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Learn the math behind your money

The world of finance is literally FULL of mathematical models, formulas, and systems. There's a reason that many word problems in math class involve making change, calculating interest rates, or auditing lemonade stands. There's no avoiding math when it comes to money. Fortunately, most of what the average person needs to know is straightforward. However, it is absolutely necessary to understand certain key concepts in order to be successful financially, whether that means saving money for the future, or to avoid being a victim of a quick-talking salesman.

Financial Lessons:

  • Compound Interest
  • Future Value
  • Present Value

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Finite Mathematics : Mathematics of Finance

Study concepts, example questions & explanations for finite mathematics, all finite mathematics resources, example questions, example question #1 : simple interest.

What is the total interest made after 4 years on a simple interest loan that accumulates 13% each year and has original amount was $1350.

finance math problem help

To solve this problem, first recall the formula to calculate simple interest.

finance math problem help

From the question it's known that,

finance math problem help

Thus the equation becomes,

finance math problem help

Therefore $702 in interested accumulated after four years.

Example Question #1 : Mathematics Of Finance

Money is deposited in a bank account at 7% interest per year, compounded bimonthly. If no money is deposited into or withdrawn from the account, then how long will it take for the money to double?

9 years 8 months

9 years 6 months

9 years 10 months

10 years 0 months

10 years 2 months

finance math problem help

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Mathematical Finance

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Mathematical Finance

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Introduction

 Mathematical finance is a branch of applied mathematics. Mathematical finance is also known as quantitative finance. It has a prominent use in many different parts of economics, especially in banking. Financial Mathematics includes a whole range of problems related to calculating the final value of capital. Capital is the value (in the form of money, property or human resources), which is invested in the production or other economic activity with the main purpose to increase value or to make a profit.  The capital can be invested in the production or non-production sector. Its main purpose, however, is always the same, and that is the increasing basic value or the production of other goods.

With mathematical finance it is possible to answer the following questions:

Is it better to buy a good today or tomorrow?

Should I invest money in the bank?

Do my earnings in dollars convert into foreign currency?

Would it be financially wiser to acquire a new car for cash, credit or a lease?

What are the best securities in which to invest money?

When is it advisable to take a bank loan?

Importance of Mathematical Finance

In terms of limited financial resources, it is necessary to make the wisest decision about where to invest. With the help of mathematical finance, it is possible to increase the profitability of a company.  It involves making the right decisions at the right time. Once the wrong decision has been made, it is very difficult to put the company back on the right path. This can make a tremendous difference in the following areas:

  • Businesses and individuals
  • Banks, insurers, and other financial institutions
  • Legislation
  • Education of staff and citizens

Simple and Compound Interest Calculation

Simple and compound interest are the most common methods of calculation interest.

The General definition for interest is the fee for using borrowed money. It can be explained as an expense for the person who borrows money and income for the person who lends money. Interest can be charged on principal amount at a certain rate for a certain period. For instance, 12% per year, 3% per quarter or 1% per month etc.

By definition, the principal amount means the amount of money that is originally borrowed from an individual or a financial institution and it does not include interest. In real life, the interest is charged using one of two methods- simple or compound calculation.

Simple Interest (Is) = P × i × t

   P is the principle amount;

   i represents the interest rate per period;

   t is the time for which the money is borrowed or lent.

Compound Interest (Ic) = P × (1 + i) n – P

   i represents the compound interest rate per period;

   n refers to the number of periods.

References:

  • An Introduction to Quantitative Finance, Stephen Blyth
  • Quantitative Methods for Business, David R. Anderson, Dennis J. Sweeney, Thomas A. Williams, Jeffrey D. Camm, James J. Cochran
  • Quantitative Methods for Finance, Terry Watsham (Author), Keith Parramore

To fulfill our tutoring mission of online education, our college homework help and online tutoring centers are standing by 24/7, ready to assist college students who need homework help with all aspects of mathematical finance. Our business tutors can help with all your projects, large or small, and we challenge you to find better mathematical finance tutoring anywhere.

