Introduction to the Mathematics of Finance (Problem Set 6 – 1)

CHAPTER-6

Introduction to the
Mathematics of Finance

Symbols for Mathematics of Finance

Symbols Meanings
PV present value/principal/cost
FV future value/Total amount
SV scrap value/salvage value
P perpetual value
i rate of interest
d rate of depreciation
n number of years
k rate of interest
r rate of interest
A annuity/instalment
E endowment fund
S.I. simple interest
C.I. compound interest
p.a. per annum/per year
@ at/at the rate of

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More Symbols
SYMBOLS MENAINGS
 implies (or)
= equals
 not equals
 identity
 approximates
 approximately equals
 number
± plus-minus
 minus-plus
D discriminate
| | absolute
* strike
 lesser than
 greater than
 lesser than or equal to
 greater than or equal to
 Equivalence
 alpha
 beta
 gamma
 percent
0 per thousand
i = 1 imaginary unity
§ section
( ) parentheses
 braces
[ ] brackets

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Formulas for Business Application
No. Formulas
Present Value (simple interest):
1 FV
PV 
1  ni
Present Value (compound interest):
2 FV
PV 
(1  i) n
Present Value (annuity):
3 1  (1  i)  n 
PV  A  
 i 
Future Value (simple interest):
4 FV  P(1  ni )
Future Value (compound interest):
5 FV  P(1  i) n
Future Value (annuity):
6  (1  i) n  1 
FV  A  
 i 
Scrap Value:
7
SV  PV(1  d) n
Simple Interest:
8
S.I.  P  n  i
Compound Interest:
9
C.I.  P(1  i) n  P
Endowment/Perpetual Fund:
10 A
E
i

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Rules for Basic Operations

1. Logarithm with base 10 is denoted by log.
2. Logarithm with base e is denoted by ln.
3. Logarithm without denoting bases may be log or ln in terms of
respective fields.
4. Logarithm without base is impossible.
5. Natural logarithm (ln x) can be converted into common logarithm
(log x) with a multiplier of 2.3026.

Rules for Use of Log Table

1. At least four decimal places are acceptable for logarithm values.
2. Logarithm of negative number is not defined. So logarithm of
negative number is always rejected.
3. The scientific calculator may be used in place of logarithmic tables
for finding logarithm values.
4. In case of using scientific calculator in place of logarithmic tables,
negative numbers of logarithms must be converted into positive
numbers with a bar denotation.
5. Rules for converting negative numbers of logarithms into positive
numbers of logarithms are as follows:
(a) For example, let a scientific calculator gives the value of log
0.000786 = – 3.1046.
(b) To convert this negative number into positive number we shall
write one more value of integral part with a bar notation, and
adding this number to the negative value for placing the new
fractional results behind the bar value, i.e., 4.8954 .
(c) To find the value of antilogarithm of 4.8954 through the
scientific calculator we must use the original negative number.
Because simple scientific calculator does not receive bar value.

Rules for Business Applications

1. When the interest is given half yearly, then i will be divided by 2 and n
will be multiplied by 2; when the interest is given quarterly then i will
be divided by 4 and n will be multiplied by 4 and so on.

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2. For the words ‘now, borrow, loan, purchase’, the money is present
value.
3. For the words ‘will, then, amount or profit’, the money is future value.
4. For the word ‘depreciation’, then salvage value formula is to used.
5. For the word ‘life member/perpetual’, then endowment fund formula is to be
used.
6. When the type of interest is not denoted by the question, it is
considered as compound interest.
7. When the interest is given m times in a year, then i will be divided by
m and n will be multiplied by m.
8. When a question contains the words ‘each year/every year/ annually
/annuity’ then PV (annuity) or FV (annuity) formula is to be used.
9. For beginning of the year/period deposits in annuity problems, (1 + i)
is to be multiplied to each annuity formula.

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Examples
Text: G. D. Prichett & J. C. Saber
Solutions: Muhammad Shamim

Example 1 Find the interest on $100 at 8% yearly.

Solution: Given Principal (P) = $100

Interest rate (i) = 8%

Requirement: Interest (I) = ?

We know,
Interest = Principal  Interest rate
 I =Pi
= $100  8%
8
= $100 
100
= $8 [Ans.]

Example 2 Find the interest on $100 at 8% for 9 months.

Solution: Given Principal (P) = $100

Interest rate (i) = 8%
Time in years (n) = 9 months = 9/12 year
Requirement: Interest (I) = ?
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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
= $100  8%  9/12
9
= $100  0.08 
12
= $6 [Ans.]

Example 3 Find the interest on $600 at 7½ % for 10 months?

Solution: Given Principal (P) = $600

Interest rate (i) = 7½% = 0.075
Time in years (n) = 10 months = 10/12 year

Requirement: Interest (I) = ?

We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
= $600  0.075  10/12
= $37.50 [Ans.]

Example 4 Find the interest rate if $1000 earns $45 interest in 6

months?

