Mathematics Of Finance

The techniques of mathematics useful for the financial institutions like banks, investment collecting agencies, insurance companies and leasing companies etc, included in the mathematics of finance. Community used techniques of business mathematics included in the mathematics of finance are based on the concept of simple interest, compound interest and Annuity.

Interest Interest is defined as the additional amount of money paid / received on each period at a stated rate on borrowed capital or investment. Interest is further classified into two classes i.e Simple Interest and Compound Interest.

Simple And Compound Interest

The interest earned on capital, when the interest is withdrawn as it is paid, then it is known as simple interest. Thus, in simple interest the capital remains fixed. While in compound interest the earned interest in each period is added to the original capital as it earned. Thus the capital, and therefore the interest on it, increases year by year.

Annuity

The idea of an annuity is based on the fact that every one of us desires to have a large amount in future but few of us are in a position to save an amount at present which after earning interest may become the amount as desired by us in future. However majority of us may be in a position to save small amount at regular interval of time to meet the future requirements.

The regular periodic sequence of savings / payments / installments charged with compound interest is called an annuity

Characteristics i.The amount of payment is usually identical throughout the term of annuity. ii.The interval of time in each payment period of an annuity is usually constant such as annually, half annually, quarterly or monthly. iii.Growth rate of money remain constant throughout the term of annuity and charged compounded. The rate of interest usually mentioned on annual basis but maybe compounded half annually quarterly or monthly basis.

Applications 1.Business of insurance companies 2.Business of leasing companies 3.Business of goods sold on installments 4.Business of house building finance corporation 5.Business of Bound or Debenture 6.Amortization of debt etc. Types An annuity may be classified in any of the following three classes i.Ordinary Annuity ii.Annuity Due iii.Perpetuity

Ordinary Annuity An annuity is considered as to be ordinary annuity if each payment is made at the end of each payment period and continue for a definite period.

Annuity Due An annuity is considered as to be annuity due if each payment is made at the beginning of each payment period and continue for a definite period.

Perpetuity An annuity is considered as to be perpetuity if the payment starts on a certain date and continue for indefinite period.

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