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 Mathematics for Finance
Advances in Applied Mathematics

INTRODUCTION TO FINANCIAL MATHEMATICS

Introduction to Financial Mathematics is ideal for an introductory undergraduate
course. Unlike most textbooks aimed at more advanced courses, the text motivates
students through a discussion of personal finances and portfolio management. The

INTRODUCTION
author then goes on to cover valuation of financial derivatives in discrete time, using
all of closed form, recursive, and simulation methods.

The text covers nearly all of the syllabus topics of the Financial Mathematics Ac-

TO FINANCIAL
tuarial examination, providing students with the foundation they require for future
studies and throughout their careers. It begins by covering standard material on
the mathematics of interest, including compound interest, present value, annuities,
loans, several versions of the rate of return on an investment, and interest in con-

MATHEMATICS
tinuous time.

The text explains how to value bonds at their issue dates, at coupon times, between
coupon times, and in cases where the bonds are terminated early. Next, it supplies a
rapid-fire overview of the main ideas and techniques of discrete probability, includ-
ing sample spaces and probability measures, random variables and distributions,
expectation, conditional probability, and independence.

The author introduces the basic terminology of stocks and stock trading. He also
explains how to derive the rate of return on a portfolio and how to use the idea of
risk aversion to model the investor tradeoff between risk and return. The text also
discusses the estimation of parameters of asset models from real data.

The text closes with a detailed discussion of how to value financial derivatives us-
ing anti-arbitrage assumptions. The one-step and multi-step cases are covered,
and exotic options such as barrier options are also introduced, to which simulation
methods are applied.

Many of the examples in the book involve numerical solution of complicated non-

Kevin J. Hastings
linear equations; others ask students to produce algorithms which beg to be imple-
mented as programs. For maximum flexibility, the author has produced the text
without adhering to any particular computational platform

A digital version of this text is also available in the form of Mathematica® notebooks
Hastings
that contain additional content.

K25703

w w w. c rc p r e s s . c o m

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Contents

Preface xi

1 Theory of Interest 1
1.1 Rate of Return and Present Value . . . . . . . . . . . . . . . . . 1
1.2 Compound Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.2.1 Geometric Sequences and Series . . . . . . . . . . . . . . . 6
1.2.2 Compound Interest . . . . . . . . . . . . . . . . . . . . . . 8
1.2.3 Discounting . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.2.4 Present Value and Net Present Value . . . . . . . . . . . . 14
1.3 Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.3.1 Ordinary Annuities . . . . . . . . . . . . . . . . . . . . . . 20
1.3.2 Annuities Due . . . . . . . . . . . . . . . . . . . . . . . . 28
1.3.3 Variations on Annuities . . . . . . . . . . . . . . . . . . . 32
1.4 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
1.4.1 Loan Payments . . . . . . . . . . . . . . . . . . . . . . . . 47
1.4.2 Loan Amortization . . . . . . . . . . . . . . . . . . . . . . 50
1.4.3 Retrospective and Prospective Forms for Outstanding Bal-
ance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
1.4.4 Sinking Fund Loan Repayment . . . . . . . . . . . . . . . 56
1.5 Measuring Rate of Return . . . . . . . . . . . . . . . . . . . . . . 64
1.5.1 Internal Rate of Return on a Transaction . . . . . . . . . 64
1.5.2 Approximate Dollar-Weighted Rate of Return . . . . . . . 69
1.5.3 Time-Weighted Rate of Return . . . . . . . . . . . . . . . 73
1.6 Continuous Time Interest Theory . . . . . . . . . . . . . . . . . . 80
1.6.1 Continuous Compounding: Effective Rate and Present Value 80
1.6.2 Force of Interest . . . . . . . . . . . . . . . . . . . . . . . 85
1.6.3 Continuous Annuities . . . . . . . . . . . . . . . . . . . . 88
1.6.4 Continuous Loans . . . . . . . . . . . . . . . . . . . . . . 91

2 Bonds 99
2.1 Bond Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
2.1.1 Bond Value at Issue Date . . . . . . . . . . . . . . . . . . 101
2.1.2 Bond Value at Coupon Date . . . . . . . . . . . . . . . . 107
2.1.3 Recursive Approach: Bond Amortization Table . . . . . . 110

vii
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viii CONTENTS

2.2 More on Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

2.2.1 Value of a Bond between Coupons . . . . . . . . . . . . . 120
2.2.2 Callable and Putable Bonds . . . . . . . . . . . . . . . . . 126
2.2.3 Bond Duration . . . . . . . . . . . . . . . . . . . . . . . . 130
2.3 Term Structure of Interest Rates . . . . . . . . . . . . . . . . . . 136
2.3.1 Spot Rates, STRIPS, and Yield to Maturity . . . . . . . . 138
2.3.2 Forward Rates and Spot Rates . . . . . . . . . . . . . . . 141

3 Discrete Probability for Finance 151

3.1 Sample Spaces and Probability Measures . . . . . . . . . . . . . . 153
3.1.1 Counting Rules . . . . . . . . . . . . . . . . . . . . . . . . 155
3.1.2 Probability Models . . . . . . . . . . . . . . . . . . . . . . 160
3.1.3 More Properties of Probability . . . . . . . . . . . . . . . 162
3.2 Random Variables and Distributions . . . . . . . . . . . . . . . . 169
3.2.1 Cumulative Distribution Functions . . . . . . . . . . . . . 176
3.2.2 Random Vectors and Joint Distributions . . . . . . . . . . 178
3.3 Discrete Expectation . . . . . . . . . . . . . . . . . . . . . . . . . 186
3.3.1 Mean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
3.3.2 Variance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
3.3.3 Chebyshev’s Inequality . . . . . . . . . . . . . . . . . . . . 197
3.4 Conditional Probability . . . . . . . . . . . . . . . . . . . . . . . 203
3.4.1 Fundamental Ideas . . . . . . . . . . . . . . . . . . . . . . 203
3.4.2 Conditional Distributions of Random Variables . . . . . . 214
3.4.3 Introduction to Markov Processes . . . . . . . . . . . . . 219
3.4.4 Conditional Expectation . . . . . . . . . . . . . . . . . . . 223
3.5 Independence and Dependence . . . . . . . . . . . . . . . . . . . 235
3.5.1 Independent Events . . . . . . . . . . . . . . . . . . . . . 235
3.5.2 Independent Random Variables . . . . . . . . . . . . . . . 238
3.5.3 Dependence: Covariance and Correlation . . . . . . . . . 245
3.6 Estimation and Simulation . . . . . . . . . . . . . . . . . . . . . 256
3.6.1 The Sample Mean . . . . . . . . . . . . . . . . . . . . . . 257
3.6.2 Sample Variance, Covariance, and Correlation . . . . . . . 262
3.6.3 Simulation for Estimation . . . . . . . . . . . . . . . . . . 269

4 Portfolio Theory 281

4.1 Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
4.1.1 Common Stocks, Preferred Stocks, and Stock Indices . . . 282
4.1.2 Stock Transactions . . . . . . . . . . . . . . . . . . . . . . 286
4.1.3 Long and Short Positions . . . . . . . . . . . . . . . . . . 290
4.2 Portfolios of Risky Assets . . . . . . . . . . . . . . . . . . . . . . 297
4.2.1 Asset Rates of Return: Modeling and Estimation . . . . . 298
4.2.2 Portfolio Rate of Return . . . . . . . . . . . . . . . . . . . 302
4.2.3 Risk Aversion . . . . . . . . . . . . . . . . . . . . . . . . . 307
4.3 Optimal Portfolio Selection . . . . . . . . . . . . . . . . . . . . . 312
4.3.1 Two-Asset Problems . . . . . . . . . . . . . . . . . . . . . 313
4.3.2 Multiple-Asset Problems . . . . . . . . . . . . . . . . . . . 316