College mathematical finance homework help.

Since we have tutors in all Mathematical Finance related topics, we can provide a range of different services. Our online Mathematical Finance tutors will:

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Our tutors are just as dedicated to your success in class as you are, so they are available around the clock to assist you with questions, homework, exam preparation and any Mathematical Finance related assignments you need extra help completing.

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Part 7: Financial Mathematics | Free Worksheet

Has Financial Maths not accrued your interest? Well, after you read this article, it will have! In this article, we dsicuss everything you need to know to master financial maths, including types of interest, modelling investments and loans and harder questions.

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Mastering financial maths is an extremely important skill, not only in High School mathematics, but also in later life.

By being able to adeptly solve financial mathematics questions, students can efficiently put their Series and Sequences, AP and GP knowledge to the test.

Further, grasping the fundamentals of financial mathematics allows students also gain deeper insight into how interest, super, loans, etc., are calculated, preparing them for later life.

In this article we discuss:

  • The NESA Syllabus Outcomes

Assumed Knowledge

Types of interest.

  • Modelling Investments and Loans

Harder Financial Mathematics

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NESA Syllabus Outcomes: Financial Maths

NESA requires students to be proficient in the following syllabus outcomes:

  • Solve compound interest problems involving financial decisions, including a home loan, a savings account, a car loan or superannuation
  • Solve problems involving compound interest loans or investments, eg determining the future value of an investment or loan, the number of compounding periods for an investment to exceed a given value and/or the interest rate needed for an investment to exceed a given value (ACMGM096)
  • Recognise a reducing balance loan as a compound interest loan with periodic repayments, and solve problems including the amount owing on a reducing balance loan after each payment is made
  •  Solve problems involving financial decisions, including a home loan, a savings account, a car loan or superannuation

Students should already be familiar with basic series and sequences concepts. This includes being able to prove an AP or GP as well as determine the common differences, ratios, sums, etc.

Students can refresh their knowledge on basic trigonometric functions in the following Year 12 Advanced Subject Guide:

  • Series and Sequences

Simple Interest

Simple interest is calculated on the investment only and depends intrinsically on the amount of time the money is invested. The interest is usually calculated annually and is a percentage of the original investment.

The formula for simple interest is as follows:

\( I = Prn \)

Where \( I  \) simple interest, \( P \) principal amount, \( r \) interest rate, \( n \) number of time periods.

It is important to note that \( r \) would be expressed as a decimal. I.e. if the interest rate is \( 3 \% \ p.a \), \( r = 0.03 \).

Compound Interest

On the other hand, compound interest is the interest earned from both the principal amount as well as any past interest accumulated.

As compound interest also takes into account any past interest accumulated, it would be significantly more than simple interest calculated at the same interest rate.

The formula for compound interest is as follows:

\begin{align} A_n = P(1 + r)^{n} \end{align}

Where \( A_n \) amount at the end of the \( n^{th} \) period, \( P = \) principal amount,  \( r = \) interest rate, \( n = \) number of time periods.

As above, it is important to note that would be expressed as a decimal. I.e. if the interest rate is \( 3 \% \ p.a., r = 0.03 \).

Further, the interest rate must correspond to the time period used.

For example, if the interest rate is given per annum, but our question requires us to compound monthly, we must then divide the interest rate by 12 (as there are 12 months) to obtain \( r \).

Modelling Investment and Loans

An annuity is a regular series of equal investments which are subject to compound interest. These investments are generally made at the end of a time period meaning that no interest is earned until the next compounding period.

With annuities, we are often required to find the final value of an annuity or the present value of an annuity.

