Chapter 5 - Exercise Resolution

FORM
Simple Rational Discount
N i n N
DR ;DR VR i n;VR ;VR N DR
1 i n 1 i n
Simple Commercial Discount

DC N d n;V N1
C
d  n;VC  DC
N

Simple Bank Discount

Db N d 
n  s;V N1bd n  b N Db 
s
Db N d n N d n;V N 1 d n
b 
n
Relations between Simple Rational Discount and Simple Commercial Discount
DC i
DC D R
1 i n;D C DR ;se d i
1 I n
Implicit Linear Interest Rate or Effective Linear Rate of Simple Commercial and Banking Discount

N N s
1 1 d
Vc d Vb n d
icl ;icl ;ibl ;ibl
n 1 d n n s 1 d
1 d n
n
Implicit Exponential Interest Rate or Effective Exponential
1 1 1
N n 1
N 1
iRe  1 and
;i 1Ri  n 1;i  and
n
c
 1 c;i
and
 1;
VR Vc 1 d n
1 1 1
n
N n
1 n 1
iband  1 b;i
e
1 1
Vb 1 d n s 1 d s n 
Compound Rational Discount or Financial Discount

 1 i 1  n N
Df N V f;Df V f 1 i 1 ;  DN f
;Vf
 1 I  n  1 I 

Compound Commercial Discount or Compound Externally

n Vcc 1 (1 d) n
Dcc N Vcc ;Dcc N1 (1 d ) ;N ;Dcc Vcc
 1 d  n (1 d) n

Implicit Interest Rate of Compound Commercial Discount or Compound Outside

d I
i ;d
1 d 1 i 

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 42

 Chapter 5–Exercise Resolution

5.5—Proposed Exercises

1) Consider a bond with a nominal value in a term of 3 years, issued today. What
it must be the monthly discount rate that I should pay in six months so that the value of
redemption is half of the nominal value, considering the following types of discount:
a) Simple Rational Discount
b) Simple Commercial Discount
c) Rational Compound Discount
d) Compound Commercial Discount

Solution
a) Simple Rational Discount
N N
1 1
N VR 0.5N 1
VR i i 0.03333 or 3.3333% per annum
1 i n n 30 30

b) Simple Commercial Discount

VC 0.5N
1 1
N N 0.5
VC N1 d n d 0.016667 or 1.6667% per month.
n 30 30

c) Compound Rational Discount

1 1
n
N N N 30
Vf i 1 i 1 0.023374 or 2.3374% per month.
 1 i 
n
Vf 0.5N

d) Compound Commercial Discount

1 1
Vcc Vcc n 0.5N 30
N d 1 d 1 0.02284 or 2.284% per month.
 1 d  n N N

A nominal value bond of R$ 50,000.00 was discounted at a bank 100 days beforehand.
of maturity. What is the discounted amount and the effective daily interest rate, linear and
exponential, for the following conditions:
a) Simple interest rate discount of 24% per year and simple rational discount?
b) Simple interest rate of 3% per month and simple commercial discount?
c) Simple discount interest rate of 2% per month, plus 2% on the nominal value, as title
of bank fees, and simple bank discount?
d) Compound interest rate of a 24% annual discount and compound rational discount?
e) Compound interest rate of a 3% per month discount and compound commercial discount?

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 43

 Chapter 5 – Exercise Resolution

Solution
a) Simple discount interest rate of 24% per year and simple rational discount.
N 50000
VR 46875.00
1 i n 0.24
1 100
360
In the case of simple rational discount, the effective linear rate is equal to the current rate of
simple discount, in this case, 24% per year. Therefore, the effective linear daily rate is:
0.24
iRl 0.000667 or 0.0667% a.d.
360
On the other hand, the effective exponential rate is:
1 1
N n
50000 100
ie
R
1 1 0.00646 or 0.0646% a.d.
VR 46875

b) Simple interest rate discount of 3% per month and simple commercial discount
0.03
Vc N1 d n  50000 1 100 R$ 45,000.00
30
0.03
d 30 0.001
icl 0.00111 or 0.111% a.d.
1 d n 0.03
1 100 0.9
30
1
100
1
1 n 1
ice 1 1 0.001054 or 0.1054% a.d.
1 d n 0.03
1 100
30
c) Simple discount interest rate of 2% per month, plus 2% on the nominal value, as a title.
of bank fees, and simple bank discount.

