Financial Mathematics

Question 1

What is the simple interest formula?

Answer 1

I = PRN

Question 2

What is the compound interest formula?

Answer 2

A = P (1 + r)ⁿ

Question 3

How do you calculate compound interest that has been earned or is owed?

Answer 3

I = FV - PV

Question 4

What is the future value formula?

Answer 4

FV = PV(1 + r)ⁿ

Question 5

What is the salvage value formula?

Answer 5

S = V_o (1 - r)ⁿ

Question 6

How do you calculate the rate of depreciation?

Answer 6

r = 1 - ⁿ√S/V_o

Question 7

What does each variable represent in the salvage value formula?

Answer 7

S = Vo(1 − r)ⁿ
S – Salvage value or current value of an item.

V_o – Purchase price of the item. Value of the item when n = 0.

r – Rate of depreciation per time period expressed as a decimal.

n – Number of time periods.

Question 8

What is the dividend yield formula?

Answer 8

Yield (%) = Div per share/ current market price per share x 100

Question 9

What is the recurrence relation formula to calculate an investment?

Answer 9

V_n+1 =V_n(1+r)+D

Question 10

What is the recurrence relation formula to calculate a loan?

Answer 10

V_n+1 =V_n(1+r)−D

Question 11

What are the components of the recurrence relation formula?

Answer 11

V_{n + 1} – Value of the investment or loan after (n + 1) payments

V_n – Value of the investment or loan after (n) payments

r – Rate of interest per compounding period expressed as a decimal

D – Payment made per compounding period

Question 12

Finish the sentence…

“A recurrence relation uses the ?** result to generate the **? value in recurring calculations.”

Answer 12

A recurrence relation uses the previous result to generate the next value in recurring calculations.

Question 13

What is the formula used to calculate the future value of an investment?

Answer 13

FV = P x I

FV - Future Value

P - Periodic payment and I = interest factor from a table

I - Interest

Question 14

What is the formula used to calculate interest on annuities?

Answer 14

Interest = FV - Total contributions

Question 15

What formula is used to calculate the present value of payment when given the future amount? (formula when not given a table)

Answer 15

A = P (1 + r)ⁿ

A - Future Amount

P - Present value

Question 16

What is an annuity?

Answer 16

An annuity is a periodic payment of the same value. e.g paying the bank $100 every month for a year.

Question 17

What formula is used to calculate the present value of payment when not given the present value? (formula when given a table)

Answer 17

PV = P x I

PV - Present Value

P - Periodic payment

I - Interest

Question 18

How do you work out the periodic payment?

Answer 18

P = PV/I

PV - The amount of loan

P - Periodic payment

I - Interest