REPUBLIC OF CAMEROON

PEACE-WORK-FATHERLAND REPUBLIQUE DU CAMEROUN

MINISTRY OF HIGHER EDUCATION PAIX-TRAVAIL-PATRIE
678342142/675067126 MINISTERE DE L’ENSEIGNEMENT SUPERIEUR
678342142/675067126

COURAGEOUS HIGHER INSTITUTE OF PROFESSIONAL STUDIES

(CHIPS)
MBANKOLO-YAOUNDE
MOTTO: RESPECT-RESILIENCE-EXCELLENCE

COURSE: FINANCIAL MATHEMATICS I

LEVEL 200
FIRST SEMESTER

COURSE MASTER ACADEMIC YEAR

NENG KELLY-N 2024/2025
 Objective for Financial Mathematics I:

The objective of this course is to provide students with a

comprehensive understanding of fundamental concepts in financial
mathematics. Students will learn to compute
- simple and compound interest
- understand the principles of current value and discounting,
- analyze the implications of various interest rates on financial
transactions.
By the end of the course, students will be equipped to make
- informed financial decisions,
evaluate investment opportunities,
- apply mathematical techniques to real-world financial scenarios.

General Introduction

Financial mathematics is a vital field that combines mathematical

principles with financial theory to analyze and solve problems related to
money management and investment strategies. In today's complex financial
landscape, understanding these concepts is essential for making sound
financial decisions, whether for personal finance, corporate investment, or
economic policy.

This course, Financial Mathematics I, serves as an introduction to the

foundational elements of financial mathematics. We will explore key topics
such as simple and compound interest, which form the basis for
understanding how investments grow over time. Additionally, we will delve
into the concepts of current value—both commercial and rational—and the
calculations involved in determining the present worth of future cash flows.
 Students will also learn about the intricacies of short-term financial
transactions, including current accounts and the effects of commercial
discounts. As we progress, we will examine the average rate of a series of
simultaneous investments and the principles of equivalence and
replacement of effects.

By understanding these concepts, students will gain the analytical skills

necessary to assess various financial situations, apply mathematical
techniques to real-world problems, and ultimately make informed decisions
in their financial endeavors.
 Unit 1
The basic concept
Here are the definitions with two examples each, followed by an
exercise:

1.1 Simple Interest

Simple interest is a type of interest calculation where the interest is

calculated only on the principal amount. The formula is given by;
SI=PTR

Examples

1. Principal: 500,000 FCFA, Rate: 8% per annum, Time: 2 years

Simple Interest = 500,000 x 8% x 2 = 80,000 FCFA

2. Principal: 750,000 FCFA, Rate: 12% per annum, Time: 3 years

Simple Interest = 750,000 x 12% x 3 = 270,000 FCFA

Exercise

Calculate the simple interest on a principal amount of 300,000 FCFA at a

rate of 10% per annum for 4 years.

1.2 Calculation of Value Gained

Value gained refers to the difference between the total amount received
or paid and the principal amount.
 Examples
1. Principal: 500,000 FCFA, Total Amount: 580,000 FCFA
Value Gained = Total Amount - Principal = 580,000 - 500,000 = 80,000
FCFA

2. Principal: 1,000,000 FCFA, Total Amount: 1,200,000 FCFA

Value Gained = Total Amount - Principal = 1,200,000 - 1,000,000 =
200,000 FCFA

Exercise
Calculate the value gained on a principal amount of 800,000 FCFA if the
total amount received is 960,000 FCFA.

1.3 Current Value Commercial

Current value commercial is the present value of a future amount,

calculated using a commercial interest rate.

Examples
1. Future Amount: 1,000,000 FCFA, Commercial Interest Rate: 10% per
annum, Time: 3 years
Current Value Commercial = 1,000,000 / (1 + 0.10)^3 = 751,315 FCFA

2. Future Amount: 500,000 FCFA, Commercial Interest Rate: 12% per

annum, Time: 2 years
Current Value Commercial = 500,000 / (1 + 0.12)^2 = 394,759 FCFA

Exercise

Calculate the current value commercial of a future amount of 2,000,000

FCFA at a commercial interest rate of 8% per annum for 4 years.
 1.4 Current Value Rational

Current value rational is the present value of a future amount, calculated

using a rational interest rate.

