MAT 183
Math of Finance Lecture #1
Nov. 18/19, 2009
1
Mathematics of finance Lecture #1
§
10.1 and
§
10.2
•
You invest $1,000 at 6% compounded monthly for
one year.
•
Interest rate
is always reported as an
annual rate
or
nominal rate
,
r
.
•
Periodic rate
is the annual rate divided by
c
, the
number of periods per year:
i
=
r
c
•
principal + interest:
F
= (1 +
i
)
P
•
Interest compounded
n
times:
F
= (1 +
i
)
n
P
•
Variations: invest for 4.5 years; compound weekly,
daily.
•
Present Value:
P
=
1
(1+
i
)
n
F
•
Work problems 3, 5, 6, 16 (page 477)
•
Simple interest
s
s
=
yr
, (the principal is invested for
y
years.)
Consider $1000 at 6% simple interest for 8 months,
for 4.5 years
•
E
ff
ective rate
e
[The equivalent simple interest for
a oneyear investment.]
1 +
e
= (1 +
i
)
c
= (1 +
r
c
)
c
where
i
=
r
c
is the periodic rate,
r
is the annual or
nominal rate and
c
is the number of compounding
periods per year.
Compute the e
ff
ective rate for $1000 at 6% com
pounded monthly.
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2
MAT 183
Math of Finance Lecture #1
Nov. 18/19, 2009
•
“Finance Formulas on the TI84” has been posted on
Blackboard.
•
Work problems 32, 35, 36, 50, 51, 53 (pg 4789)
•
An annuity
is a sequence of regular payments called
the
rent
and denoted by
R
; the
payment periods
and the compounding periods are the same
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 Fall '09
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 Math, Time Value Of Money, th payment/compounding period

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