Solution: Given Principal (P) = $1000

Interest (I) = $45
Time in years (n) = 6 months = 6/12 year

Requirement: Interest rate (i) = ?

We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
 $45 = $1000  i  6/12
 $45 = $1000  i  0.50
 $1000  i  0.50 = $45
$45
 i=
$1000  0.50
$45
 i=
$500
 i = 0.09
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 i = 0.09  100%
 i = 9% [Ans.]

Example 5 Find the interest on $1460 for 72 days at 10 percent

interest using (a) the exact method, and (b) the ordinary method.

Solution: Given Principal (P) = $1460

Interest rate (i) = 10% = 0.10
Time in years (n) = 72 days
Requirement: Interest (I) = ?
(a) Interest under Exact Method:
We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
= $1460  0.10  72/365
= $28.80 [Ans.]
(b) Interest under Ordinary Method:
We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
= $1460  0.10  72/360
= $29.20 [Ans.]

Example 6 Find the relationship between ordinary interest and exact

interest.

Solution: We know, Ordinary days in a year = 360 days

Exact days in a year = 365 days

Ordinary interest P  i  n ( Number of days/Ordinary days in a year)

Thus =
Exact interest P  i  n ( Number of days/Exact days in a year)
Ordinary interest Number of days/Ordinary days in a year
 =
Exact interest Number of days/Exact days in a year
Number of days
Ordinary interest Ordinary days in a year
 =
Exact interest Number of days
Exact days in a year
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Ordinary interest Number of days Exact days in a year
 = 
Exact interest Ordinary days in a year Number of days
Ordinary interest Exact days in a year
 =
Exact interest Ordinary days in a year
Ordinary interest 365
 =
Exact interest 360
Ordinary interest 73
 =
Exact interest 72
 73 
 Ordinary interest =   Exact interest [Ans.]
 72 

Example 7 Find the interest on $1000 at 9% for 8 months?

Solution: Given Principal (P) = $1000

Interest rate (i) = 9% = 0.09
Time in years (n) = 8 months = 8/12 year
Requirement: Interest (I) = ?
We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
= $1000  0.09  8/12
= $60 [Ans.]

Example 8 Find the future value of $1000 at 9 % for 8 months?

Solution: Given Principal (P) = $1000

Interest rate (i) = 9% = 0.09
Time in years (n) = 8 months = 8/12 year
Requirement: Future value (F) = ?
We know,
Future value = Principal + (Principal  Interest rate  Time in years)
 F = P + (P  i  n)
= $1000 + ($1000  0.09  8/12)
= $1000 + $60
= $1060 [Ans.]

Example 9 Find the future value if $20000 is invested at 6 percent

for 3 months.

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Solution: Given Principal (P) = $20000
Interest rate (i) = 6% = 0.06
Time in years (n) = 3 months = 3/12 year
Requirement: Future value (F) = ?
We know,
Future value = Principal + (Principal  Interest rate  Time in years)
 F = P + (P  i  n)
 F = P(1 + i  n)
 F = $20000(1 + 0.06  3/12)
 F = $20000(1 + 0.15)
 F = $20000(1.15)
 F = $20300 [Ans.]

Example 10 Jan received $50 for a diamond at a pawn shop, and a

month later paid $53.50 to get the diamond back. Find the percent
interest rate.
Solution: Given Principal/Present value (P) = $50
Future value (F) = $53.50
Time in years (n) = 1 months = 1/12 year
Requirement: Interest rate (i) = ?
We know,
Future value = P(1 + i  n)
 F = P(1 + in)
 $53.50 = $50[1 + i(1/12)]
53.50 1
 = 1 + i 
50  12 
i
 1.07 =1+
12
12  i
 1.07 =
12
 1.07  12 = 12 + i
 12.84 = 12 + i
 12 + i = 12.84
 12 + i = 12.84 – 12
 i = 0.84
 i = 0.84  100%
 i = 84% [Ans.]

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Example 11 Find the present of $530 receivable 9 months from now

if the interest rate is 8 percent.

Solution: Given Future value (F) = $530

Interest rate (i) = 8% = 0.08
Time in years (n) = 9 months = 9/12 years
Requirement: Present value (P) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
530
=
1  0.08  (9/12)
530
=
1  0.06
530
=
1.06
= $500 [Ans.]

Example 12 If $1000 is borrowed at 12 percent for 6 months, find

the borrower’s proceeds.

Solution: Given Future value (F) = $1000

Discount rate (d) = 12% = 0.12
Time in years (n) = 6 months = 6/12 years

Requirement: Proceeds (P) = ?

We know,
Proceeds = Future value – Future value  Interest rate  Time in years
 P =F–Fdn
= $1000 – $1000  0.12  6/12
= $1000 – $60
= $940 [Ans.]

Example 13 How much a borrower will pay back 6 months from

now, if he wants a proceeds of $1000 at 12 percent?

