رياضيات مالية

‫كلية االقتصاد والعلوم اإلدارية‬
)118 ‫مقرر الرياضيات المالية (مال‬

1443-1442 ‫السنة الجامعية‬
‫الفصل الدراسي األول‬
‫جميع الشعب‬
Al-Imam Muhammad Ibn Saud Islamic University ‫جامعة اإلمام محمد بن سعود اإلسالمية‬
College of Economics and Administrative Sciences ‫كلية االقتصاد والعلوم اإلدارية‬
Department of Finance and Investment ‫قسم التمويل واالستثمار‬
Course Financial Mathematics

Unit course FIN 118
Number Unit 0
Unit Subject Introduction to the course
Dr. Lotfi Ben Jedidia

Dr. Imed Medhioub
1
Information about this course
Financial Mathematics
FIN 118
Units
Prerequisite adopted Course
MATH 045 dedicated to
3
all disciplines
of the College
Knowledge required from this course
1 2 3
Produce highly Solving Financial Equip students with
skilled graduate & Economic tools that allow
students having problems by them to be able to
a deep using understand the
knowledge in mathematical problems relating to
mathematics tools economics and
finance and solve
them
2
Learning Strategy
1 2 3
Lectures Personal Regular

with interactive & Homework
participation Collective
Questions in
Class
Evaluation
1 2 3
Midterms Attendance &

Final Exam
Participation
40
Midterm1 : 20 Homework : 15
Homework1: 5
(19 – 10 to 24 - 10 ) Homework2: 10
Midterm2 : 20 Attendance: 5
(21-11 to 25 - 11) 0-4 Abs: 5 marks
5-6 Abs: 4 marks
7-8 Abs: 3 marks
9-10 Abs: 2 marks
11-12 Abs: 1 mark
60% 40%
6
3
Main learning outcomes
At the end of this course, the student should understand
the following concepts:
• Linear and quadratic equations and its applications.
• Differentiation, integration and its applications.
• Functions of several variables and its applications.
• Sequences and series and their applications in financial
mathematics.
• Time value of money, annuities, Short-term payments
and long-term payments and bond valuation .
• Some case studies in finance (loans, debt discount,
Murabaha, Musharaka).
Topics to be covered
• The importance of mathematics for students of
Economics and Administrative Sciences.
• Linear and quadratic equations and its applications in

economic and financial problems.
• Critical points, integration and its applications in

economic and financial problems.
• Functions of several variables and its applications in

economic and financial problems
4
Topics to be covered
• Arithmetic and geometric sequences and series.
• Simple interest and compound interest.
• Ordinary annuity and Annuity due
• Short-term payments and long-term payments.
• Valuation of Bonds and Sukuk
• Practical applications (Murabaha, Musharaka, lease-

purchase contracts).
Contents
Unit 0 : Introduction to this course
Unit 1: Linear Equations and Quadratic Equations
Unit 2: Derivability, critical points and optimization
of functions
Unit 3: Unit 4: Economic applications of integrals
Unit 4: Functions of several variables
Unit 5: Sequences and Series
Unit 6: Time Value of Money and Simple Interest
Unit 7: Compound Interest, non annual compound
interest, continuous compound interest
10
10
5
Contents
Unit 8: Ordinary Annuity and Annuity Due
Unit 9: Long Term Annuities; Amortization &
sinking Funds;
Unit 10: Bond Valuation
Unit 11: Equal short-term payments and
Settlement of short-term debt
Unit 12: Practical applications
11
11
References
‫مقدمة في الرياضيات للعلوم اإلدارية واالجتماعية للدكتور إبراهيم بن عبد هللا الجاسر (الطبعة‬
.)‫م‬2005 ‫الثانية‬
‫ دار‬,‫ و وليد أحمد صافي‬,‫ محمود إبراهيم نور‬.‫ ود‬,‫ شقيري نوري موسى‬.‫الرياضيات المالية د‬
.)‫م‬2011 ,‫ هـ‬1432( ‫ الطبعة الثانية‬,‫المسيرة للنشر والتوزيع والطباعة‬
Calculus and its applications, 10/E , Marvin L. Bittinger, David J.

Ellenbogen and Scott A. Surgent.
ISBN-10:0-321-69433-3. ISBN-13:978-0-321-69433-1
C2012 Pearson.
Mathematics for Economics and Business, 7/E , Ian Jacques,

Formerly of the University of Coventry.
ISBN-10:0273763563 . ISBN-13: 9780273763567
C2013 Pearson
12
12
6
Additional References
1/ Basic Mathematics for Economists, Second
Edition, Routledge, Taylor & Francis Group ©
1993, 2003 Mike Rosser.
ISBN 0-203-42263-5 Master e-book ISBN
2/ Applied Calculus, Hughes-Hallett, Gleason,
Lock, Flath et Al. Fourth Edition, Copyright ©
2010, 2006, 2002, 1999 John Wiley & Sons,
Inc. All rights reserved.
ISBN: 978-0-470-17052-6
Binder Ready: 978-0-470-55662-7
13
13
We will see in the next unit

1. Linear Equations in One Variable
Formulae
Solving a Linear Equation in One Variable
Applications in Economic and Financial problems
2. Quadratic Equations in One Variable

Formulae
Solving a quadratic Equation in One Variable
Applications in Economic and Financial problems
14
14
7

Unit course FIN 118
Number Unit 1
Unit Subject Linear Equations

Quadratic Equations
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15
We will see in this unit

1. Linear Equations in One Variable
Formulae
Solving a Linear Equation in One Variable
Applications
2. Quadratic Equations in One Variable

Formulae
Solving a quadratic Equation in One Variable
Applications
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8
Learning Outcomes
At the end of this unit, you should be able to:
1. Understand what is meant by “linear equation” and

“quadratic equation”
2. Understand how to solve linear and quadratic

linear equations.
3. Solve equations for real world situations in order

to solve problems, especially economic and financial.
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17
Math Review
Linear Equation:
Any equation written in the form
Ax + B = C
Is said a linear equation where A, B and C are
fixed numbers and A  0
Examples
• x – 5 = 16
• 2y + 4 = 12
• 5n - 4 = 6
• z/2 – 6 = 4
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9
Math Review
How to solve linear equation?
Two Steps for Solving linear Equations
Step1- Solve for any Addition or Subtraction on

the variable side of equation by “undoing” the
operation from both sides of the equation.
Step2- Solve any Multiplication or Division from

variable side of equation by “undoing” the
operation from both sides of the equation.
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19
Math Review
Example : Solve 4x – 5 = 15
4x – 5 = 15
• Try the above Examples:

x – 5 = 16 ; 2y + 4 = 12 ; 5n - 4 = 6 ; z/2 – 6 = 4
solutions: x = ; y = ; n = ; z =
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10
Math Review
Quadratic Equation:
Any equation written in the form
Ax2 + Bx + C = 0
Is said a quadratic equation where A, B and C are
fixed numbers and A  0
Examples
4 x2 + x + 1 = 0
4 x2 − 4 x + 1 = 0
x2 + 8x − 20 = 0
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21
Math Review
How to solve quadratic equations ?

Quadratic equations can be solved using Discriminant method
:
Step1 : Express the equation in a general form
Ax2 + Bx + C = 0
Step2 : Calculate the discriminant:  = B 2 − 4 AC
Step 3: Give solution
Case1:   0 no real roots
−B
Case2:  = 0 only one real root r =
2A
Case3:   0 two distinct real roots
−B−  −B+ 
r1 = and r2 =
2A 2A
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11
Math Review
Example1: Solve the quadratic equation if possible
4 x2 + x + 1 = 0
Step1 :
Step2 :
Step 3:
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23
Math Review
Example2: Solve the quadratic equation
4x2 − 4x +1 = 0
Step1 :
Step2 :
Step 3:
!!! We can rewrite the quadratic equation
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12
Math Review
x 2 + 8 x − 20 = 0
Step1 :
Step2 :
Step 3:
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25
Math Review

x 2 − 4 x = −3
Step1 : rewrite the equation in general form
A= , B= and C=
Step2 :
Step 3:
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13
Applications of linear and quadratic equations
in economic problems:
Example1:
The demand and supply equations for a good are given

respectively by :
P = 100 - 0.5 Qd
P = 5 + 0.5 Qs
Calculate the equilibrium quantity & price
• Step 1: Set the right-hand side of both equations to equal on
another & solve for Q* (Q*= Qd = Qs in equilibrium)
• Step 2: Substitute Q* into either equation & solve for P*
(P*=P in equilibrium)
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27
Example2:
The weekly demand and supply equations for a good are given
respectively by :
P = - (Q – 40)2 – 10(Q – 40) + 400
P = (Q-40)2 + 20(Q – 40) + 200
Where P is measured in dollars and Q is measured in units of a
hundred. Calculate the equilibrium quantity & price
28
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14
We will see in the next unit
1. Essential rules of differentiation
2. Second and higher derivatives
3. Critical points
4. Optimization of functions of one variable
29
29

Unit course FIN 118
Number Unit 2
Unit Subject Derivability

Critical points
Optimization of functions
30
30
15
1. Essential rules of differentiation

2. Second and higher derivatives
3. Critical points
4. Optimization of functions of one variable
31
31
Learning Outcomes
1. Understand what is meant by “Optimization of functions of a
single variable”.
2. Apply some rules of differential calculus that are especially
useful for decision making.
3. Find the critical points of a function.
4. Apply derivatives to real world situations in order to optimize

unconstrained problems, especially economic and finance.
32
32
16
Math Review
Definition1:
Derivative of Function
Differentiation is a method to compute the rate at which a
dependent output y changes with respect to the change in the
independent input x.
Definition2:
This rate of change is called the derivative of y (the function)
with respect to x. The derivative gives the value of the slope of
the tangent line to a curve at a point (rate of change).
Definition3:
The slope of the tangent line is very close to the slope of the
line through (a, f(a)) and a nearby point on the graph, for
example (a + h, f(a + h)).
f (x + h ) − f (x )
f ' (x ) =
df
= lim
dx h→0 h
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33
Math Review
Some rules of differentiation
To simplify the determination of derivatives we can use the
following rules.
k = (k )' = 0 cx = (cx )' = c

d d
1/ 2/
dx dx
3/
d n
x = xn ( ) = nx
' n −1
4/
d
dx
( ) = ncx
cx n = cx n
' n −1
dx
( x )' = 2 1 x
'
d d 1 1 −1
5/ x = 6/  =  = 2
dx dx  x   x  x
7/ d ln ( x ) = (ln ( x ))' = 1 8/
d x
dx
e = ex ( ) =e
' x
dx x
34
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17
Math Review
Second and Higher Derivatives
Given a function f we defined first derivative of the
function as: f (x + h) − f (x )
f (1) (x ) = f ' (x ) = lim
h→0 h
The second derivative is obtained by:
f (1) (x + h) − f (1) (x )
f (2 ) (x ) = f ' ' (x ) = lim
h→0 h
And the n-th derivative is obtained by:
f (n−1) (x + h) − f (n−1) (x )
f (n) (x ) = lim
h→0 h
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35
Math Review
Second and Higher Derivatives
Example:
1/ the function: f (x ) = 4 x 5 − 3 x 2 + 2 x − 10
2/ first derivative : f (1) = f ' (x ) = 20 x 4 − 6 x + 2
3/ second derivative : f (2 ) = f '' (x ) = 80 x 3 − 6
4/ third derivative : f (3) = f ''' (x ) = 240x 2

