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Math Help - Financial Mathematics

  1. #1
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    Financial Mathematics

    P=A(((1+re)^1/12 -1) / (1 - (1+re)^-n)))

    Consider a 100,000 mortgage borrowed for a period of 40 years.
    How many years is half the oroiginal mortgage paid?

    Interest rate = 4%

    n = 40 years

    re= .04 therefore r = .039 as (1+ r/12)^12 = 1 + re

    the problem i have is, P is meant to equal 413.50 but i just cant seem to get it to work out like that, the P formula is giving me minus answers and stuff.

    By the way in the P formula it is 1+re to the power of 1/12 and the other 1+re is to the power of -n

    Please help!!
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  2. #2
    MHF Contributor
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    1) You must define your terms. Notation is not always the same. Various authors and teachers use various notations. What are 'r' and 're'? Have they names or relationships?

    2) The problem statement is insufficient. We do not know the terms of the loan. What it the interest crediting methodology? What is the payment frequency? No lumps?

    3) You have some rounding problems. If you are using the effective monthly interest to only two decimals, you should have some problems. 100000*0.039 = 3900. There are still two zeros to the LEFT of the decimal! How are you going to get exact pennies out of that? You need at least four more decimal places. Of course, this still won't help for the reasons in the next note.

    4) Please see note #1. (1+0.04)^{\frac{1}{12}} - 1 = 0.0032737397822 Notice how this has a zero you didn't have before digits are non-zero. Your version is off by an order of magnitude. 0.039 just won't do.

    5) Do NOT memorize a formula for 1/2 the remaining balance. Just learn how to calculate values. Once you've the exact payment, you can calculate the value for ANY number of remaining payments.

    If i = 0.04, then i^{(12)} = 0.0032737397822 and v^{12}=\frac{1}{1+i^{(12)}} = 0.9967369426186. 100,000*\frac{i^{(12)}}{1-(v^{(12)})^{12*40}} = 413.50189234, so p = 413.51.

    Just solve for 'n'

    50,000*\frac{i^{(12)}}{1-(v^{(12)})^{n}} = 413.50189234
    Last edited by TKHunny; January 7th 2008 at 08:09 AM. Reason: typos
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