College Math

Chapter 2: Financial Mathematics Overview Money is an essential component of everyday life. Sometimes we work to earn money and sometimes money works for us, helping us earn more money. Financial mathematics deals with applies mathematics to real life situations. We all make purchases of physical as well as financial products and services and with the help of financial mathematics, we can become smart consumers. The motivation of this course is not just to excel in your educational career, but to equip you with the skills to understand the daily transactions happening around you. You will become an intelligent consumer and saver by learning even the basic concepts underlying financial mathematics. This chapter will cover important concepts like percentage, discounts, markups, taxes, changes in percentage, profits and losses. Further, the financial transactions taking place in the financial markets are also taught in this lesson, which consists of simple interest, compound interest, effective rate of interest, continuous compounding, effective annual yield, and present and future values. Objectives By the end of the chapter, you will be able to understand and apply the concepts of: • Percentages and their usages • Changes in percentages • Different interest rates • Compounding techniques • Present and future value 2.1 Percent We are familiar with the word ‘percentage’ and often use it to describe interest rates, growth in sales, exam scores, etc. For example, if a student scored 85% on the CLEP college mathematics examination, it would mean they got 85 questions correct out of 100: 85 100 % But what does percent or percentage mean? Percent is generally used to describe any value ‘out of 100’, which means ‘divide by 100’. The denominator, however, does not always default to 100. In that case, make the denominator 100 by multiplying the factor by a scaler. For example, suppose Randall scored 15 out of 20, then the fraction becomes: 15 20 Now, multiply both numerator and denominator by 5 so that the denominator becomes 100.

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