(4 )
5/ fourth derivative : f = f (x ) = 480 x
''''
6/ fifth derivative : f (5 ) = f ''''' (x ) = 480

36
36
18
Math Review
Classifications of Extreme Values
Absolute Minimum/Maximum – the smallest/largest function value in the domain
Local Minimum/Maximum – the smallest/largest function value in an open
interval in the domain
Absolute Maximum
Local
Maximum
Local
Minimum
Absolute Minimum
Absolute
Minimum
Absolute Maximum
Local Local Local
Maximum Maximum Maximum
Local
Local Local Minimum
Minimum Minimum Local
Minimum
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37
Math Review
Critical points: local extrema
Definition :
A critical point of a function of a single real variable f (x ), is a
value x0 in the domain of ƒ where either the function is not
differentiable or its derivative is 0, f ' (x ) = 0 .
✓ The point M = ( x0 , f ( x0 )) is a local minimum if
f ' (x0 ) = 0 and f '' (x 0 )  0
✓ The point M = ( x0 , f ( x0 )) is a local maximum if
f ' (x0 ) = 0 and f '' (x0 )  0
. 38
38
19
Math Review
Maximum and Minimum points
39
39
Math Review
Example1:
Let
Find the critical point and determine its nature
(critical value)
Using the Second Derivative Test:
3 1
The point 𝑀 = (2 , − 4) is an absolute minimum
40
40
20
Math Review
Example2: Let
Find the critical points and determine their nature
(critical values)
Second Derivative Test:
𝑀1 = (0, 2) is a local maximum 𝑀2 = (2, −2) is a local minimum

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41
Unconstrained optimization of
one variable
Introduction:
• In economic, financial and business contexts, optimization
is a frequently relied upon tool
• Optimization is used to maximize profits, minimize costs,
etc.
• We break optimization down into two types:
- Unconstrained optimization: We seek to maximize or
minimize functions without any restrictions.
- Constrained optimization: We impose limits on the values
that our variables can take (for example budget constraints,
level of inputs, etc.)
• On this unit we focus on unconstrained optimization.
42
42
21
Mathematical optimization
Mathematical optimization is the selection of the best
element based on a particular criterion from a set of
available alternatives.
Optimization deals with the problem of finding numerically
optimums (minimums or maximums) of a function. It
consists of three components:
• The objective or objectives, that is, what do we want to optimize?
• A solution, that is, how can we achieve the optimal objective?
• The set of all feasible solutions, that is, among which possible
options may we choose to optimize?
43
43
Unconstrained optimization of a function of one

variable
Definition:
The standard form of a continuous unconstrained
optimization problem can take the following expressions:
• min 𝑓 𝑥 𝑖𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝑎 𝑚𝑖𝑛𝑖𝑚𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑝𝑟𝑜𝑏𝑙𝑒𝑚
𝑥
• max 𝑓 𝑥 𝑖𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝑎 𝑚𝑎𝑥𝑖𝑚𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑝𝑟𝑜𝑏𝑙𝑒𝑚
𝑥
𝑓 𝑥 is called the objective function and which represents
the output you’re trying to maximize or minimize.
Example:
Economic agents seek the optimal value of some objective
function such as:
- Consumers maximize utility
- Firms maximize profit and minimize cost
44
44
22
Maximization of a function of one variable
First-order condition (FOC) for maximization:
For a function of one variable to attain its maximum value at some
point, the derivative at that point must be zero
𝑑𝑓
ቤ = 𝑓′(𝑥)ቚ =0
𝑑𝑥 𝑥=𝑥∗ 𝑥=𝑥∗
FOC is a necessary condition for a maximum but not

sufficient. Second order condition is required
Second-order condition for maximization:
We have a local maximum if the following is true:
𝑑2𝑓
อ = 𝑓"(𝑥)ቚ <0
𝑑𝑥 2 𝑥=𝑥∗
𝑥=𝑥∗
45
45
Profit maximization function

Example:
Suppose a monopolist served a market that faced the inverse
demand function of 𝑝 = 250 − 2𝑞 and a cost of production
function of 𝑐 = 50q.
1- What value of 𝑞 maximizes the monopolist’s profit?
2- What is the corresponding price and profit?
Solution:
1- In this example, the monopolist is maximizing his profit,
max 𝜋 𝑞
𝑞
We must first determine the profit function
Profit = total revenue – total cost = pq – 50q
𝜋 𝑞 = 250 − 2𝑞 𝑞 − 50𝑞 = −2𝑞 2 + 250𝑞
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23
Profit maximization function
Then,
max 𝜋 𝑞 ֞ = max −2𝑞 2 + 200𝑞
𝑞 𝑞
First order condition for a maximum is:
𝑑𝜋
= 𝜋 ′ 𝑞 = −4𝑞 + 200 = 0
𝑑𝑞
𝑞 ∗ = 50
Since the second derivative is always -4 (second order
condition for a maximum is satisfied), then q = 50 is the
quantity that maximizes the monopolist’s profit.
2- The corresponding price = 250 – 2q* = 250 – 2(50) = 150
The corresponding Profit = 𝜋 𝑞 = −2𝑞 2 + 200𝑞 = 5000
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Minimization of a function of one variable

First-order condition (FOC) for minimization:
For a function of one variable to attain its minimum value at some
point, the derivative at that point must be zero
𝑑𝑓
ቤ = 𝑓′(𝑥)ቚ =0
𝑑𝑥 𝑥=𝑥∗ 𝑥=𝑥∗
FOC is a necessary condition for a minimum but not

sufficient. Second order condition is required.
Second-order condition for minimization:
We have a local minimum if the following is true:
𝑑2𝑓
อ = 𝑓"(𝑥)ቚ >0
𝑑𝑥 2 𝑥=𝑥∗
𝑥=𝑥∗
48
48
24
Cost minimization function
Example:
A manufacturer of POS systems/credit card readers finds that
the cost (in dollars) generated by manufacturing q units per
week is given by the function 𝐶 𝑞 = 0.15𝑞 2 − 39𝑞 + 4500.
1- How many units should be manufactured to minimize the
cost?
2- What is the corresponding cost?
Solution:
1- In this example, the manufacturer is minimizing his cost,
m𝑖𝑛 𝐶 𝑞 ֞ = min 0.15𝑞 2 − 39𝑞 + 4500
𝑞 𝑞
First order condition for a minimum is:
𝑑𝐶
= 𝐶 ′ 𝑞 = 0.3𝑞 − 39 = 0
𝑑𝑞
49 𝑞 ∗ = 130 𝑢𝑛𝑖𝑡𝑠
49
Cost minimization function

Since the second derivative is always 0.3 (second order
condition for a minimum is satisfied), then q = 130 is the
quantity that minimizes cost.
2- Minimum cost:
𝐶 𝑞 = 0.15𝑞 2 − 39𝑞 + 4500
𝐶 130 = 0.15(1302 ) − 39 130 + 4500 = $1965
50
50
25
we will see in the next unit
1. The inverse process of differentiation:
Integration.
2. The connection between integration and summation.
3. How to calculate area under a curve.
4. How to calculate area between two Curves.

5. How to calculate consumer surplus
51
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26

Unit course FIN 118
Number Unit 3
Unit Subject Integral Calculus
53
53

1. Integral calculus : Definition
2. Indefinite integral
3. Definite integral
4. Some rules of integral
5. Area between two curves
6. Economic Application: Consumer
surplus
54
54
27
Learning Outcomes
1. Understand what is meant by “integral of function”.
2. Find definite or indefinite integrals.
3. Calculate the Area Between Two Curves.
4. Calculate the consumer surplus.
55
55
Integral calculus
Frequently, we know the rate of change of a
function 𝑓 ′ 𝑥 and wish to find the original
function 𝑓 𝑥 . Reversing the process of

differentiation and finding the original function
from the derivative is called integration or anti-
differentiation. The original function, 𝑓 𝑥 , is
called the integral or antiderivative of 𝑓 ′ 𝑥 .
Thus, we have න𝑓 ′ 𝑥 𝑑𝑥 = 𝑓 𝑥 + 𝑐
56
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Integral calculus
Example 1:
1/ Find the derivative of f1 (x ) = c , f 2 (x ) = x , f 3 (x ) = x
2
2/ Find the antiderivative of the results of

question 1.
Solution:
1/ f1' (x ) = 0 , f 2' (x ) = 1 , f 3' (x ) = 2 x
2/  f1 ( x )dx =  0dx = c ,  f 2 ( x )dx =  1dx = x + c

' '
 f 3 ( x )dx =  2 xdx = x + c
' 2
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Indefinite Integral
• The indefinite integral of a function is a
function defined as :
 f ( x )dx = F ( x )+ c
• Every antiderivative F of f must be of the form
F(x) = G(x) + c, where c is a constant (constant of
integration)
!!!
 2 xdx = x +c
2
Represents every possible

antiderivative of 2x.
58
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29
Definite integral
If f is a continuous function, the definite
integral of f from a to b is defined as:
b
 f (x )dx = F (x )a = F (b)− F (a )
b
An integral = Area under a curve
n
f ( x )dx = lim  f ( xk ) x
b
 a n →
k =1
b−a
x = = xk +1 − xk
n
59
59
Integral Calculus
Exemple1:
b
a
f ( x )dx = Area of R1 – Area of R2 + Area of R3
60
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30
Some rules of integration
To simplify the determination of antiderivatives we
can use the following rules.
1/  dx = x + c 2/  kdx = kx + c
x n +1 1
3/  x dx =
n
n +1
+c 4/  x dx = ln x + c
bx
5/ b dx = +c e dx = e x + c
x
6/
x
ln (b )
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61
Some rules of integration

7/
 ( f  g ) dx =  fdx   gdx
n +1
( ax + b )
8/
 ( ax + b ) ( n  −1)
n
dx = +C
a(n + 1)
−1 1
9/
 ( ax + b ) dx =
a
ln ax + b + C
1 ax +b
e
ax +b
10/ dx = e +C
a
1 ax +b
11/
 c dx =
ax +b
c +C
a ln c
62
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31
More examples
1/  2 x.dx =
2/
 (6 y + 3 y )dy =
5
 1 2x 
3/   x − e dx =
 (6 x − 1) dx =
2
4/
 abx .dx =
3
5/
63
63
More Examples
6/
−1
1
 (x 2
)
− 7 x + 12 dx =
−2
(
7/  3 x − 3 dx =
0
2
)
8/
3