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CONTENTS ix

5 Valuation of Derivatives 325

5.1 Basic Terminology and Ideas . . . . . . . . . . . . . . . . . . . . 326
5.1.1 Derivative Assets . . . . . . . . . . . . . . . . . . . . . . . 326
5.1.2 Arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . . 330
5.1.3 Arbitrage Valuation of Futures . . . . . . . . . . . . . . . 331
5.2 Single-Period Options . . . . . . . . . . . . . . . . . . . . . . . . 337
5.2.1 Pricing Strategies . . . . . . . . . . . . . . . . . . . . . . . 338
5.2.2 Put–Call Parity . . . . . . . . . . . . . . . . . . . . . . . . 343
5.2.3 ∆–Hedging . . . . . . . . . . . . . . . . . . . . . . . . . . 344
5.3 Multiple-Period Options . . . . . . . . . . . . . . . . . . . . . . . 350
5.3.1 Martingale Valuation . . . . . . . . . . . . . . . . . . . . . 351
5.3.2 Valuation by Chaining . . . . . . . . . . . . . . . . . . . . 358
5.4 Valuation of Exotic Options and Simulation . . . . . . . . . . . . 365
5.4.1 Exotic Options . . . . . . . . . . . . . . . . . . . . . . . . 366
5.4.2 Approximate Valuation by Simulation . . . . . . . . . . . 378

Appendix: Answers to Selected Exercises 389

Bibliography 401

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Preface

A number of years ago I started to develop a keen interest in mathematical

problems in economics and finance. It was a natural progression for a probabilist
with an applied bent, because activity in this area has been accelerating and it
provides a rich set of materials to which undergraduates can apply themselves.
I was always impressed with the text resources that I found and learned from,
many of which are listed in the bibliography. But I found it curious that they
differed so much from one another. In addition, it seemed to me that books were
mostly pitched at the very advanced undergraduate or introductory graduate
level, given their emphasis on continuous models and stochastic calculus. So I
began to think that a resource at a more introductory undergraduate level would
be a valuable addition to the field, and as well might serve to standardize subject
matter in a useful way and prepare students better to embark on their studies
in financial mathematics.
The organization of the book is as follows.
Chapter 1 covers fairly standard material on the mathematics of interest,
including compound interest and present value, annuities and loans, several ver-
sions of the rate of return on an investment, and interest in continuous time.
These topics appear in courses even at the level of finite mathematics, although
I have attempted to be more rigorous here and to emphasize real problem solving
as opposed to template “plug-and-chug” drill. Such problem solving depends on
understanding basic concepts well so as to apply them in new situations, and the
examples and exercise sets take that approach. I have tried to roughly follow the
pattern established in the excellent books by Federer Vaaler [5] and Broverman
[2]. The material in this and the following chapter is particularly appropriate for
students who want to get started preparing for the FM (Financial Mathematics)
Actuarial Exam.
In Chapter 2 we show how to value bonds, at their issue dates, at coupon
times, between coupon times, and in the case where the bonds may be terminated
early by either the issuer or the holder. There is also a brief subsection on bond
duration, a kind of average time of payment of a bond. This leads to a lengthy
section on the term structure of interest rates, in which the concepts of spot
rates and forward rates of interest play starring roles.
As a probabilist, I am rather surprised at the degree to which problems in the
theory of interest are restricted to deterministic situations where interest rates
are known perfectly in advance, nobody ever defaults on loans or skips payments,

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xii PREFACE

dividends are fixed and known, etc. So one of the distinctive features of this book
is Chapter 3 on discrete probability for finance. It is a rapidfire pass through
the main ideas and techniques of discrete probability: sample spaces and prob-
ability measures, random variables and distributions, expectation, conditional
probability, and independence. Throughout this chapter, there is emphasis on
probability in the context of financial problems. For example, problems from
Chapter 1 involving interest rates that change occasionally are generalized to
problems in which these rates are random variables instead of known constants.
The chapter also lays the groundwork for the ensuing material on portfolios of
risky assets and valuation of simple derivatives in the next two chapters. The
binomial branch model for the motion of risky assets over time is introduced here
and used as a common theme. There is a bonus section at the end of Chapter
3 on estimation and simulation. In this chapter, we illustrate the use of data
to estimate means, variances, and covariances of rates of return on assets, and
we develop Monte Carlo simulation algorithms to study the behaviors of finan-
cial assets. The latter is important for the increasingly prevalent applications in
which closed form answers are difficult to get.
I have always been interested in the problem of optimal portfolio selection,
which integrates ideas and techniques from calculus, finance, and probability.
It also seems strange to me that this subject matter does not find its way into
the financial mathematics curriculum anywhere. In Chapter 4 we introduce the
basic terminology of stocks and stock trading, and then go on to derive the rate
of return on a portfolio, and use the idea of risk aversion to model the investor
tradeoff between risk and return. Students will solve problems with multiple
independent assets, with a risk-free asset like a bond included in the mix, and
with correlated assets. There is a peek at the deeper idea of the market portfolio,
which is a key idea in the famous Capital Market Theory which is covered in
more advanced courses. Besides the earlier material and the introduction to
probability, this is another important way in which this book serves as a very
good bridge to advanced work.
Much of the thrust in modern finance has been in the direction of valuing
assets that are derivative of some more basic underlying asset in the market.
This is the topic of Chapter 5, the last chapter. The easiest examples are futures
and European options, but the results in this chapter apply to more general
derivatives. As is normal in the literature, the theme is the use of anti-arbitrage
assumptions to enforce initial values of these derivatives. Both single-period and
multiple-period derivatives are valued, assuming a binomial branch model for
the underlying asset. The technique of chaining is used heavily in the chapter,
which my experience indicates is intuitively appealing to many students. Again
a glimpse of deeper things is given to the student in the form of martingale
characterization of solutions, which is the modern approach to the problem.
Another bonus section appears at the end of the book, in which some non-
vanilla options are valued (e.g., American options and barrier options), and the
use of simulation to value derivatives is practiced.
Problem solving in this book assumes at least the use of a good calculator,
but my point of view is that more sophisticated tools are widely available and

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PREFACE xiii

should not be ignored. Many of the most interesting examples in the book in-
volve numerical solution of complicated non-linear equations; others ask students
to produce algorithms which beg to be implemented as programs. For maximum
flexibility, I have produced the print version of this text without adhering to any
particular computational platform. There are several popular symbolic algebra,
numerical and graphical packages, but my particular favorite is Mathematica R .
This book can be obtained digitially in the form of Mathematica notebooks, one
per chapter, with enhanced material and computation. Besides its adaptable
general purpose functions that are perfect for numerical solution of equations,
graphics, and animation, Mathematica has some special financial functions, such
as TimeValue for time valuations of payments, and FinancialData for importing
current and historical financial data in real time. Mathematica also is a program-
ming language with sophisticated random number simulation that works well for
the kinds of simulations illustrated in this book. The experience of studying and
interacting with the text is greatly enhanced by the use of Mathematica.
It is my sincere hope that this text will be a valuable resource for students,
and moreover that it will stimulate the creation of new coursework in mathemat-
ics departments that will help to draw students into the fascinating and growing
area of financial mathematics.
I would be remiss not to thank the folks at Taylor & Francis for their help,
including Marsha Pronin and Bob Ross. I also have a special fondness for all of
the students I have taught, and who have taught me and kept me honest. This
project benefited tremendously from their input, and they have helped me to
find quite a few errors. Any errors that are left are entirely my responsibility,
not theirs. But don’t tell them that.

Kevin J. Hastings

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Chapter 1

Theory of Interest

We begin our study of financial mathematics in this chapter by introducing the

key concepts of rate of return and present value
value. With the stage thus set, we
will be prepared to investigate a number of important ideas in the theory of
interest: compound interest, annuities, loan repayment, and the valuation of
bonds. Prerequisite mathematics for the first few sections of this chapter, in
which time moves discretely, is simply standard precalculus material with an
emphasis on geometric sequences and series (which will be reviewed). At the
end of the chapter we will see how the ideas extend to continuous time models,
for which both differential and integral calculus will be necessary. By the end
of the chapter students should be prepared to make educated decisions in many
financial situations in their personal lives. The groundwork for further study in
financial mathematics is laid as well, including study of actuarial mathematics
and preparation for the FM exam that is administered by the major actuarial
societies. For this purpose, you may find the references Federer Vaaler [5] and
Broverman [2] to be very useful. Both Chapters 1 and 2 of this book are heavily
influenced by these works. Furthermore, the financial services industry is con-
cerned with how to value firms and tradable assets, and students will acquire
the background to continue the pursuit of problems related to this important
area.

