on Theory of Interest STEPHEN G. KELLISON McGRAW-HILL INTERNATIONAL EDITION camaTHE THEORY OF INTEREST Third Edition International Edition 2009 Exclusive rights by McGraw-Hill Education (Asia), for manufacture and export. This book cannot be re-exported from the country to which it is sold by McGraw-Hill. This International Edition is not to be sold or purchased in North America and contains content that is different from its North American version, Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright © 2009, 1991, 1970 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. ‘Some ancillaries. including electronic and print components, may not be available to customers outside the United States. 10 09 08 07 06 05 04 03 02 20 09 CTF ANL When ordering this title, use ISI 978-007-127627-6 or MHID: 007-127627-0 Printed in Singapore www.mbhe.com To my family: Toni, Matt, and LexiPreface ‘This third edition is a substantially revised and expanded treatment of the theory of interest from that contained in the second edition. With a few minor exceptions, all the material in the second edition has been retained and updated. In addition, a significant amount of new material has been added. ‘The first seven chapters cover the basic mathematical theory of interest as traditionally developed. These seven chapters match the first seven chapters in the second edition. However, the material on yield rates was moved from ‘Chapter $ to Chapter 7 and the other two chapters were renumbered accordingly. ‘The coverage of topics in these seven chapters largely tracks the second dition. The consideration of annuities varying in geometric progression has been expanded into a separate section reflecting the increasing importance of indexed annuities in various types of applications. The material on capital budgeting in Chapter 7 has been significantly expanded with the introduction of several techniques not covered in the second edition. Finally, the discussion of short sales has been expanded and repositioned into Chapter 7 ‘Chapter 8 covers practical applications of material presented in the first seven chapters. It is organized into largely independent sections, so that it can readily be used as a reference for the topics covered. One new topic that has been added in Chapter 8 is leasing as an alternative to traditional loan financing, with particular emphasis on automobile leasing. Also, the section introducing, the reader to modem financial instruments has been expanded to include additional financial instruments. Chapters 9 through 13 introduce the reader to the economic and financial theory of interest, in additional to the mathematical theory of interest. Much of this material was covered in the second edition, but the extent and depth of ‘coverage has been significantly expanded in the third edition. For example, Chapter 9 has seperate sections devoted to reflecting the effects of inflation, ‘expenses, taxes, currency exchange rates, and risk and uncertainty in calculations involving interest. Chapters 10 and 11 are two new chapters representing a significantly expanded treatment of two important topics covered in Chapter 9 of the second dition. Chapter 10 covers the term structure of interest rates with expanded consideration of spot rates, forward rates, relationship with bond yields, and &Prefoce vii section with a detiled discussion of arbitrage. Chapter 1 covers important techniques in the management of assets and lisbiies, such as duration, convexity, and immunization. The analysis of interest sensitive cashflows is considered more explicitly and in more gepth. Also, the material on the full immunization technique has been moved from an appendix and expanded into a separate section With couple of notable exceptions, the first cleven chapters largely utilize 4 deterministic approach to the subject of interest. The final two chapters explicitly address stochastic approsches to interest theory. Chapter 12 contains 2 number of different models for doing this and consists of an expanded tweatment of material from Chapter 10 in the second edition. The use of binomial lattices for interest rate modeling and the development of several continuous stochastic models are new tothe third edition, Chapter 13 addresses options and other derivatives and has been expanded into an ene chapter. Significant non-mathematcal introductory material has been added in the carly part of the chapter to provide more complete introduction into the basics of options. The two primary approaches for option valuation, binomial latices and the Black-Scholes formula, have been updated and expanded. Finally, the reader is briefly introduced to some extensions of option valuation techniques for more complex types of options. ‘The computational approaches in the third edition have been modernized to reflect the widespread availabilty of calculators with exponential and logarithmic