0
(e ) dx =
x
1
9/  e
0
( 2 x +3
) dx =
5  1 
10/   2 x − + 1 dx =
1  x 
64
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32
Area Between Two Curves
Let f and g be continuous functions, the area below
f(x) and above g(x) over the interval [a, b] is:
 f (x ) − g (x )dx
b
R= 
a
y = f (x )
y
y = g (x )
a b x
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65
Area Between Two Curves

Example:
Find the area below f(x) and above g(x)
 f (x ) − g (x )dx
2
R=  where
0
f (x ) = x 2 and
g (x ) = x − 2
R=
R=14/3
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33
Economic Application: Consumer surplus
Definition1:
Consumer surplus is the economic gain accruing to consumers
when they engage in trade. The gain is the difference between
the price they are willing to pay and the actual price.
At the equilibrium level (demand and supply are equal), the
consumer surplus is the difference between what consumers are
willing to pay and their actual expenditure: It therefore
represents the total amount saved by consumers who were
willing to pay more than p∗ per unit.
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67

Definition2:
Suppose that p = D(q) describes the demand function for a
commodity. Then the consumer surplus is defined for the point
(p*, q*) as:
𝑞∗
𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = ‫׬‬0 𝐷 𝑞 . 𝑑𝑞 − 𝑝∗ 𝑞∗
𝑝∗ 𝑞 ∗ is the actual expenditure if the goods are sold at the
equilibrium price.
Graphically, the consumer surplus is the area between demand
curve and the horizontal line at p∗ (area in yellow)
68
68
34
Example:
The demand and supply functions for a given product are given
𝑞2 𝑞2
by 𝐷 𝑞 = 60 − 10 and S 𝑞 = 30 + 5
Find the consumer surplus at the equilibrium price.
Solution:
We first need to find the equilibrium price and quantity
𝑞2 𝑞2
𝐷 𝑞 =S 𝑞 60 − 10 = 30 + 5 𝑞 ∗ = 10
𝑝∗ = 𝐷(𝑞 ∗ ) = 50
𝑞∗
𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = ‫׬‬0 𝐷 𝑞 . 𝑑𝑞 − 𝑝∗ 𝑞 ∗
10
= ‫׬‬0 𝐷 𝑞 . 𝑑𝑞 − 500 = 66.67
69
69
Time to Review !
1. By reversing the process of differentiation, we find the
original function from the derivative. We call this
operation integration or anti-differentiation.
2. The indefinite integral of a function is a function defined
as : න𝑓 𝑥 𝑑𝑥 = 𝐹 𝑥 + 𝑐
3. If f is a continuous function, the definite integral of f
from a to b is defined as:
𝑏
𝑏
න 𝑓 𝑥 𝑑𝑥 = 𝐹 𝑥 𝑎 = 𝐹 𝑏 −𝐹 𝑎
𝑎
𝑞∗
4. 𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑠𝑢𝑟𝑝𝑙𝑢𝑠 = ‫ 𝑞 𝐷 ׬‬. 𝑑𝑞 − 𝑝∗ 𝑞 ∗
0
Where, 𝑝∗ 𝑞 ∗ is the actual expenditure if the goods are sold
at the equilibrium price.
70
70
35
✓ Function of several variables
✓ Partial differentiation
✓ Maximum and minimum of functions of

several variables
71
71
72
72
36

Unit course FIN 118
Number Unit 4
Unit Subject Functions of several variables
73
73
we will see in this unit

✓ Function of several variables
✓ Partial differentiation
✓ Maximum and minimum of function of

several variables
74
74
37
Learning Outcomes
1. Understand what is meant by “Functions of
several variables”.
2. Calculate partial derivatives.
3. Determining the relative extrema of the
functions of several variables.
75
75
Functions of several variables

Introduction:
Suppose a firm that produces two products. It
produces 𝑥 units for the first product at a profit of
$4 per unit and 𝑦 units for the second product at a
profit of $6 per unit.
Then, the total profit P of this firm is a function of
the two variables 𝑥 and 𝑦, and it is given by:
𝑃 𝑥, 𝑦 = 4𝑥 + 6𝑦
This function assigns to the input pair 𝑥, 𝑦 a unique

output number, 4𝑥 + 6𝑦
For example,
𝑃 25, 10 = 4 25 + 6 10 = $160
This result means that by selling 25 units of the first
product and 10 units of the second, the profit of the
firm will be $160.
76
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38
Definition1:
A function of two variables assigns to each input pair,
𝑥, 𝑦 , exactly one output number, 𝑓 𝑥, 𝑦 .
Definition2:
A function of Several Variables is a function that has
more than one independent variable.
Example: The total cost to a company of producing its goods
is given by: 𝐶 𝑥, 𝑦, 𝑧, 𝑤 = 4𝑥 2 + 5𝑦 + 𝑧 − ln 𝑤 + 1
Where, x dollars are spent for labor, y dollars for raw
materials, z dollars for advertising and w dollars for
machinery. This is a function of four variables.
Compute 𝐶 3, 2, 0, 10 ?
𝐶 3, 2, 0, 10 = 4 32 + 5 2 + 0 − 𝑙𝑛 10 + 1 = $43.6
In this unit, we treat the case of two variables only.
77
77
77
Partial derivatives
Definition:
Suppose, we have a function 𝑓 𝑥, 𝑦 , which depends on
two variables 𝑥 and 𝑦, where 𝑥 and 𝑦 are independent of
each other. Then we say that the function 𝑓 partially
depends on 𝑥 and 𝑦.
Now, if we calculate the derivative of 𝑓 , then that
derivative is known as the partial derivative of 𝑓. If we
differentiate the function 𝑓 with respect to 𝑥, then take 𝑦
as a constant and if we differentiate 𝑓 with respect to 𝑦,
then take 𝑥 as a constant.
78
78
39
Partial derivatives Formula
If 𝑓 𝑥, 𝑦 is a function which partially depends on 𝑥 and 𝑦 and
if we differentiate 𝑓 with respect to 𝑥 and 𝑦, then the
derivatives are called the partial derivatives of 𝑓.
• The formula for partial derivative of 𝑓 with respect to 𝑥
taking 𝑦 as a constant is given by:
• The formula for partial derivative of 𝑓 with respect to 𝑦

taking 𝑥 as a constant is given by:
79
79
To get partial derivatives….

• To get f x assume y is a constant and differentiate with
respect to x
Example f ( x, y ) = xy 2 + x 2 y
f x ( x, y) = (1) y 2 + (2 x) y = y 2 + 2 xy
• To get f y assume x is a constant and differentiate with
respect to y
Example f ( x, y ) = xy 2 + x 2 y
f y ( x, y) = x(2 y) + x 2 (1) = 2 xy + x 2
80
80
40
Example: Compute the partial derivatives of the following functions
1/ 𝑓(𝑥, 𝑦) = 2𝑥 + 3𝑦 − 4
2/ f ( x, y) = 3x 2 y − 2 + y 3.
3/ f ( x, y ) = 3 x y + x ln y
2
81
Partial Derivatives
81
Second-Order Partial Derivatives

• The partial derivative of a partial derivative
is called a second-order partial derivative.
• Four second order partial derivatives can
be deduced:
2 f  2 f 
f xx = 2 = ( f x ) f xy = = ( fx )
x x yx y
2 f  2 f 
f yy = 2 = fy ( ) f yx = = ( fy )
y y xy x
82
82
41
Example1: Find the second-order partial derivatives of the function
f ( x, y ) = 3 x 2 y + x ln y
1
f x = 6 xy + ln y f y = 3x 2 + x  
 y
x 1 1
f xx = 6 y f yy = − f xy = 6 x + f yx = 6 x +
y2 y y
Example2: Find the second-order partial derivatives of the function
fx =3 f y = −4 y
f xx = 0 f yy = −4 f xy = 0 f yx = 0
83
83
Example: Compute the second order partial derivatives of the

following functions
1/ f ( x, y ) = 2 x − x 2 − y 2
2/ f ( x, y) = 3x 2 y − 2 + y 3.
3/ f ( x, y ) = 3 x 2 y + x ln y
84
Partial Derivatives
84
42
Maximum and minimum of
functions of several variables
Definition:
Let 𝑓 be a function defined on a region R containing
(a, b).
• 𝑓(a, b) is a relative maximum of 𝑓 if f ( x, y )  f (a, b)
for all 𝑥, 𝑦 sufficiently close to (a, b).
• 𝑓(a, b) is a relative minimum of 𝑓 if f ( x, y )  f (a, b)
for all 𝑥, 𝑦 sufficiently close to (a, b).
85
85
Critical Point of 𝒇
Definition:
A point (a, b) in the domain of f is a critical
point of a function 𝑓 𝑥, 𝑦 if :
f f
( a, b ) = 0 and ( a, b ) = 0
x y
• If 𝑓 𝑥, 𝑦 has a relative extreme value, then

it must occur at a critical point.
86
Partial Derivatives: Application of Second Partial Derivatives
86
43
Example1: Determine critical point of the of the function
f ( x, y ) = 2 x − x 2 − y 2
𝜕𝑓 𝜕𝑓 𝜕𝑓
𝑥, 𝑦 = 2 − 2𝑥 and 𝑥, 𝑦𝜕𝑓
= −2𝑦
𝑓𝑥 = 𝑥, 𝑦 = 2𝜕𝑥− 2𝑥 = 0 and 𝑓𝜕𝑦 𝑦 = 𝑥, 𝑦 = −2𝑦 = 0
𝜕𝑥 𝜕𝑦
2 − 2𝑥 = 0 0 𝑥 =𝑥1
൜ 2 − 2𝑥 = ⟹ ቊ =1
൜−2𝑦 = 0 ⟹ 𝑦ቊ= 0
−2𝑦 = 0 𝑦=0
The point M = (1, 0) is a critical point.
87
87
Example2: Determine critical point of the of the function
f ( x, y ) = x 2 − 2 xy + 3 y 2 + 4 x − 16 y + 22
88
88
44
Second derivative test
89
89
Example1: Determine the relative extrema of the of the

function
f ( x, y ) = 2 x − x 2 − y 2
So the only critical

f x = 2 − 2x = 0 f y = −2 y = 0
point is (1, 0).
f xx = f yy = −2, f xy = 0
D(1, 0) = ( −2 )( −2 ) − 02 = 4  0 and f xx (1,0 ) = −2  0
So f (1,0) = 1 is a relative maximum