Example:
Future Amount: 1,000,000 FCFA
Rational Interest Rate: 8% per annum
Time: 3 years

Current Value Rational = 1,000,000 / (1 + 0.08)^3 = 793,193 FCFA

1.5 Précompté Interest

Précompté interest is a type of interest calculation where the interest is

deducted from the principal amount at the beginning of the period.

Example:
Principal: 500,000 FCFA
Précompté Interest Rate: 10% per annum
Time: 1 year

Précompté Interest = 500,000 x 10% = 50,000 FCFA

1.6 Effective Interest

Effective interest is a type of interest calculation where the interest is

calculated on the principal amount and any accrued interest.
 Example:
Principal: 500,000 FCFA
Effective Interest Rate: 10% per annum
Time: 1 year

Effective Interest = 500,000 x (1 + 0.10) = 550,000 FCFA

Compound Interest

Compound interest is a type of interest calculation where the interest is

calculated on the principal amount and any accrued interest.

Example:
Principal: 500,000 FCFA
Compound Interest Rate: 10% per annum
Time: 2 years

Compound Interest = 500,000 x (1 + 0.10)^2 = 605,000 FCFA

 UNIT 2
Basic Calculations and financial transactions

2.1 Calculation of the Average Rate of a Series of Simultaneous Investments

The average rate of return is calculated using the formula:

Average Rate = (Σ (Investment x Rate)) / Total Investment

Application
1. What is the average rate of return on the following investments?
Investment (FCFA) Rate of return Amount
500,000 8%
750,000 10%
250,000 6%

Solution:
Total Investment = 500,000 + 750,000 + 250,000 = 1,500,000 FCFA

Average Rate = ((500,000 x 8%) + (750,000 x 10%) + (250,000 x 6%)) /

1,500,000
Average Rate = (40,000 + 75,000 + 15,000) / 1,500,000
Average Rate = 8.67%
Example 2;
1. A company has two investments: one with a principal amount of 1,000,000
FCFA and a rate of return of 12%, and another with a principal amount of
800,000 FCFA and a rate of return of 9%. What is the average rate of return on
these investments?
Solution:
Total Investment = 1,000,000 + 800,000 = 1,800,000 FCFA

Average Rate = ((1,000,000 x 12%) + (800,000 x 9%)) / 1,800,000

Average Rate = (120,000 + 72,000) / 1,800,000
Average Rate = 10.67%

Assignment 1

A company has three investments: one with a principal amount of 2,000,000

FCFA and a rate of return of 10%, another with a principal amount of
1,500,000 FCFA and a rate of return of 8%, and a third with a principal amount
of 1,000,000 FCFA and a rate of return of 12%. What is the average rate of
return on these investments?

2.2 Equivalence and Replacement of Effect

Equivalence refers to the comparison of two or more investments with

different cash flow patterns.

The present value of each investment is calculated using the formula:

PV = Σ (CFt / (1 + r)^t))

Application
1. What is the present value of an investment with a future amount of
1,000,000 FCFA, an interest rate of 10% per annum, and a time period of 3
years?

Solution:
PV = 1,000,000 / (1 + 0.10)^3
PV = 1,000,000 / 1.331
PV = 751,315 FCFA

2. A company has two investments: one with a future amount of 500,000

FCFA, an interest rate of 8% per annum, and a time period of 2 years, and
another with a future amount of 750,000 FCFA, an interest rate of 12% per
annum, and a time period of 3 years. Which investment has a higher present
value?

Solution:

Investment 1:
PV = 500,000 / (1 + 0.08)^2
PV = 500,000 / 1.166
PV = 429,508 FCFA

Investment 2:
PV = 750,000 / (1 + 0.12)^3
PV = 750,000 / 1.404
PV = 534,759 FCFA

Investment 2 has a higher present value.

