MBA, 52nd , 01 , MAT 501 Date:30.10.

21

Mathematics of Finance

Present Value (Principal): The amount of money initially

invested is called the Present Value (principal) and is denoted
by P.
Future Value: The amount of money principal has grown to after
the time period is called the Future Value (accumulated value)
and is denoted by F.
Interest: The amount of money charged for the initial
investment for a period of time and is denoted by I.
Interest = Future value - Present Value
Or I = F - P
Interest Rate : The percentage of the amount of
money charged for the initial investment for a period
of time and is denoted by i.

Formula For Finding Total Interest:

I = Pin
Here P = Present value (Principal)
I = Interest
i = Rate of interest
n = Number of years
Formula For Finding Future Value:

F = P(1 + in)
Here P = Present value (Principal)
I = Interest
i = Rate of interest
n = Number of years
F = Future value

Compound Interest: Computing the interest on

interest is called compounding interest.
Formula For Finding Future Value:

n
F = P (1+i)
Here P = Present value (Principal)
i = Rate of interest
n = Number of period
F = Future value
 Simple Interest

Prob.-1: In problems i through x, find a) the

interest and b) the amount for each of the principals
for the stated simple interest rate and time period:
i. $500 ; 7 percent ; 1 year
ii.$1000 ; 8 percent ; 1 year
iii. $1000 ; 9 percent ; 6 months
iv.$2000 ; 6 percent ; 6 months
v. $100 ; 36 percent ; 4 months
vi.$500 ; 24 percent ; 3 months
vii.$200 ; 12 percent ; 18 months
viii.$500 ; 18 percent ; 16 months
ix.$5000 ; 24 percent ; 3 years
x. $4000 ; 30 percent ;2 years
Solution:
i. Given that,
$500 ; 7 percent ; 1 year
We know,
I = Pin……….(1)
Here P = 500
 i = 7% = 0.07
n=1
I=?
F=?
From (1), we get
I = 500 × 0.07 × 1
= $35
Again, F = P + I
= 500 + 35
= $535
Solution: (iii) We know,
I = Pin…….…….(1)
Here Principal, P = 1000
Rate of interest, i = 9 % = 9 / 100 = 0.09
Number of year , n = 6 months = 6 / 12 year
= 0.5 year
Interest, I = ?
 Future value , F = ?
Putting these values in (1), we get
I = $(1000 × 0.09 × 0.5)
= $45
Again,
We know
F= P+I
F = $(1000 + 45)
= $1045
Solution: (ix) We know,
I = Pin……...…….(1)
Here Principal, P = 5000
Rate of interest, i = 24% = 24 / 100 = 0.24
Number of year , n = 3 years
Interest, I = ?
Future value , F = ?
Putting these values in (1), we get
I = $(5000 × 0.24 × 3)
= $3600
Again,
We know
F= P+I
F = $(5000 + 3600)
= $8600
Prob.-2: Fran deposits $1000 in an
employees’ savings account at 6 percent
interest. How many months will it be
until the amount in the account is
$1100?
Solution: We know,
F = P(1 + in)
𝐅
⇒ 1 + in =
𝐏
𝐅
⇒ in = -1
𝐏
𝐅−𝐏
⇒ in =
𝐏

⇒ n =
𝐅− 𝐏
𝐏𝐢
…….(1)
Here Principal, P = 1000
Future value , F = 1100
Rate of interest, i = 6% = 6/100 = 0.06
Number of year , n = ?
Putting these values in (1), we get
 1100 − 1000
n =
1000 × 0.06
100
=
60
= 1.67 years
= 1.67 × 12 months
= 20 months (approx)

Compound Interest

Prob.-1: In problem i through iv , find the future value using

the appropriate interest rate and number of periods:
i. $150 ; 8 years ; 8 percent compounded quarterly
ii. $250 ; 3 years ; 12 percent compounded monthly
iii. $600 ; 20 years ; 8 percent compounded semiannually
iv.$1000 ; 10 years ; 16 percent compounded quarterly.