capability, including those with builtin financial functions Techniques for solving certain key types of problems, eg. the determination of an unknown yield rate given a set of cashflows, are illustrated. However, the presentation is generic and not tied to any one particular financial calculator. ‘The coverage of calculator techniques is targeted and is not widespread throughout the book. The imporance of the mastery of basic concepts and techniques is stressed throughout and is not sacrificed in those areas in which caleulatr techniques are ilustated. The interest tables have been climinated from the third eition as obsolete. ‘Also, iteration techniques ae greatly emphasized from the presentation inthe Second edition. An appendix on iteration methods is retained for those reader interested in pursuing this subject in more detail. ‘The pedagogical approach in the second edition has been retained in the third edition, The textbook narrative emphasizes bath the importance of conceptual understanding and the ability to apply the techniques to practical problems. Verbal interpretations of key reslts are emphasized throughout. Key formulas are numbered for ease of reference. Illustrative examples are provided Preface ix at the ends of most sections. The number of exercises a the ends ofthe chapters has been significantly expanded to S4S. Each exercise is intended to illustrate a somewhat different point to keep the number of repetitious exercises to a ‘minimum. Answers othe exercises are provided at the back ofthe book. ‘A new feature in the thitd edition is the addition of chapter appendices. “These appendices contain such items as the more complex derivations, extended results of interest but not fundamental, and additional formulas and techniques. ‘The purpose is for the primary textbook narrative to be “tighter” and focused on the fundamental material. In addition to these chapter appendices, the book also contains five general appendices at the end of the book. These latter five appendices are lettered rather than numbered to avoid ambiguity. ‘A working knowledge of calculus is required, since the continuous nature of interest is recognized throughout the book. Also, the last two chapters of the book dealing with stochastic approaches assume knowledge of basic probability and statistics, “The book is designed to be appropriate for both classroom use with an instructor and for self-study by those learning the subject without the ai of an instructor. The amount of material probably exceeds that which can be covered in a one-semester university couse. “The author is indebted to a number of students who have used the textbook and a number of other correspondents who have written over the years in connection with the second edition. As a result of this input and correspondence, a number of improvements have been incorporated into the thicd edition “The author wishes to express his appreciation to the Society of Actuaries land tothe Casualty Actuarial Society for using the second edition as a syllabus reference on the actuarial examination covering financial mathematics for many years. A number of the exercises appearing in this book have been obtained from published examinations ofthese two actuarial organizations. ‘The author also wishes to give special recognition and appreciation to two individuals atthe University of Central Florida. Kellie Tabor spent uncountable hours typing the manuscript for the book. Since final copy was produced by ‘word processing, this was a very painstaking process. Dandan Xu, a graduate student, used special software to develop the figures in the book and also contributed extensively tothe exercises. Finally, the author wishes to recognize the patience and understanding of his wife Toni for her unfailing support. Without her dedication and support this ‘book could not have been completed. October 2007 STEPHEN G. KELLISONContents 1 The measurement of interest wnvnrnnentnnn LI Introduction, 1 12 The accumulation and amount functions, 2 13. Theeffective rate of interest, 5 14 Simple interest, 7 15 Compound intrest, 8 16 Present value, 13, 1.7 Theefective rte of discount, 15 1.8 Nominal rates of interest and discount, 22 1.9 Forces of interest and discount, 28 140. Varying interest, 35, LIL Summary of results, 38 Appendix 1, 39 ‘Simple interes for factional periods, 39 ‘Compound interest for fractional periods, 40 Becises, 42 2 Solution of problems to later tenner 21 Introduction, 49 22 Thebasic problem, 50 23° Equations of vale, $2 24 Unknown time, 5$ 25° Unknown rate of interest, 58 26 — Detemining time periods, 60 2.7 Practical examples, 62 Appendix, 66 Derivation involving method of equated ie, 6 Bxeriss, 67319 Aamir thing cong es $8 pen 8 ‘Aponte ar io of i 16 Mee et en 42 ites pases oven er 43. Amit ppb equ thn ce cove, 1 44 Aan pte are ea an ie coven, 2 416. Paynea yagi popes 127 47 Paying gum: ops 13 410 Sammy on ‘penn 10 er em en py ey ie Aber posh pms ayn inate pein. Amertation shel an snag fade 32 Png ostning han ic, 153 54 Shiga tt Site met prince pin 0 od 5 Sepang 8 end a ethe sche ene ene cen Speen 6 ean $1 Citteucpaaeyaa Vl 8 eee 73 signet eye 25 2 Tipe i ofr 209 29 Copalageing bushi 211 710 Capitan her ietaes 286 ret 295, ethene nee sunt 9 Seon 75. 