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    MATH 1009: Basic Mathematics For Business and Economics The Mathematics of Finance Study Guide

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    sultanhsu168
    This document is a study guide for Chapter 3 of a basic mathematics textbook for business and economics students. The chapter focuses on applications of mathematics to finance. It reviews percentages and introduces compound interest, continuous compounding, and the annual percentage rate. It also reviews geometric series and applies these concepts to time value of money, present and future value of sums, and internal rate of return for investment appraisal. Solving some of these financial mathematics problems may involve high-degree equations that are beyond the level of this course but can be solved using computers.

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    MATH 1009: Basic Mathematics For Business and Economics The Mathematics of Finance Study Guide

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    sultanhsu168
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    This document is a study guide for Chapter 3 of a basic mathematics textbook for business and economics students. The chapter focuses on applications of mathematics to finance. It reviews percentages and introduces compound interest, continuous compounding, and the annual percentage rate. It also reviews geometric series and applies these concepts to time value of money, present and future value of sums, and internal rate of return for investment appraisal. Solving some of these financial mathematics problems may involve high-degree equations that are beyond the level of this course but can be solved using computers.

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    This document is a study guide for Chapter 3 of a basic mathematics textbook for business and economics students. The chapter focuses on applications of mathematics to finance. It reviews percentages and introduces compound interest, continuous compounding, and the annual percentage rate. It also reviews geometric series and applies these concepts to time value of money, present and future value of sums, and internal rate of return for investment appraisal. Solving some of these financial mathematics problems may involve high-degree equations that are beyond the level of this course but can be solved using computers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    30 views2 pages

    MATH 1009: Basic Mathematics For Business and Economics The Mathematics of Finance Study Guide

    Uploaded by

    sultanhsu168
    This document is a study guide for Chapter 3 of a basic mathematics textbook for business and economics students. The chapter focuses on applications of mathematics to finance. It reviews percentages and introduces compound interest, continuous compounding, and the annual percentage rate. It also reviews geometric series and applies these concepts to time value of money, present and future value of sums, and internal rate of return for investment appraisal. Solving some of these financial mathematics problems may involve high-degree equations that are beyond the level of this course but can be solved using computers.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    MATH 1009: Basic Mathematics for Business and Economics

    Chapter 3 The Mathematics of Finance


    Study Guide

    This is the final pre-calculus chapter before we start the main dish of the course, calculus.
    Unlike Chapters 1 and 2, this chapter focuses on applications more than mathematical concepts.
    Essentially the only new mathematical tool needed is geometric series (which is not so new
    since you should have learned that in secondary school), while we will also revisit the number
    e introduced in Chapter 2.

    Section 3.1 of the textbook consists of a review on percentages. You are expected to know
    the mathematics well, so this section will not be covered in the lecture videos. Some applications
    of percentages have also been mentioned in the textbook, and they are straightforward so you
    should be able to understand them well with your background in economics without much
    difficulty — except perhaps that you may not remember the meanings of the terms Lasperyres
    index and Paasche index — and it is not necessary to remember these names in this course
    anyway. You should take a quick look at this section of the textbook to ensure that you indeed
    know the mathematics well.

    3A. Interest problems

    This section deals with various compound interest problems, and it is based mainly on
    Section 3.2 of the textbook. There are two main things to learn in this section:

    ˆ The concept of continuous compounding — a particular example (a principal of $1, an


    interest rate of 100% per annum and a period of 1 year) was mentioned in Chapter 2 in
    introducing the number e. Here we look at the more general case where these parameters
    could change.

    ˆ The concept of annualised percentage rate (APR) — with so many different ways to
    quote interest rates in real life, the APR provides a common ground for comparison. It
    should be noted that you may see different definitions of the APR in other courses. The
    definition adopted in this course agrees with that used in our textbook, and also agrees
    with the one adopted by the Hong Kong Bank Association.

    3B. Geometric series

    In this part we review the mathematics of geometric series which you should have learned
    in secondary school. The materials can be found in Section 3.3 of the textbook, and the
    summation notation is discussed in ‘Formal Mathematics’ at the end of Chapter 3.

    1
    You should try to relate the sum to infinity of a geometric series with the concept of limits
    introduced in Chapter 2. Basically as you keep adding terms of a geometric sequence the
    accumulated sum will get closer and closer to the sum to infinity provided that the series is
    convergent. Hence the sum to infinity can be considered as a limit. You should also be able to
    determine whether a geometric series is convergent based on the common ratio.

    3C. Topics in financial mathematics (I)

    In this part we study more advanced problems involving interest rates in financial mathe-
    matics, some of which require the mathematical tool of geometric series to solve. The central
    notion is the time value of money, which leads to the concepts of present value and future value
    of a sum of money.

    The problems in this part mainly come from Section 3.3 of the textbook, although the
    textbook introduces the concept of future value in Section 3.2 and that of future value in
    Section 3.4.

    3D. Topics in financial mathematics (II)

    In this part we mainly study investment appraisal problems, and the materials are based
    largely on Section 3.4 of the textbook. We introduce the notion of internal rate of return
    (IRR) which, having essentially the same meaning as the APR, provides a common ground for
    comparing different investment projects. It should be noted that solving for the APR or IRR
    often involves an equation of high degree, which is generally beyond the level of this course.
    We can however solve these equations with the help of computers.

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