1.1 Rate of Return and Present Value

In this section we explore the two most fundamental and far-reaching ideas in
financial mathematics: the rate of return on an investment or a loan, and the
present value of a future amount of money. Let us consider an investment sit-
uation in which there are two times: “now” and “later,” symbolized by times
t0 and t1 . For simplicity, we may sometimes assume that t0 = 0 and t1 = 1.
An amount of money A0 = A (t0 ) is invested at time t0 , and its value at time
t1 is A1 = A (t1 ). In general, we will use a function A(t) to represent the total
accumulated value of an investment at time t. We can measure the performance

1
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2 CHAPTER 1. THEORY OF INTEREST

of the investment by its gain in value per dollar invested, which gives rise to the
following definition.

Definition 11. The rate of return or effective rate of interest on the investment
is:

A1 − A0 A (t1 ) − A (t0 )
R= = . (1.1)
A0 A (t0 )
Notice that, if we solve for the final, future value A (t1 ) in Equation (1.1), we
obtain:

A (t1 ) = A (t0 ) (1 + R). (1.2)

Remark 11. We can consider a loan of A0 dollars to a borrower as an investment
by the lender at time t0 . If the borrower agrees to pay back A1 to the lender
at time t1 , then the lender’s rate of return on this investement would be given
by Equation (1.1). But, from the borrower’s point of view, the right side of this
equation is also called the effective interest rate charged to the borrower for this
loan on the time interval [t0 , t1 ].

Simple interest
Example 11. (Simple interest) A bank offers interest on a checking account such
that the gain in value over a period in which the beginning balance is B and no
deposits or withdrawals are made is proportional to both the balance and the
time elapsed t (in units of years). The proportionality constant r is called the
simple interest rate
rate. Then the gain in value under simple interest is:

A(t) − A(0) = r · B · t. (1.3)

So the final value at time t is

A(t) = B + r · B · t = B(1 + r · t). (1.4)

For simple interest situations, the value of the investment is therefore a linear
function of time. If the balance begins in a particular month at $1000, and the
account offers a 1% per dollar per year interest rate, then the account value after
a week (i.e., 1/52 of a year) of no account activity is:
 
.01
A(1/52) = $1000 1 + = $1000.19.
52
Example 22. Suppose now that there are two times t1 and t2 after the initial
time when we observe the value of an investment. Then we could talk about
the rates of return over time intervals [t0 , t1 ], [t1 , t2 ], or [t0 , t2 ], which would be,
respectively,

A (t1 ) − A (t0 ) A (t2 ) − A (t1 ) A (t2 ) − A (t0 )

R01 = , R12 = , R02 = .
A (t0 ) A (t1 ) A (t0 )

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1.1. RATE OF RETURN AND PRESENT VALUE 3

If $500 is invested initially and the rate of return on [t0 , t1 ] is 3% while the rate
of return on [t1 , t2 ] is 2%, find the rate of return on [t0 , t2 ].

Solution
Solution. The strategy is to first find A (t1 ) using the given rate of return on
[t0 , t1 ], then use it and the rate of return on [t1 , t2 ] to find A (t2 ), and finally
substitute that into the formula for R02 .

A (t1 ) = A (t0 ) (1 + R01 )

= $500(1.03)
= $515
A (t2 ) = A (t1 ) (1 + R12 )
= $515(1.02)
= $525.30
Therefore,

A (t2 ) − A (t0 ) $525.30 − $500

R02 = = = .0506. 
A (t0 ) $500
If you look at the details of the computation in Example 2, you can generalize
an approach to find the final value and the rate of return on the larger interval
[t0 , t2 ] in terms of the rates of return in the subintervals. We had both:

A (t1 ) = A (t0 ) (1 + R01 ) and A (t2 ) = A (t1 ) (1 + R12 ) ,

and thus

A (t2 ) = A (t0 ) (1 + R01 ) (1 + R12 ) , (1.5)

which gives the overall rate of return as:

A(t2 ) − A(t0 )
R02 =
A(t0 )
A(t0 )(1 + R01 )(1 + R12 ) − A(t0 )
=
A(t0 )
= (1 + R01 )(1 + R12 ) − 1. (1.6)

Checking the numerical result in the example,

R02 = (1 + .03)(1 + .02) − 1 = .0506.

Equations (1.5) and (1.6) are easy to extend to multiple time periods.

Example 33. If a loan of $1000 is made at simple interest with a repayment of

$1100 at the end of 2 years, what is the corresponding simple interest rate per
year?

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4 CHAPTER 1. THEORY OF INTEREST

Solution
Solution. By Equation (1.4), the interest rate r satisfies the equation

 
1 1100
A(2) = $1100 = $1000(1 + r · 2) =⇒ r = −1 = .05. 
2 1000

Next we introduce the key element in the valuation of many financial quan-
tities. It provides a common yardstick against which we can compare the values
of different sums earned at different times.

Definition 22. The present value of a future amount A (t1 ) at a current time t0
using an effective rate of R in [t0 , t1 ] is the amount that would need to be invested
at t0 in order to accumulate to A (t1 ), which is

A (t0 ) = (1 + R)−1 A (t1 ) . (1.7)

Equation (1.7) follows directly from Equation (1.2). We sometimes call the ex-
pression (1 + R)−1 the discount factor that converts the future value A (t1 ) to
the present value A (t0 ).

Example 44. Find the present value under simple interest at rate 4% per year of
an amount of $10,000 in 10 years.

Solution
Solution. Equation (1.4) gives the relationship between the present and future
value under simple interest. Since the elapsed time in general is the difference
between the ending and starting times t1 − t0 , we have:

A (t1 ) = A (t0 ) (1 + r · (t1 − t0 )) =⇒ A (t0 ) = (1 + r · (t1 − t0 )) −1 A (t1 ) .

For our problem parameters, the present value is:

A (t0 ) = (1 + .04 · 10)−1 $10, 000 = $7142.86. 

Example 55. Suppose as in Example 2 that the rate of return on [t0 , t1 ] is 3% and
the rate of return on [t1 , t2 ] is 2%. Find the time t0 present value of an amount
of $5000 at time t2 .

Solution
Solution. The rate of interest to use in discounting was found to be R =
(1 + R01 ) (1 + R12 ) − 1. Then

(1 + R)−1 = (1 + R01 ) −1 (1 + R12 ) −1 ,

hence the present value is

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1.1. RATE OF RETURN AND PRESENT VALUE 5

A (t0 ) = (1 + R)−1 A (t2 ) = (1 + R01 ) −1 (1 + R12 ) −1 A (t2 )

= (1.03)−1 (1.02)−1 · $5000
= $4759.19. 

Important Terms and Concepts

Rate of return or Effective interest rate - Change in value of an investment di-
vided by initial value: R = A(t1A(t
)−A(t0 )
0)
.

Future value - The amount that a current investment is worth at a later time:
A (t1 ) = (1 + R)A (t0 ).

Simple interest - Interest earned is proportional to both the initial amount and
the time elapsed: A (t1 ) − A (t0 ) = r · A (t0 ) · (t1 − t0 ).

Present value - The amount that must be invested to achieve a given value
in the future at a given time with a given effective interest rate: A (t0 ) =
(1 + R)−1 A (t1 ).

Exercises 1.1
1. If the accumulated value of an investment at time t years is of the form
A(t) = 100(1.05)t, then find the effective rate of interest over the first year, first
two years, and first three years.

2. An investment of $1000 earns simple interest at rate 4% for the first year,
decreasing by half a percent each year until the interest rate is zero. (a) What
is the final value of the investment? (b) What is the effective rate of interest on
the investment?

3. In order for an investment of $500 to reach a value of at least $800 in 10 years

at simple interest, at least what must the interest rate per year be?