Solution: Given Proceeds (P) = $1000

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Discount rate (d) = 12% = 0.12
Time in years (n) = 6 months = 6/12 years
Requirement: Future value (F) = ?
We know,
Proceeds = Future value – Future value  Interest rate  Time in years
 P =F–Fdn
 P = F(1 – d  n)
 $1000 = F(1 – 0.12  6/12)
 $1000 = F(1 – 0.06)
 $1000 = F(0.94)
 F(0.94) = $1000
$1000
 F =
0.94
 F = $1063.83 [Ans.]
Example 14 Find the present value, effective interest rate of $1000
payable in 6 months at 12 percent simple interest?
Solution: Given Future value (F) = $1000
Interest rate (i) = 12% = 0.12
Time in years (n) = 6 months = 6/12 years
Requirement: (i) Present value (P) = ?
(ii) Effective interest rate (ie)= ?
(i) We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
1000
=
1  0.12  (6/12)
1000
=
1  0.06
1000
=
1.06
= $943.40 [Ans.]
(ii) We know for simple interest (i),
Interest amount for one year
Effective interest rate (ie) =
Amount borrower receives

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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
(P)(i)(1 year)
 ie =
P
$943.40  0.12  1
 ie =
$943.40
$113.20
 ie =
$943.40
 ie = 0.11999
 ie = 0.12 = 12% [Ans.]

Example 15 Prove that effective interest rate is equal to simple

interest rate charged on present value.

Solution: Let Present value = P

Simple interest rate = i
Effective interest rate = ie
Time in years = n
= 1 year
Requirement: To prove ie = i.
We know,
(P)(i)(n)
ie =
P
(P)(i)(1 year)
 ie =
P
(P)(i)(1)
 ie =
P
Pi
 ie =
P
 ie = i [Proved]

Example 16 If the proceeds is $940 on a future value of $1000 at 12

percent for 6 months, find the effective interest rate.

Solution: Given Future value (F) = $1000

Proceeds (P) = $940
Discount rate (d) = 12% = 0.12
Time in years (n) = 6 months = 6/12 years
Requirement: Effective interest rate (ie) = ?

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 Bowen, Prichett & Saber’s Mathematics Manual
We know,
Interest amount for one year
Effective interest rate (ie) =
Amount borrower receives
(Future value - Proceeds)1 2/6
 ie =
Proceeds
($1000 - $940)2
 ie =
$940
$120
 ie =
$940
 ie = 0.1277
 ie = 12.77% [Ans.]

Example 17 find the effective interest rate on a future value of $1000

at 12 percent for 6 months.

Solution: Given Future value (F) = $1000

Discount rate (d) = 12% = 0.12
Time in years (n) = 6 months
= 6/12 years

Requirement: Effective interest rate (ie) = ?

We know,
Proceeds = F(1 – d  n)
 P = $1000(1 – 0.126/12)
= $1000(1 – 0.06)
= $1000(0.94)
= $940

We also know,
Interest amount for one year
Effective interest rate (ie) =
Amount borrower receives
(Future value - Proceeds)1 2/6
 ie =
Proceeds
($1000 - $940)2
 ie =
$940
$120
 ie =
$940

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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
 ie = 0.1277
 ie = 12.77% [Ans.]

Example 18 Find the effective interest rate at 12 percent for 6

months.

Solution: Given Discount rate (d) = 12% = 0.12

Time in years (n) = 6 months
= 6/12 years
Requirement: Effective interest rate (ie) = ?
We know,
d
Effective interest rate (ie) =
1  dn
d
 ie =
1  dn
0.12
 ie =
1  0.12  6 / 12
0.12
 ie =
1  0.06
0.12
 ie =
0.94
 ie = 0.1277
 ie = 12.77% [Ans.]

Example 19 Find the discount rate on 12 percent true interest for 6

months.

Solution: Given
Effective interest rate or True interest rate (ie) = 12% = 0.12
Time in years (n) = 6 months
= 6/12 years

Requirement: Discount rate (d) = ?

We know,
ie
Discount rate (d) =
1  ien

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 Bowen, Prichett & Saber’s Mathematics Manual
0.12
 d =
1  0.12  6/12
0.12
 d =
1  0.06
0.12
 d =
1.06
 d = 0.1132
 d = 11.32% [Ans.]

Alternative Method:
We know,
d
Effective interest rate (ie) =
1  dn
d
 0.12 =
1  d  6 / 12
d
 0.12 =
1  0.50d

 0.12(1 – 0.50d) = d
 0.12 – 0.06d = d
 0.12 = d + 0.06d
 0.12 = d(1 + 0.06)
 0.12 = (1.06)d
 (1.06)d = 0.12
0.12
 d =
1.06

 d = 0.11321
 d = 11.321% [Ans.]

d ie
Example 20 Derive the formula ie = to d = .
1  dn 1  ien

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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
d
Solution: Given ie =
1  dn
 ie(1 – dn) = d
 ie – iedn = d
 ie = d + iedn
 ie = d(1 + ien)
 d(1 + ien) = ie
ie
 d= [Proved]
1  ien

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Exercises
Text: G. D. Prichett & J. C. Saber
Solutions: Muhammad Shamim
Exercise 1 Compute the interest on $480 at 6¼ percent for 9 months.

