APPLICATIONS FOR MATHEMATICS OF
FINANCE
1. (Compound Amount) Suppose that $1000 is invested in a savings bank which earns interest at a rate of 8 percent per year compounded annually. If all interest is left in the account, what will the account balance be after 10 years?
2. (Effective Interest Rate) The nominal interest rate on investment is 12 percent per year. Determine the effective annual interest rate if interest is compounded quarterly.
3. (Mortgage Loan) A mortgage loan of $90,000 with interest computed at 9.5 percent per year compounded monthly.
a. Determine the monthly mortgage payment if the loan is to be repaid over 25 years.
b. Compute the total payments and total interest under the 25-year loan period.

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4. (Depreciation) A salesperson buys a new car for
$14,000 and depreciates it over 5 years, after which time its salvage value is $2000. Find the amount depreciated and the car’s value at the end of each of the 5 years using
a. straight-line depreciation.
b. sum-of-the-digits depreciation.
c. fixed-percentage depreciation.
5. (Sum of Annuity)A mother wishes to set up a savings account for her son’s education. She plans on investing $750 when her son is 6 months old and every 6 months thereafter. The account earns interest of 8 percent per year, compounded semiannually. a. To what amount will the account grow by the time of her son’s 18th birthday?
b. How much interest will be earned during this period? 2

6. (Investment Appraisal) An investment project requires an initial outlay of $8000 and will produce a return of $17,000 at the end of five years. Use the (a) net present value and (b) internal rate of return methods to decide whether this is worthwhile if the capital could be invested elsewhere at 15% compounded annually.
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SUGGESTED ANSWERS:

$1000 (1  0.08 )10  $2158 .92
1.
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