90
90
45
Example2: Determine the relative extrema of the of the
function
f ( x, y ) = x 2 − 2 xy + 3 y 2 + 4 x − 16 y + 22
91
91
Application
The total weekly revenue (in dollars) that Acrosonic realizes in
producing and selling its bookshelf loudspeaker systems is given
by 1 3 1
R ( x, y ) = − x 2 − y 2 − xy + 300 x + 240 y
4 8 4
where x denotes the number of fully assembled units and y
denotes the number of kits produced and sold each week. The total
weekly cost is given by
C ( x, y ) = 180 x + 140 y + 5000
Determine how many assembled units and how many kits
Acrosonic should produce per week to maximize its profit.
92
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46
𝐒𝐨𝐥𝐮𝐭𝐢𝐨𝐧:
P ( x, y ) = R ( x, y ) − C ( x , y )
1 3 1
= − x 2 − y 2 − xy + 120 x + 100 y − 5000
4 8 4
1 1
𝑥 + 𝑦 = 120 𝑥 = 208
2 4 ⇒ቊ
1 3 𝑦 = 64
𝑥 + 𝑦 = 100
4 4
The profit function has the critical point M = (208, 64)
93
93
1 1 3
Pxx = − Pxy = − Pyy = −
2 4 4
2
 1  3   1  5
D ( x, y ) =  −  −  −  −  =
 2  4   4  16
Since, D ( 208,64 )  0 and Pxx ( 208,64 )  0 , the

point (208,64) is a relative maximum of P.
Therefore, Acrosonic should produce 208 assembled

units and 64 kits per week to maximize its profit
94
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47
Time to Review !
✓ A function of two variables assigns to
each input pair, 𝑥, 𝑦 , exactly one output
number, 𝑓 𝑥, 𝑦 .
✓ For determining relative extrema in

case of a function of two variables we do
the following:
1- Find all the critical points by solving
the system:
𝑓𝑥 = 0, 𝑓𝑦 = 0
95
95
2. The 2nd Derivative Test: Compute

2
𝐷(𝑥, 𝑦) = 𝑓𝑥𝑥 𝑓𝑦𝑦 − 𝑓𝑥𝑦
D(a, b) fxx(a,b) Interpretation
+ + Relative min. at (a, b)
+ - Relative max. at (a, b)
- Neither max. nor min. at (a, b)

→ saddle point
0 Test is inconclusive
96
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48
✓ The “arithmetic sequences” and
“arithmetic series”.
✓ The “Geometric sequences” and
“Geometric series”.
✓ Solve some questions for real world
situations in order to solve problems,
especially economic and financial.
97
97

Unit course FIN 118
Number Unit 5
Unit Subject Sequences & Series
98
98
49
✓The “arithmetic sequences” and “arithmetic
series”.
✓ The “Geometric sequences” and
“Geometric series”.
✓ Solve some questions for real world
situations in order to solve problems,
especially economic and financial.
99
99
Learning Outcomes
1. Understand what is meant by “Arithmetic

sequences” and “Arithmetic series”
2. Understand what is meant by “Geometric

sequences” and “Geometric series”.
3. Solve some questions for real world situations in

order to solve problems, especially economic and
financial.
100
100
50
Arithmetic sequences and series
The can pyramid…
Q1/ How many cans are there on the
bottom row in this pyramid ?
Q2/ How many cans are there in this

pyramid ?
1/ There are 3 cans on the bottom row

2/ There are 6=3+2+1 cans in this pyramid
!!! How many cans are there in a pyramid with

100 cans on the bottom row?
101
101
Arithmetic sequences and series

Solution:
We have S = 100+99+98+….+3+2+1 cans in a
pyramid with 100 cans on the bottom row.
S = 100+99+98+….+3 +2 +1
S = 1 +2 +3 +….+98+99+100
2S = 101 +101+101 +….+101+101+101
100 times
100  101
Then S= = 5050
2
102
102
51
Arithmetic sequences
Definition1: An Arithmetic Sequence is a sequence
whose consecutive terms have a common
difference, r.
• In the pyramid can example the common
difference r = 1.
Example 1:
0 2 4 6 8 10 12 14 16 18 ? ? ?
→ To find the common difference (r), just subtract
any term from the term that follows it. Then
The next numbers are 20, 22 and 24 because the
common difference is r = 2.
!!! Question:
What is the twentieth number ?
103
103
Example 1 (Continued)
If We set u1=0, u2=2, u3=4, u4=6, u5=8, and so
on. Then the twentieth number correspond to
u20
First Term: u1 = 0
Second Term: u2 = u1 + r = 0 + 2 = 2
Third Term: u3 = u 2 + r = u1 + 2r = 0 + 2  2 = 4
Fourth Term: u 4 = u3 + r = u1 + 3r = 0 + 3  2 = 6
Fifth Term: u5 = u4 + r = u1 + 4r = 0 + 4  2 = 8
And so on:
u20 = u19 + r = u1 + 19r = 0 + 19  2 = 38
104
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52
Formula for the nth term of an
ARITHMETIC sequence
un = u1 + (n − 1)r
nth term 1st term # of term common

trying to find difference
Example 2:
Given the following arithmetic sequence:
100, 120, 140, 160,… Find the 10th term
u1 = 100 r = 20 u10 = u1 + 9r = 100 + 9  20 = 280

105
105
Example3:
Which of the following sequences are arithmetic?
Identify the common difference, and calculate u12
for arithmetic sequences.
−3, − 1, 1, 3, 5, 7, 9, . . .
84, 80, 74, 66, 56, 44, . . .

15.5, 14, 12.5, 11, 9.5, 8, . . .
−50, − 44, − 38, − 32, − 26, . . .
106
106
53
Aerithmetic series
Definition:
An Arithmetic series is the sum of the terms in an
arithmetic Sequence.
If we consider the following arithmetic sequence
n
u1 , u 2 , u3 , u 4 , u5 , ...., u n then S =  ui
n i =1
We can write the formula of arithmetic series as:
# of terms
Sn =
n
(u1 + un )
2
107 1st Term Last Term
107
Arithmetic series
Example 1:
Find the 20th term and the sum of 20 first terms of
the sequence 2 , 5, 8, 11, 14, 17, . . .
Solution:
This is an arithmetic sequence with
•
108
108
54
Arithmetic series
Example 2:
Find the sum of the terms of this arithmetic
sequence.
151 + 147 + 143 + 139 + ..... + (− 5)
Solution:
109
109
Geometric sequences and series

Example:
What if your interest check started at $100 a
week and doubled every week. What would your
interest after three weeks? What would your
interest after nine weeks? What would your total
interest at the end of tenth week?
Solution:
 Starting $100.
 After one week : 2 × $100 = $200
 After two weeks : 2 × $200 = $400 = 2 2 100
 After three weeks : 2 × $400 = $800 = 23 100
Start 1 week 2 weeks 3 weeks
100 200 400 800
!! After 3 weeks I would have $800

110
110
55
Solution: continued
• Starting $100.
• After one week : 2 × $100 = $200 = 21  100
• After two weeks : 2 × $200 = $400 = 2 2 100
• After three weeks : 2 × $400 = $800 = 2 100
3
And so on
• After nine weeks : 29  100 = $51200
!!! After 9 weeks I would have $51200
• The total interest is:

S = 100 + 200 + 400 + 800 + .... + 51200
111 (
S = 100 1 + 2 + 22 + 23 + .... + 29 )
111

Solution: continued
-
( )
S = 100 1 + 2 + 22 + 23 + .... + 29
2 S = 100 (2 + 2 + 2 + 2 + .... + 2 )
2 3 4 10
S − 2 S = 100 (1 − 2 )
10
(1 − 2)S = 100 (1 − 2 )
10
S = 100
(1 − 2 ) = 102300
10
(1 - 2)
!!! At the end of tenth week I would have $102300
112
112
56
Geometric sequences
Definition1:
A Geometric Sequence is a sequence whose
consecutive terms have a common ratio, q.
Example 1:
→ In interest example the common ratio q = 2.
suppose we have the following sequence
1 4 16 64 ? ?
→ To find the common ratio (q), just divide any
term by the previous term. Then
The next numbers are 256 and 1024 because the
common ratio is q = 4.
!!! Question:
What is the tenth number ?
113
113
Geometric sequences
If We set u1=1, u2=4, u3=16, u4=64, and so on.

Then the tenth number correspond to u10
First Term: u1 = 1
Second Term: u2 = u1  q = 1 4 = 4
Third Term: u3 = u2  q = u1  q 2 = 1 42 = 16
Fourth Term: u4 = u3  q = u1  q = 1 4 = 64
3 3
Fifth Term: u5 = u4  q = u1  q 4 = 1 44 = 256
And so on:
114 u10 = u9  q = u1  q 9 = 1 49 = 262144

114
57
Formula for the nth term of a
GEOMETRIC sequence
un = u1  q n−1
common
nth term 1st term ratio
Example 2:
Given the following geometric sequence:
5, 15, 45,… Find the 10th term.
115
115
Geometric sequences
Example3:
Which of the following sequences are geometric?
Identify the common ratio, and calculate u5 for
geometric sequences:
 2, 6,18,… .
 5, 15, 25, 45, ….
 1, 5, 25, 125, ….
116
116
58
Geometric series
Definition:
A Geometric Series is the sum of the terms in a
geometric Sequence.
If we consider the following geometric sequence
n
u1 , u 2 , u3 , u4 , u5 , ...., u n then S n =  ui
i =1
We can write the formula of geometric series as:
(1 − q )
The sum of n terms # of terms
n
S n = u1 
(1 − q )
117 1st Term The common ratio
117

Example:
1/ Find the common ratio of the following sequence
2, -4, 8, -16, 32, …
2/ Find the ninth and tenth term.
3/ Find S10.
Solution:
118
118
59
Arithmetic and geometric sequences and series
Time to Review!
Arithmetic sequences Geometric sequences
and series and series
un − un −1 = r un
=q
u n −1
un = u1 + (n − 1)  r u n = u1  q n −1
n(u1 + u n ) 1 − q n 
S n = u1  
Sn = 
2  1− q 
119
That’s All !
119
Practical Examples
Example 1: (Arithmetic sequence)
Abdul Aziz makes a monthly saving plan for a period
of two years in a bank that doesn't give interest
for saving accounts (compliant with Shariah). In
the first month he deposits 1000 SAR, in the
second month he deposits 1200 SAR and the third
month 1400 SAR and so on.
1. What is the amount that he will deposit in the
fifth month, in the 24th month?
2.What is the total amount that he will obtain at
the end of the second year?
120
120
60
Practical Examples
Solution of Example1
1.
2.
121
121
Practical Examples
Example 2: (Geometric sequence)
Abdul Aziz makes a monthly saving plan for a period
of one year in a bank that doesn't give interest for
saving accounts (compliant with Shariah). In the
first month he deposits 5 SAR, in the second
month he deposits 10 SAR and the third month 20
SAR and so on.
1. What is the amount that he will deposit in the

fourth month, in the eighth month.
2.What is the total amount that he will obtain at

the end of the period.
122
122
61
Practical Examples
Solution of Example2
1.
2.
123
123

✓ The relationship between time and money.
✓ The simple interest rate and the interest
amount
✓ The present value of one future cash flow
✓ The future value of an amount borrowed or
invested.
✓ The relationship between Real Interest Rate,
Nominal Interest Rate and Inflation.
124
124
62
125
125

