STA 4183 The Theory of Interest

Basic Formulas

Accumulation function

a(t),

a(0) = 1

Simple interest

a(t) = 1 + it

Amount function

A(t) = A(0) a(t)

Simple discount

d(t) = 1 dt

Eective rate of interest

in =

a(n) a(n 1) a(n 1)

Compound interest

a(t) = (1 + i)t

i = i1

1+i=

i(m) 1+ m

Discount function

d(t) =

1 a(t)

Compound discount

d(t) = (1 d)t

Eective rate of discount

a(n) a(n 1) dn = a(n)

1d=

d(m) 1 m

d = d1

Force of Interest

(t) =

a (t) a(t)

d=

i , 1+i

i=

d 1d

a(t) = e

(s) ds

STA 4183 The Theory of Interest

Formulas for Annuities

Annuities

Present value
n

Accumulated value

Perpetuities

Present value

1 Immediate an| =

1 1+i

i
1 1+i n

sn| =

(1 + i)n 1 i

Immediate

a| =

1 i

1 Due an| =

sn| =

(1 + i)n 1 d

Due

a| =

1 d

an| = (1 + i)an|

an| = an1| + 1

log(1 ian| ) n= log(1 + i)

1 i

an| 2 n

an|
sn| 2 n

sn| = (1 + i)sn|

sn| = sn+1| 1

log(1 + isn| ) n= log(1 + i)

sn|

STA 4183 The Theory of Interest

Formulas for More General Annuities

n conversion periods

k conversions per payment

n/k payments

Annuities

Present value

Accumulated value

Perpetuities

Present value

Immediate

an| sk| an| ak|

sn| sk| sn| ak|

Immediate

1 isk| 1 iak|

Due

Due

n conversion periods

m payments per conversion

mn payments

Annuities

Present value

Accumulated value

Perpetuities

Present value

Immediate

ian| i(m) ian| d(m)

isn| i(m) isn| d(m)

Immediate

1 i(m) 1 d(m)

Due

Due

STA 4183 The Theory of Interest

Formulas for Varying Annuities

Increasing Annuities

Present value
n

Accumulated value

Increasing Perpetuities

Present value

Immediate

(Ia)n| =

an| n i

1 1+i

(Is)n| =

sn| n i

Immediate

(Ia)| =

1 id

Due

(I)n| = a

an| n d

1 1+i

(I s)n| =

sn| n d

Due

(I)| = a

1 d2

Decreasing Annuities

Present value

Accumulated value n (1 + i)n sn| i n (1 + i)n sn| d

Immediate

(Da)n| =

n an| i n an| d

(Ds)n| =

Due

(D)n| = a

(D)n| = s

Geometric Annuities

Present value
n

Accumulated value

Geometric Perpetuities

Present value

1 Immediate (Ga)n| =

1+x 1+i

ix

(Gs)n| =

(1 + i)n (1 + x)n ix

Immediate

(Ga)| =

1 ix for i > x

1 Due (G)n| = a

1+x 1+i ix 1+i

(G)n| = s

(1 + i)n (1 + x)n
ix 1+i

Due

(G)| = a

1+i ix

for i > x

STA 4183 The Theory of Interest

Formulas for Dierent Investment and Reinvestment Rates

Investment rate i Reinvestment rate j

Reinvestment Annuities

Accumulated value

a(t) = 1 + i

(1 + j)t 1 j

Immediate

(Rs)n| = n + i

sn|j n j

Due

(R)n| = n + i s

sn|j n j

STA 4183 The Theory of Interest

Formulas for Yield Rates

Yield rate

Dollar weighted

Time weighted

I =BAC

2I A+BI

I A+
tk

Ctk (1 tk )

(1 + i) =
tk

Btk Btk1 + Ctk1

STA 4183 The Theory of Interest

Formulas for Amortization Schedules

Loan amount

R1 = = Rn
n

R1 = = Rn

R1 = = Rn

(i = j)

L=
k=1

Rk

1 1+i

L = Rt an|i

Rt =

L an|i

Rk (i > j) L=
k=1

1 1+j

1 + (i j)an|j

L=

Rt an|j 1 + (i j)an|j

Rt =

L + (i j)L an|j

Loan balance

R1 = = Rn
n

R 1 = = Rn

Prospective

Bt =
k=t+1

Rk

1 1+i

kt

Bt = Rt ant|i

Retrospective

Bt = L(1 + i)t
k=1

Rk (1 + i)tk

Bt = Rt an|i (1 + i)t Rt st|i

Amortization Schedule

R1 = = Rn

R1 = = Rn

It = iBt1

It = Rt Rt

1 1+i

nt+1

Pt = Rt It

Pt = R t

1 1+i

nt+1

Bt = Bt1 Pt

Bt = Rt ant|i

STA 4183 The Theory of Interest

Formulas for Sinking Fund Schedules

Sinking Fund

(i = j)

Sinking Fund

(i > j)

R1 = = Rn

R1 = = Rn
n

R1 = = R n

R1 = = Rn

It = iL

It = Rt Rt

1 1+i
n

It = iL

It = Rt

L sn|j

Dt = Rt It

Dt = Rt

1 1+i

Dt = Rt It

Dt =

L sn|j

Bt = (1 + i)Bt1 + Dt

Bt = Rt st|i

1 1+i

Bt = (1 + j)Bt1 + Dt

Bt =

Lst|j sn|j

STA 4183 The Theory of Interest

Formulas for Bonds
1 1+i n

Bonds

K=C

g=

Fr C

G=

Fr i

P = F ran|i + C

1 1+i

P = C + C(g i)an|i g P = K + (C K) i

P = G + (C G)

1 1+i

Bond Amortization Schedule

It = iBt1

It = Ci + Ci(g i)ant+1|i
nt+1

Pt = F r It

Pt = C(g i)

1 1+i

Bt = Bt1 Pt

Bt = C + C(g i)ant|i

f Bt+k

F rk

m Bt+k

Theoretical

Bt (1 + i)k

Fr

(1+i)k 1 i

Bt (1 + i)k F r

(1+i)k 1 i

Practical

Bt (1 + ki)

kF r

Bt (1 + ki) kF r

Semitheoretical

Bt (1 + i)k

kF r

Bt (1 + i)k kF r

Yield rate i

Yield rate i Reinvestment rate j

g 1+

k n n+1 2n

where k = k

P C C

(1 + i )n =

C Fr + s P P n|j