4. Find the rate of return on each of the time intervals [t0 , t1 ], [t0 , t2 ], [t0 , t3 ],
[t1 , t2 ], [t2 , t3 ] on an investment that begins at value $800 and takes on inter-
mediate values $825, $850, and $875 at times t1 , t2 , and t3 . Make note of the
pattern of the rates, in particular whether the rates of return are constant or
varying with time.

5. Tom loans Tim an amount of $3000 at 7% simple interest per year for a period
of 3 years, with repayment of the full balance occurring at the end of the 3 years.

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6 CHAPTER 1. THEORY OF INTEREST

Find the amount that Tim owes Tom at the end of each year, and the effective
rate of interest in each individual year. Does simple interest seem to favor the
lender or the borrower?

6. For an investment earning a constant effective rate of R = .04 in each of four

consecutive periods, find the initial value of a final value of $5000.

7. At least how much must the yearly simple interest rate be so that the present
value of an amount of $1200 earned at the end of 6 months is no more than
$1100?

1.2 Compound Interest

To understand basic financial objects, such as savings accounts, loans, annuities,
and bonds, which investors encounter most frequently, it is necessary to have
a thorough grounding in the idea of compound interest. So, you will find this
section to be one of the most important parts of this book. You should read
the examples very carefully, because they illustrate critical ways of thinking
financially and very useful computational techniques.
For most of this section we will restrict to the case where an investment earns
a constant rate of return r in each time interval of unit length. This will allow
us to easily derive very useful and simple formulas for future and present values
of an investment. But to accomplish this, first it is appropriate to review some
background on geometric sequences and series.

1.2.1 Geometric Sequences and Series

In general, a sequence is a (possibly infinite) list a0 , a1 , a2 , . . .. A geometric
sequence is a list of the form

a, a · q, a · q 2 , a · q 3 ...
In other words, each term in a geometric sequence after the initial term a is a
common multiple q of the preceding term, as shown below.

a0 = a
a1 = q · a0 = a · q
a2 = q · a1 = a · q 2
a3 = q · a2 = a · q 3
..
.

The general term of a geometric sequence is therefore an = a · q n . The constant

q is also called the common ratio between consecutive terms.

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1.2. COMPOUND INTEREST 7

Example 11. (a) Write out the first few terms of the geometric sequence with
initial term 1 and common ratio 1/2.
(b) Is either of the following sequences geometric? If so, identify a and q.
(i) 3, 5, 7, 9, ... (ii) 2, −4, 8, −16, 32, ...

Solution
Solution. (a) The first few terms of this geometric sequence are

1, 1/2, 1/4, 1/8, ....

1 n
It is easy to see that the nth term is of the form


2 , n = 0, 1, 2, . . ..

(b) In sequence (i) consecutive terms have a common difference, not ratio, of 2.
This kind of sequence is called an arithmetic sequence
sequence. Sequence (ii) is geomet-
ric; the initial term is a = 2 and the common multiple is −2. A closed form
expression for the nth term of the sequence is therefore an = 2 · (−2)n . 

Certain financial problems involve adding the terms of a geometric sequence:

m
X
2 m
a + aq + aq + · · · + aq ≡ a · qj . (1.8)
j=0
Pn
(Remember that in general the sigma notation j=m aj is shorthand for the
sum of terms am + · · · + an of a sequence.) The quantity in (1.8) is called a
finite geometric series
series. How can we evaluate a sum like this? Fortunately, there
is an easy formula, as Theorem 1 shows.

Theorem 11. The sum of the geometric series in Equation (1.8) is

m
X q m+1 − 1 1 − q m+1
a · qj = a · = . (1.9)
j=0
q−1 1−q

Proof.
Pm Itj suffices to factor out the initial term a and try to sum the series s =
j=0 q . Note that:

1 + q + q2 + · · · + qm − q 1 + q + q2 + · · · + qm



s−q·s =
1 + q + q 2 + · · · + q m − q + q 2 + q 3 + · · · + q m+1



=
= 1 − q m+1 .

Therefore we have the following equation for the unknown sum s.

1 − q m+1
s(1 − q) = 1 − q m+1 =⇒ s = .
1−q
This proves (1.9), in light of the fact that the middle expression in the formula
is simply obtained from the right-hand term by multiplying by −1 in both nu-
merator and denominator. 

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8 CHAPTER 1. THEORY OF INTEREST

Example 22. (a) Find the sum of the first eight terms of the geometric sequence
from Example 1(a) with initial term 1 and common ratio 1/2.
(b) Find the sum of the first six terms of the geometric sequence from Example
1(b): 2, −4, 8, −16, 32, −64, ...

Solution. (a) The first eight terms begin with the 0th term and end with the 7th ,
Solution
so Equation (1.9) gives
7  j
X 1 1 − (1/2)8
= 2 1 − (1/2)8 = 1.99219.


1· =
j=0
2 1 − (1/2)

(b) The first term is 2 and the common ratio is −2, hence Equation (1.9) yields
that the sum is
5
X (−2)6 − 1 2
2 · (−2)j = 2 · = − (−2)6 − 1 = −42. 


j=0
−2 − 1 3

Parts (a) and (b) of the previous example illustrate the two possibilities that
can happen as more and more terms are added to a geometric series. As the
m+1
middle formula a · q q−1−1 in (1.9) shows, when the common ratio q is at least
1 in magnitude as in part (b), the series cannot converge to a finite number as
m+1
m −→ ∞. But when |q| < 1 as in (a), the right-hand formula a · 1−q 1−q of (1.9)
gives us the following result for the infinite geometric series:
∞ m
X X 1
a · q j = lim a · qj = a · if |q| < 1. (1.10)
j=0
m→∞
j=0
1−q

1.2.2 Compound Interest

Suppose that the rate of return on an investment is a constant r on any time
interval of length 1. Then, by Equation (1.2) of Section 1, the values A(n) at
integer times n satisfy:

A(1) = (1 + r)A(0)
A(2) = (1 + r)A(1)
A(3) = (1 + r)A(2)

etc., so that the terms A(n) form a geometric sequence with common ratio
1 + r and initial term a0 = A(0). Notice that the increase in value between
consecutive integer times is A(n + 1) − A(n) = r · A(n), so that interest is being
added on the entire current balance, including the part of it which is interest
that has been accumulated earlier. Value is being gained by so-called (discrete)
compound interest
interest. Because of what we know about geometric sequences, the
future value of the investment at an integer time n is given by:

A(n) = a0 · (1 + r)n , n = 0, 1, 2, . . . (1.11)