Solution: (i) We have

n
F = P (1+i) …………..(1)
Here Principal, P = 150
𝟖%
Rate of interest, i = 8% (Quarterly) = = 2% = 0.02
𝟒
Total number of period, n = 8 × 4 period = 32
Future value , F = ?
 From (1) we get
F = 150 (1 + 0.02)32
= 150 (1.02)32
= 150 × 1.88 ; by calculator
= $282
Hence the future value is $282.

Solution: (ii) We have

F = P (1+i)n………..(1)

Here Principal, P = 250

Rate of interest, i = 12% (Monthly) =
𝟏𝟐%
= 1% = 0.01
𝟏𝟐
Total number of period, n = 3 ×12 period
= 36
Future value , F = ?
From (1) we get
F = 250 (1 + 0.01)36
= 250 (1.01)36
= 250 × 1.430768784 ; by calculator
= $357.69

Solution: (iii) We have

F = P (1+i)n……………………..(1)
 Here Principal, P = 600
𝟖%
Rate of interest, i = 8% (Semiannually) = =
𝟐
4% = 0.04
Total number of period, n = 20 × 2 period = 40
Future value , F = ?
From (1) we get
F = 600 (1 + 0.04)40
= 600 (1.04)40
= 600 × 4.801020628 ; by calculator
= $2880.61
Hence the future value is $2880.61.
Solution: (iv) We have
F = P (1+i)n……………………..(1)
Here Principal, P = 1000
Rate of interest, i = 16% (Quarterly) =
𝟏𝟔%
= 4% = 0.04
𝟒
Total number of period, n = 10 × 4 period =
40
Future value , F = ?
From (1) we get
F = 1000 (1 + 0.04)40
= 1000 (1.04)40
= 1000 × 4.801020628 ; by calculator
= $4801.02
Hence the future value is $4801.02.
Prob.-2: How many years will it take at 7 percent
compounded annually for $5000 to amount to
$20000 ?
Solution: We have
n
F = P (1+i) ………..(1)
Here Principal, P = 5000
Rate of interest, i = 7% = 0.07
Total number of period, n = ?
Future value , F = 20000
From (1) we get
2000 = 5000 (1 + 0.07)n
⇒ 20000 = 5000 (1.07)n
𝟐𝟎𝟎𝟎𝟎
⇒ (1.07)n =
𝟓𝟎𝟎𝟎
n
⇒ (1.07) = 4
Taking log on both sides , we get
n
log (1.07) = log4
⇒ n log(1.07) = log4
𝐥𝐨𝐠𝟒
⇒ n = 𝐥𝐨𝐠(𝟏.𝟎𝟕)
⇒ n = 20.49 year ; by calculator
Prob.-3: Find the rate of interest compounded
annually at which a sum of money will double in
20 years.
Solution: We have

F = P (1+i)n……………..(1)
Here Let Principal = P
Future value F = 2P
Rate of interest, i = ?
Total number of period, n = 20
From (1) we get
2P = P (1 + i)20
⇒ 2 = (1 + i)20
⇒ (1+ i )20 = 2
𝟏
⇒ 1+ i =𝟐 𝟐𝟎

𝟎.𝟎𝟓
⇒ i=𝟐 –1
⇒ i = 1.03 – 1 ; by calculator
⇒ i = 0.03
⇒ i = 3%
 Calculus
 Differentiation
Integration

