Mathematical Finance

UNIT III

Mathematics of Debt and Leasing

1. Credit and Loans

2. Mortgage Debt

3. Leasing

Unit III Summary

List of Formulas

Exercises for Unit III

1	Credit and Loans

Credit for both businesses and consumers is an important element in the health of the economy, as long as it can be well managed. Credit understanding and management must be part of a long-term spending and saving plan, and for that it can become a determinant of economic growth. Unless access to credit acts to create a false sense of prosperity and leads to harmful overextension, it can actually reap great benefits by expanding current consumption, stimulating saving, and bringing about economic growth and robustness. Borrowing can basically increase today’s income and expand one’s current capacity to buy. However, all borrowing is made against future income, which will be reduced by the repayment of debt and its interest. This means that a person’s future income will not be able to maintain the level of consumption unless it is increased by what can compensate for all debt repayments and other variables, such as inflation and changes in one’s needs and wants. The bottom line is that borrowing and saving involve the choice of spending more or less today versus less or more tomorrow. Making the right choice requires a good understanding of what credit is all about and how debt can best be managed. Our focus here is on understanding the types of debt and loans, the process and calculation of repayment, how debt ...