Chapter 1

Basics:
a (t) : accumulation function. Measures the amount in a fund with an investment of 1 at time 0 at the end of year t. a (t) a (t 1) : amount of growth in year t. it =
a(t)a(t1) a(t1)

: rate of growth in year t, also known as the eective rate of interest in year t.

A (t) = ka (t) : any accumulation function can be multiplied by a constant (usually the principal amount invested) to obtain a result specic to the amount invested.

Common Accumulation Functions:

a (t) = 1 + it : simple interest.
t

a (t) =
j=1

(1 + ij ) : variable interest.
t

a (t) = (1 + i) : compound interest.

Present Value and Discounting:

PV = dt =
1 a(t)

1 (1+i)t

= (1 + i)

= v t : amount you must invest at time 0 to get 1 at time t.

a(t)a(t1) a(t)

: eective rate of discount in year t.

Some Useful Relationships:

1d=v d= i=
i 1+i d 1d

= iv

Nominal Interest and Discount:

i(m) and d(m) are the symbols for nominal rates of interest compounded m-thly. 1+i= 1+
i(m) m m

i(m) = m (1 + i) m 1 1d= 1
d(m) m m

d(m) = m 1 (1 d) m

Force of Interest:
t =
1 d a(t) dt a (t) Rt
0

d dt lna (t)

: denition of force of interest.

a (t) = e

r dr

If the Force of Interest is Constant:

a (t) = et P V = et = ln (1 + i)

Chapter 3:
Annuities:
an = an =
1v n i 1v n d

= v + v 2 + + v n : PV of an annuity-immediate. = 1 + v + v 2 + + v n1 : PV of an annuity-due.

a n = (1 + i) a n = 1 + a n1 sn =
(1+i)n 1 i

= (1 + i)

n1

+ (1 + i)

n2

+ + 1 : AV of an annuity-immediate (on the date of the last

deposit). sn = = (1 + i) + (1 + i) of the last deposit).

(1+i)n 1 d n n1

+ + (1 + i) : AV of an annuity-due (one period after the date

s n = (1 + i) s n = s n+1 1 a mn = a n + v n a n + v 2n a n + + v (m1)n a n