✐ ✐

✐ ✐
Another Random Scribd Document
with Unrelated Content
the threat of a divine judgment, from which ne conclusion can be
drawn as to the relation in which the person using it stood to God.
Moreover, Jude had not our vision in his mind, but another event,
which has not been preserved in the canonical Scriptures.
 252 ZECHARIAH. is added. Because Jehovah has chosen
Jerusalem, and maintains His choice in its integrity (this is implied in
the participle bochér). He must rebuke Satan, who hopes that his
accusation will have the effect of repealing the choice of Jerusalem,
by deposing the high priest. For if any sin of the high priest, which
inculpated the nation, had been sufficient to secure his removal or
deposition, the office of high priest would have ceased altogether,
because no man is without sin. 92, to rebuke, does not mean merely
to nonsuit, but to reprove for a thing; and when used of God, to
reprove by action, signifying to sweep both him and his accusation
entirely away. The motive for the repulse of the accuser is
strengthened by the clause which follows: Is he (Joshua) not a
brand plucked out of the fire ? i.e. one who has narrowly escaped
the threatening destruction (for the figure, see Amos iv. 11). These
words, again, we must not take as referring to the high priest as an
individual ; nor must we restrict their meaning to the fact that
Joshua had been brought back from captivity, and reinstated in the
office of high priest. Just as the accusation does not apply to the
individual, but to the office which Joshua filled, so do these words
also apply to the supporter of the official dignity. The fire, out of
which Joshua had been rescued as a brand, was neither the evil
which had come upon Joshua through neglecting the building of the
temple (Koehler), nor the guilt of allowing his sons to marry foreign
wives (Targ., Jerome, Rashi, Kimchi): for in the former case the
accusation would have come too late, since the building of the
temple had been resumed five months before (Hag. i. 15, compared
with Zech. i. 7); and in the latter it would have been much too early,
since these misalliances did not take place till fifty years afterwards.
And, in general, guilt which might possibly lead to ruin could not be
called a fire; still less could the cessation or removal of this sin be
called deliverance out of the fire. Fire is a figurative expression for
punishment, not for sin. The fire out of which Joshua had been
saved like a brand was the captivity, in which both Joshua and the
nation had been brought to the verge of destruction. Out of this fire
Joshua the high priest had been rescued. But, as Kliefoth has aptly
observed, “the priesthood of Israel was concentrated in the high
priest, just as the character of Israel as the holy nation
 CHAP. II. 1-5. 253 was concentrated in the priesthood. The
high priest represented the holiness and priestliness of Israel, and
that not merely in certain official acts and functions, but so that as a
particular Levite and Aaronite, and as the head for the time being of
the house of Aaron, he represented in his own person that character
of holiness and priestliness which had been graciously bestowed by
God upon the nation of Israel.” This serves to explain how the hope
that God must rebuke the accuser could be made to rest upon the
election of Jerusalem, i.e. upon the love of the Lord to the whole of
His nation. The pardon and the promise do not apply to Joshua
personally any more than the accusation; but they refer to him in his
official position, and to the whole nation, and that with regard to the
special attributes set forth in the high priesthood— namely, its
priestliness and holiness. We cannot, therefore, find any better
words with which to explain the meaning of this vision than those of
Kliefoth. ‘The character of Israel,” he says, “as the holy and priestly
nation of God, was violated —violated by the general sin and guilt of
the nation, which God had been obliged to punish with exile. This
guilt of the nation, which neutralized the priestliness and holiness of
Israel, is pleaded by Satan in the accusation which he brings before
the Maleach of Jehovah against the high priest, who was its
representative. A nation so guilty and so punished could no longer
be the holy and priestly nation: its priests could no longer be priests
; nor could its high priests be high priests any more. But the Maleach
of Jehovah sweeps away the accusation with the assurance that
Jehovah, from His grace, and for the sake of its election, will still
give validity to Israel’s priesthood, and has already practically
manifested this purpose of His by bringing it out of its penal
condition of exile.” After the repulse of the accuser, Joshua is
cleansed from the guilt attaching to him. When he stood before the
angel of the Lord he had dirty clothes on. The dirty clothes are not
the costume of an accused person (Drus., Ewald); for this Roman
custom (Ley. ii. 54, vi. 20) was unknown to the Hebrews. Dirt is a
figurative representation of sin; so that dirty clothes represent
defilement with sin and guilt (cf. Isa. Ixiv. 5, iv. 4; Prov. xxx. 12; Rev.
iii. 4, vii. 14). The Lord had indeed refined His nation in its exile, and
in His grace had
 254 ZECHARIAH. preserved it from destruction; but its sin
was not thereby wiped away. The place of grosser idolatry had been
taken by the more refined idolatry of self-righteousness, selfishness,
and conformity to the world. And the representative of the nation
before the Lord was affected with the dirt of these sins, which gave
Satan a handle for his accusation. But the Lord would cleanse His
chosen people from this, and make it a holy and glorious nation.
This is symbolized by what takes place in vers. 4 and 5. The angel of
the Lord commands those who stand before Him, «.e. the angels
who serve Him, to take off the dirty clothes from the high priest, and
put on festal clothing; and then adds, by way of explanation to
Joshua, Behold, I have caused thy guilt to pass away from thee, that
is to say, I have forgiven thy sin, and justified thee (cf. 2 Sam. xii.
13, xxiv. 10), and clothe thee with festal raiment. The inf. abs.
halbésh stands, as it frequently does, for the finite verb, and has its
norm in MY (see at Hag.i.6). The last Wäre are either spoken to the
attendant angels as well, or else, what is more likely, they are simply
passed over in the command given to them, and mentioned for the
first time here. Machälätsöth, costly clothes, which were only worn
on festal occasions (see at Isa. iii. 22). They are not symbols of
innocence and righteousness (Chald.), which are symbolized by
clean or white raiment (Rev. iii. 4, vii. 9); nor are they figurative
representations of joy (Koehler), but are rather symbolical of glory.
The high priest, and the nation in him, are not only to be cleansed
from sin, and justified, but to be sanctified and glorified as well.—
Ver. 5. At this moment the prophet feels compelled to utter the
prayer that they may also put a clean mitre upon Joshua’s head,
which prayer is immediately granted. The prayer appears at first to
be superfluous, inasmuch as the mitre would certainly not be
forgotten when the dirty clothes were taken away and the festal
dress was put on. Nevertheless, the fact that it is granted shows that
it was not superfluous. The meaning of the prayer was hardly that
the high priest might be newly attired from head to foot, as
Hengstenberg supposes, but is rather connected with the
significance of the mitre. Tsäniph is not a turban, such as might be
worn by anybody (Koehler), but the headdress of princely persons
and kings (Job xxix. 14; Isa. Ixii. 3), and is synonymous with
mitsnepheth, the technical word for the
 CHAP. III. 6-10. 255 tiara prescribed for the high priest in
the law (Ex. and Ler.), as we may see from Ezek. xxi. 31, where the
regal diadem, which is called tséniph in Isa. Ixii. 3, is spoken of
under the name of mitsnepheth. The turban of the high priest was
that portion of his dress in which he carried his office, so to speak,
upon his forehead; and the clean turban was the substratum for the
golden plate that was fastened upon it, and by which he was
described as holy to the Lord, and called to bear the guilt of the
children of Israel (Ex. xxviii. 38). The prayer for a clean mitre to be
put upon his head, may therefore be accounted for from the wish
that Joshua should not only be splendidly decorated, but should be
shown to be holy, and qualified to accomplish the expiation of the
people. Purity, as the earthly type of holiness, forms the foundation
for glory. In the actual performance of the matter, therefore, the
putting on of the clean mitre is mentioned first, and then the
clothing with festal robes. This took place in the presence of the
angel of the Lord. That is the meaning of the circumstantial clause,
“and the angel of the Lord stood” (ritum tanguam herus imperans,
probans et presentia sua ornans, C. B. Mich.), and not merely that
the angel of the Lord, who had hitherto been sitting in the judge’s
seat, rose up from his seat for the purpose of speaking while the
robing was going on (Hofmann, Koehler). 5% does not mean to
stand up, but simply to remain standing. Vers. 6-10. In these verses
there follows a prophetic address, in which the angel of the Lord
