About MATH 1003

Section 3.1 Simple Interest

Section 3.2 Compound interest

MATH 1003 Calculus and Linear Algebra

(Lecture 1)

CAI, Jianfeng
Department of Mathematics, HKUST

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

About MATH 1003

Lecturer: CAI, Jianfeng (Office: Rm 3443. E-mail: jfcai@ust.hk)

Teaching assistant:
JIANG, Yue Email: yjiangan@connect.ust.hk
ZHANG, Luchan Email: lzhangas@connect.ust.hk
Office hours: Mon/Wed 9am-10am
Textbook: College Mathematics for Business, Economics, Life
Sciences, and Social Sciences (13th Edition), by Raymond A.
Barnett, Michael R. Ziegler and Karl E. Byleen
Course website:
http://www.math.ust.hk/~jfcai/math1003.html

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Tentative Syllabus

I Chapter 3. Mathematics of Finance (3.1-3.4)

I Chapter 4. Systems of Linear Equations; Matrices (4.1-4.7)
I Chapter 10. Limits and the Derivative (10.4-10.5)
I Chapter 11. Additional Derivative Topics (11.1-11.7)
I Chapter 12. Graphing and Optimization (12.1-12.2, 12.4-12.6)
I Chapter 13. Integration (13.1-13.2, 13.4-13.5)
I Chapter 14. Additional Integration Topics (14.1-14.3)

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Grading Policy

I Weekly practice problems (0%) - No need to hand in.

I Online homework (WeBWork) (10%)
I In-Class Quizzes (5%)
I Two 1.5-hour Midterm Exams (25% each) - Date: TBA
I One 2-hour Final Exam (35%) - Date: TBA

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Some Advice

The mathematics covered by this course is not as difficult as it

appears to be
I Attend lectures and tutorial classes
I Make use of resources (math help center, office hour, etc.)
I Focus on the textbook and homework for 2 to 3 hours per
week.

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Single variable calculus

I Math1003: A course in basic single variable calculus and

linear algebra. In general, this course cannot fulfill the
prerequisites for taking other more advanced math courses.
However, students receiving a grade of A- or above will
exceptionally be allowed to proceed to Math1014.
I Math1012/1014:A standard sequence of single variable
calculus. Students without the HKDSE Math Extended
Module M1 or M2, or a grade of below level 3, should take
this sequence.

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Single variable calculus

I Math1013/1014: A standard sequence of single variable

calculus. Students with a grade of 3 or above in the HKDSE
Math Extended Module M1 or M2 should take this sequence.
I Math1023/1024: The honors sequence of single variable
calculus. This sequence places more emphasis on rigorous
mathematical reasoning. Students who have obtained a level
5 or above in HKDSE Math Extended Module M2 should take
this sequence.

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Simple Interest

Definition
Let r be the (annual) interest rate. Suppose we invest/borrow a
sum of money P through a certain financial instrument, then after
t years, the amount of interest I received/owed is given by

I = Prt

Therefore, the amount you will receive/pay, A, is

A = P + I = P + Prt = P(1 + rt)

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Simple Interest

Definition

A = P(1 + rt), I = Prt

I I =interest
I A=amount, or future value
I P=principal, or present value
I r =annual simple interest rate
I t=time in years

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Remark
Interest rate is the percentage of principal that is paid over a
certain period of time (usually one year)

I
r= 100%,
Pt
where P is the principal, t is the time in years and I the interest
for t year.
I If the interest earn for a deposit of $100 after one year is $5,
then the rate is 5%.

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 1

Example
Find the total amount to be received for a deposit of RMB10000
after three months and a year respectively based on the following
table from BEA
Period 3 months 6 months 1 year
Interest rate 2.4 p.a. 2.5 p.a. 2.7 p.a.

Remark
p.a. stands for per annum

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 1

Solution
I 3-month:  
2.4 3
A = P(1 + rt) = 10000 1 + = (RMB)10060
100 12
I 1-year:  
2.7
A = P(1 + rt) = 10000 1 + 1 = (RMB)10270
100

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 2

Example
If you want to earn an annual rate of 20% on your investments,
how much should you pay for a note that will be worth $5000 in 9
months?

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 2

Solution
20 9
5000 = P(1 + )
100 12
P = $4347.8

Practice
If you want to earn an annual rate of 10% on your investments,
how much should you pay for a note that will be worth $10000 in 2
years?

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 3 Treasure Bills

Example
T-bills (Treasury bill) are one of the instruments the U.S. Treasury
Department uses to finance the public debt. If you buy a 180-day
T-bill with a maturity value of $10000 for $9800, what annual
simple interest rate you will earn?

Remark
For the convenience of calculation, here one year is defined to be
360 days.

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 3 Treasure Bills

Solution
 
180
10000 = 9800 1 + r
360
r = 0.0408 = 4.08%

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 4 Interest Rate Earned on an Investment

Example
You sell an old car to our friend and accept a 270-day note for
$3500 at 10% simple interest rate as payment. (Both principal and
interest will be paid at the end of 270 days.) Sixty days later you
find that you need the money and sell the note to a third party for
$3550. What annual interest rate will the third party receive for
the investment?

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 4 Interest Rate Earned on an Investment

Solution
The future value of the 270-day note
 
270
3500 1 + 0.1 = $3762.5
360

The third party paid $3550 and then after 270 60 = 210 days,
he/she will obtain $3762.5.

Let r be the annual interest rate for this investment. Then we have
 
210
3762.5 = 3550 1 + r
360

r = 0.1026 = 10.26%
CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 5 Stock Investments (Optional)

Example
The brokerage firm charge commissions based on the amount of
the trade. The following table shows the commission schedule for
one of these firms.
Transaction Size Commission
$0-$2499 $29+1.6% of principal
$2500-$9999 $49+0.8% of principal
$10000+ $99+0.3% of principal

An investor purchases 50 shares of a stock at $47.52 per share.

After 200 days, the investor sells the stock for $52.19 per share.
Using the above commission schedule, find the annual rate of
interest earned by this investment.
CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 5 Stock Investments (Optional)

The values of 50 shares of stocks: 50 47.52 = $2376

The commission for buying those 50 shares of stocks:

29 + 1.6% 2376 = $67.02

Therefore, the total amount of investment is

2376 + 67.02 = $2443.02.

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 5 Stock Investments (Optional)

The values of 50 shares of stocks after 200 days:

50 52.19 = $2609.5
The commission for selling those 50 shares of stocks:

49 + 0.8% 2609.5 = $69.88

Therefore, the total amount of money obtained by selling stocks is

2609.5 69.88 = $2539.62

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Example 5 Stock Investments (Optional)

Let r be the annual interest rate earned by this investment. Then

we have  
200
2539.62 = 2443.02 1 + r
360
Solving, we get r = 0.0712 = 7.12%.

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)
 About MATH 1003
Section 3.1 Simple Interest
Section 3.2 Compound interest

Summary

1. Interest is the fee paid for the use of a sum of money, called
the principal. Simple interest is given by

I = Prt

2. If a principal P (present value) is borrowed, the the amount A

(future value) is the total of the principal and the interest:

A = P + I.

If the interest is simple, then

A = P(1 + rt)

CAI, Jianfeng Department of Mathematics, HKUST MATH 1003 Calculus and Linear Algebra (Lecture 1)