Solution: Given Principal (P) = $480

Interest rate (i) = 6¼ % = 0.0625
Time in years (n) = 9 months = 9/12 year
Requirement: Interest (I) = ?
We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
= $480  6¼ %  9/12
9
= $480  0.0625 
12
= $480  0.046875
= $22.50 [Ans.]

Exercise 2 Compute the yield for General Electric from the market
report of $76.00 per share sold, and the annual dividend $2.20 per
share.
Solution: Given Share value at par (S) = $76.00
Annual dividend at par (D) = 2.20
Requirement: Yield (Y) = ?
We know,
Annual dividend at par
Yield =  100
Share value at par

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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
D
 Y =  100
S
2.20
=  100
76.00
= $2.895 percent [Ans.]

Exercise 3 Find the exact and ordinary interest on $2190 for 75 days
at 12 percent interest.

Solution: Given Principal (P) = $2190

Interest rate (i) = 12% = 0.12
Time in years (n) = 75 days
Requirement: Interest (I) = ?

(a) Interest under Exact Method:

We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
= $2190  0.12  75/365
= $54.00 [Ans.]

(b) Interest under Ordinary Method:

We know,
Interest = Principal  Interest rate  Time in years
 I =Pin
= $2190  0.12  75/360
= $54.75 [Ans.]

Exercise 4 Find the future value of $1000 at 10% for 9 months?

Solution: Given Principal (P) = $5000

Interest rate (i) = 10% = 0.10
Time in years (n) = 9 months = 9/12 year
Requirement: Future value (F) = ?

We know,
Future value = Principal + (Principal  Interest rate  Time in years)

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 Bowen, Prichett & Saber’s Mathematics Manual
 F = P + (P  i  n)
= $5000 + ($5000  0.10  9/12)
= $5000 + $375
= $5375.00 [Ans.]
Exercise 5 Fran has placed $500 in an employees’ savings account
that pays 8 percent simple interest. How long will it be, in months,
until the investment amounts to $530?
Solution: Given Present value (P) = $500
Future value (F) = $530
Interest rate (i) = 8% = 0.08

Requirement: Time in years (n) = ?

We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
530
 500 =
1  0.08  n
 500(1 + 0.08n) = 530
530
 1 + 0.08n =
500
 1 + 0.08n = 1.06
 0.08n = 1.06 – 1
 0.08n = 0.06
0.06
 n =
0.08
6
 n =
8
3
 n = years
4
3
 n =  12 months
4
 n = 9 months [Ans.]

Exercise 6 How much will Fran have to invest now in the employees’
8 percent savings account in order to have $600 a year from now?

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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
Solution: Given Future value (F) = $600
Interest rate (i) = 8% = 0.08
Time in years (n) = 1 year
Requirement: Present value (P) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
600
=
1  0.08  1
600
=
1  0.08
600
=
1.08
= Tk 555.56 [Ans.]
Exercise 7 Find the present value of $1000 at 9 percent due 8 months
from now.
Solution: Given Future value (F) = $1000
Interest rate (i) = 9% = 0.09
Time in years (n) = 8 months = 8/12 year
Requirement: Present value (P) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
1000
=
1  0.09  8/12
1000
=
1  0.06
1000
=
1.06
= Tk 943.40 [Ans.]

Exercise 8 (a) A borrower signs a note promising to pay a bank

$5000 ten months from now. How much will the borrower receive if
the discount rate is 8.4 percent?
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(b) How much would the borrower have to repay in order to
receive $5000 now?

Solution: Given Future value (F) = $5000

Discount rate (d) = 8.4% = 0.084
Time in years (n) = 10 months = 10/12 years
Requirement: Proceeds (P) = ?
(a) We know,
Proceeds = Future value – Future value  Interest rate  Time in years
 P =F–Fdn
= $5000 – $5000  0.084  10/12
= $5000 – $350
= $4650 [Ans.]

(b) Given Proceeds (P) = $5000

Discount rate (d) = 8.4% = 0.084
Time in years (n) = 10 months = 10/12 years
Requirement: Future value (F) = ?
We know,
Proceeds = Future value – Future value  Interest rate  Time in
years
 P =F–Fdn
 P = F(1 – d  n)
 $5000 = F(1 – 0.084  10/12)
 $5000 = F(1 – 0.07)
 $4000 = F(0.93)
 F(0.93) = $5000
$5000
 F =
0.93
 F = $5376.34 [Ans.]

Exercise 9 What would be the present value of $1000 payable in 6

months at 12 percent simple interest?

Solution: Given Future value (F) = $1000

Interest rate (i) = 12% = 0.12
Time in years (n) = 6 months = 6/12 years
Requirement: Present value (P) = ?

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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
1000
=
1  0.12  (6/12)
1000
=
1  0.06
1000
=
1.06
= $943.40 [Ans.]

Exercise 10 Find the effective interest rate if the discount rate is 12

percent for 6 months.