Unit course FIN 118
Number Unit 6
Unit Subject Time Value of Money

Simple Interest
126
126
63
✓The relationship between time and money.
amount
invested.
127
127
Learning Outcomes
1.Understand simple interest including
accumulating, discounting and making comparisons
using the effective interest rate.
2.Identify variables fundamental to solving

interest problems.
3.Solve problems including future and present

value.
4.Distinguish between nominal and effective

interest rates.
128
128
64
Time value of Money
▪ The time value of money is the relationship between
time and money.
▪ Receiving 1 SAR today is worth more than 1 SAR in
the future. This is due to opportunity costs.
▪ TIME allows you the opportunity to postpone
consumption and earn INTEREST
Today Future
?
129
129
Time value of Money

If we can measure this
opportunity cost, we can:
 Translate 1 SAR today into its equivalent in the
future : operation of capitalization)‫(الرسملة‬
Today Future
?
 Translate 1 SAR in the future into its equivalent
today: Discounted operation (‫(الخصم أو الحسم‬
Today Future
130
?
130
65
Time value of Money
Borrower owes (Debt+interest) to

Financial institution
Lends the Principal

Borrowers
payment of dividends
‫المقترضون‬
Deposit their
money
131
Depositor (‫(المودعون‬
131
Time value of Money: Fundamental Concepts

• Principal: The amount borrowed or invested.
• Interest rate: A percentage of the outstanding
principle.
• Time: The number of years or fractional portion
of a year that principal is outstanding.
• A present value is the discounted value of one or
more future cash flows.
• A future value is the compounded value of a
present value.
• The discount factor is the present value of one
riyal invested in the future.
• The compounding factor is the future value of
one riyal invested today.
132
132
66
Time value of Money
Loan Types
Short term loans Long term loans

(less than 1 year) (more than 1 year)
Simple Bank Compound

Interest Discount Interest
Method Method Method
Interest is added
Interest is paid Interest is paid periodically to
on the principal on the date of the principal.
on the date due issue using a Interest is paid on
133
discount rate the accumulated value
133
The Simple Interest
Definition1: An interest amount in each period is

computed based on a principal sum in the period.
Interest = Principal × Interest Rate × number of
periods
I = PV  i  n
Definition2: The future value is the sum of
present value and the interest amount.
Future Value = Present Value + Interest
FVn = PV + I
FVn = PV (1 + i  n )
134
134
67
Formulas of simple interest method
I = PV  i  n
i= n= PV =
FVn = PV (1 + i  n )
PV =
135
135
The Simple Interest

More Examples
Example1:
How much money would you pay in interest if you
borrowed $1600 for 1 year at 16% simple interest
per annum?
Solution:
136
136
68
The Simple Interest
More Examples
Example2:
borrowed $16000 for 6 months at 12% simple
interest per annum?
Solution:
137
137
The Simple Interest

More Examples
Example3:
borrowed $16000 for 9 months at 5% quarterly
simple interest?
Solution:
138
138
69
The Simple Interest
More Examples
Example4:
You take a 40000 SAR loan for 127 days. Annual
simple interest rate is 12%. Calculate:
a) The interest
b) The amount that he must pay on the date due?
Solution:
a)
b)
139
139
The Simple Interest

More Examples
Example5:
When invested at an annual interest rate of 6% an
account earned $180 of simple interest in one year.
How much money was originally invested in
account?
Solution:
140
140
70
The Simple Interest
More Examples
Example6:
If an investment of $7000 accumulate $910 of interest in
the account after 1 year, what was the annual simple
interest rate on the savings account?
Solution:
141
141
The Simple Interest

More Examples
Example7:
You put $600 today in an account that earns an annual
simple interest rate of 8%. How many years will it take for
this single investment of $600 to have a future value of
$900?
Solution:
142
142
71
The Simple Interest
More Examples
Example8:
An investment earns 4.5% annual simple interest rate.
If $2400 is invested, what is the total amount that
can be withdrawn when the account is closed out after
2 months?
Solution:
143
143
Nominal Interest Rates vs. Real Interest Rates
State1: Suppose we buy a 1 year bond for face

value that pays 6% at the end of the year. We pay
$100 at the beginning of the year and get $106 at
the end of the year. Thus the bond pays an
interest rate of 6%. This 6% is the nominal
interest rate, as we have not accounted for
inflation. Whenever people speak of the interest
rate they're talking about the nominal interest
rate, unless they state otherwise.
144
144
72
Nominal Interest Rates vs. Real Interest Rates
State2: Now suppose the inflation rate is 3% for that
year. We can buy a basket of goods today and it will
cost $100, or we can buy that basket next year and it
will cost $103. If we buy the bond with a 6% nominal
interest rate for $100, sell it after a year and get
$106, buy a basket of goods for $103, we will have $3
left over. So after factoring in inflation, our $100 bond
will earn us $3 in income; a real interest rate of 3%.
The relationship between the nominal interest rate,
inflation, and the real interest rate is described by the
Fisher Equation:
145
Real Interest Rate = Nominal Interest Rate - Inflation
145
It’s time to review

Simple Interest Compound interest
I = PV  i  n see Unit 9
see Unit 9
FVn = PV + I
FVn = PV (1 + i  n )
see Unit 9
More than one compounding periods per year
See Unit 9
Real Interest Rate = Nominal Interest Rate - Inflation

146
146
73
✓ The compound interest rate and the interest
amount
✓ How to Calculate the future value of a single
sum of money invested today for several
periods.
✓ How to Calculate the interest rate or the
number of periods or the principal that achieve
a fixed future value.

147
147

Unit course FIN 118
Number Unit 7
Unit Subject Compound Interest

Non annual Compound Interest
Continuous Compound Interest
148
148
74
!!! remember what we saw last time
✓ The relationship between time and money.
amount
invested.
149
149

✓The compound interest rate and the interest
amount
✓ How to Calculate the future value of a single
sum of money invested today for several
periods.
✓ How to Calculate the interest rate or the
number of periods or the principal that achieve
a fixed future value.
150
150
75
Learning Outcomes
1. Understand compound interest, including
accumulating, discounting and making comparisons
using the effective interest rate.
2. Distinguish between compound interest.
3. Identify variables fundamental to solving

interest problems.
4. Solve problems including future and present

value.
151
151
The Compound Interest

Definition1: In each subsequent period, the interest
amount computed is used to form a new principal sum,
which is used to compute the next interest due.
 As we said, Compound Interest uses the Sum of
Principal & Interest as a base on which to calculate new
Interest and new Principal !
FV1 = PV (1 + i1 ) one period

FV2 = FV1 (1 + i2 ) = PV (1 + i1 )(1 + i2 ) two period s
FV3 = FV2 (1 + i3 ) = PV (1 + i1 )(1 + i2 )(1 + i3 ) three periods

FVn = PV (1 + i1 )(1 + i2 )(1 + i3 )  (1 + in ) n periods
152
152
76
Definition2: If the interest rate is constant over

different periods we have: i1 = i2 = i3 = .... = in = i
and
FVn = Principal ×(1+ Interest Rate) number of Periods
FVn = PV (1 + i )
n
PV = i= n=
!!! Remember FVn = PV + I

153
153

Property1:
The compound interest rate is a geometric sequences
but the simple interest is an arithmetic sequences.
3000
2500
2000
Value
1500
1000
500
0
0 2 4 6 8 10 12 14 16 18 20
Years
Simple Interest
Compound Interest
Simple interest: Linear growth i = 0.15

154 Compound interest: Geometric growth i = 0.15
154
77
More Examples
Example1:
borrowed $1600 for 3 years at 16% compound
interest per annum?
Solution:
155
155

More Examples
Example2:
What is the present value of $150000 to be
received 5 years from today if the discount rate
(annual compounded interest) is 10%?
Solution:
156
156
78
More Examples
Example3:
Assume that the initial amount to invest is
PV = $100 and the interest rate is constant over
time. What is the compound interest rate in
order to have $150 after 5 years?
Solution:
157
157

More Examples
Example4:
Find the number of periods to double your
investment at 6% compound interest per annum .
Solution:
158
158
79
Question 1 ? How to calculate the FV if we have more than
one compounding periods per year ?
Response:
The table shows some common compounding periods
and how many times per year interest is paid for them.
Compounding Periods Times per year (t)
Annually 1
Semi-annually 2
Quarterly 4
Monthly 12
nt
And  i
FVn,t = PV 1 + 
 t
!!! If t=1 we retrieve the old formula
159
159

Example1:
You invested $1800 in a savings account that pays
4.5% interest p.a. compounded semi-annually. Find
the value of the investment in 12 years.
Solution:
160
160
80
Example2:
You invested $3700 in a savings account that pays
2.5% interest p.a. compounded quarterly. Find the
value of the investment in 10 years.
Solution:
161
161

Example3:
You invested $1700 in a savings account that pays 1.5%
interest p.a. compounded monthly. Find the value of the
investment in 15 years.
Solution:
162
162
81
Example4:
You expect to need $1500 in 3 years. Your bank
offers 4% interest p.a. compounded semiannually.
How much money must you put in the bank today (PV)
to reach your goal in 3 years?
Solution:
163
163

Example5:
Suppose a bank quotes nominal annual interest
rates on five-years of:
 6.6% compounded annually,
 6.5% p.a. compounded semi-annually, and
 6.4% p.a. compounded monthly.
Which rate should an investor choose for an

investment of $10000?
Solution:
164
164
82
Solution : continued
First proposition:
Second proposition:
Third proposition:
165
165
Question 2 ? What would happen to our money if

we compounded a really large number of times?
Response:
We would have to compound not just every hour, or
every minute or every second but for every
millisecond. We have:
nt
 i → PV  e ni
FVn,t = PV 1 +  ⎯t⎯
⎯→
 t
 Then with Continuous compounding interest we
have:
FVn, = PV  e ni
166
166
83
Example1:
If you invest $1000 at an annual interest rate of
5% p.a. compounded continuously, calculate the
final amount you will have in the account after five
years.
Solution:
167
167

Example2:
How long will it take an investment of $10000 to
grow to $15000 if it is invested at 9% p.a.
compounded continuously?
Solution:
168
168
84
Example3:
What is the interest rate compounded continuously
of an investment of $1000 to grow to $2000 if it
is invested for 7 years?
Solution:
169
169
Compound Interest
Example4:
What amount will an account have after 5 years if
$100 is invested at an annual nominal rate of 8%
compounded annually? Semiannually? continuously?
Solution:
Compounded annually:
Compounded semi-annually:
Compounded continuously:
170
170
85
Effective Interest Rate
• When analyzing a loan or an investment, it can be difficult to get
a clear picture of the loan's true cost or the investment's true
yield.
• The effective interest rate attempts to describe the full cost
of borrowing. It takes into account the effect of compounding
interest, which is left out of the nominal or "stated" interest
rate.
• For example, a loan with 10% interest compounded monthly will
actually carry an interest rate higher than 10%, because more
interest is accumulated each month.
• The effective interest rate calculation does not take into
account one-time fees like loan origination fees. These fees are
considered, however, in the calculation of the annual percentage
rate.
171
171

• The compounding periods will generally be monthly,
quarterly, annually, or continuously. This refers to
how often the interest is applied.
• The effective interest rate is calculated through a

simple formula:
r: the effective interest rate,

i: the stated interest rate,
t: the number of compounding periods per year.
172
172
86
Example 1:
Find the effective annual rate for a stated rate of
7.5% per year compounded quarterly.
Solution:
173
173

