15%, and 20% at Place I, Place II, and Place III, respectively, find the expected number of hot dogs, and corn dogs to be sold
8. It is known that 80% of the people wear seat belts, and 5% of the people quit smoking last year. If 4% of the people who wear seat belts quit smoking, are the events, wearing a seat belt and quitting smoking, independent?
Mr. Shamir employs two part-time typists, Inna and Jim for his typing needs. Inna charges $10 an hour and can type 6 pages an hour, while Jim charges$12 an hour and can type 8 pages per hour. Each typist must be employed at least 8 hours per week to keep them on the payroll. If Mr. Shamir has at least 208 pages to be typed, how many hours per week should he employ each student to minimize his typing costs, and what will be the total cost?
At De Anza College, 20% of the students take Finite Mathematics, 30% take Statistics and 10% take both. What percentage of the students take Finite Mathematics or Statistics?