 Indefinite Integral
 Definite Integral

Differentiation
Some Basic Formulas on
Differentiation:
𝐝 n n−1
1. x = nx
𝐝𝐱
e,g 𝐝𝐱𝐝 𝐱𝟓 = 𝟓𝐱𝟓−𝟏 = 𝟓𝐱𝟒
 𝐝 𝟐
𝐱 = 𝟐𝐱 𝟐−𝟏 = 𝟐𝐱
𝐝𝐱
d
𝑥 = 1. x1−1 = 1. x 0 = 1
dx
𝐝
2. (Constant) = 0
𝐝𝐱

d
5=0
dx

d
100 = 0
dx
d
3. emx = memx
dx
d 2x
𝑒, 𝑔 e = 2e2x
dx
d 1
4. 𝑙𝑛𝑥 =
dx 𝑥
d 1
𝑙𝑜𝑔𝑥 =
dx 𝑥
Find the differential coefficients
(derivatives) of the following
functions:
𝟒
i. 𝒚 = 𝟓𝒙 − 𝟑
+ 𝟏𝟎
𝒙𝟐
ii. 𝑦 = 2𝑥 + 3𝑒 −𝑥 + 4𝑙𝑛𝑥 + 1
1 2
iii. 𝑓(𝑥) = (𝑥 − )
𝑥
5 3 1
iv. 𝑓 = 5 + √(𝑥 2 ) − −5
√𝑥 𝑒 3𝑥

Solution:
i. Given that,
4 𝟑
𝒚 = 5𝒙 − 2 + 10
𝑥
Differentiating both sides w.r.to x,
we get
𝐝 𝐝 4
𝐲= (5𝑥 3 − 2 + 10)
𝐝𝐱 𝐝𝐱 𝑥
𝐝𝒚 d 3
d 4 d
𝑂𝑟, = 5𝑥 − 2
+ 10
𝐝𝐱 dx dx 𝑥 dx
d𝑦 d 3
d 1 d
𝑂𝑟, = 5𝑥 − . 4. 2 + 10
dx dx dx 𝑥 dx
d𝑦 d 3 d −2 d
𝑂𝑟, = 5 𝑥 − 4 𝑥 + 10
dx dx dx dx
d𝑦
𝑂𝑟, = 5. 3𝑥 3−1 − 4. (−2)𝑥 −2−1 + 0
dx
d𝑦 2 −3
𝑂𝑟, = 15𝑥 + 8𝑥
dx
ii. Given that,
𝑦 = 2𝑥 + 3𝑒 −𝑥 + 4𝑙𝑛𝑥 + 1
Differentiating both sides w.r.to x,
we get
 𝐝 𝐝
𝑦= (2𝑥 + 3𝑒 −𝑥 + 4𝑙𝑛𝑥 + 1)
𝐝𝐱 𝐝𝐱
𝐝𝒚 d d −𝑥
d d
𝑂𝑟 , = 2𝑥 + 3𝑒 + 4𝑙𝑛𝑥 + 1
𝐝𝐱 dx dx dx dx
d𝑦 d d −1.𝑥 d d
𝑂𝑟 , =2 𝑥+3 𝑒 + 4 𝑙𝑛𝑥 + 1
dx dx dx dx dx
d𝑦 1−1 −𝑥
1
𝑂𝑟 , = 2.1. 𝑥 + 3(−1)𝑒 + 4 + 0
dx 𝑥
d𝑦 4
𝑂𝑟 , = 2 − 3𝑒 −𝑥 +
dx 𝑥
iii. Given that,
2
1
𝑓(𝑥) = (𝑥 − )
𝑥 2
1 1
𝑂𝑟 , 𝑓 = 𝑥 2 − 2. 𝑥. + ( )
𝑥 𝑥
2
1
𝑂𝑟 , 𝑓 = 𝑥 − 2 + 2
𝑥
 𝑂𝑟 , 𝑓 = 𝑥 2 + 𝑥 −2 − 2
Differentiating both sides w.r.to x,
we get
d d 2
𝑓 = (𝑥 + 𝑥 −2 − 2)
dx dx
𝐝𝒇 d 2 d −2 d
𝑂𝑟 , = 𝑥 + 𝑥 − 2
𝐝𝐱 dx dx dx
d𝑓
𝑂𝑟 , = 2𝑥 + (−2)𝑥−3 − 0
dx