describes the symbolical action of the re-clothing of the high priest,
according [Link] typical significance in relation to the continuance and
the future of the kingdom of God. Ver. 6. “ And the angel of the Lord
testified to Joshua, and said, Ver. 7. Thus saith Jehovah of hosts, If
thou shalt walk in my ways, and keep my charge, thou shalt both
judge my house and keep my courts, and I will give thee ways
among these standing here. Ver. 8. Hear then, thou high priest.
Joshua, thou, and thy comrades who sit before thee: yea, men of
wonder are they: for, behold, I bring my servant Zemach (Sprout).
Ver. 9. For behold the stone which I have laid before Joshua; upon
one stone are seven eyes: behold I engrave its carving, is the saying
of Jehovah of hosts, and I lear away the iniquity of this land in one
day. Ver. 10. In that
 256 ZECHARIAH. day, is the saying of Jehovah of hosts, ye
will invite one another under the vine and under the fig-tree.”” In
ver. 7 not only is the high priest confirmed in his office, but the
perpetuation and glorification of his official labours are promised. As
Joshua appears in this vision as the supporter of the office, this
promise does not apply to Joshua himself so much as to the office,
the continuance of which is indeed bound up with the fidelity of
those who sustain it. The promise in ver. 7 therefore begins by
giving prominence to this. condition: If thou wilt walk in my ways,
etc. Walking in the ways of the Lord refers to the personal attitude
of the priests towards the Lord, or to fidelity in their personal
relation to God; and keeping the charge of Jehovah, to the faithful
performance of their official duties (shémar mishmarti, noticing what
has to be observed in relation to Jehovah; see at Lev. vill. 35). The
apodosis begins with MAX DN, and not with ‘nn. This is required not
only by the emphatic ’attah, but also by the clauses commencing
with v’gam; whereas the circumstance, that the tense only changes
with v’ndthatti, and that tddin and tishmor are still imperfects, has
its simple explanation in the fact, that on account of the gam, the
verbs could not be linked together with Vav, and placed at the head
of the clauses. Taken by themselves, the clauses v’gam tädın and
v’gam tishmor might express a duty of the high priest quite as well
asa privilege. If they were taken as apodoses, they would express an
obligation; but in that case they would appear somewhat
superfluous, because the obligations of the high priest are fully
explained in the two previous clauses. If, on the other hand, the
apodosis commences with them, they contain, in the form of a
promise, a privilege which is set before the high priest as awaiting
him in the future—namely, the privilege of still further attending to
the service of the house of God, which had been called in question
by Satan’s accusation. 'M3TNS 7, to judge the house of God, z.e. to
administer right in relation to the house of God, namely, in relation
to the duties devolving upon the high priest in the sanctuary as
such; hence the right administration of the service in the holy place
and the holy of holies. This limitation is obvious from the parallel
clause, to keep the courts, in which the care of the ordinary
performance of worship in the courts, and the keeping of everything
of an idolatrous nature
 CHAP. III. 6-10. 257 from the house of God, are transferred
to him. And to this a new and important promise is added in the last
clause (AD). The meaning of this depends upon the explanation
given to the word pap, Many commentators regard this as a Chaldaic
form of the Aiphil participle (after Dan. ili. 25, iv. 34), and take it
either in the intransitive sense of “ those walking” (LXX., Pesh., Vulg.,
Luth., Hofm., etc.), or in the transitive sense of those conducting the
leaders (Ges., Hengst., etc.). But apart from the fact that the hiphil
of 723 in Hebrew is always written either pin or on, and has never
anything but a transitive meaning, this view is precluded by the }'3,
for which we should expect 72 or }9, since the meaning could only
be, “I give thee walkers or leaders between those standing here,”
z.e. such as walk to and fro between those standing here
(Hofmann), or, “] will give thee leaders among (from) these angels
who are standing here” (Hengstenberg). In the former case, the
high priest would receive a promise that he should always have
angels to go to and fro between himself and Jehovah, to carry up his
prayers, and bring down revelations from God, and supplies of help
(John i. 52; Hofmann). This thought would be quite a suitable one;
but it is not contained in the words, “since the angels, even if they
walk between the standing angels and in the midst of them, do not
go to and fro between Jehovah and Joshua” (Kliefoth). In the latter
case the high priest would merely receive a general assurance of the
assistance of superior angels; and for such a thought as this the
expression would be an extremely marvellous one, and the }'2 would
be used incorrectly. We must therefore follow Calvin and others, who
take DY3onn as a substantive, from a singular Tom, formed after
2319, 199%, om, or else as a plural of om, to be pointed pony (Ros.,
Hitzig, Kliefoth). The words then add to the promise, which ensured
to the people the continuance of the priesthood and of the blessings
which it conveyed, this new feature, that the high priest would also
receive a free access to God, which had not yet been conferred upon
him by his office. This points to a time when the restrictions of the
Old Testament will be swept away. The further address, in vers. 8
and 9, announces how God will bring about this new time or future.
To show the importance of what follows, Joshua is called upon to “
hear.” It is doubtfu: where what VOL. II. R
 258 ZECHARIAH. he is to hear commences ; for the idea,
that after the summons to attend, the successive, chain-like
explanation of the reason for this summons passes imperceptibly
into that to which he is to give heed, is hardly admissible, and has
only been adopted because it was found difficult to discover the true
commencement of the address. The earlier theologians (Chald.,
Jerome, Theod. Mops., Theodoret, and Calvin), and even Hitzig and
Ewald, take 8'239 "229 '2 (for behold I will bring forth). But these
Fra are evidently explanatory of man nbd WIN (men of wonder,
etc.). Nor can it commence with amashti (and I remove), as
Hofmann supposes (Weiss. u. Erfüll. i. 339), or with ver. 9, “ for
behold the stone,” as he also maintains in his Schriftbeweis (ii. 1, pp.
292-3, 508-9). The first of these is precluded not only by the fact
that the address would be cut far too short, but also by the cop. Vav
before masht?; and the second by the fact that the words, “ for
behold the stone,” etc., in ver. 9, are unmistakeably a continuation
and further explanation of the words, “ for behold I will bring forth
my servant Zemach,” in ver. 8. The address begins with “ thou and
thy fellows,” since the priests could not be called upon to hear,
inasmuch as they were not present. Joshua’s comrades who sit
before him are the priests who sat in the priestly meetings in front of
the high priest, the president of the assembly, so that yoshébh
liphné corresponds to our “ assessors.” The following kt introduces
the substance of the address; and when the subject is placed at the
head absolutely, it is used in the sense of an asseveration, “ yea,
truly” (cf. Gen. xvili. 20; Ps. exviii. 10-12, exxviii. 2; and Ewald, §
330, 5). *Anshé mophéth, men of miracle, or of a miraculous sign,
as mdphéth, TO tépas, portentum, miraculum, embraces the idea of
nix, onetov (cf. Isa. viii. 18), are men who attract attention to
themselves by something striking, and are types of what is to come,
so that möpheth really corresponds to rUmos T@v ueAAövrwv (see
at Ex. iv. 21, Isa. viii. 18). 159 stands for DAS, the words passing
over from the second person to the third on the resuming of the
subject, which is placed at the head absolutely, just as in Zeph. ii.
12, and refers not only to T'¥7, but to Joshua and his comrades.
They are men of typical sign, but not simply on account of the office
which they hold, viz. because their mediatorial priesthood points to
the mediatorial office and atoning work of the Messiah, as most
 CHAP, III. 6-10. 259 of the commentators assume. For “this
applies, in the first place, not only to Joshua and his priests, but to
the Old Testament priesthood generally; and secondly, there was
nothing miraculous in this mediatorial work of the priesthood, which
must have been the case if they were to be möpheth. The miracle,
which is to be seen in Joshua and his priests, consists rather in the
fact that the priesthood of Israel is laden with guilt, but by the grace
of God it has been absolved, and accepted by God again, as the
deliverance from exile shows,” and Joshua and his priests are
therefore brands plucked by the omnipotence of grace from the fire
of merited judgment (Kliefoth). This miracle of grace which has been
wrought for them, points beyond itself to an incomparably greater
and better act of the sin-absolving grace of God, which is still in the
future. This is the way in which the next clause, “for I bring my
servant Zemach,” which is explanatory of ’ansh@ möpheth (men of
miracle), attaches itself. The word Tsemach is used by Zechariah