Solution: Given Discount rate (d) = 12% = 0.12

Time in years (n) = 6 months = 6/12 years
Requirement: Effective interest rate (ie) = ?
We know,
d
Effective interest rate (ie) =
1  dn
d
 ie =
1  dn
0.12
 ie =
1  0.12  6 / 12
0.12
 ie =
1  0.06
0.12
 ie =
0.94
 ie = 0.12766
 ie = 12.766% [Ans.]

Exercise 11 (a) Find the present value and effective rate of $1000 due
in 4 months at 12 percent interest.
(b) Find the proceeds and effective rate of $1000 due in 4
months at a discount rate of 12 percent.
Solution: (a) Given Future value (F) = $1000
435
 Bowen, Prichett & Saber’s Mathematics Manual
Interest rate (d) = 12% = 0.12
Time in years (n) = 4 months = 4/12 years
Requirement: (i) Present value (P) = ?
(ii) Effective interest rate (ie) = ?
(i) We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
1000
=
1  0.12  ( 4/12)
1000
=
1  0.04
1000
=
1.04
= $961.54 [Ans.]
(ii) We also know,
Interest amount for one year
Effective interest rate (ie) =
Amount borrower receives
(Future value - Proceeds)12/4
 ie =
Proceeds
($1000 - $961.54)3
 ie =
$961.54
$115.38
 ie =
$961.54
 ie = 0.119995
 ie = 0.12  100%
 ie = 12 % [Ans.]

(b) Given Future value (F) = $1000

Discount rate (d) = 12% = 0.12
Time in years (n) = 4 months = 4/12 years
Requirement: (i) Proceeds (P) = ?
(ii) Effective interest rate (ie) = ?

(i) We know,
Proceeds (P) = F(1 – d  n)
 P = 1000(1 – 0.12  4/12)
= 1000(1 – 0.04)
436
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
= 1000(0.96)
= $960.00 [Ans.]
(ii) We also know,
Interest amount for one year
Effective interest rate (ie) =
Amount borrower receives
(Future value - Proceeds)12/4
 ie =
Proceeds
($1000 - $960.00)3
 ie =
$960.00
$120
 ie =
$960
 ie = 0.125
 ie = 0.125  100%
 ie = 12.5 % [Ans.]

Exercise 12 Suppose a lender wishes to earn 15 percent true interest

on a 4-month transaction using interest deducted-in-advance. What
discount rate should be quoted?

Solution: Given
Effective interest rate or True interest rate (ie) = 15% = 0.15
Time in years (n) = 4 months = 4/12 years
Requirement: Discount rate (d) = ?
We know,
ie
Discount rate (d) =
1  ien
0.15
 d =
1  0.15  4/12
0.15
 d =
1  0.05
0.15
 d =
1.05
 d = 0.14286
 d = 14.286% [Ans.]

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 Bowen, Prichett & Saber’s Mathematics Manual

Problem Set 6 – 1
Text: E. K. Bowen, G. D. Prichett & J. C. Saber
Solutions: Muhammad Shamim

In Problems 1 through 10, find (a) the interest, and (b) the
amount for each of the principals for the stated simple
interest rate and time period:

1 $500; 7 percent; 1 year.

Solution: Given Principal (P) = $500

Interest rate (i) = 7% = 0.07
Time in years (n) = 1 year
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

=Pin
= $500  0.07  1
= $500  0.07
= $35 [Ans.]

(b) Amount (A) = Principal + Interest

=P+I
= $500 + $35
= $535 [Ans.]

2 $1000; 8 percent; 1 year.

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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
Solution: Given Principal (P) = $1000
Interest rate (i) = 8% = 0.08
Time in years (n) = 1 year
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

=Pin
= $1000  0.08  1
= $1000  0.08
= $80 [Ans.]

(b) Amount (A) = Principal + Interest

=P+I
= $1000 + $80
= $1080 [Ans.]

3 $1000; 9 percent; 6 months.

Solution: Given Principal (P) = $1000

Interest rate (i) = 9% = 0.09
Time in years (n) = 6 months = 6/12 year
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

=Pin
= $1000  0.09  6/12
= $1000  0.045
= $45 [Ans.]

(b) Amount (A) = Principal + Interest

=P+I
= $1000 + $45
= $1045 [Ans.]

439
 Bowen, Prichett & Saber’s Mathematics Manual
4 $2000; 6 percent; 6 months.

Solution: Given Principal (P) = $2000

Interest rate (i) = 6% = 0.06
Time in years (n) = 6 months = 6/12 year
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

=Pin
= $2000  0.06  6/12
= $2000  0.03
= $60 [Ans.]

(b) Amount (A) = Principal + Interest

=P+I
= $2000 + $60
= $2060 [Ans.]

5 $100; 36 percent; 4 months.

Solution: Given Principal (P) = $100

Interest rate (i) = 36% = 0.36
Time in years (n) = 4 months = 4/12 year
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

=Pin
= $100  0.36  4/12
= $100  0.12
= $12 [Ans.]

