STAT 2032/6046 – Financial Mathematics – Formula Sheet

S (u + 1) − S (u )
Effective rate of interest: iu +1 =
S (u )
Payment of 1 Compound interest Simple interest
Accumulated value (1 + i )t (1 + ti )
after t years
Present value at time 0 vt= (1 + i ) − t (1 + it ) −1

i paid at the end of the period on the balance at the beginning of the period.
d paid at the beginning of the period on the balance at the end of the period.
i
d=
1+ i
Present value with simple discount: (1 − d ⋅ t )
1+ i
Real interest rate: 1 + ireal =
1+ r

The accumulated value of 1 from time 0 to time t under compound interest:

mt − mt
 i (m)   d (m) 
S (t ) = 1 +  = (1 + i )t = v −t = (1 − d ) −t = 1 −  = e δt
 m   m 
The present value at time 0 of 1 payable at time t under compound interest
is:
− mt mt
 i (m)   d (m) 
= (1 + i )
−t
S (0) = 1 +  = v = (1 − d ) = 1 −
t t
 = e −δt
 m   m 

Force of interest
For constant force of interest:= δ ln(1 + i ) .
Constant force of interest Variable force of interest
Accumulation at time (t2 ) S (t1 ) ⋅ eδ (t2 −t1 )
S=  t2 
t2 of an amount S (t1 ) (t2 ) S (t1 ) ⋅ exp  ∫ δ t dt 
S=
t 
invested at t1 1 
Present value at time t1 (t1 ) S (t2 ) ⋅ e −δ (t2 −t1 )
S=  t2 
of an amount S (t2 ) due S (t1 ) = S (t2 ) ⋅ exp  − ∫ δ t dt 
 t 
 1 
at time t2

Annuities
n payments of 1 Payments made in arrears (at Payments made in advance
end of each period) (at start of each period)
Accumulated value n −1
(1 + i ) n − 1 n
(1 + i ) n − 1
sn = ∑ (1 + i )t= sn = ∑ (1 + i )t=

t =0 i t =1 d
Present value n
1 − vn n −1
1 − vn
=
an ∑=
vt
t =1 i
an
= ∑=
vt
t =0 d

Financial Mathematics (STAT2032/8046) 1

 1 Payments made in arrears Payments made in advance
Payments of made
m
th
1
each of a year for
m
n years
Accumulated value (1 + i ) n − 1 (1 + i ) n − 1
sn( m ) = 
sn( m ) =
i(m) d (m)
Present value 1 − vn 1 − vn
an( m ) = (m) an( m ) = (m)
i d
Payments of 1 for Payments made in arrears Payments made in advance
perpetuity
Present value of 1 per 1 1
a∞ = a∞ =
period i d
1 1 1
Present value of per a ( m ) = ( m ) a∞( m ) =
m ∞
i d (m)
1
period of length
m
Continuous annuity Fixed rate of interest Variable rate of interest
of 1 per period for n
periods
Accumulated value n
(1 + i ) n − 1 n
n 
∫
n −t
sn = (1 + i ) dt = sn δ = ∫ exp ∫ δ r dr dt
0
δ r
0 t 
Present value n
1 − vn n
 t 
=
an ∫=
vt dt
δ
an δ = ∫ exp − ∫ δ r dr dt
 o 
r
0 0

Arithmetically Payments made in arrears Payments made in advance

increasing annuity of
n payments
Accumulated value 
sn − n 
sn − n
( Is ) n = ( Is) n =
i d
Present value an − nv n
an − nv n
( Ia ) n = ( Ia) n =
i d
Arithmetically Payments made in arrears Payments made in advance
decreasing annuity of
n payments
Accumulated value n ⋅ (1 + i ) n − sn n ⋅ (1 + i ) n − sn
( Ds ) n = ( Ds) n =
i d
Present value n − an n − an
( Da ) n = ( Da) n =
i d

Financial Mathematics (STAT2032/8046) 2

Increasing annuity with discrete increases and with continuous increases
continuous payments and continuous payments
Present value n
an − nv n n
an − nv n
( Ia ) n ∫=
= t  v dt
t
Ia ) n ∫=
(= t
tv dt
0
δ 0
δ
1 − x k +1 x k +1 − 1
Geometric series summation formula: 1 + x + x 2 + x 3 + ... =
+ xk=
1− x x −1
Present value at time 0 of a series of n payments, each of amount 1, commencing
at time k + 1 : k an = v k ⋅ an = an + k − ak

Financial Mathematics (STAT2032/8046) 3