Financial Mathematics

Question 1

What are the two types of interest calculations?

Answer 1

Simple interest and compound interest

Question 2

What is the formula for calculating simple interest and what does each term represent?

Answer 2

A = P(1 + in)
A - final amount
P - principal amount/starting value
i - interest rate(written as a decimal)
n - number of time periods

Question 3

What is the formula for calculating compound interest and what does each term represent?

Answer 3

A = P(1 + i)^n
Terms are the same as simple interest.

Question 4

True/False. Hire Purchase agreements are always calculated using compound interest.

Answer 4

False. They are calculated using simple interest.

Question 5

In a hire purchase problem, how do you determine the amount owed if there is a deposit paid?

Answer 5

Amount owing = cash price - deposit

Question 6

How do you calculate monthly repayments on a hire purchase problem?

Answer 6

Step 1: Determine the final amount including interest
Step 2: Divide this amount by the total number of months

Question 7

In hire purchase problems, what does the A represent?

Answer 7

The final amount a customer will pay. This is cash price + interest

Question 8

In hire purchase problems, what does the P represent?

Answer 8

The cash price of the item bought. If there is a deposit paid, P becomes cash price - deposit.