It is one of the applications of mathematics that allows us to obtain relevant financial information, which can be used to make credit or investment decisions. Keep reading and learn more about this topic.
Nowadays, financial and commercial activity requires more and more trained professionals to offer the appropriate advice and guidance to organizations or individuals seeking access to credit, loans or financing. Also for those who want to obtain the best interest rates or returns for the capital they invest. Therefore, the study of financial mathematics is essential for negotiations of this type.
Financial Mathematics: What is it?
In the book Financial Mathematics and Basic Statistics (2008), financial experts Xavier Brun Lozano , Óscar Elvira Benito and Xavier Puig explain that “financial mathematics allows us to base and understand the analysis of financial instruments used in the market, as well as the design of new financial products, all in a context of combination of theory and practice”. This is how it is based on the inequality between the current value and the future value of financial capital.
This is a branch of basic mathematics, also known as financial arithmetic. It is used to calculate the value and profitability of financial market products, including stocks, bonds, loans and deposits . Thus, from an economic point of view, financial mathematics aims to select the most convenient financial alternative.
Why is financial mathematics important?
It is an essential area because, through different techniques and models, it serves as an analysis and evaluation tool to make the best decisions when it comes to having a certain amount of money for projects or investments, affecting the actions that will be carried out in the future. This is very important, considering that every organization seeks to optimize the resources it has, in order to obtain profitability.
Financial mathematics has a practical application in solving common business problems, directly related to economic and financial issues. It also allows determining the risk associated with the decisions that can be taken, helping to choose the most appropriate ones. In addition, this branch of mathematics is very useful because it facilitates the execution of the following activities:
Controlling expenses. Financial mathematics analyzes daily income and cpa email addresses expenses, offering a clear vision to optimize the budget, minimizing expenses.
Forecasting the future. It allows you to know the long-term behavior of money, which is useful for projecting the evolution of an investment and determining its fluctuations over time.
Amortize loans. Creating an amortization table allows you to know the payment plan for a loan or financing, which is crucial to planning savings and payments.
Analyzing inflation. By knowing the real value of money in different periods, financial mathematics is a basic tool for studying the behavior of inflation.
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Basic elements of financial mathematics
Considering that financial arithmetic comprises a series of options, which are used to make financial calculations and decide on investment or financing options, the benefit generated by interest rates must be taken into account, which represents the value of money in the financial market. In this sense, it is necessary to know the following basic elements of financial mathematics:
Financial capital
It represents an amount of money at a given point in time. It groups together the amounts of money saved and represents the total wealth of an organization. It seeks to obtain income, profits or interest to increase its own capital.
Financial Equivalence
It determines the equivalence between two financial capitals, where there is a liquidity surplus and a liquidity deficit. The financial market, the financial regime, the interest or discount rate and the valuation date are involved.
Deferral
It has to do with the moment in which capital or financial income must be valued. It gives rise to the interest rate, which is generated as compensation for not having capital available for a certain period of time and can be of two types, real and nominal.
Financial mathematics is the basis of finance in general. Without it, valuable tools such as the net annual value or the internal rate of return, the calculation of the profitability of an investment or the amortization table for bank loans, among other essential applications in the business world, would not have been developed.