The general formula for these two annuities is as follows:

\begin{align} F = a \Big{(} \frac{(1 + r)^{n} – 1}{r} \Big{)} \end{align}

Where \( F = \) the final value of the annuity at the end of the \( n^{th} \) period, \( a = \) equal investments made, \( r = \) interest rate, \( n = \) number of time periods.

\begin{align} P = \frac{F}{(1 + r)^{k}} = \frac{a}{r} \Big{(} 1 – \frac{1}{(1 + r)^{k}} \Big{)} \end{align}

Where \( P = \) the present/current value of the annuity at the end of a \( k^{th} \) period, \( a = \) equal investments made, \( r = \) interest rate, \( n = \) total number of time periods.

However, generally annuities are generally represented through standard tables, one for the present value of an annuity (PVA) and one for a final value of an annuity (FVA). These standard tables will use $1 as the base value.

The FVA table will represent how the final value of an annuity differs depending on the interest rate and the number of time periods.

Conversely, the PVA table will represent the current value of the annuity and how it differs depending on the interest rate and the number of time periods. Hence, the formulae described above will seldom need to be used.

Example partial tables are shown below:

Recurrence Relation

A recurrence relation is when the equation is expressed as a function of the preceding terms.

In most cases, the amount left at the end of a time period is expressed as a function of the previous period’s balance.

When constructing a recurrence relation, you must make sure to define the initial terms of the correctly. In particular, you have to be careful if you are analysing the amount left at the beginning or the end of the time period. In most cases, it is best to choose the end of the time period.

An example is as follows:

If I repay \( M \) on my loan each year compounded annually at \( 100r \ \% \ p.a. \):

Let \( A_{n} = \) the amount left in my loan at the end of each year and \( L = \) the original amount of the loan.

Recurrence relations are an integral part of a many financial mathematics questions but are most commonly used to determine repayments needed to be made on a loan, etc. Other types of questions which will use recurrence relations include:

Superannuation

Superannuation questions involve regular investments made into a fund for time periods. The fund pays interest which is compounded every period.

These sorts of questions often want us to determine the amount left in the account at the end of \( n \) time periods, i.e. we need to find what \( A_{n} \) is.

To do this we use the recurrence relation described above.

Sally opens a new super account and deposits of \( $885 \). At the beginning of each month, her employer matches this deposit. The interest for her account is compounded monthly at a rate of \( 2.65 \ \% \ p.a. \) After 35 years, how much will Sally have in her account?

\begin{align} A_{1} &= 885 \\ A_{2} &= 885 \Bigg{(} 1 + \Big{(} 1 + \frac{2.65}{100 \times 12} \Big{)} \Bigg{)} \end{align}

Following this recurrence relation:

Home Loans/Time Repayments

Questions which involve repayments on loans also use the recurrence relation but are a little bit more difficult when compared to superannuation problems. These repayments are made on a timely, regular basis (most often monthly) and are equal.

When solving these questions, we must take into account the interest left on the previous balance of our loan. I.e. the loan keeps growing in value the longer we take to repay — it does not stagnant as the original amount.

Thus, in general, after repayments of \( \$ M \) on a loan worth \( \$ L \) :

Where \( A_{n} \) the balance left in my loan at the end of each time period.

Roger borrows $300,000 at an interest rate of \( 5.35 \% \ p.a \). He borrowed the money at the beginning of January, 2012. At the end of each month he pays back an instalment of \( \$ M \). What is the value of \( M \) if the loan is repaid after 20 years?

When \( n = 240, \ A_{n} = 0 \). Therefore, we rearrange and solve for \( M \):

\begin{align} M &= \frac{ \big{(} 1 + \frac{5.35}{100 \times 12} \big{)}^{240} (300 \ 000)}{ \Bigg{[} \frac{\big{(} 1 + \frac{5.35}{100 \times 12} \big{)}^{240} – 1}{ \big{(} 1 + \frac{5.35}{100 \times 12} \big{)} – 1} \Bigg{]}} \\ &= \$ 2038.33 \end{align}

1. The total value of an investment after earning simple interest for 7 years is $30,598. If original investment was $25,000, what was the interest rate?