simply as a proper name of the Messiah; and the combination ‘abhdi
Tsemach (my servant Tsemach) is precisely the same as ‘abhdi Dävid
(my servant David) in Ezek. xxxiv. 23, 24, xxxvil. 24, or “my servant
Job” in Jobi. 8, ii. 3, ete. The objection raised by Koehler—namely,
that if tsemach, as a more precise definition of “abhdi (my servant),
or as an announcement what servant of Jehovah is intended, were
used as a proper name, it would either be construed with the article
(M37), or else we should have io¥ nny "IY as in ch. vi. 12—is quite
groundless. For “if poets or prophets form new proper names at
pleasure, such names, even when deprived of the article, easily
assume the distinguishing sign of most proper names, like bägodah
and m’shübhäh in Jer. ii.” (Ewald, § 277, ec.) It is different wit} iow
in ch. vi. 12; there sh’md is needed for the sake of the sense, as in 1
Sam. i. 1 and Job i. 1, and does not serve to. designate the
preceding word as a proper name, but simply to define the person
spoken of more precisely by mentioning his name. Zechariah has
formed the name Tsemach, Sprout, or Shoot, primarily from Jer.
xxiii. 5 and xxxiii. 15, where the promise is given that a righteous
Sprout (tsemach tsaddiq), or a Sprout of righteousness, shall be
raised up to Jacob. And Jeremiah took the figurative description of
the great descendant of David, who will create righteousness upon
the earth, as
 260 ZECHARIAH. a tsemach which Jehovah will raise up, or
cause to shoot up to David, from Isa. xi. 1, 2, lili. 2, according to
which the Messiah is to spring up as a rod out of the stem of Jesse
that has been hewn down, or as a root-shoot out of dry ground.
Tsemach, therefore, denotes the Messiah in His origin from the
family of David that has fallen into humiliation, as a sprout which will
grow up from its original state of humiliation to exaltation and glory,
and answers therefore to the train of thought in this passage, in
which the deeply humiliated priesthood is exalted by the grace of the
Lord into a type of the Messiah. Whether the designation of the
sprout as “my servant” is taken from Isa. lii. 13 and liii. 11 (cf. xlii. 1,
xlix. 3), or formed after “my servant David” in Ezek. xxxiv. 24, xxxvii.
24, is a point which cannot be decided, and is of no importance to
the matter in hand. The circumstance that the removal of iniquity,
which is the peculiar work of the Messiah, is mentioned in ver. 95,
furnishes no satisfactory reason for deducing ‘abhdi tsemach pre-
eminently from Isa. liii. For in ver. 9 the removal of iniquity is only
mentioned in the second rank, in the explanation of Jehovah’s
purpose to bring His servant Tsemach. The first rank is assigned to
the stone, which Jehovah has laid before Joshua, etc. The answer to
the question, what this stone signifies, or who is to be understood
by it, depends upon the view we take of the words DX)... j28 by.
Most of the commentators admit that these words do not form a
parenthesis (Hitzig, Ewald), but introduce a statement concerning
JAN7 373, Accordingly, "N j285 737 is placed at the head absolutely,
and resumed in ANS IN >¥. This statement may mean, either upon
one stone are seven eyes (visible or to be found), or seven eyes are
directed upon one stone. For although, in the latter case, we should
expect ON instead of >Y (according to Ps. xxxiii. 18, _xxxiv. 16), 99
fY O°” does occur in the sense of the exercise of loving care (Gen.
xliv. 21; Jer. xxxix. 12, xl. 4). But if the seven eyes were to be seen
upon the stone, they could only be engraved or drawn upon it. And
what follows, "a MADD 1235, does not agree with this, inasmuch as,
according to this, the engraving upon the stone had now first to take
place instead of having been done already, since hinneh followed by
a participle never expresses what has already occurred, but always
what is to take place in the future. For this reason we must
 CHAP. III. 6-10, 261 decide that the seven eyes are
directed towards the stone, or watch over it with protecting care.
But this overthrows the view held by the expositors of the early
church, and defended by Kliefoth, namely, that the stone signifies
the Messiah, after Isa. xxviii. 16 and Ps. exviii. 22,—a view with
which the expression näthatti, “ given, laid before Joshua,” can
hardly be reconciled, even if this meant that Joshua was to see with
his own eyes, as something actually present, that God was laying
the foundation-stone. Still less can we think of the foundation-stone
of the temple (Ros., Hitz.), since this had been laid long ago, and we
cannot see for what purpose it was to be engraved ; or of the stone
which, according to the Rabbins, occupied the empty place of the
ark of the covenant in the most holy place of the second temple
(Hofmann) ; or of a precious stone in the breastplate of the high
priest. The stone is the symbol of the kingdom of God, and is laid by
Jehovah before Joshua, by God’s transferring to him the regulation
of His house and the keeping of His courts (before, liphne, in a
spiritual sense, as in 1 Kings ix. 6, for example). The seven eyes,
which watch with protecting care over this stone, are not a figurative
representation of the all-embracing providence of God ; but, in
harmony with the seven eyes of the Lamb, which are the seven
Spirits of God (Rev. v. 6), and with the seven eyes of Jehovah (Zech.
iv. 10), they are the sevenfold radiations of the Spirit of Jehovah
(after Isa. xi. 2), which show themselves in vigorous action upon this
stone, to prepare it for its destination. This preparation is called
pittzäch pittuchäh in harmony with the figure of the stone (cf. Ezek.
xxviii. 9, 11). _“T will engrave the engraving thereof,” t.e. engrave it
so as to prepare it for a beautiful and costly stone. The preparation
of this stone, z.e. the preparation of the kingdom of God established
in Israel, by the powers of the Spirit of the Lord, is one feature in
which the bringing of the tsemach will show itself. The other consists
in the wiping away of the iniquity of this land. Mash is used here in a
transitive sense, to cause to depart, to wipe away. N’ YUNA (that
land) is the land of Canaan or Judah, which will extend in the
Messianic times over the whole earth. The definition of the time,
b°ydm’echdd, cannot of course mean “on one and the same day,” so
as to affirm that the communication of the true nature to Israel,
namely, of one well pleasing to God, and
 262 ZECHARIAH. the removal of guilt from the land, would
take place simultanevusly (Hofmann, Koehler) ; but the expression
“in one day” is substantially the same as edara£ in Heb. vii. 27, ix.
12, x. 10, and affirms that the wiping away of sin to be effected by
the Messiah (tsemach) will not resemble that effected by the typical
priesthood, which had to be continually repeated, but will be all
finished at once. This one day is the day of Golgotha. Accordingly,
the thought of this verse is the following: Jehovah will cause His
servant 7Tsemach to come, because He will prepare His kingdom
gloriously, and exterminate all the sins of His people and land at
once. By the wiping away of all guilt and iniquity, not only of that
which rests upon the land (Koehler), but also of that of the
inhabitants of the land, i.e. of the whole nation, all the discontent
and all the misery which flow from sin will be swept away, and a
state of blessed peace will ensue for the purified church of God. This
is the thought of the tenth verse, which is formed after Mic. iv. 4 and
1 Kings v. 5, and with which the vision closes. The next vision shows
the glory of the purified church. THE FIFTH VISION : THE
CANDLESTICK WITH THE TWO OLIVE TREES.—CHAP. IV. Ver. 1. “
And the angel that talked with me returned and waked me, like a
man who is waked out of his sleep.” After the prophet has seen four
visions one after another, probably with very short intervals, and has
heard the marvellous interpretation of them, he is so overpowered
by the impression produced by what he has seen and heard, that he
falls into a state of spiritual exhaustion resembling sleep, just as
Peter and his companions were unable to keep awake at the
transfiguration of Christ (Luke ix. 32). He has not only fallen back
into the state of ordinary human consciousness, but his ordinary
spiritual consciousness was so depressed that he resembled a man
asleep, and had to be waked out of this sleep-like state by the
mediating angel, in order to be qualified for further seeing. It is
evident from the expression 2%) (and he returned) that the angelus
interpres had left the prophet after the termination of the previous
visions, and now came back to him again. The fresh vision which
presents itself to his spiritual
 CHAP. IV. 2, 3. 263 intuition, is described according to its
principal features in vers. 2 and 3. Ver. 2. “ And he said to me, What
seest thou? And I said, I see, and behold a candlestick all of gold,
and its oil-vessel up above it, and its seven lamps upon it, seven
pipes each for the lamps upon the top of it. Ver. 3. And two olive
trees (oil trees) by it, one to the right of the oil-vessel, and one to
the left-of it.’ The second 7x (chethib) in ver. 2 might, if necessary,
be explained in the way proposed by L. de Dieu, Gusset., and
Hofmann, viz. by supposing that the mediating angel had no sooner
