Overview

Financial mathematics is the application of mathematical methods to the solution of problems in finance. Many people are in the dark when it comes to applying math to practical problem solving. This section will show you how to do the math required to figure out a home mortgage, automobile loan, the present value of an annuity, to compare investment alternatives, and much more.

This section contains formulas, definitions and some examples regarding:

1. Simple interest

2. Compound interest

3. Annuity

4. Amortization

1 Simple Interest

Interest is the fee paid for the use of someone else's money. Simple interest is interest paid only on the amount deposited and not on past interest. The formula for simple interest is

where

Example

Find the simple interest for $1500 at 8% for 2 years.

Solution:

1. Future value
   If P dollars are deposited at interest rate r for t years, the money earns interest. When this interest is added to the initial deposit deposit, the total amount in the account is

   
   

   This amount is called the future value or maturity value.

Example

Find the maturity value of $10,000 at 8% for 6 months.

Solution:

The maturity value is

2 Compound Interest

Simple interest is normally used for loans or investment of a year or less. For longer periods, compound interest is used.

The compound amount at the end of t years is given by the compound...