Example 2:
Determine the effective rate on the basis of the
compounding period for each interest rate.
a) 9% per year, compounded yearly
b) 6% per year, compounded quarterly
c) 8% per year, compounded monthly
d) 5% per year, compounded weekly
Solution:
Nominal interest Compounding period t Effective
rate (i) interest rate (r)
9% per year Year
6% per year Quarter
8% per year Month
5% per year Week
174
174
87
It’s time to review
Simple Interest Compound interest
I = PV  i  n
FVn = PV + I FVn = PV + I
FVn = PV (1 + i  n ) FVn = PV (1 + i )
n
More than one compounding periods Continuous Compound Interest

per year
nt
 i
FVn,t = PV 1 +  FVn = PV  e ni
 t
Effective Interest Rate =
175 Real Interest Rate = Nominal Interest Rate - Inflation
175

✓ Meant of simple Annuity
✓Simple Annuity: Ordinary Annuity,

Annuity Due (unit8)
176
176
88
177
177

Unit course FIN 118
Number Unit 8
Unit Subject Ordinary Annuity
Annuity due
178
178
89
✓ Meant of simple Annuity
✓ Ordinary Annuity
✓ Annuity Due
✓ How to Calculate present and future
values of each type of annuity.
179
179
Learning Outcomes
1. Distinguish between an ordinary annuity and an

annuity due.
2. Calculate present and future values of each

type of annuity.
3. Apply knowledge of annuities to solve a range of

problems, including problems involving principal-
and-interest loan contracts.
180
180
90
Introduction
In unit 7, we have seen that a single sum of money
invested today for several periods will produce a
higher future sum due to compounding effect. In
this unit we attempt to see that the same
phenomenon will occur for multiple stream of cash
flow.
A multiple stream of cash flow that is made in an
equal size and at a regular interval is known as
simple annuity.
It exists four different forms for Simple annuity:

Ordinary Annuity, Annuity Due (unit8), Deferred
Annuity, and Perpetuity.
181
181
Ordinary Annuity
Definition: Ordinary Annuity is a series of equal cash
payments or deposits made at the end of each
compounding period.
Examples :
i/ When a particular individual buy a bond, he will
receive equal semi-annual coupon interest payments
over the life of the bond.
ii/ When a particular individual borrow money to buy

for example a house or a car, he will pay a stream of
equal payments at the end of each period of coverage.
182
182
91
Ordinary Annuity
Question: what is value of the sum of all
payments now and at the end of period?
See unit 7g
183
183
Future Value Annuity FVAn

The future value annuity of an ordinary annuity is
the sum of all regular equal payments and the
compounded interest accumulated at the end of
last period. It is determined as follow:
 (1 + i )n − 1
FVAn = PMT  
 i 
 PMT: annuity payment deposited or received at

the end of each period,
 i : interest rate per period,
 n : number of payments.
184
184
92
Proof :
FVAn = PMT + PMT (1 + i ) + PMT (1 + i ) +  + PMT (1 + i )

2 n −1

= PMT  1 + (1 + i ) + (1 + i ) + ... + (1 + i )
2 n −1

 (1 + i )n − 1
FVAn = PMT  
 i 
185
185
Future Value Annuity

More Examples
Example 1:
Suppose you plan to deposit $1000 annually into an
account at the end of each of the next 7 years. If the
account pays 12% annually, what is the value of the
account at the end of 7 years?
Solution :
186
186
93
Example 2
What is the future value of $5000 invested at the end
of each year for 10 years if money earns 6% per
annum?
Solution
187
187
Present Value Annuity PVAn

The present value annuity of an ordinary annuity is
the sum of all regular equal payments discounted
at a certain interest rate in at the end of each
period. It is determined as follow:
1 − (1 + i )− n 
PVAn = PMT  
 i 
PMT: annuity payment deposited or received at

the end of each period,
i : interest rate per period,
n : number of payments.
188
188
94
Proof :
PMT PMT PMT

PVAn = + ++
1+ i (1 + i )2
(1 + i )n
PMT  1 1 1 
=  1 + + + ... + =
1 + i  1 + i (1 + i )2
(1 + i ) 
n −1

= PMT (1 + i )−1  1 + (1 + i )−1 + (1 + i )− 2 + ... + (1 + i )− ( n −1) 
1 − (1 + i )− n  1 − (1 + i )− n 
= PMT (1 + i )−1   = PMT  
 1 − (1 + i ) 
−1
 i 
189
189
Present Value Annuity

More Examples
Example 1:
You plan to withdraw $1000 annually from an account at
the end of each of the next 7 years. If the account pays
12% annually, what must you deposit in the account today?
Solution :
190
190
95
More Examples
Example 2:
What is the present value of $5000 that will be
invested at the end of each year for 10 years if money
earns 6% per annum?
191
191
Annuity Due
Definition: Annuity Due is a series of equal cash
payments or deposits made at the beginning of
each compounding period.
Examples :
i/ When a particular individual make an
apartment lease contract over a period of
several years, he must paid at the beginning of
each year an annual rent .
ii/ When a particular individual buy a car he must

paid at the beginning of each year an annual
insurance premium.
192
192
96
Annuity Due
Question: what is value of the sum of all
payments now and at the end of period?
See Unit 7
Answer :
193
193

The future value annuity of an annuity due is the
sum of all regular equal payments at the beginning
of each period and the compounded interest
accumulated at the end of last period. It is
determined as follow:
 (1 + i )n − 1
FVAn = PMT  (1 + i )
 i 
 PMT: annuity payment deposited or received at
the beginning of each period,
 n : number of payments.
194
194
97
Proof :
FVAn = PMT (1 + i ) + PMT (1 + i ) + PMT (1 + i )  + PMT (1 + i )

2 3 n

= PMT (1 + i ) 1 + (1 + i ) + (1 + i ) + ... + (1 + i )
2 n −1

 (1 + i )n − 1  (1 + i )n − 1
FVAn = PMT (1 + i )  = PMT   (1 + i )
195
 i   i 
195

More Examples
Example 1:
Suppose you plan to deposit $1000 annually into an
account at the beginning of each of the next 7 years. If
the account pays 12% annually, what is the value of the
account at the end of 7 years?
Solution :
196
196
98
More Examples
Example 2:
What is the future value of $5000 invested at the
beginning of each year for 10 years if money earns 6%
per annum?
197
197

The present value annuity of an annuity due is the
sum of all regular equal payments discounted at a
certain interest rate in at the beginning of each
period. It is determined as follow:
1 − (1 + i )− n 
PVAn = PMT  (1 + i )
 i 
* PMT: annuity payment deposited or received at
the beginning of each period,
* i : interest rate per period,
* n : number of payments.
198
198
99
Proof :
PMT PMT PMT

PVAn = PMT + + ++
1 + i (1 + i )2
(1 + i )n−1
 1 1 1 
= PMT  1 + + + ... + n −1 
=
 1 + i (1 + i )2
(1 + i ) 

= PMT  1 + (1 + i ) + (1 + i )
−1 −2
+ ... + (1 + i )
−( n −1)

1 − (1 + i )− n  1 − (1 + i )− n 
= PMT  −1 
= PMT   (1 + i )
 1 − (1 + i )   i 
199
199

More Examples
Example 1:
You plan to withdraw $1000 annually from an account at the
beginning of each of the next 7 years. If the account pays
12% annually, what must you deposit in the account today?
Solution :
200
200
100
More Examples
Example 2:
What is the present value of $5000 that will be invested
at the beginning of each year for 10 years if money
earns 6% per annum?
Solution:
201
201
Formulas
Time to Review!
Simple Annuity
Ordinary Annuity Annuity Due Deferred Annuity Perpetuity
 (1 + i )n − 1  (1 + i )n − 1
FVAn = PMT  
FVAn = PMT  (1 + i )
 i   i 
1 − (1 + i )− n  1 − (1 + i ) −n 
PVAn = PMT   PVAn = PMT  (1 + i )

 i   i 
202
That’s All for 50% of simple Annuity !
202
101
✓ Long term ordinary annuity

✓ Long term annuity due
✓ Amortization & sinking Funds
✓Some real life examples
203
203

Unit course FIN 118
Number Unit 9
Unit Subject Long Term Annuities

Amortization & sinking Funds
204
204
102
✓ Long term ordinary annuity

✓ Long term annuity due
✓ Amortization & sinking Funds
✓Some real life examples
205
205
Learning Outcomes
1. Understand what is meant by “long term
annuities”.
2. Calculate Present and future value long term
annuities for the case of ordinary and annuity due.
3. Calculate the single payment for real life
examples in the case of long term annuities
( Amortization & sinking Funds).

206
206
103
Introduction
• As we say in unit 8, Annuity is a series of equal cash
payments or deposits. These regular equal payments can be
planned for short term, intermediate or long term periods.
• In this unit we are interested to the calculation of long

term payments or deposits.
• Two basic questions can be exposed with annuities:

– Calculate how much money will be accumulated if we
consider an annuity plan for long time (30 years for
example)
– How to calculate the periodic payments or deposits in
order to obtain a specific amount on a given time period
(calculate monthly payments for a mortgage loan for
example).
207
207
Long Term Ordinary Annuity

• As we have seen in unit 8, the same formula is
applied to the case of long term annuities.
• The future and present value of an ordinary annuity
are given respectively by
 (1 + i )n − 1 1 − (1 + i )− n 
FVAn = PMT   PVAn = PMT  
 i   i 
if payments are made annually.

