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Financial Mathematics
Master. Son Pham Van
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Chapter 1: Interest
Interest income or interest is the fee paid by
the borrower to the owner.
Interest income or interest is the amount
protrude compared to the initial capital
investment.
The simple interest method is a method in
which the interest of any period is not
included in the capital for the next interest
period.
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Chapter 1: Interest
Simple interest method is a method in which
the interest of any period is not included in
the capital for the next interest period.
Compound interest method is a method in
which the interest of a given period is
included in the capital for the next period and
so on until the end of the investment period.
What is the differences between 2 methods ?
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Chapter 1: Interest
What is the difference between two methods ?
The interest of one period
Total interest of two or more periods.
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Chapter 1: Interest
Simple Interest Method
Formula: I = C.t.n
Denote
C: Capital Investment.
t: Interest rate per period.
n: Number of periods.
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Chapter 1: Interest
Multiplication & Fixed quotient Method
How to calculate the total interest of two
or more investments quickly?
Denote:
N = C x n
D = 36000/t
The total interest is I = C
j
.t.n
j
/ 36000
I = N
j
/ D
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Chapter 1: Interest
The average interest rate
Assuming an investment C is invested for a
period of n days, but with different rates t
1
, t
2
,
t
3
, ..., t
m
corresponding to individual time n
1
, n
2
,
n
3
, ..., n
m
days. Denote C is the amount of
principal and interest at the end of period.
C is the total amount of principal (C) and interest
at the end of period are invested in n days with
interest rate t.
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Chapter 1: Interest
The average interest rate


|
|
|
|
|
.
|

\
|
+ = + + + + =

=
36000
.
1
36000
. .
......
36000
. .
36000
. .
1
2 2 1 1
'
m
j
j j
m m
n t
C
n t C n t C n t C
C C

=
=
m
j
j
n n
1
|
.
|

\
|
+ = + =
36000
.
1
36000
. .
'
n t
C
n t C
C C
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Chapter 1: Interest
The average interest rate




t is the average interest rate

=
= =
= =
m
j
j
m
j
j j
m
j
j j
n
n t
n
n t
t
1
1 1
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Chapter 1: Interest
Compound Interest Method
Supposed that there is an initial capital
investment during the period T of n evenly.
The interest rate per period is i. The
calculation of compound interest and capital to
be made at the end of each period.
Call C
j
( ) is the amount, including principal
and interest at the end of period j.
n j : 1 =
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Chapter 1: Interest
Compound Interest Method

( )
n
n
i C C + = 1
0
( ) | | 1 1
0
+ =
n
i C I
( )
1
0 1
1 : i C C have We + =
( )
1
1 2
1 i C C and + =
( ) on so and i C C So
2
0 2
1+ =
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Chapter 1: Interest
Comparison between simple interest and
Compound Interest Methods
Denote: i is interest rate.
Simple interest Y
1
= I = C.i.n
Compound interest: Y
2
= I = C.[(1+i)
n
-1 ]
n
Y
1

Y
2

i
Y
1
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Chapter 1: Interest
The average interest rate
In a sense, the average interest rate is
calculated on compound interest method like
calculation of simple interest method.



( ) ( ) ( ) ( )
n n
m
n n
n
i C i i i C C
m
+ = + + + = 1 1 ..... 1 1
0 2 1 0
2 1

=
j
n n
( ) ( )
n
m
j
n
j
i i
j
+ = +
[
=
1 1
1
So, the average interest rate
( ) 1 1
1
+ =
[
=
n
m
j
n
j
j
i i
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Chapter 1: Interest
Equivalent Interest rate of the simple
interest method and compound interest
method
Let A, a be two different terms of interest rates,
where A> a.
i
A
, i
a
the term interest rates A, a.
Supposed that C is capital investment with A
period, and the amount received at the end of
period includes capital and interest which is
C'.
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Chapter 1: Interest
According to the simple interest method
C = C(1+i
A
) = C(1+ n.i
a
)
i
A
= n.i
a

i
A
is equivalent to i
a

According to the compound interest method
C = C(1+i
A
) = C(1+ i
a
)
n
(1+i
A
) = (1+ i
a
)
n

i
A
is equivalent to i
a
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Chapter 1: Interest
Calculation of the compound interest in
case n is not a integer
Calculate C
n
= C
0
(1+i)
n
. with n isnt a integer.
Perform n = k + u / v with k, u, v, integers and u
<v.
Commercial Method:
( ) ( ) ( ) ( ) ( )
|
.
|

\
|
+ + = + + = + = + =
+
i
v
u
i C i i C i C i C C
k v u k v u k n
n
1 1 1 1 1 1
0
/
0
/
0 0
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Chapter 1: Interest
Calculation of the compound interest
rate in case n is not an integer
Fair method


Adjusting the interest period so that n is an
integer
( ) ( ) ( )
v
u v k
v u k n
n
i C i C i C C
+
+
+ = + = + =
.
0
/
0 0
1 1 1