296 Inert veer ing cnt core 297Pract Ap ERS0 8 St mann 38 82 Tring 310 35 Amoi acne 316 Ae Reem morgan 6 8S promenade 333 56 Depend 388 1A Maden Gn tn 35 More advanced Basil A 6 enn I 93 Deemer a evel of te 36 4 Region fin 379 97 Coe eng te 397 Ref kw cea 0 “The term srctre tre een 103 Spat 4 104 Resto bond el 26 ee Arg 107 een el 40 eration convey nd inmate A 2) Daan at 114 tees ah ov a 113 Amit oan 70 118 hag wt a 6 eget 8 Pat wai ofan sos ‘Stochaste appre 18 ner anne (an Tarot 500 Arp. eb eae the var of wey, 2 ‘Options and eter dria omen 122 atc els pn 56 ‘Aspen 5 Det oe Bk Sets ol 59ApmeadtsA lemurs fe et Append 8 tse morgage arto sels Append © Ba ten ee Arment Ninn ag AINE hn Sn 1 ‘The measurement of interest 1.4 INTRODUCTION eres ay be deed 2 he eogesation tht rower of capil pays ‘ofr of ep for is we. Thus interest at be Weed 3 frm freak thatthe torower pays 10 the lender to compenste Tor he les of we of the spi by he lender file lated w the Berner theory, capt iret ned othe expressed in terms ofthe same commodiy. or orale, ames A may ed a wate wo Fam 8 fr use in harvesting Bx wheat cop ‘sum for percenageof te whet harvested tn his example the actor fe apt a he prin of west tha ives As iter. However or aot ll aplesions, Bo capital and intrest ar expres in es rn. Ta Chop he various uaive mesure first oe sales, TA shape itcades mest of te ase peices involved inthe meserement of Inert. Cher 2 through labors and extend th as principles 0 more ‘compl anil tanaction. These capers explore te varus meth By ‘hich cress cau anny which cap anders ae repay he omer otk ede. CChapers 18 in esence ae conrad wih the mathematical theory of inert on eteriniic hss. Chapters 13 nace the ede 10 3 nme of moe advanced opis. Among these topics ae We following: the eeaoae ‘nancial theory of nee he tm tre rest ae, ecg ‘claing assets and lables, sacha appraches to ines, and more aance racial isnt sh attests eae,2 Tethers of rat 12 THE ACCUMULATION AND AMOUNT FUNCTIONS ‘come nani wantin ihe invent of an amount of ney a fers For example person may invest na svings acount ta bak. The Inia amour of mney capital) ive fe clled the principal and he tl nut eevee 2 ped of time i cal he acrumated value The Giterece between the sovimalted vale ad he inci Be amount of eres ojo merece dang the ped of vestnes or the momen, atime Hatten the og pip vested, te coma vale ay pt nine ea be did We wil ase at ‘pcp ed or witha ding te eri investment any ‘Shange i the fon dor acy oe eet fires. Late we wl en his ‘stumplon nd low for cntibuicns and wiurevals dung the pte! of Tet measure tne from the de of investmet. In thcry ine may be mead in many fern ws ey, os, decades. THe ut 9 Inhich tine ic mean called the eturement perio. or jo prod. The Inet common mesnrenen paid is On yar a is wl Be assumed ness ‘ed bernie {Consider the iavesunet of one unit of rip We can define an cumulation acto al wich vs the accurate vue a me 12 Oo at ‘opin ivesment a What properties dos his anton possess? 1 Mice tare) 2 at generally sn neweaseg fanctin, A decree in the anna ales fue icesing F would imply aepave itest_Aough negate ie sie mathematical, ot relevant most atone encour in race. However, thee ae station in which negate interest does aPPE. ‘gan investment fad tha ses ancy ove acer ero of ime, Constant ‘action valves wool inpy ew lee, aon ceca ocesnally 1. Wier acres cotnaoaly, a sully te case be anton wl be entinvous However, tee are stutons i which ies cs pot ace covinnsy between ines payment des. in which ce tM) posect ‘Secon. Pemmscennt fie 3 tn peer he orga principal invested wil ote one unit bu wll be some nant k > 0. We now define an anoint futon A) wich gives he ‘ecurulate vale wie (20 fw xin! vestneat of Then we have aw) ny a wo AO) = ‘Thence and thd proprio sted above clea alo bor A. ‘We wl denote the au of tres aed ring te mh pei om he die ofiaesinest by fy Then ee ave 1, = Atm Ana for 3.23, 02 I sbould be noted ut J notes the et f itr onan interval time, ‘shure Alma amu at pec point nme au a04 Peter of ee ‘Aca. the cumin con 2 spi ese ofthe anwent fron foe which k= 1" However: the accuulan fn wl signin enough inte vet ofthis cape to warran «eparatedetition In may cue. De ‘Suman foncion edhe anu fron cn be wed nterchangeably. ure 1 shows four exanpes of cu fons Figur 2 Tier mount fancion, Fir () ose, in th eve an expoenti CONE Figure (0 an amour ton whic shone te slope se. This fiewe fepesets an aunt firtion im which the racial amine 90 Incest Figure 4d an ant fection i Which inves sot acing uwimoasly but acing in dre Segments