𝑂𝑟 ,
d𝑓
= 2𝑥 − 2𝑥 −3
dx

iv. Given that,

5 3 1
𝑓(𝑥) = 5 + √(𝑥 2 ) − 3𝑥 − 5
√𝑥 𝑒
1
5 2 )3
𝑂𝑟 , 𝑓 = 1 + (𝑥 − 𝑒 −3𝑥 − 5
𝑥5
 1 2
−
𝑂𝑟 , 𝑓 = 5𝑥 + 𝑥 − 𝑒 −3𝑥 − 5 5 3

Differentiating both sides w.r.to x,

we get
d d −
1 2
𝑓 = ( 5𝑥 5 + 𝑥 3 − 𝑒 −3𝑥 − 5)
dx dx
1 2
d𝑓 d − d d
Or, = 5𝑥 5 + 𝑥 − 3 𝑒 −3𝑥 −
dx dx dx dx
d
5
dx
1 2
d𝑓 d − d d
Or, =5 𝑥 5 + 𝑥 − 3 𝑒 −3𝑥 −
dx dx dx dx
d
5
dx
1 2
d𝑓 1 − −1 2 −1
Or, = 5. (− ) 𝑥 5 + 𝑥 3 −
dx 5 3
(−3)𝑒 −3𝑥 − 0
6 −1
d𝑓 − 2
Or, = −𝑥 5 + 𝑥 3 + 3𝑒 −3𝑥
dx 3
 Business Application of Differentiation

y = 3x + 15
Prob.-1: The total cost C for output x is
given by
C(x) = 3𝑥 2 − 2𝑥 + 4
Find: i. Cost when output is 4 units.
ii. Average cost of output of 10 units.
iii. Marginal cost when output is 3 units.

Solution:
Given that,
C = 3x 2 − 2x + 4
i. For x = 4,
C = 3.42 − 2.4 + 4
= 48 – 8 + 4
= Tk. 44
ii. We know,
TC
AC =
x
For x = 10,
C = 3.102 − 2.10 + 4
= 300 – 20 + 4
= Tk. 284
284
AC = = Tk. 28.4
10

iii. We know,
d
MC = C
dx
 d
Or, MC = (3x 2 − 2x + 4)
dx
d 2 d d
Or, MC = 3x − 2x + 4
dx dx dx
𝐝 𝟐
𝐝 𝐝
𝐎𝐫, 𝐌𝐂 = 𝟑𝐱 − 𝟐𝐱 + 𝟒
𝐝𝐱 𝐝𝐱 𝐝𝐱
𝐝 𝟐 𝐝 𝐝
𝐎𝐫, 𝐌𝐂 = 𝟑 𝐱 − 𝟐 𝐱 + 𝟒
𝐝𝐱 𝐝𝐱 𝐝𝐱
Or, MC = 3.2x 2−1 − 2.1. x1−1 + 0

Or, MC = 6x − 2
For x = 3,
MC = 6.3 − 2
= Tk. 16
Prob.-2: If the total cost of producing
p units of pen is C(p) = 0.0015p3 – 0.9p2
+ 200p + 60000 ,compute the marginal
cost at outputs (a) 100 units (b) 200
units (c) 300 units.
Solution:
Given that,
C = 0.0015p3 – 0.9p2 + 200p + 60000
We know,
d
MC = C
dp
d
= (0.0015p3 – 0.9p2 + 200p + 60000)
dp
d d d
= 0.0015 p3 – 0.9 p2 + 200 p+
dp dp dp
d
60000
dp

= 0.0015 . 3p2 – 0.9 . 2p + 200 . 1 + 0

MC = 0.0045 p 2
– 1.8p + 200
a. For p = 100,
MC = 0.0045 (100)2 – 1.8(100) + 200
= Tk. 65
b. For p = 200,
MC = 0.0045 (200)2 – 1.8(200)
+ 200
= Tk. 20
c. For p = 300,
MC = 0.0045 (300)2 – 1.8(300)
+ 200
= Tk. 65