• If payments are made non annually (more than once
in year) we must introduce in the previous formula
the number of times per year. So, we have the
following formula
( )
 1 + i n.t − 1 
PVAn,t = PMT 
( )
1 − 1 + i − n.t 

FVAn,t = PMT  
t t
 i   i 
208  t   t 
208
104
Example1
You plan to deposit in an account $5000 at
the end of each year for the next 25 years.
If the account pays 6% annually, what is the
value of your deposits at the end of 25 years?
Solution
209
209
Long term Ordinary Annuity
Example2
You plan to deposit, in an account, $100 at the
end of each month for the next 25 years. If
the account pays 6% annually, what is the
value of your deposits at the end of 25 years?
Solution
210
210
105
Example3
You plan to withdraw at the end of each year from an
account $5000 for the next 25 years. If the account
pays 6% annually, what is the amount that you must
deposit today in order to guarantee these
withdrawals ?
Solution
211
211
Long term Ordinary Annuity

Example4
You plan to withdraw at the end of each month $100
from an account of the next 25 years. If the account
pays 6% annually, what is the amount that you must
deposit today in order to guarantee these
withdrawals?
Solution
212
212
106
Long Term Annuity Due
• As we have seen in unit 8, the same formula is
applied to the case of long term annuities.
• The future and present value of an annuity due
are given respectively by
 (1 + i )n − 1 1 − (1 + i )− n 
FVAn = PMT  (1 + i ) PVAn = PMT   (1 + i )
 i   i 
if payments are made annually.
• If payments are made non annually (more than
once in year) we must introduce in the previous
formula the number of time per year. So, we have
the following formula
FVAn,t = PMT 
( )
 1 + i n.t − 1 
t   i
1 +  PVAn,t = PMT 
( )
1 − 1 + i − n.t 
1 + i 
 t
 i  t   i  t 
 t   t 
213
213

Example1
You plan to deposit in an account $5000 at the
beginning of each year for the next 25 years. If the
account pays 6% annually, what is the value of your
deposits at the end of 25 years?
Solution
214
214
107
Long term Annuity Due
Example2
You plan to deposit in an account $100 at the
beginning of each month for the next 25 years. If the
account pays 6% annually, what is the value of your
deposits at the end of 25 years?
Solution
215
215

Example3
You plan to withdraw from an account $5000 at the
beginning of each year for the next 25 years. If the
account pays 6% annually, what is the amount that you
must deposit today in order to guarantee these
withdrawals?
Solution
216
216
108
Long term Annuity Due
Example4
You plan to withdraw from an account $100 at the
beginning of each month for the next 25 years. If
the account pays 6% annually, what is the amount that
you must deposit today in order to guarantee these
withdrawals?
Solution
217
217
Amortization &Sinking Funds

‫اهالك القروض أو استهالك القروض‬/‫إطفاء‬
ِ َ‫صندوق إطفاء الدين أو اِحْ تِي‬
‫اط ّي سداد قرض‬
• When a lender pays a debt (including

interest) by making periodic payments at
regular intervals, the debt is said to be
amortized.
• When a payment is made to an investment

fund each period at a fixed interest rate to
yield a predetermined future value, the
payment is called a sinking fund.
218
218
109
Amortization &Sinking Funds
• Ordinary Amortization Formula

Annual Non-annual
   i 
i  
PMT = PVA   PMT = PVA
−n 
t

 1 − (1 + i )   1 − (1 + i )
− nt

 t 
• Ordinary Sinking Fund Payment

Annual Non-annual
 i   i 
PMT = FVA   PMT = FVA  t 
 (1 + i ) − 1 
( ) 
n
nt
 1 + t − 1 
i
219
219
Real life example: Loan Amortization

Example
Suppose you want to borrow money to buy a house. You are
considering a 7-years or a 25-years loan.
A bank offers different interest rates, reflecting the
differences in risks of intermediate-term and long-term
lending.
* For the 7-years loan, the annual interest rate is 5.25%
compounded monthly.
* For the 25-years loan, the annual interest rate is 6.75%

compounded monthly.
→If you borrow $150000, what would be your monthly

payments for each type of loan?
220
220
110
Real life example: Loan Amortization
Solution
First Scenario: 7-years loan
Second Scenario: 25-years loan
221
221
Real life example: Sinking Fund

Example 1
Suppose you decide to use a sinking fund to save
$150 000 for a house. If you plan to make 300 monthly
payments (25 years × 12=300) and you receive 6.75%
interest per annum, what is the required payment for
an ordinary annuity?
Solution
222
222
111
Real life example: Sinking Fund
Example 2
Suppose you use a sinking fund to save $50 000 for a car. If
you plan on 60 monthly payments (5 years ×12= 60) and
you receive 5% interest per annum, what is the required
payment for an ordinary annuity?
Solution
223
223
Time to Review !
✓Long term annuities is an extension to

the ordinary and annuity due.
✓Making periodic payments to repay a
debt, including the principal and interest,
is called amortization.
✓A fund into which periodic payments
necessary to realise a given sum of money
in the future are made is called sinking
fund.
224
224
112
✓ What’s a bond
✓ Different types of bonds
✓ Bond valuation
225
225

Unit course FIN 118
Number Unit 10
Unit Subject Bond Valuation
226
226
113
✓What’s a bond
✓ Different types of bonds
✓ Bond valuation
227
227
Learning Outcomes
At the end of this unit, you should be able
to:
1. Understand what is meant by “Bond”.
2. Know the different types of bonds.
3. Calculate the value of a bond.
228
228
114
What is a Bond
Definition:
• A debt instrument: When one purchases a bond,
one essentially lends an organization such as the
government or a corporation a specified amount of
money which the borrower agrees to repay at a
designated time.
• A promise to pay interest over a specific term at

stated future dates and then pay lump sum at
maturity (the end of the term).
• Issued by corporations and governments as a way

to provide money to the company.
229
229
Components of a bond
• Principal or Face value of the bond: The
amount of money that is paid to the
bondholders at maturity. For most bonds
this amount is $1,000 (and its doubles). It
also generally represents the amount of
money borrowed by the bond issuer.
• Coupon rate or rate of interest : It is

expressed as a percentage of the bond's
face value. It also represents the interest
cost of the bond to the issuer.
230
230
115
Components of a bond
• Coupon Payments: It represent the periodic
interest payments from the bond issuer to the
bondholder. The annual coupon payment is calculated
by multiplying the annual coupon rate by the bond's
face value. Since most bonds pay interest
semiannually, generally one half of the annual coupon
is paid to the bondholders every six months.
• Maturity date: It represents the date on which

the bond matures, i.e., the date on which the face
value is repaid. The last coupon payment is also paid
on the maturity date.
231
231
Bond Valuation
Time line of payments
FV
+
C C … C C
0 1 2 n-1 n
C
(1 + i)
C
(1 + i )2
C
(1 + i )n−1
C + FV
(1 + i )n
232
232
116
Types of Bonds
• Government Bonds: or Treasury Bonds, a debt
security issued by a government to support
government spending.
• Corporate Bonds: a debt security issued by
companies and sold to investors in order to finance
expansion or raise funds for other expenses.
Interest rates accorded to this type of bonds is
higher than government bonds.
• Municipal Bonds: a debt security issued by a state,
a municipality or a county in order to finance its
projects or expenditures. Municipal bonds may be
general obligations of the issuer or secured by
specified revenues.
233
233
Bond Valuation
• Bonds are valued using time value of money concepts.
• Their coupon, or interest, payments are treated like an
equal cash flow stream (annuity).
• Their face value is treated like a lump sum.
n

Coupon Face Value of Bond
PV(Bond) = +
t (1 + i)n
t = 1 (1 + i)
 1−(1 + i ) −n  Face Value of bond

PV (bond )=Coupon  +
 i  (1 + i ) n
 
Coupon = Face Value  Coupon rate

C = Coupon; r = annual coupon rate; i = annual interest rate;
FV = face value; n = number of years.
234
234
117
Bond Valuation
Example 1: Annual Coupon Payments
Your father bought a 10-year bond from Al-Nasr

Corporation Europe Ltd. The bond has a face value of
$1000 and pays an annual coupon. The annual coupon
rate is equal to 10%. The current market rate of
return is 12% (or the discount rate).
1- Find the value of the coupon.
2- Find the Price of the Bond (Market value of the
bond to day).
235
235
Bond Valuation
Solution:
1/ The value of the coupon
2/ The bond price is the Present value of the coupon

stream plus the Present Value of the Face Value.
236
236
118
Bond Valuation
Non-annual Coupon Payments
• The rule for valuing annual bonds is easily extended
to valuing bonds paying interest even more
frequently (semi-annually, quarterly, monthly).
• For example, to determine the value of a bond

paying interest semi- annually, we can remark that
we have to pay the coupon two times a year. Then,
to calculate the price of the bond, we must double
the number of annual periods and the annual coupon
payment and divide the coupon rate and the
discount rate by two.
237
237
Bond Valuation
Non-annual Coupon Payments
• In general, if we let t be equal to the number of
payments per year, n be equal to the maturity in years
and i be the annual discount rate, then the general
formula for valuing a bond can be expressed as follows:
  − nt 
i
1− 1 +  
PV (bond )=Coupon  
t  + Face Value of bond
i  nt
   i
t 1 + 
   t
Coupon rate
Coupon = Face Value 
t
C = Coupon; r = Annual coupon rate; i = interest rate; FV = face
value; n = number of years; t = number of times in 1 year.
238
238
119
Bond Valuation
Example 2: Semi-Annual Coupon Payments

Corporation Europe Ltd. The bond has a face value
of $1000 and pays a semi-annual coupon. The annual
coupon rate is 10%. The current market rate of
return is 12% (or the discount rate).
1- Find the value of the coupon.
2- Find the Bond price.
239
239
Bond Valuation
Solution:
1/ The value of the coupon
2/ The bond price is the Present value of the coupon

stream plus the Present Value of the Face Value.
240
240
120
Relation between coupon
rate and discount rate
First Relation:
three cases are possible:
✓ Coupon rate = discount rate
The price of the bond equal to the Face value of
the bond  par bond
✓ Coupon rate > discount rate

The price of the bond is greater than the Face
value of the bond  premium bond
✓ Coupon rate < discount rate

The price of the bond is smaller than the Face
value of the bond  discount bond
241
241
Relation between bond price and

discount rate
Second Relation:
Two cases are possible:
✓ Rate of return increase  The price of the bond
decreases
✓ Rate of return decrease  The price of the bond
increases
✓ Inverse relation between bond price and discount
rate
BP
0
i
242
242
121
Bond Valuation
Example 3:
Corporation Europe Ltd. The bond has a face value of
$2000 and pays an annual coupon. The annual coupon rate
is fixed at 10%.
1- Find the price of the bond if the current market rate

of return is 8%. What we can conclude?