asked the prophet what he saw, than he proceeded, without waiting
for his answer, to give a description himself of what was seen. But
this is at variance with the analogy of all the rest of the visions,
where the visions seen by the prophet are always introduced with
’N’S8I or 7898) followed by 72) (cf. ch. i. 8, 1. 1, 5, v. 1, vi. 1), and
it remains quite inflexible; so that we must accept the keri 1281,
which is adopted by the early translators, and found in many codd.,
as being the true reading, and pronounce 198" a copyist’s error. On
the combination mp2 ant ni32, in which the last two words are
construed as a relative clause in subordination to m‘norath, see
Ewald, § 332, c. The visionary candlestick, all of gold, with its seven
lamps, is unquestionably a figurative representation of the seven-
branched golden candlestick in the tabernacle, and differs from this
only in the three following additions which are peculiar to itself: (1)
That it has its gulläh (ADA for nn>3, with the feminine termination
resolved; cf. Hos. xili. 2, and Ewald, § 257, d), &.e. a can or round
vessel for the oil, which was omitted altogether from the candlestick
of the holy place, when the lamps were filled with oil by the priests,
“at the top of it” (MONTY); (2) That it had seven mütsägöth (pipes)
each for the lamps, that is to say, tubes through which the oil
poured from the gulläh into the lamps, or was conducted to them,
whereas the candlestick of the tabernacle had no pipes, but only
seven arms (gänim), for the purpose of holding the lamps, which of
course could not be wanting in the case of the visionary candlestick,
and are merely omitted from the description as being self-evident.
The number of the pipes is also a disputed point, viz. whether HY3v)
Hyav means seven and seven, ze. fourteen, or whether it is to be
taken distributively, seven each for the lamps, ü.e. seven for each
lamp, and therefore
 264 ZECHARIAH, forty-nine for the seven. ‘The distributive
view is disputed by Hitzig and Koehler as at variance with the usage
of the language: the former proposing to alter the text, so as to
obtain seven pipes, i.e. one for each lamp ; and the latter, on the
other hand, assuming that there were fourteen pipes, and inferring
from the statement “seven and seven,” instead of fourteen, that the
second seven are to be sought in a different place from the first,
that is to say, that the first seven led from the oil-vessel to the seven
different lamps, whilst the second seven connected the seven lamps
with one another, which would have been a very strange and
perfectly useless provision. But there is no foundation whatever for
the assertion that it is at variance with the usage of the language.
For although a distributive relation is certainly expressed as a rule by
the simple repetition of the number without any connecting Vav,
such passages as 2 Sam. xxi. 20 and 1 Chron. xx. 6 show quite
indisputably that the repetition of the same number with the Var
cop. between is also to be taken distributively. When, for example, it
is stated in 2 Sam. xxi. 20, with regard to the hero of Gath, that the
fingers of his hands and the fingers (toes) of his feet were “ shésh
väshesh, four-and-twenty in number,” it is evident that shésh
väshesh cannot mean “six and six,” because six and six do not make
twenty-four; and a division of the shésh between the hands and feet
is also untenable, because his two hands had not six fingers on
them, but twelve, and so his two feet had not six toes on them, but
twelve. Consequently shésh väshesh must be taken distributively:
the fingers of his (two) hands and the toes of his (two) feet were six
each; for it is only 2+2 (=4) X6 that can give 24. This is shown still
more clearly in 1 Chron. xx. 6: “and his fingers were shésh väshesh,
four-and-twenty.” It is in this distributive sense, which is thus
thoroughly established, so far as the usage of the language is
concerned, that ‘8% nyIvA ny2Y is to be taken: seven pipes each for
the lamps, 7.¢. forty-nine for the seven lamps ; inasmuch as if
fourteen pipes were meant, it would be impossible to imagine any
reason why “seven and seven” should be written instead of fourteen.
And we cannot be shaken in this conviction, either by the objection
“that if there was any proportion between the pipes and the size of
the oil-vessel, such a number of pipes could not possibly (?) spring
from one oil-can ”
 CHAP. IV. 4-7. 265 (Koehler), or by the statement that
“forty-nine would be quite as much at variance with the original as
fourteen, since that had only one pipe for every lamp” (Hitzig). For
the supposed original for the pipes had no existence, inasmuch as
the Mosaic candlestick had no pipes at all; and we can form no
opinion as to the possibility of forty-nine pipes issuing from one
oilvessel, because we have no information as to the size either of the
oil-vessel or of the pipes. (3) The third peculiarity in the visionary
candlestick consists in the olive trees on the right and left of the oil-
vessel, which supplied it with oil, and whose connection with the
candlestick is first described in ver. 12. These three additions which
were made to the golden candlestick seen by Zechariah, as
contrasted with the golden candlestick of the tabernacle, formed the
apparatus through which it was supplied with the oil required to light
it continually without the intervention of man. The interpretation of
this vision must therefore be founded upon the meaning of the
golden candlestick in the symbolism of the tabernacle, and be in
harmony with it. The prophet receives, first of all, the following
explanation, in reply to his question on this point: Ver. 4. “ And I
answered and spake to the angel that talked with me, What are
these, my lord? Ver. 5. And the angel that talked with me answered
and said to me, Knowest thou not what these are? And I said, No,
my lord. Ver. 6. Then he answered and spake to me thus: This is the
word of Jehovah to Zerubbabel, saying, Not by might, and not by
power, but by my Spirit, saith Jehovah of hosts. Ver. 7. Who art thou,
O great mountain before Zerubbabel? Into a plain ! And He will bring
out the top-stone amidst shoutings, Grace, grace unto it!” The
question addressed by the prophet to the mediating angel, “ What
are these?” (mah élleh, as in ch. ii. 2) does not refer to the two olive
trees only (Umbreit, Kliefoth), but to everything described in vers. 2
and 3. We are not warranted in assuming that the prophet, like
every other Israelite, knew what the candlestick with its seven lamps
signified ; and even if Zechariah had been perfectly acquainted with
the meaning of the golden candlestick in the holy place, the
candlestick seen by him had other things beside the two olive trees
which were not to be found in the candlestick of the temple, viz. the
gulläh and the pipes for the lamps, which
 266 ZECHARIAH. might easily make the meaning of the
visionary candlestick a doubtful thing. And the counter-question of
the angel, in which astonishment is expressed, is not at variance
with this For that simply presupposes that the object of these
additions is so clear, that their meaning might be discovered from
the meaning of the candlestick itself. The angel then gives him the
answer in ver. 6: “ This (the vision as a symbolical prophecy) is the
word of the Lord to Zerubbabel : Not by might,” etc. That is to say,
through this vision Zerubbabel is informed that it—namely, the work
which Zerubbabel has taken in hand or has to carry out—will not be
effected by human strength, but by the Spirit of God. The work itself
is not mentioned by the angel, but is referred to for the first time in
ver. 7 in the words, “ He will bring out the top-stone,” and then still
more clearly described in the word of Jehovah in ver. 9: “The hands
of Zerubbabel have laid the foundation of this house (the temple),
and his hands will finish it.” It by no means follows from this that the
candlestick, with its seven lamps, represented Zerubbabel’s temple
(Grotius, Hofmann) ; for whilst it is impossible that the candlestick,
as one article of furniture in the temple, should be a figurative
representation of the whole temple, what could the two olive trees,
which supplied the candlestick with oil, signify with such an
interpretation? Still less can the seven lamps represent the seven
eyes of God (ver. 10), according to which the candlestick would be a
symbol of God or of the Spirit (Hitzig, Maurer, Schegg). The
significance of the candlestick in the holy place centred, as I have
shown in my biblische Archäologie (i. p. 107), in its seven lamps,
which were lighted every evening, and burned through the night.
The burning lamps were a symbol of the church or of the nation of
God, which causes the light of its spirit, or of its knowledge of God,
to shine before the Lord, and lets it stream out into the night of a
world estranged from God. As the disciples of Christ were called, as
lights of the world (Matt. v. 14), to let their lamps burn and shine, or,
as candlesticks in the world (Luke xii. 35; Phil. ii. 15), to shine with
their light before men (Matt. v. 16), so was the church of the Old
Testament also. The correctness of this explanation of the meaning
of the candlestick is placed beyond all doubt by Rev. i. 20, where the
seven Avyvias, which
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