wit) miners acing Tetacn tet pet ats Tbe fllowing seston, various mesa of ters wile developed from be scunulaton fasion. practice 0 parca aecumalation fonctions Weil tana mest ian which are However, he ede soul ndersand the pope general accumton Fintona defined ins Seton ad be shleto wok wi sample LI Am ineionet of $10.00 made int and atime = 0 ‘Tha fad develops the allowing Blancs over te nest 4 eas: 1 au o ‘iagonos 1 1.0.00 2 143000 3 137320 4 45398 1 $5000 invest time = 2, ander he same interest envionment find the sccumalated yale of he $000 a ine = 4 es bee eu se of he SOD, K ae Ne demi! a a “kau sisi we 43)" Thiew Premeaarenet cites 5 1.3 THE EFFECTIVE RATE OF INTEREST The fist measure fires i ale he effete rate of ret se i sete by Apri defini The eet rate of interest 16 the am of mes that ome ait vested atthe Begining of a perdi ar daring the per where eres paid a tend of he per ‘ete that in es ofthe accel eto, ts deiton is eure 10 saying tha f= at}-2(0) atl) = be «3 ‘Seven oberon tu this dfoion a impanan: Tae we othe word eee” aime clear, Tse is sed for ‘es of ntti which teeta ence per easement period This will te conta it) mina” rae of interes which ners pid ore Ars tan ose per meaner be conse ia Sion 1, 2. The eevee of itr fen oxped a penta c= HE The sony of theese rite of ines 5 ecemtae mt nce with te defi ove, which wats tats aman of ny, 8 35 ‘Sn bloke! up as pe nit of pp |. The amount of princi emai constan oughout he erg em ne cipal comb and no pega widen droge ered. 4. The ffs te meet sa mean which niet sp a tend ‘fhe pena. The sigifiance of ths mate at mete lt Wel necome eign in Section 1.7. whee # snare te dew 0 which incest pid tt Begining of he per. gD tise mi fineret cane defied nsf he ana non a att) -a(0) | a()=400) 1, 2) et, Ts, acne fener accmalain oetion ey = L4H oe FaI2A, as) ‘easing mere asin hi pte cad ine ere SSCTECT ae sco a imc i ot iy 2 costa nee eset Lie conta mo end Ente met me re mn perm td nS 3 cinveain-t) (tinh fleet] ey 8 aid Ta ie-ty eh for n= 12%. which a decesing faction fn Ths coma ae of ‘nlite ingles decreasing ere te ofr “The scumtonfuycton fer single ert has ben defined only fo vals of ich are pov ftges However, is rau texted tbe ‘fino to gonial values of > O aswell This i ogvaent whe ‘rainy fier prporionaly ore any tation of «pv 1f is se ‘hte he amour fonction cae represent) Figure a) Cire i Stetoteny for completed pee wih mo cet or etna periods, en he ‘snot fancion Poors «sep function eth dscomineties as eed By Fe Ll, Uses sate erwin, wl be ase hat ineret i ceed opto over action prods nde smple res. sore rigs eration spl tres fo tonal pesos v= ln appendix athe end lhe ageTheme tt ‘Scample 1.3 Find he accemaated vaso $2000 invested forfour yar, the re of tpl interes #% pr annum, Aaning ema Sechne + om be Note he ean fees ene 340 200» $0 Th a ae binds 30 ORK on gee 0). bellow! naan tn ee far st rom ryan ny i ste te amine eg te af ea pie ‘Akon tae else a tet ie th er a sin emit) Te wl eh ecm 1.8 COMPOUND INTEREST Simple imcrest has the peopeny hat the inert is ot nse 1 ca sol inert. For example consderan invent 100 for to yan 10 simp interest. Ur simple neret the invest wil cee S10 he cndof chat ihe two yeas. Howes rat fr the secu year th net ‘as S110 which could Rave Been inte Clty t woul he advagrs to {vet the S110 at 1, sce the investor woul he eine $1 i tre the secood earintead of $10. “The tory of compo nee hanes is podem by assuming a the isere cane is asonaticalyseinvesod Toe word “emp” refers the proses of ners fig ected 6 eam ada iret, With coped Inet the tr investment of pial and inet eared date het Pemewmeene fet 9 ne mow dese wo find he seaman fection for compound interes. Consider the vest! of | Shh secures 1 1+ tthe ed fhe ft ped Ths balance of |» can be omidere ws picpal a te epanng o the secod pared and wile iret of i dang the second ped. The ‘ce athe end ft socond period i [1+f} 6 1(he) = (84) Sealy, the bln (I+) canbe comaered a principal a eben fe nd evn ad wil eam reso (1+) ding tet peso, ‘The tance at tbe end of the Wind pened sy (les) + a(loy) = (V4). Coming Bis ‘ces indefinitely. we aban ai = (4a for e128 oy Tecan he shown ta constant mae of compound rt mis a ont effective ref inert a. sroover, athe ba a og Lt Fb the ensure of compound erst ade 1, be We fete rate of eee oe et period as eld Seco 13, Then. weave (oat ean tae al _ ale)main=t) ‘ale-i vic is independent of nT, aouph defied Sorel, « ae of Compound inet nde cvespontingefetive ate of ier re ene “The est st derived an e erga with the eh bane in Seco ls mamely ta cost ef singe itl mgt eresing sve fe ofits Tye rel sould be inutvely cen since simple inert ‘comes popes less fatale the menor a he peo vest “The accumulation ction for compan ints has ben deine ty for ‘ulus of hich ar pstv tegen nessa 10 develop the accumulation Tunon for poninegnl valves of >0. Te most snighforeard meta ee ol this simply to asm dt Orla (8) can