(b) Amount (A) = Principal + Interest

=P+I
440
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
= $100 + $12
= $112 [Ans.]

6 $500; 24 percent; 3 months.

Solution: Given Principal (P) = $500

Interest rate (i) = 24% = 0.24
Time in years (n) = 3 months = 3/12 year
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

=Pin
= $500  0.24  3/12
= $500  0.06
= $30 [Ans.]

(b) Amount (A) = Principal + Interest

=P+I
= $500 + $30
= $530 [Ans.]

7 $200; 12 percent; 18 months.

Solution: Given Principal (P) = $200

Interest rate (i) = 12% = 0.12
Time in years (n) = 18 months = 18/12 years
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

=Pin
= $200  0.12  18/12
= $200  0.18
= $36 [Ans.]

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 Bowen, Prichett & Saber’s Mathematics Manual
(b) Amount (A) = Principal + Interest
=P+I
= $200 + $36
= $236 [Ans.]

8 $500; 18 percent; 16 months.

Solution: Given Principal (P) = $500

Interest rate (i) = 18% = 0.18
Time in years (n) = 16 months = 16/12 years
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

 I =Pin
= $500  0.18  16/12
= $500  0.24
= $120 [Ans.]

(b) Amount (A) = Principal + Interest

 A =P+I
= $500 + $120
= $620 [Ans.]

9 $5000; 24 percent; 3 years.

Solution: Given Principal (P) = $5000

Interest rate (i) = 24% = 0.24
Time in years (n) = 3 years
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?

(a) Interest (I) = Principal  Interest rate  Time in years

=Pin
= $5000  0.24  3
= $5000  0.72
= $3600 [Ans.]

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 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
(b) Amount (A) = Principal + Interest
=P+I
= $5000 + $3600
= $8600 [Ans.]

10 $4000; 30 percent; 2 years.

Solution: Given Principal (P) = $4000

Interest rate (i) = 30% = 0.30
Time in years (n) = 2 years
Requirement: (a) Interest (I) = ?
(b) Amount or Future value (F) = ?
(a) Interest (I) = Principal  Interest rate  Time in years
=Pin
= $4000  0.30  2
= $4000  0.60
= $2400 [Ans.]

(b) Amount (A) = Principal + Interest

=P+I
= $4000 + $2400
= $6400 [Ans.]

11 How many months will it take until the interest on $900 at 12

percent will be $135?

Solution: Given Principal (P) = $900

Interest rate (i) = 12% = 0.12
Interest (I) = $135
Requirement: Time in years (n) = ?

Interest (I) = Principal  Interest rate  Time in years

 I =Pin
 135 = 900  0.12  n
 135 = 108  n
 108  n = 135
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 Bowen, Prichett & Saber’s Mathematics Manual
135
 n =
108
5
 n = years
4
5
 n =  12 months
4
 n = 15 months [Ans.]

12 A credit card holder has owed the credit card company $200 for a
month, and receives a bill containing an interest of $3. Find the
interest rate.

Solution: Given Principal (P) = $200

Time in years (n) = 1 month = 1/12 year
Interest (I) = $3
Requirement: Interest rate (i) = ?
Interest (I) = Principal  Interest rate  Time in years
 I =Pin
 3 = 200  i  1/12
 3 = 200/12  i
 200/12  i = 3
 i = 3  12/200
 i = 36/200
 i = 0.18
 i = 18% [Ans.]

13 Compute the yield of New England Electric Company stock from

the following stock market report:
New Eng Elec 2.16 32.

Solution: Given Share value at par (S) = $32

Annual dividend at par (D) = 2.16
Requirement: Yield (Y) = ?

444
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
We know,
Annual dividend at par
Yield =  100
Share value at par
D
=  100
S
2.16
=  100
32
= 0.0675
= 6.75% [Ans.]

14 How much must be deposited in an account paying 7 percent if

interest of $100 is to be earned in 24 months?

Solution: Given Interest rate (i) = 7% = 0.07

Interest (I) = $100
Time in years (n) = 24 months = 2 years
Requirement: Principal (P) = ?

Interest (I) = Principal  Interest rate  Time in years

 I =Pin
 100 = P  0.07  2
 100 = P  0.14
 P  0.14 = 100
100
 P =
0.14
 P = $714.29 [Ans.]