243
243
Bond Valuation
Solution:
Coupon =
1- If the market interest rate is 8% (the discount

rate), the market value of the bond is:

244
244
122
Bond Valuation
Solution:

245
245
Time to Review !
✓Bonds are debt instruments with maturity
date.
✓ If the coupon rate is greater than the
market rate, the market value of the bond is
greater than the Face value of the bond.
✓ If the coupon rate is smaller than the
market rate, the market value of the bond is
smaller than the Face value of the bond.
✓ If the two rates are equal, market value is
equal to the Face value of the bond.
246
246
123
✓Meant of Equal short term payments
and settlement of short-term debt
✓How to Calculate the amount of total
payments.
✓How to Calculate the amount of a new
settlement
247
247

Unit course FIN 118
Number Unit 11
Unit Subject Equal short term payments
248
248
124
✓ Meant of Equal short term payments
and settlement of short-term debt
✓How to Calculate the amount of total
payments.
✓How to Calculate the amount of a new
settlement
249
249
Learning Outcomes
1. Apply the rule of an ordinary annuity and an

annuity due to Equal short term payments and
settlement of short-term debt
2. Calculate the amount of total payments and the

amount of total settlement of short-term debt.
250
250
125
Introduction
In unit 10, we have seen that a multiple stream of
cash flow that is made in an equal size and at a
regular interval is known as simple annuity.
Therefore we have seen that exists four types of
Simple annuity: Ordinary Annuity, Annuity Due
(unit10), Deferred Annuity, and Perpetuity. So we
have applied the compound interest to this type of
annuity to calculate future or present value of the
amount of all stream.
In this unit we attempt to apply the simple interest

rather than compound interest for multiple stream
of cash flow known as Equal short term payments.
We also explain how to apply the settlement of
short-term debt via some practical examples.
251
251
1/ Equal short term payments

Definition: Equal short term payments is a
series of equal cash payments made at the
end or at beginning of each simple period.
Examples :
i/ When you buy some house wares in
monthly installment
ii/ When financing operational activities

of Firm.
252
252
126
Ordinary Payments / Payments due
Definition: Ordinary payments, called the
reimbursement installments, which
payments are to be paid at the end of each
period of time, it has paid at the end of
every month or every two months, or every
3 months or etc.
Definition: Payments Due, called the

reimbursement installments, which
payments are to be paid at the beginning
of each period of time, it has paid at the
beginning of every month or every two
months, or every 3 months or etc.
253
253
How to calculate Total of

installments?
Generally, the total of installments is equal to the
principal plus interest. It is determined as follow:
Total Installments = Principal + Interest
Total Installments = PMT  n + PMT  i  T

Total Installments = PMT (n + i  T )
 PMT: the installment to be paid at each period,
 n : number of payments,
254
 T: the number of time periods.
254
127
How to calculate Total of installments?
The number of time periods (T) is generally, function of
the number of payments.
 Number of periods of the first payment until maturity 
n 
T=  + 
2 
 Number of periods of the last payment until maturity 
Example1: Suppose you plan to deposit $1000 at the end

of each month into an account for one year. If the account
pays a simple interest equal to 15% annually, what is the
value of your deposits at the end of the year?
Solution:
255
255

installments?
Example2: Suppose you plan to deposit $1000 at the beginning
of each month into an account for one year. If the account pays
a simple interest equal to 15% annually, what is the value of
your deposits at the end of the year?
Solution:
256
256
128
installments?
Example3: Suppose you plan to deposit $1000 in the middle of
each month into an account for one year. If the account pays a
simple interest equal to 15% annually, what is the value of your
deposits at the end of the year?
Solution:
257
257

installments?
Example4: Suppose you plan to deposit $1000 at the end of
each month into an account for six months. If the account pays
a simple interest equal to 15% annually, what is the value of
your deposits at the end of the year?
Solution:
258
258
129
installments?
Example5: Suppose you plan to deposit $1000 at the end of
each two months into an account for one year and half. If the
account pays a simple interest equal to 15% annually, what is
the value of your deposits at the end of the period?
Solution:
259
259
2/ the settlement of short-term debt

Definition:The settlement of short-term debt is
intended to an agreement between the debtor
and the creditor to replace old debt by new
debt. Therefore the agreement includes a
method of replacement and general rule used is
the equality between the value of old debt and
the value of new debt at a specific date which is
called the settlement date.
Rule :
The value of the old debt at the date of settlement
=
The value of the new debt at the date of settlement
260
260
130
How to calculate the value of New Debt ?
Generally, we have three cases:
Case 1 : the settlement date is before all dates of maturity. So
we must calculate the present value of each batch at the date of
settlement.
Date of Debt 1 Debt 2 Debt 3 Debt 4

settlement
Case 2 : the settlement date is before one date of maturity. So
we must calculate the PV of each batch after the date of
settlement and FV of each batch before the date of settlement .
Debt 1 Debt 2 Date of Debt 3 Debt 4

settlement
Case 3: the settlement date is after all dates of maturity, we
must calculate the future value of each batch at the date of
settlement
Debt 1 Debt 2 Debt 3 Debt 4 Date of

261
settlement
261
How to calculate the value of New Debt

and installments ?
Example 1a: Someone owes the following amounts:
1000 SAR payable after 3 months
It was agreed with the creditor to sign two new
promissory notes with the same amount fixed at 4000
SAR. The first worth after 4 months, the second after
10 months and pay the rest owed cash immediately.
Calculate the amount of cash paid by the debtor if we

set the discount rate at 5% per annum.
262
262
131
and installments ?
Example 1a: Solution 6000 SAR
1000 SAR 3000 SAR
6 Months 9 Months
Date of 3 Months
settlement
Now 4 Months 10 Months
x SAR 4000 SAR 4000 SAR
 3  6
PV1 = 1000  1 − 0.05   = 987.5 PV2 = 3000  1 − 0.05   = 2925
 12   12 
 9
PV3 = 6000  1 − 0.05   = 5775 PV (olddebt ) = 9687.5
263  12 
263

and installments ?
Example 1a: Solution (continued)
 10 
 4 PV3 = 4000 1 − 0.05  
PV1 = x PV2 = 4000 1 − 0.05   = 3933.33  12 
 12 
= 3833.33
PV ( Newdebt ) = x + 3933.33 + 3833.33
PV ( Newdebt ) = 7766.66 + x
PV (olddebt ) = PV ( Newdebt)
7766.66 + x = 9687.5  x = 9687.5 − 7766.66 = 1920.84
The amount of cash paid by the debtor = 1920.84 SAR

264
264
132
and installments ?
Example 1b: Someone owes the following amounts:
It was agreed with the creditor to pay immediately

4000 SAR and sign two new promissory notes. The
first worth after 4 months, the second after 10
months. If we set the discount rate at 5% per
annum and the value of the second promissory note
equal to 4000 SAR, calculate the amount of the
first promissory note.
265
265

and installments ?
Example 1b: Solution 6000 SAR
1000 SAR 3000 SAR
6 Months 9 Months
Date of 3 Months
settlement
4000 SAR x SAR 4000 SAR
 3  6
PV1 = 1000  1 − 0.05   = 987.5 PV2 = 3000  1 − 0.05   = 2925
 12   12 
 9
PV3 = 6000  1 − 0.05   = 5775 PV (olddebt ) = 9687.5
266
 12 
266
133
and installments ?
Example 1b: Solution (continued)
 10 
 4 PV3 = 4000 1 − 0.05  
PV1 = 4000 PV2 = x 1 − 0.05   = 0.983 x  12 
 12 
= 3833.33
PV ( Newdebt ) = 4000 + 0.983 x + 3833.33
PV ( Newdebt ) = 7833.33 + 0.983 x

9687.5 − 7833.33
7833.33 + 0.983 x = 9687.5  x = = 1886.24
0.983
The value of the first promissory note = 1886.24 SAR

267
267

and installments ?
Example 1c: Someone owes the following amounts:
It was agreed with the creditor to pay immediately the
amount of 2800 SAR, and the rest of new debt is
divided on two promissory notes. The value of the first
promissory note is equal to 4000 SAR payable after 4
months and the second payable after 10 months. If we
set the discount rate at 5% per annum, calculate the
nominal value of the second new promissory note.
268
268
134
and installments ?
Example 1c: Solution 6000 SAR
1000 SAR 3000 SAR
6 Months 9 Months
Date of 3 Months
settlement
2800 SAR 4000 SAR x SAR
 3  6
PV1 = 1000  1 − 0.05   = 987.5 PV2 = 3000  1 − 0.05   = 2925
 12   12 
 9
PV3 = 6000  1 − 0.05   = 5775 PV (olddebt ) = 9687.5
269
 12 
269

and installments ?
Example 1c: Solution (continued)
 10 
 4 PV3 = x 1 − 0.05  
PV1 = 2800 PV2 = 4000 1 − 0.05   = 3933.33  12 
 12 
= 0.958 x
PV ( Newdebt ) = 2800 + 3933.33 + 0.958 x
PV ( Newdebt ) = 6733.33 + 0.958 x

9687.5 − 6733.33
6733.33 + 0.958 x = 9687.5  x = = 3083.69
0.958
The value of the second promissory note = 3083.69 SAR

270
270
135
Time to Review!
Equal short term payments/

Ordinary Payments / Payment Due the settlement of short-term debt

Total Installments = Principal + Interest The value of the old debt at the
date of settlement
Total Installments = PMT (n + i  T ) =
The value of the new debt at the
T=
n
(Duration of the first payment + Duration of the last payment )
2 date of settlement
271
271
‫الخاتمة‬
‫تم بحمد هللا إتمام البرنامج‬
‫وإن تبقى من الوقت شيء فسوف نقدم تطبيقات‬
‫ وفوائد البيع‬,‫عملية لحساب فوائد المرابحة‬
‫ وفوائد اإليجار المنتهي بالتمليك‬,‫بالتقسيط‬
‫نشكركم على حسن المتابعة ونتمنى لكم النجاح‬

‫والتوفيق‬
272
272
136

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‫كلية االقتصاد والعلوم اإلدارية‬

)118 ‫مقرر الرياضيات المالية (مال‬

Course Financial Mathematics

Unit Subject Introduction to the course

Dr. Lotfi Ben Jedidia

Knowledge required from this course

Lectures Personal Regular

Midterms Attendance &

• Linear and quadratic equations and its applications in

• Critical points, integration and its applications in

• Functions of several variables and its applications in

• Simple interest and compound interest.

• Ordinary annuity and Annuity due

• Short-term payments and long-term payments.

• Valuation of Bonds and Sukuk

• Practical applications (Murabaha, Musharaka, lease-

Calculus and its applications, 10/E , Marvin L. Bittinger, David J.

Mathematics for Economics and Business, 7/E , Ian Jacques,

We will see in the next unit

2. Quadratic Equations in One Variable

Course Financial Mathematics

Unit Subject Linear Equations

We will see in this unit

2. Quadratic Equations in One Variable

At the end of this unit, you should be able to:

1. Understand what is meant by “linear equation” and

2. Understand how to solve linear and quadratic

3. Solve equations for real world situations in order

Step1- Solve for any Addition or Subtraction on

Step2- Solve any Multiplication or Division from

• Try the above Examples:

How to solve quadratic equations ?

Example2: Solve the quadratic equation

!!! We can rewrite the quadratic equation

!!! We can rewrite the quadratic equation

Example4: Solve the quadratic equation

!!! We can rewrite the quadratic equation

The demand and supply equations for a good are given

Course Financial Mathematics

Unit Subject Derivability

1. Essential rules of differentiation

4. Apply derivatives to real world situations in order to optimize

k = (k )' = 0 cx = (cx )' = c

2/ first derivative : f (1) = f ' (x ) = 20 x 4 − 6 x + 2

3/ second derivative : f (2 ) = f '' (x ) = 80 x 3 − 6

4/ third derivative : f (3) = f ''' (x ) = 240x 2

6/ fifth derivative : f (5 ) = f ''''' (x ) = 480

f ' (x0 ) = 0 and f '' (x 0 )  0

✓ The point M = ( x0 , f ( x0 )) is a local maximum if

f ' (x0 ) = 0 and f '' (x0 )  0

Using the Second Derivative Test:

Second Derivative Test:

𝑀1 = (0, 2) is a local maximum 𝑀2 = (2, −2) is a local minimum

Unconstrained optimization of a function of one

FOC is a necessary condition for a maximum but not

Profit maximization function

Minimization of a function of one variable

FOC is a necessary condition for a minimum but not

Cost minimization function

2. The connection between integration and summation.