be efor any vale of 15.0. Thsisequvaen wo suming compound intrest ver coal periods a ‘el snc peo. A marrige ders yng tis ren given ln Aopeoit 1a he endothe caper Unless sted otherwise, willbe seamed ha weet is acre over frxonal pers cord formula 8 under compound interest. Ths be sewn fonction expel a canbe sepasemted by Figure 110) The10 Meteo aime exponential form of te smut fonction sold ot be expected, since many [Howth curves encounter nthe ttl cence exponent "an stresing nigh ino the eer resionstip between simple incre sod compontd nee can be cane! ty peering» Kanal ‘expen om [Ti] soem) he inom expo i aie ot terms, we obtain +i appearing i erm or mp ere ‘Some rede maybe would, the ne hand bythe Staten at inert is pid at heen of the pe and. om We other hand by tester th ‘ve acon pesos at wel a completed pes. When hi the cas. the ‘Scumulted values a any pit in tine ae al from ether pespesine sclera simple and compound tere proach ae reat oer one rmeuusenet pend Ove lnger period, compound net proces 3 ger ‘Scumulted value tan single nee whe the oposite & toe oer 9 ster mention abo nd wile propia displayedn Section 17 Pano nigh nto the conceal leece between simple nee ampond intrest canbe son ft the two poh pater eed Under Simple tes tthe absent fro ha cna ve 6 pes fine wil unde comgouned ies 8 he Plate rate of oth tha isconstat. Inver of sym under sens qe) = ale) Seindpendet of wb under compound nee Seindpendent of ‘Compoutel crest sad almost exchsvely for financial vansactons venga period of cee year oF mare an it fen aed for shoe tee traoctone at well Simple imerest 6 octal seed for aber tmesctone and a a8 appoint for compound inet ger frond pes, Memecsreent ef meres 11 ‘Tews fcompoxnd intrest fer competed eros and simple tert or & Sina atonal period can e analyzed as flows. Conse the evesiest of 1 (heh pera were ma nom-eptive impor and O- Discoun-paid at the begining of the psd on he haan at te endothe pr Same rears may fin the we be wordy in common With as of Scant some confine. ance the Borer des nt dime "ay" Be inet as wih ates of wert. Homes. dente of dating the eet in advance is wo diferent hun i he fll smog aoe a en the ‘mare immediately pays be interes In thc, some reader Gd the we ofthe won! “pu” sonfsing in sete see a well This confi iavaves he pssble imation ‘net spl” nists 2 iced er hn being cum to ‘ anal iret. We So it tach sac conan the werd pl. ich can te used in eter cotat stove Teme auch © “charge of “ree” might be refered My tose wh fin he word “paid ambos Wissen Elective rates of dnc can eckson any pticlar measure sid. Lt db the elecve rate of Sasoun ding the mh eid rom the ‘hte fiavesimes, A fom aralogos 1 ys, Memeanrement of tert 1 “Ral ~ tn) for mela 3 [As melon above, 1, may be commonly called eter the woman of doco oF the uncut of eet Ie gene day vay fom pei © erin However if we have compound iterate which ae the efevine ie ‘terest constant then te elecve rae of count i ao com. These Sioions ae refered ea compound daca em analogs 10 compoend ‘The illustration discussed aie ia his eto sowed hata fective te ies of 6 ino he sae ta festive rae of dca of 6%. However, ere a define Felaiomhip betcen elecve mies of intrest ad fletve fae of dicot To develop tis wiaonsip we ned to deine concept of tatency 8 oho Tio rts of interest or discount are sai be eguivolen if 2 given enous of principal need forthe sme length of ime each of the ates prodace the sane acimalted ole AS we sal se Un Section 1, his defini applicable or mia tes of nee and scout, a wells ffacve s. ‘Assume tht a penn bows I ata fete me of dont Then fect be aiinal pip it 1~ and he aunt fie (coe) owewr, from theta dfnion of ste rao ofthe amount of nest ‘dicount pci bain wy ‘This ernst expres sition of ‘By sil alg iti posible expres da fenton of aon at oh ese)1 The er fie Formule (150) can be explained as 2 restatement of the defnton of te fc rae of diana thee‘ te amet of eres (coun) Bat 1 ‘eam daring the pero the aroun ive tthe endo ep “There ae ingot rlaoeships between da rte of darn, and 3 tscoun factor, One elansip is ident (L158) few 1356) ‘This relaionship hasan ieteresting verbal intepeton, net eamed on a investment of 1 pid he Bening of he pero i interest eamed on an investment of | paid athe ed of We pend it. Therefor if we disco Ihe end ofthe peri othe einige eid wih escent tar, we ‘Thee [sacterelaionship between dnd which fen ae oy “Tis reaionsip so cn be inept veal. Wren he form vd it ise hat bah sides of the equation epee te present alc of 110 Be paid stead of he period ‘Therein ana aonsip betwen and dh i significant ie lia aun ‘Thisrcatonship so has un ursing vert nerpretion. A person ca eid emo I and repay 1+ he ed ofthe psi har I~ and pay Um the end ofthe pid. The exprenon i te iferece inthe amet of interest oid. Ths ference aes bens the pica rowed les by Tevet on moun fc ne pratt i Themeamroen ert 18 The ffestine te of dicount or compoue