0.02
Vb N1 d n  s 
50000 1 100 0.02 R$ 45,666.67
30

s 0.02 0.02
d 
ibl n 30 100 0.0009489 or 0.09489% a.d.
s 0.02 0.02
1 d n 1  100
n 30 100
1
100
1
1 n 1
ibe 1 1 0.0009070 or 0.09070% a.d.
1 d n  s 0.02
1 100 0.02
30

d) Compound interest rate of 24% per annum with monthly compounding and compounded rational discount.

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 44

 Chapter 5 – Exercise Resolution

N 50000
Vf R$ 46,806.11
 1 I 
n
 1.02 
100
30

The effective discount interest rate is 2% per month, which is equivalent to the daily rate of:

1
 1 d m 1 d

30
d d 1 d d  m
30 1
1
 1
d d 1.02  300.00066031a.d.ou0.066031%a.d.

In the case of compound rational discount, the effective rate is equal to the current rate of
compound discount, that is 0.066031% per day.

e) Compound interest rate of 3% per month and compound commercial discount.

Vcc 100
N V cc N1 d 
50000 1 0.03  30 R$ 45,172.67
 1 d  translatedText

*
The effective monthly interest rate,im , é:
* d 0.03
im 0.030928 or 3.0928% per month.
1 d1 0.03
Logo, the effective daily interest rate, id* , é:
1
 1 i* m 1 i* i*d
30
1 i*  m 30 1
1
id*  1.030928 1 30 0.001016 a.d. or 0.1016 a.d.
3) João has commitments made on the same date with Pedro, through two
promissory notes:
The promissory note with a face value of R$ 100,000.00 and a term of three months.
36% annual interest rate.
The promissory note with a face value of R$ 50,000.00 and a term of 6 months, at the rate of
36% annual average compound monthly
The question is:
I. If, after 1 month from the date of the loans, João proposes to Pedro to settle his debts.
debts through a single payment, due at the end of 4 months, what is the
the amount that must be paid, if Pedro stipulates:
a) compound rational discount at a rate of 4% per month?
b) compound commercial discount at a rate of 4% per month?

II. At the moment of negotiation with João, Pedro noticed that he would earn more if he specified.
compound commercial discount for the invoiceA, and compound rational discount for the
noteB. In this new condition, how much should João pay Pedro, keeping the rate
of a 4% monthly discount and a single payment due in period 5?

Introduction to Financial Mathematics–Faro & Lachtermacher–Final Version Page 45

 Chapter 5–Exercise Resolution

Solution

The first step is to find the nominal values of the promissory notes A and B; taking
Considering the effective rate of 36%/12= 3% per month.

Na 100000 1 0.03 109,272.70

 3

Nb 50000 1 0.03 59702.61

 6

The scheme that represents the transaction is given by:

where date 0 denotes the date of the loans.

Item i
N
a) Given the relationship in compound rational discount V f we have the following
 1 I 
value equation, with focal date in period 5.
59702.61
P 109272.70 1 0.04 2 R$175,595.71
 1 0.04 
Vcc
b) Given the relationship in compound commercial discountN we have the following
 1 d  n
value equation, with focal date at time 5.

109,272.70
 59702.61 1 0.04 1
P R$175,882.97
 1 0.04  2

Item ii
Considering the conditions set by the creditor for compound commercial discount, for
to note A, and compound rational discount for note B, we have the following equation of
value, with a focal date in period 5 and a discount rate of 4% per month.