2. Veronica opens a savings account and deposits $798 fortnightly. The bank gives Veronica an interest rate of \( 1.15 \% \ p.a. \) Calculate the amount, to the nearest dollar, left in her account after 3 years if the account collects compound interest calculated monthly.

3. Tim’s employer deposits $700 into a super account at the beginning of every month. The interest earned on the account is \( 4.65 \% \ p.a. \) compounding quarterly. If Tim works for this employer for 24 years, how much will he collect when he retires (to the nearest dollar)?

1. \( 3.20 \%  \)

2. \( \$ 63 \ 299  \)

3. \( \$122 \ 419 \)

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Finance Calculator

Calculate formulas in finances step by step, simple interest, compound interest, present value, future value.

finance math problem help

finance-calculator

finance math problem help

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  2. Adding Money Word Problems Worksheets

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  3. 08 Financial Maths

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  4. Mathematics of Finance:Simple Interest rate: Ex 5.1,Q(15): Saima

    finance math problem help

  5. Worksheet # 2 Problem 7

    finance math problem help

  6. Solve Finance problems

    finance math problem help

VIDEO

  1. New math #viralvideo #viralvideo #education #shortsfeed

  2. Basic personal finance math (Link to full video in description)

  3. Solution of Some Finance Math Related Problems FOR HSC 2023-24

  4. Chapter 14 Finance Math Calculations Optional Review Session

  5. Math 176. Math of Finance. Lecture 12

  6. 🌈 Math is So Easy! 💯 (Cartoon Animation)

COMMENTS

  1. Why Is Math Important in Life?

    Math is important in life for its practical, everyday applications like cooking and baking, financing a home and providing the right tip at a restaurant. It is also used by professionals to solve problems.

  2. What Is the Answer to Your Math Problem?

    The answer to any math problem depends on upon the question being asked. In most math problems, one needs to determine a missing variable. For instance, if a problem reads as 2+3 = , one needs to figure out what the number after the equals ...

  3. What Is the Way to Find a Missing Number in a Math Problem?

    It depends on the operation being performed within the math problem, but finding a missing number typically requires the student to perform the opposite operation on both sides of the equation.

  4. Financial Math Homework Help & Answers

    Financial Math Homework Help. Post Homework Questions and Get Answers from Verified Tutors 24/7.

  5. Financial Math

    The world of finance is literally FULL of mathematical models, formulas, and systems. There's a reason that many word problems in math class involve making

  6. Finite Mathematics : Mathematics of Finance

    Study concepts, example questions & explanations for Finite Mathematics. Example Questions. Finite Mathematics Help » Mathematics of Finance

  7. 1a) Financial Mathematics Solutions to Practice Questions

    Notes finm1001: foundations of finance financial mathematics: solutions to practice questions question one woman invests at compounded annually and plans

  8. 6: Mathematics of Finance

    This chapter covers principles of finance. After completing this chapter students should be able to: solve financial problems that involve

  9. Financial Mathematics

    Learn about financial mathematics. Discover the key finance equations, and study financial mathematics questions and solutions to learn how

  10. Mathematical Finance

    Collaborate with your tutor online Work together with your tutor to answer your question within minutes! Mathematical Finance Tutors Available Now. 20 tutors

  11. Part 7: Financial Mathematics

    Modelling Investments and Loans; Harder Financial Mathematics; Concept Check Questions; Concept Check Solutions. Want to invest in better financial maths

  12. Solutions to Mathematics of Finance Sample Questions:

    sitting for the Financial Mathematics (FM) Exam. ... Only the second root gives a positive solution. Thus.

  13. Online Financial Calculators

    Financial Calculators · Polynomial Calculators · Rational Expressions · Radical Expressions · Solving Equations · Quadratic Equation · Geometry · Complex Numbers.

  14. Finance

    Symbolab is the best step by step calculator for a wide range of math problems, from basic arithmetic to advanced calculus and linear algebra.