Assignment 2:

A company has two investments: one with a future amount of 2,000,000

FCFA, an interest rate of 10% per annum, and a time period of 4 years, and
another with a future amount of 1,500,000 FCFA, an interest rate of 8% per
annum, and a time period of 3 years. Which investment has a higher present
value?
2.3 Short-term Financial Transactions - Current Account and Interest

A current account is a type of deposit account that allows for frequent

deposits and withdrawals.

The interest on a current account is calculated using the formula:

Interest = Principal x Rate x Time

Application

1. What is the interest earned on a current account with a principal amount of

500,000 FCFA, an interest rate of 5% per annum, and a time period of 1 year?

Solution:

Interest = 500,000 x 5% x 1
Interest = 500,000 x 0.05
Interest = 25,000 FCFA

2. A company has a current account with a principal amount of 1,000,000

FCFA, an interest rate of 2.5% quarterly, and a time period of 36months. What
is the interest earned on the Capital account?

3. A company has a current account with a principal amount of 750,000 FCFA,

an interest rate of 18% for 4yrs, and a time period of 3 years. What is the total
amount in the account after 3 years?
2.4 Commercial Discount - Real Rate of Discount

Commercial discount refers to the discount on a bill of exchange or a

promissory note.

The real rate of discount is calculated using the formula:

Real Rate of Discount = (Discount / Face Value) x (365 / Time)

Application

1. What is the real rate of discount on a bill of exchange with a face value of
1,000,000 FCFA, a discount rate of 10% per annum, and a time period of 3
months?

Solution

Discount = Face Value x Discount Rate x Time

Discount = 1,000,000 x 10% x 3/12
Discount = 25,000 FCFA

Real Rate of Discount = (Discount / Face Value) x (365 / Time)

Real Rate of Discount = (25,000 / 1,000,000) x (365 / 90)
Real Rate of Discount = 10.17%

2. A company purchases a bill of exchange with a face value of 500,000 FCFA,

a discount rate of 8% per annum, and a time period of 2 months. What is the
real rate of discount?

Solution:
Discount = Face Value x Discount Rate x Time
Discount = 500,000 x 8% x 2/12
Discount = 6,667 FCFA

Real Rate of Discount = (Discount / Face Value) x (365 / Time)

Real Rate of Discount = (6,667 / 500,000) x (365 / 60)
Real Rate of Discount = 8.19%

Exercise
A company purchases a bill of exchange with a face value of 2,000,000 FCFA, a
discount rate of 12% per annum, and a time period of 4 months. What is the
real rate of discount?
 UNIT 3
Compound Interest

Meaning:
Compound interest is a type of interest calculation where the interest is
calculated on the principal amount and any accrued interest.

3.1 Acquired Value

The acquired value is the total amount of money accumulated after a certain
period of time, including the principal amount and the interest earned.
Formula is denoted;
Acquired Value = Principal x (1 + Rate)^Time

Application
1. What is the acquired value of an investment with a principal amount of
500,000 FCFA, an interest rate of 8% per annum, and a time period of 3 years?

Solution
Acquired Value = 500,000 x (1 + 0.08)^3
Acquired Value = 500,000 x 1.2597
Acquired Value = 629,850 FCFA

2. A company invests 1,000,000 FCFA for 2 years at an interest rate of 10% per
annum. What is the acquired value of the investment?

Solution
Acquired Value = 1,000,000 x (1 + 0.10)^2
Acquired Value = 1,000,000 x 1.21
Acquired Value = 1,210,000 FCFA
Solve for;

A company invests 750,000 FCFA for 4 years at an interest rate of 12% per
annum. What is the acquired value of the investment?

3.2 Current Value

The current value is the present value of a future amount, calculated using a
compound interest rate.

Formula:

PV = FV / (1 + Rate)^Time

_Examples:_

1. What is the current value of an investment with a future amount of

1,000,000 FCFA, an interest rate of 10% per annum, and a time period of 3
years?