dacout, assumes compound | ime. However ts pssile edt simple dscout i a manner amogaus te defiion of simple inet. Conse a stain in which be anc of Sscuntcamed during each pei i constant. Then. the gia pcp sich wil pode an accolade of | atthe ed of pe i a “eso pat of Weisel sme o Keep) > 0. This conta sh compound acount a which see present ae dr for O51 ctid a9) ele) ev = al fr 20. «9 "shuld be noted a formes (1.14, (148), (16), an (17 same elective ‘eof incest an coun ad reno vali for snp eof eet and ‘Ssount anesthe perio of investment haps to bert one ped “Te reader should oe ta single discount nthe sue as semper. Mower, simple dicoun dos have properis anions, to oppose, wo single inte The floing ress cn be bine by examining ine Seve expansion forthe gh hand te formal (19, 1. A constant rte of simple interest ples a decreasing efectve eae of incre the end of miesiment acess while a constant eof ingle scone ings an nein este rate Fon andere) Sinple nd compound discune proce De same eso ovr measurement ped. Over longer prod, simple discount prodoes © salle preset value than compound discount. while the oppo se vera shone poe eis intretive wise ee es grapicaly.Fgue 1M) compares he sccumlaon function ender simple interest and compoutd fet Siar. Figure 1.1 compares the dicount fonction under imple discount tnd compound sou20 Theos of ert ewe 13 Compartons nmgl comp inert nd "Disp aad compean an Simple scout wed oy for she tations and as an spprosimatioe fr varpount acon ver tonal peas. aa as ely ‘ed a sige ites However, dies ave ce ngorantappeion which wt te sane in Seton 62 + The werd “coun” ufone is ed in eo dierent coments with rious ses meaning in cach. Its wedi onnecton wih present ies (Giscount fae saan fancton, icon, dscns’ ale) and in ‘oameton with inet plat the beginning ofthe period (ect re of $5count. amount of aco. orp dict, simple coe, Untruey ems fveving te word “ncn ae fen missed race For example inte pret of dacouming taking preset les te pase "ate ficou itn snd when ely "Te res” sat, Yet acter wae ofthe word "Ascunwil appear in Chapter Th en will be wed efertobons fc which te pc es han he eden vale Esactbing he contusion ctenfithr 2 foudh ase of the woR! "Sicoon” to refer pice reucons AReugh we do mosh his meaning ‘0 the wor in hs book commonly bas hs ean in bases ad Gane larson. Needless o say he reader shoul! be itfl in wing te em "scant to hep te mewn comply cet sd shuld at este Sek lesion fom thers wing the erm ee any pony of antag Penance re 21 Example 18 Rework Beample 17: (1) Assuming mpl acount instead of imple interes (2h Assuming compound dicount 1 Arig oom 8 me ners e103) = $70 2 Ayo 19 tri From goa rnc. rer tea jie elaine magne of es, Example 19 For the $10,000insexoment given in Example, find the tfecive rate of coun forte fourth eri de ‘Gon egal Sin sant 12 Then gpg oom Example 110 Derive a formule analogous to formula (L9) fo computing present values using compound discount! for complied prods and imple acount fora inal rca period Cone he pet veo i be pad atte do + pei wh mi heonacpine ered Oct | we por ner elise been Yan +n hed = (Aina sk-a" = (oa [-ayenttoal car i emo (1.20) ey compan daca fr completed prem sine cat2 Mehon amet 18 NOMINAL RATES OF INTEREST AND DISCOUNT ln Sections 13 an 1.7 efcive res of inert and dicount were faced. The tr ected i tes ofc an son ina nee is ad once per messi ment eo ithe he do he eid a the besianing ofthe pene as he cae may be In ths econ ae come ‘tution in which interest pid move Gequnty han onc per messin Pid, Rate of incest an dcou in thee cases ae eal rial = Mos penons have encountered such statins in pace” For example ender A mip charge an anu efecve ae of 9 oles: Lede B gh charge 8% % compounded query: and Lender Cmigh charge 88 payable 's aban an convertible onhiy.-Mostpenonsprotaly elie tas hese {es are not dey compare, Pty woul) probly muh aetna a valid comparison among them ender is chrgog an ancl eect rate of terest which hs aay ten dcused. However. Lender Bis chaning what we calls opal re of Iimerest while Lender charging wht we eal nominal ato dco, ‘Yaris tes ae used in pace to derision In ubih mare is Pid ore tequenty than once per measurement pi Aman thee her mis a posveieper> I. By a aominl rate of tee 7 he Memesneeme fret 23 re pyate mye eo tres "Ym for ech mh of peo and ot" Porcuample rominal ee of #% conver quart Goce nt mena {Suncrest eof 8 per queer barber an erestrate f 2 pe quai, In ‘eli, we can sy that a nomial ofr off per geod sete Imefleive rte finest of) per meh of» eto. ‘Thus. rome dfnton a equivalency we bane ) (aie, tat = [te (ee Sine ech side of he egtion gives the accumulated va f 1 avs fr oe meres ped, Renny We ave am cate, Fue 14 itso accunaion a + omit of ite for one ‘essen period. The diagonal rows 1 the ph ca be pte as Plat Sis and dwar Tow cl2 Methonafmerat ‘The symbol fora nominal at of coun pa mimes pec peso isd by « nomial ce of acout