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 Bowen, Prichett & Saber’s Mathematics Manual
In solving Problems 15 through 26, draw the associated time
diagram:

15 How many months will it take at 8 percent interest for $2000 to

grow to an amount of $2400?
Solution: Given Present value (P) = $2000
Future value (F) = $2400
Interest rate (i) = 8% = 0.08
Requirement: Time in years (n) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
2400
 2000 =
1  0.08  n
 2000(1 + 0.08n) = 2400
2400
 1 + 0.08n =
2000
 1 + 0.08n = 1.20
 0.08n = 1.20 – 1
 0.08n = 0.20
0.20
 n =
0.08
 n = 2.5 years
 n = 2.5  12 months
 n = 30 months [Ans.]

i = 8%
P = $2000 F = $2400

    Months
0 10 20 30
n = 30 months
fig: Time Diagram

446
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
16 Fran deposits $1000 in an employees’ savings account at 6
percent. How many months will it be until the amount in the account
is $1100?
Solution: Given Present value (P) = $1000
Future value (F) = $1100
Interest rate (i) = 6% = 0.06
Requirement: Time in years (n) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
1100
 1000 =
1  0.06  n
 1000(1 + 0.06n) = 1100
1100
 1 + 0.06n =
1000
 1 + 0.06n = 1.10
 0.06n = 1.10 – 1
 0.06n = 0.10
0.10
 n =
0.06
5
 n = years
3
5
 n =  12 months
3
 n = 20 months [Ans.]

i = 8%
P = $1000 F = $1100

   Months
0 10 20
n = 20 months
fig: Time Diagram

447
 Bowen, Prichett & Saber’s Mathematics Manual
17 Dan buys a TV set priced at $500 and is to pay this amount, plus
interest, 3 months later. The total bill was $520. Compute the
interest rate.

Solution: Given Present value (P) = $500

Future value (F) = $520
Time in years (n) = 3 months = 3/12 year
Requirement: Rate of interest (i) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
520
 500 =
1  i  3/12
 500(1 + i  3/12) = 520
520
 (1 + i  3/12) =
500
 1 + i  3/12 = 1.04
 i  3/12 = 1.04 – 1
 i  3/12 = 0.04
 i = 0.04  12/3
 i = 0.16
 i = 16% [Ans.]

i = 16%
P = $500 F = $520

    Months
0 1 2 3
n = 3 months
fig: Time Diagram
448
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
18 At what rate of interest will an investment of $1000 for 2 years
grow to the amount of $1100?

Solution: Given Present value (P) = $1000

Future value (F) = $1100
Time in years (n) = 2 years
Requirement: Rate of interest (i) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
 P =
1  in
1100
 1000 =
1 i  2
 1000(1 + i  2) = 1100
1100
 (1 + i  2) =
1000
 1 + i  2 = 1.10
 i  2 = 1.10 – 1
 i  2 = 0.10
 i = 0.10  1/2
 i = 0.05
 i = 5% [Ans.]

i = 5%
P = $1000 F = $1100

   Years
0 1 2
n = 2 years
fig: Time Diagram

449
 Bowen, Prichett & Saber’s Mathematics Manual
19 Find the present value of $460 receivable 18 months from now if
the interest rate is 10 percent.

Solution: Given Future value (F) = $460

Interest rate (i) = 10% = 0.10
Time in years (n) = 18 months
= 18/12 years
Requirement: Present value (P) = ?
We know,
Future value
Present value (P) =
1  interest rate  years

F
=
1  in
460
=
1  0.10  (18/12)

460
=
1  0.15
460
=
1.15
= $400 [Ans.]

20 Find the present value of $1000 receivable 2 years from now if the
interest rate is 8.5 percent.

Solution: Given Future value (F) = $1000

Interest rate (i) = 8.5% = 0.085
Time in years (n) = 2 years
Requirement: Present value (P) = ?
We know,
Future value
Present value (P) =
1  interest rate  years

F
=
1  in

450
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
1000
=
1  0.085  2
1000
=
1  0.17
1000
=
1.17
= $854.70 [Ans.]

21 How much will Sam have to invest now in an employees’ savings

account at 7 percent in order to have $1000 in the account 18 months
from now?

Solution: Given Future value (F) = $1000

Interest rate (i) = 7% = 0.07
Time in years (n) = 18 months
= 18/12 years
Requirement: Present value (P) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
=
1  in
1000
=
1  0.07  (18/12)

1000
=
1  0.105
1000
=
1.105
= $904.98 [Ans.]

22 (See Problem 21.) How much would Sam have to invest if the
interest rate were 10 percent?

Solution: Given Future value (F) = $1000

Interest rate (i) = 10% = 0.10
451
 Bowen, Prichett & Saber’s Mathematics Manual
Time in years (n) = 18 months
= 18/12 years
Requirement: Present value (P) = ?
We know,
Future value
Present value (P) =
1  interest rate  years
F
=
1  in
1000
=
1  0.10  (18/12)

1000
=
1  0.15
1000
=
1.15
= $869.57 [Ans.]

23 Find the proceeds of a $2000, 18 month loan from a bank if the

discount rate is 12 percent.

Solution: Given Future value (F) = $2000

Discount rate (d) = 12% = 0.12
Time in years (n) = 18 months
= 18/12 years
Requirement: Proceeds (P) = ?
We know,
Proceeds = Future value – Future value  Discount rate  Time in years
=F–Fdn
= $2000 – $2000  0.12  18/12
= $2000 – $360
= $1640 [Ans.]

452
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
24 Find the proceeds of a $500, 9-month loan from a bank if the
discont rate is 9 percent.