Solution:

PV = 1,000,000 / (1 + 0.10)^3
PV = 1,000,000 / 1.331
PV = 751,315 FCFA

1. A company expects to receive 500,000 FCFA in 2 years. What is the current

value of the expected amount if the interest rate is 8% per annum?
Solution:
PV = 500,000 / (1 + 0.08)^2
PV = 500,000 / 1.166
PV = 429,508 FCFA

Solve for;
A company expects to receive 2,000,000 FCFA in 4 years. What is the current
value of the expected amount if the interest rate is 12% per annum?

3.3 Rate Equivalent and Proportional Rate

The rate equivalent is the interest rate that would produce the same amount
of interest over a given period of time. And the formula can be denoted as;
Rate Equivalent = (Interest / Principal) x (365 / Time)

Application
1. What is the rate equivalent of an investment with a principal amount of
500,000 FCFA, an interest amount of 50,000 FCFA, and a time period of 1
year?

Solution;
Rate Equivalent = (50,000 / 500,000) x (365 / 365)
Rate Equivalent = 10%

1. A company invests 1,000,000 FCFA for 2 years and earns an interest of

120,000 FCFA. What is the rate equivalent of the investment?

Solution:
Rate Equivalent = (120,000 / 1,000,000) x (365 / 730)
Rate Equivalent = 6%

Exercise:
A company invests 750,000 FCFA for 3 years and earns an interest of 90,000
FCFA. What is the rate equivalent of the investment?

3.4 Rate of Interest Apparent

The rate of interest apparent is the interest rate that is apparent or visible,
but may not reflect the true interest rate. Thus can be calculated as;

Rate of Interest Apparent = (Interest / Principal) x (365 / Time)

Application:
1. What is the rate of interest apparent of an investment with a principal
amount of 500,000 FCFA, an interest amount of 50,000 FCFA, and a time
period of 1 year?

Solution:

Rate of Interest Apparent = (50,000 / 500,000) x (365 / 365)

Rate of Interest Apparent = 10%

2. A company invests 1,000,000 FCFA for 2 years and earns an interest of

120,000 FCFA. What is the rate of interest apparent of the investment?
Solution:
Rate of Interest Apparent = (120,000 / 1,000,000) x (365 / 730)
Rate of Interest Apparent = 6%

Exercise

A company invests 750,000 FCFA for 3 years and earns an interest of 90,000
FCFA. What is the rate of interest
 TUTORIALS

1. A company has three investments: one with a principal amount of

1,500,000 FCFA and a rate of return of 10%, another with a principal amount
of 2,000,000 FCFA and a rate of return of 12%, and a third with a principal
amount of 500,000 FCFA and a rate of return of 8%. What is the average rate
of return on these investments?

2. A company has two investments: one with a future amount of 2,500,000

FCFA, an interest rate of 10% per annum, and a time period of 4 years, and
another with a future amount of 3,000,000 FCFA, an interest rate of 12% per
annum, and a time period of 5 years. Which investment has a higher present
value?

3. A company expects to receive 1,500,000 FCFA in 3 years. What is the

present value of the expected amount if the interest rate is 9% per annum?

4. A company has a current account with a principal amount of 2,000,000

FCFA, an interest rate of 6% per annum, and a time period of 2 years. What is
the total amount in the account after 2 years?

5. A company purchases a bill of exchange with a face value of 3,000,000

FCFA, a discount rate of 10% per annum, and a time period of 6 months. What
is the real rate of discount?

6. A company invests 2,500,000 FCFA for 3 years at an interest rate of 10% per
annum. What is the acquired value of the investment?

7. A company expects to receive 3,000,000 FCFA in 4 years. What is the

present value of the expected amount if the interest rate is 11% per annum?
8. A company invests 2,000,000 FCFA for 5 years at an interest rate of 9% per
annum. What is the rate equivalent of the investment?

9. A company invests 1,000,000 FCFA for 3 years and earns an interest of

150,000 FCFA. What is the rate of interest apparent of the investment?

10. A company purchases a bill of exchange with a face value of 2,500,000

FCFA, a discount rate of 12% per annum, and a time period of 3 months. What
is the real rate of discount?