we mean a repayable mh, te the cfleive rate of Scouts dm frac meh «pes. “The sonal rate of discount dice rane of ira psd atthe tesioning of moh of «prod in mh te same aera di a ease of ‘ner pid the beginning of he prod. By an argument similar the one ‘ed in developing he relaionship beeen fan i pale develop + Fermula ring an och i hey request. Fro the definon of euvlency we ave (2 sine cach se of be equation ges the reset valu of te pid ake ea of nemenrement riod Rearing, we have a2 n[rwar] - afte] «za Figure 15 ies dscouming at « nominal ete of count for one Imessrement period. The dgfonal rows othe lel canbe terete as mint ‘pes and dovaward sows sees Tre mwaremen ef rat 3 “Tee is lose relatonthipRewoen nora es of interest xd pominat ce of dicount, The followieg Flannel. snc bo sides of he ‘ation af equal 21 +4 i oy \ 1 =p hen fora 1222) Becomes fw} Mme lhe (=, the ffecive ate of ineet ani ‘ffive re of icoan Thus owl (128) ca be wed in gener Cd alent of ime or discount, eter effective oF mri. convertible ‘wh any dened eve ‘Amur eatoshp Pewee £™ and d™ aralogos to oma (17s ae) mae a ‘The veal interpretation of his rem sila to te veal npr of omnia (1.11. The derivation can be diel otained as an agebic ‘euargenen! forma 230 Tn developing the above forma ning es of terest and icon ‘hich ar eqn he dition of uivalency piven in Seto 1.7 wan wd ‘hs compumen vor one measeremeat period. ANough the ose of 088 eset prod i ry. te reer Sad vey tha ur eonpoxnd Incest a act he as a a eget ot Spend om the pad of tine chen forthe conparion However, footer pars of inet velopment. sch as simple meres and sige coun. the ale ta ge ‘epivaln wil depend on he pea tine chosen fo te comparison.25 Tete of meet eis icine rete nomial ales of interest nd dicot to dhe scumultion fntion a). An example is given in Fig 1.6 for m= 2. The ‘sie isenounged to const ther exampes..The flowing aon od apical. AR ad AG ey fz} Ab auf ae Sag = ty eu ani Gam = fy A ae ( I] 18s imeresing to noe that nominal ies of interest an dicunt are nat ‘slevant under simple tres an simple dco Since the at of tre (dicount is dey popoional to the tine voied ra of singe inet simple dsouat payable mhly iso diet than one pyale nce pr ‘etement pro, As with he word “oun” enorutely the word “poi ao as ‘mule eanings. In Secion 6.3 “normal” is wed in snr semen Treneasrmen of mere 2 conection with ylds on bonds, while fn Secon 9.4 “womina” takes on 4 “Grecian in cnmecton wih he ein of inflaon in es finerest Bcample 111 Find the accumulated valu of 500 invented for fv years at por annum converbe quart sho ee a hi in equate wich $00 ves aa me Example 112 Pind the present al 0f $100 to Be pid atthe end of he wars at 6 pr ennum payable in advance and convertible vemlannual. = 0( 37)" sea ‘etl dt i sion aa oe hi he pe ala 100 Example 113 Find the nominal rate of interest convertible quartet hich ic epuralent to nominal rate of coun of 6% per annum cnveile monty.28 Teh eet 19 FORCES OF INTEREST AND DISCOUNT. Te mess of eres ein in he pcg sco we wil for csig mers oes mera ue, Efe esol nd Scout ment noe menue pr when aso ‘keane ne cm feo pa "is abo impr bea mesh mcr wah hc me pein tach mont ie nisin salto This mse mest nil meno ue led ef of Cie hemes oh ha he anon en a i i iver ye amas fon An, Real the ely tron fea te ew oe fn a ee pp de “he mens th wh ie pert simeis eae by ee ef stage oe soe of A cane sme Fm deny ee Shope Acari pny ava tarp Hwee same we, A) unc ep o thames Forename i 2) 100s need wt eta ends of hang fh S fot lew peat a a Shane $10 find Howe, nee me open wi ee ‘resi onthe Sf ina we way tino ah an ‘er oa "e's compet fr tht y ving 4) fy he ano in he fd tie mami). Th geste tly wi we nat Craig atti exe aa npn of au ‘Ss pertinent eine teeny 8 = A. a aia > ain, “The flowing popes oso be pt in min 2s) 1. Is ameasue ofthe inesy of ees at ett tie 2.6 exqreses ts menuement sale per mesic pec v's posible wo write an expeson fr he vale of At) an atin ems of te fonction 6-H il be san fom formu (1.2) tat an alert expression for is = Linayy = 4inaie 1.26) 4 = Ling = fina 026) Replacing by rand igang bah sides between emis an Gar [mange =n = mage Ns =" Aoy ani ence weave att am Another formula can be obtained fom frmula (1.25) writen as Alvi A'),ntegrting betwee the is and, we ohn Framer = fare Forma (128) has an ineresing. vet inerpetaon, The term Afo)=AO) i he ent fires ead oer m measurement pis The iia expression A(¢éh may Be irpted a te moun of ees ‘sere on aout Af?) a ext ine dt the fore of inet When his ‘peso inert betwen ite and m1 iver te tal amount of ‘nee eared oer the eds te ight io the ne of the fre of interest may be gid by saulying formula (125) im terms of the defirtion of the derivative. The evan As) yb expressed as , Ales) ale) (9 = tg Aenea Aig = Ain) aio, 28) And fom oma (1.25) ay then be writen ‘ Ales) =a) = AO i 29) 4 9 to »20 Desert ret ssn) =0) mt base wp the incest ere uring the tral