109272,70 59702,61
P  R$175,974.82
 1 0.04  2  1 0.04 

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 46

 Chapter 5 - Exercise Resolution

A loan of R$ 200,000.00 must be amortized in 4 monthly installments.

successive and equal, the first one month after the granting of the same. Considering the rate
interest rate of 6% per month, determine the value of the monthly installment for:
a) Simple Rational Discount
b) Simple Commercial Discount
c) Financial Discount
d) Compound Commercial Discount

Solution
The diagram that represents the transaction is given by:

N
a) Considering the relationship in simple rational discountVR , the following
1 i n
the value equation must be satisfied (taking time 0 as the focal date):
P P P P
200000   
1 0.06 1 1 0.06 2 1 0.06 3 1 0.06 4

200000 P0.9434 0.8929 0.8475 0.8065 
200000
P R$ 57,301.66
3.4903
b) Considering the relationship in simple commercial discount
c
V  d nthe
N1  following
the value equation must be satisfied:

200000 P1 0.06 1 P1 0.06  2 P1 0.06  3 P1 0.06 4   

 0.88 0.82 0.76
200000 P0.94 
200000
P R$ 58.823,53
3.4
N
c) Considering the relationship in financial discountV f the following equation of
 1 i 
n

value must be satisfied:

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 47

 Chapter 5–Exercise Resolution

P P P P
200000 
1  
 1 0.06   1 0.06  2
 1 0.06  3
 1 0.06 4

200,000 P0,9434 0.8900 0.8396 0.7921 
200000
P R$ 57,718.39
3.4651
Vcc
N
d) Considering the relationship in compound commercial discount the following
 1 d  n
the value equation must be satisfied:
200000 P1 0.06 P1  0.06 P1
 0.06 P1 0.06 3  4
1 2

 0.8836 0.8306 0.7807

200000 P0.94 
200000
P R$ 58,225.86
3.4349
5) Let it be the case of a department store that, for discounting titles, whatever
be the deadline, you want to earn, in real terms, a rate of 5% per month.

Having been estimated by your Operations Department, that the monthly inflation rate,
for each um two 3 months na front be respectively
I1 0.6%, I2 0.5% eI3 0.8%it is requested to determine, for discount operations
for 1, 2, and 3 months, the respective monthly discount rates

a) Considering Simple Rational Discount

b) Considering Simple Commercial Discount
c) Considering financial discount
d) Considering Compound Discount by Outside

Solution

The apparent ratesik* paraconditions are:

I1* 1  0.05 1  0.006

 1 
0.0563 or 5.63% per month.

i2* 1  0.05 1  0.006

  1  or 11.466% a.b.
2
1 0.005 0.11466

i3* 1  0.05 1  0.006

   1 0.008 1  or 17.976% a.t.
3
1 0.005 0.17976

a) Simple Rational Discount

VR
N N N
i
 1 i  1
*
k

1 i n1 ik k  1 i* 
k
k

k=1

i1
 1 i  1
*
1  1 0.0563 1 
0.0563 or 5.63% per month.
1 1

Introduction to Financial Mathematics–Faro & Lachtermacher–Final Version Page 48

 Chapter 5 – Exercise Resolution

k=2

i2
 1 i 1
*
2  1 0.11466 1 
0.05733 or 5.733% per month.
2 2
k=3

I3
 1 i  1
*
3  1 0.17976 1 
0.05992 or 5.992% a.m.
3 2
b) Simple Commercial Discount
1
1
VC N1  d n
N 1  1 i* k
 d k
N1  dk k 1 dk
k
 1 i* 
k
 1 i* 
1
k

k=1
1
1
 1 0.0563 
d1 0.0533 or 5.33% per month.
1
k=2
1
1
 1 0.11466 
d2 0.05143 or 5.143% a.m.
2
k=3
1
1
 1 0.17976 
d3 0.05079ou5.079%a.m.
3
c) Financial Discount
1
N N N
Vf i 1 i  1k
* k

 1 i 
n
 k1 i k
 1 i* 
k
k=1
1
i1 1 0.0563 1  10.0563 or 5.63% per month.
k=2
1
i2 1 0.11466 1  0.05577
2 or 5.577% per month.
k=3
1
i3 1 0.17976 1  0.05665
3 or 5.665% per month.

d) Compound Discount Outside

1
k
Vcc N 1
N1 d
k
N  d k 1
 1 d  n k
 1 i* 
k
 1 i* 
k

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 49

 Chapter 5–Exercise Resolution

k=1
1
d1 1 0.0533 or 5.33% per month
 1 0.0563 
k =2
1
2
1
d 2 1 0.05283 or 5.283% per month.
 1 0.11466 
k=3
1
3
1
d3 1 0.05361 or 5.361% per month.
 1 0.17976 
A security with a face value of R$ 50,000.00, term of 30 months, and compound interest rate
of 10% per annum, had a financial discount of R$ 9,977.54 upon redemption, considering the
compound interest rate of 25% per year. What is the duration of the operation in days?