Solution: Given Future value (F) = $500

Discount rate (d) = 9% = 0.09
Time in years (n) = 9 months
= 9/12 years
Requirement: Proceeds (P) = ?
We know,
Proceeds = Future value – Future value  Discount rate  Time in years
=F–Fdn
= $500 – $500  0.09  9/12
= $500 – $33.75
= $466.25 [Ans.]

25 Dan wants $2000 now from a bank, to be repaid 18 months from

now. How much will the repayment be if the discount rate is 15
percent?

Solution:
Given Proceeds (P) = $2000
Discount rate (d) = 15% = 0.15
Time in years (n) = 18 months
= 18/12 years
Requirement: Future value (F) = ?
We know,
Proceeds = Future value – Future value  Interest rate  Time in years
 P =F–Fdn
 P = F(1 – d  n)
 $2000 = F(1 – 0.15  18/12)
 $2000 = F(1 – 0225)
 $2000 = F(0.775)

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 Bowen, Prichett & Saber’s Mathematics Manual
 F(0.775) = $2000
$2000
 F =
0.775
 F = $2580.65 [Ans.]

26 Fran signs a note promising to pay a bank $1000 ten months from
now and receives $900. Find the discount rate.
Solution:
Given Proceeds (P) = $1000
Future value (F) = $900
Time in years (n) = 18 months
= 18/12 years
Requirement: Discount rate (d) = ?
We know,
Proceeds = Future value – Future value  Interest rate  Time in years
 P =F–Fdn
 P = F(1 – d  n)
 900 = 1000(1 – d  10/12)
 1000(1 – d  10/12) = 900
 1 – d  10/12 = 900/1000
 1 – d  10/12 = 0.90
 – d  10/12 = 0.90 – 1
 – d  10/12 = – 0.10
 d  10/12 = 0.10
 d = 0.10  12/10
 d = 0.12
 d = 12% [Ans.]

454
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
27 Find the effective interest rate in Problem 23.

Solution: Given Discount rate (d) = 12% = 0.12

Time in years (n) = 18 months
= 18/12 years
Requirement: Effective interest rate (ie) = ?
We know,
d
Effective interest rate (ie) =
1  dn
d
=
1  dn
0.12
=
1  0.12  18 / 12
0.12
=
1  0.18
0.12
=
0.82
= 0.14634
= 14.634% [Ans.]

28 Find the effective interest rate in Problem 24.

Solution: Given Discount rate (d) = 9% = 0.09

Time in years (n) = 9 months
= 9/12 years
Requirement: Effective interest rate (ie) = ?
We know,
d
Effective interest rate (ie) =
1  dn
d
=
1  dn
0.09
=
1  0.09  9 / 12
0.09
=
1  0.0675
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 Bowen, Prichett & Saber’s Mathematics Manual
0.09
=
0.9325
= 0.09651
= 9.651% [Ans.]

29 Find the effective interest rate in Problem 25.

Solution: Given Discount rate (d) = 15% = 0.15

Time in years (n) = 18 months
= 18/12 years
Requirement: Effective interest rate (ie) = ?
We know,
d
Effective interest rate (ie) =
1  dn
d
=
1  dn
0.15
=
1  0.15  18 / 12
0.15
=
1  0.225
0.15
=
0.775
= 0.19355
= 19.355% [Ans.]

30 What discount rate should a lender quote to earn 9 percent true

interest on a 90-day transaction?

Solution: Given
Effective interest rate or True interest rate (ie) = 9% = 0.09
Time in years (n) = 90 days
= 90/365 years
Requirement: Discount rate (d) = ?

456
 Introduction to the Mathematics of Finance (Problem Set 6 – 1)
We know,
ie
Discount rate (d) =
1  ien

0.09
=
1  0.09  90/360
0.09
=
1  0.0225
0.09
=
1.0225
= 0.08802
= 8.802% [Ans.]

31 What discount rate should a lender quote to earn 11 percent true

interest on a 6-month transaction?

Solution: Given
Effective interest rate or True interest rate (ie) = 11% = 0.11
Time in years (n) = 6 months
= 6/12 years

Requirement: Discount rate (d) = ?

We know,
ie
Discount rate (d) =
1  ien

0.11
 d =
1  0.11 6/12
0.11
 d =
1  0.055
0.11
 d =
1.055
 d = 0.10427
 d = 10.427% [Ans.]
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 Bowen, Prichett & Saber’s Mathematics Manual
32 What discount rate should a lender quote to earn 15 percent true
interest on a 9-month transaction?

Solution: Given
Effective interest rate or True interest rate (ie) = 15% = 0.15
Time in years (n) = 9 months
= 9/12 years

Requirement: Discount rate (d) = ?

We know,
ie
Discount rate (d) =
1  ien

0.15
=
1  0.15  9/12
0.15
=
1  0.1125
0.15
=
1.1125
= 0.13483
= 13.483% [Ans.]

33 34 35 36 37 38 These are a computer oriented programming

problem.

Solution: Solve by any financial analyst software or Microsoft Excel

Equation Solving Program.

E-mail: mathshamimbd@gmail.com

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