MATH 1003 Calculus and Linear Algebra (Lecture 1)

Albert Ku

HKUST Mathematics Department

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Outline

1 About MATH 1003

2 Mathematics of Finance

3 Simple Interest

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 About MATH 1003

About MATH 1003

Lecturer: Albert Ku (Office: Rm 3446. E-mail: [email protected])

TA: Zhang, Shunkang (T1A,T1B), Zeng,Wenqi (T1C,T2A), Yang,
Yahong (T2B,T2C)
Office hours: TBA
Textbook: College Mathematics for Business, Economics, Life
Sciences, and Social Sciences (14th Edition), by Raymond A. Barnett,
Michael R. Ziegler and Karl E. Byleen

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 About MATH 1003

Tentative Syllabus

Chapter 2. Mathematics of Finance (2.1-2.4)

Chapter 3. Systems of Linear Equations; Matrices (3.1-3.7)
Chapter 8. Limits and the Derivative (8.1, 8.2, 8.4-8.5)
Chapter 9. Additional Derivative Topics (9.1-9.6)
Chapter 10. Graphing and Optimization (10.1-10.2, 12.4-12.6)
Chapter 11. Integration (11.1-11.2, 11.4-11.6)
Chapter 12. Additional Integration Topics (12.1)

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 About MATH 1003

Grading Policy

Online homework (WeBWork) (10%)

Midterm Exam (30%) - Date: TBA
Final Exam (60%) - Date: TBA

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 About MATH 1003

Tutorials

Teaching assistant will mainly go over examples and problems during

tutorial sessions.
The first tutorial session will begin on the second week

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 Mathematics of Finance

Mathematics of Finance

In this course, we plan to cover the following:

Simple Interest
Compound Interest
Future Value of an Annuity
Present Value of an Annuity

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 Simple Interest

Simple Interest

Definition
Let r be the (annual) interest rate. Suppose we invest/borrow a sum of
money P through a certain financial instrument, then after t years, the
amount you will receive/pay, A, is given by

A = P + I = P + Prt = P(1 + rt)

where I is the amount of interest received/owed.

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 Simple Interest

Remark
In other words, interest rate is the percentage gain/loss of money
I
over a year (t = 1) due to a financial instrument: r = × 100%
P
The principal, P, is often referred to as the present value and A as
the future value.
Future value is the future worth of a present sum of money given a
specified rate of return (interest rate). For example, if the annual
interest rate is 5%, the future value of $100 given to you now is worth
100(1 + 0.05) = $105 after one year.
Present value is the present worth of a future sum of money given a
specified rate of return (interest rate). For example, if the annual
interest rate is 5%, the present value of $100 given to you after one
year is worth 100 ÷ (1 + 0.05) = $95.24 now.

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 Simple Interest

A Simple Example

Example
Find the total amount due on a loan of $1000 at 6% simple interest rate
at the end of
2 years;
4 months.

Solution
6
A = P(1 + rt) = 1000(1 + × 2) = $1120
100
6 4
A = P(1 + rt) = 1000(1 + × ) = $1020
100 12

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 Simple Interest

More Examples

Example
If you want to earn an annual rate of 20% on your investments, how much
should you pay for a note that will be worth $5000 in 9 months?

Solution
20 9
5000 = P(1 + × )
100 12

⇒ P = $4347.8

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 Simple Interest

T-Bills

Example
T-bills (Treasury bill) are one of the instruments the U.S. Treasury
Department uses to finance the public debt. If you buy a 180-day T-bill
with a maturity value of $10000 for $9800, what annual simple interest
rate you will earn?

Remark
For the conveninence of calculation, here one year is “defined” to be 360
days.

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 Simple Interest

Solution

 
180
10000 = 9800 1 + r ·
360

⇒ r = 0.0408 = 4.08%

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 Simple Interest

Interest Rate Earned on an Investment

Example
You sell an old car to our friend and accept a 270-day note for $3500 at
10% simple interest rate as payment. (Both principal and interest will be
paid at the end of 270 days.) Sixty days later you find the you need the
money and sell the note to a third party for $3550. What annual interest
rate will the third party receive for the investment?

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 Simple Interest

Solution

The future value of the 270-day note

 
270
3500 1 + 0.1 × = $3762.5
360

The third party bought the note from you for $3550 and then after
270 − 60 = 210 days, he/she will obtain $3762.5.

Let r be the annual interest rate for this investment. Then we have
 
210
3762.5 = 3550 1 + r ·
360

⇒ r = 0.1026 = 10.26%

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 Simple Interest

Stock Investments

Example
The brokerage firm charge commissions based on the amount of the trade.
The following table shows the commission schedule for one of these firms.

Transaction Size Commission

$0-$2499 $29+1.6% of principal
$2500-$9999 $49+0.8% of principal
$10000+ $99+0.3% of principal

An investor purchases 50 shares of a stock at $47.52 per share. After 200

days, the investor sells the stock for $52.19 per share. Using the above
commission schedule, find the annual rate of interest earned by this
investment.

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 Simple Interest

Solution

The values of 50 shares of stocks: 50 × 47.52 = $2376

The commission for buying those 50 shares of stocks:

29 + 1.6% × 2376 = $67.02

Therefore, the total amount of investment is 2376 + 67.02 = $2443.02.

The values of 50 shares of stocks after 200 days: 50 × 52.19 = $2609.5

The commission for selling those 50 shares of stocks:

49 + 0.8% × 2609.5 = $69.88

Therefore, the total amount of money obtained by selling stocks is

2609.5 − 69.88 = $2539.62

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 Simple Interest

Let r be the annual interest rate earned by this investment. Then we have
 
200
2539.62 = 2443.02 1 + r ·
360

Solving, we get r = 0.0712 = 7.12%.

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