Solution

First, we must calculate the nominal value of the bond, which is:
C1 i  1 0.1 2.5 R$ 63,452.94
n
N 50000
The equivalent discount rate for the day is:
1 1
 1 i 360
a 1 i d I 1 i d  a
360 1 
1.25  360  1 0.00062 or 0.062% a.d.
Therefore
 1 i 1 n  1,00062 1 n
Df N 9977.54 63452.94
 1 I  n  1.00062  n
1 9977.54 1
1 1 0.157243
 1,00062  n
63452.94  1,00062  n
 1,00062  n 1.18658 LN(1.00062) LN(1.18658)
0.171075
n 276 days
0.0006198
7) The ratio between the nominal value of a security and its discounted value is 1.07. Knowing that
the bond was discounted 90 days before its maturity, what is the effective interest rate, linear
and monthly exponential used, considering:
a) Simple Rational Discount
b) Simple Commercial Discount
c) Financial Discount
d) Compound Discount Outside

Solution

a) Simple Rational Discount

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 50

 Chapter 5 - Exercise Resolution

N N
VR 1 I n 1.07 1 3i
1 i n VR
0.07
i 0.0233 or 2.33% per month.
3
In simple rational discount, the current interest rate is equal to the effective linear rational rate.
The effective rational exponential rate is given by:

1
N n 1
iRe 1  1
1.07  30.0228 or 2.28% per month.
VR

b) Simple Commercial Discount

N 1 1
VC N1  d n  1.07
VC1 d n 1 3d
1
3d 1 d 0.02181 a.m. or 2.181% a.m.
1.07
effective linear rate
d 0.02181
icl 0.02334 or 2.334% per month.
1 d n1 0.02181 3
effective exponential rate
1 1
1 1 3
icand 1 1 0.02281 or 2.281% per month.
1 d n 1 0.02181 3
c) Financial Discount
N
Vf  1 i  1.07
n
1 I  3
 1 I  n
Vf
1
i 1.07 1  3 0.0228091 or 2.28091% per annum.
d) Compound Discount from Outside
Vcc N 1 1
N 1.07
 1 d  n
Vcc  1 d  n
 1 d  3
1
1 3
d 1 0.0223 a.m.
1.07
d 0.0223
i* 0.02280863 or 2.280863% per month.
1 d1 0.0223
8) João holds a promissory note with a nominal value of R$ 100,000.00, which matures
At the end of 2 and a half months. Needing money, João looked for a bank that would
offered a simple commercial discount at a rate of 4% per month.

Introduction to Financial Mathematics – Faro & Lachtermacher – Final Version Page 51

 Chapter 5 - Exercise Resolution

Your friend Luís, knowing about your need, makes you a proposal for a rational discount.
simple, assuring João that the amount received by him would be, at least, equal to
amount received in the bank proposal.
What is the highest simple interest rate that Luís can charge to honor his word?

Solution

In the bank, the amount received by João would be:

VC N1 d n 100000
  2.5 R$ 90,000.00
1 0.04 
In Luís's case, the maximum value of the simple interest rate he can charge is:
100000
1
N 100000 90000
VR 90000 i 0.044444 or 4.444% per month.
1 i n 1 2.5i 2.5

9) Send the monthly compound discount tax outside, what should its value be in order to
the discounted value is equal to 80% of the nominal value, in the case of a 2-year term?

Solution
1
V V Vcc n
1 d  n
N d 1
 1 d  n N N
Logo
1 1
V n 0.8N 24
d 1 1 0.009255 or 0.9255% per month.
N N
10) Sendoda = 15%, the annual compound discount rate outside, determine what the rate is
monthlymof compound discount from the outside, which is equivalent to it?

Solution

Vcc
N V cc N1 d n
 1 d 
Logo, for 1 year or 12 months the value of Vccit must be the same, that is to say:
1
N1 d  
1 12
aN1
m a d d 1 d m
12 1
1
d m 1 0.15 1  120.013457 or 1.3452% per month.

Introduction to Financial Mathematics - Faro & Lachtermacher - Final Version Page 52