ro ine 0 time 1+ A. Fe caplet we have Now he cxpesson maybe repre the te of ner ‘ai fund vie by the amon in the fn ate being fe prod A= 1 chs twice ala periods inremen in the fan vided by te amount in the fd ate Depening ofthe period. As ‘sprees, he Ha of hs expression the force of tare yb deste ‘th nomial ao interest tase up he tensity of eet ie {eis ao poset define afore of denn msogous o Formula (1.25, Fh pup, we use the dco! fonction (ited of be accel ‘octian of) The defor ofthe force facta tine, ented by aieey eae” oT a0 ‘The deficition of smpetely analogous the efit of & except forth nas ig. The mins sg is ees 10 make he fore escount poe (qunuty The denominator of format (130) i poste bat the mero egave soe 0) ina dereaing fonction. [Luc ins section wl be Sen that the fre of scout ears reach to nominal and efletive ats of discount sind othe reo Ghat te fore of itret Beary Yo nominal and ffcve mies of ier! Howeveitean be shown tha =, 0 that we may spec wih 8 ad 4, The pots a allows: 114784 Memearemen of eet 31 1 tery. the fore of itt ay vary ineamaneouly, However, eects in Oem const Cte fore ofits cont ver teva a Tie hen tbe eeuve rte of ere wil als be conta vera itera ‘Tis can besten by wing formula (L27) over m measurement periods f a ative image) for Ostsn wom aay asa ih expreses a fection of. Taking the logarithm of frm (131) fapesee 6 a hincon of 5 illo ax) Formula (1.3) may alo be derived doy fom he scuuaon fin lec compound inset fit eat ‘ie ell ‘hs conta fo Having tld 5 ad | inmedinay reas 5 andthe ober messes of ‘meet described in his caper The following seen of equities an ‘ended version of formula (123) wich sores much ofthe Rater ‘Sekine inti cater gia) 4a32 Meter re "is murctive to examin th betavior fhe oc fiers ur sgh ‘nee nd simple cout Fr spl tet we have cas) ‘Sima, forse count we have coe 439) ‘The oppression on values of fom (1.36) neehy to bave vls fd that ae iit ad postine. As we woul expec, se decesing freon ffx simpl teres, ut an increasing Scion of for single sour The reader maybe surprised to Observe tat ough» sorta fore of inet 5 leads o » constant eflecive rae of inert the ves ot Tremeamrene ert 33 Inve low dw vary wi acho ese meen proach wy (tal Oe one peed cyt ae ein we wuld ave thee at onnant forcch fen ees bt yar ihn cach ese pee A god pact exp ies ht hese to vest 1 form ett compound nee fr oped pros, we snl ret et fect peed isa noma (19) Te priest of (be) fork 1.2m 10 Da he fective mi nest scott vet tem meee prod, However vanes within cach of he eds sce varies unde sip tee Oth ena olde conse Aust these po bt hey woul gee vee more pais fer rainonin Avot iesing ig no terre of force of inet can be tainty ning 8 nest (Frm rma 38) aan Tis formula his itive appeal. Since ff # amin rate of interest overible mehy. we ean iret 3 a «nomial ae of ints converible smtouusy ‘By an arlogos pues ii pose o sow ta Pee asmSA Tethers eet “Te poo is analogs, This formu so has inttive ape. Since di ‘ori at of cman converte my, we can reget 6 a x omia ae ‘of encount convertible coniuoasy. In esece, this san erie rot thst ‘be freof erat ad te fre of scout ee he force of interest 4 ust conceptal device making the continous row of money at compound niet sir io growh functions countered in te mata ears. In hear, de most fundamental meas fines he fore of nere. I practic, however, effective nd ama aes interes ad fiscoun tend to te sed more fequenty becuse they ae simple for ea people to congtend and tecse most Sancial uasactons involve dee, “Tis doe not tan Oat the force of terest is devoid of practical sigicance. Resides ting sf conceal nd anata ok itean be wd in pace ws an apponaton to trent converted ery feweny such at ‘Sly As, sone cia nts acaly have waned oie conus ompounding in cet years Fly, the force of ies is nporant in he (evlopment of ceria Of tbe more advanced fnacal mols conde in Cup 913 Bxomple 114 Find the accumulate ral of $1000 invested for te oars the force of inter i S Apia ema 11 eae Tremere ef meet 38 Brample 1.16 Money accumulate ata varying force of terest Be 054.0 for 05154 nd he pr tae = of payment of 10 ch be pat spin ccf ema. ere va ft et apt tne a Sit. pe le pat revel ge fom 10 VARYING INTEREST ‘nom i ent lt se tan ee et RL Taos eee in Se am fae nba she tt SORTS ee tin i tc pt i eer rele teeter oy ete Fe nega seme tae Tag eng oat SL me melee aise Sau eas at) dogitehtoe) = feu) am36 Theses of met AW hmipmoet nk te famine afe)n (Lo dian Preset vias with varying elev tes of interest can be Handed sintriy. Agu ft pose eer 2 Tw ave ‘ef aan “Tee agp flowed in formulas (139) and (140) can be ely scored Wiad comin aes of inert or cout Al ht is necessary to coon te number of fret convenicn pes in cach bricked Iobovealin which the es ae const and then mulily the appME Tasos for each sober aos the ene nena This procedue is iene Earp 117 ree. statins invelving varying interes it is desired wo find an piven evel tthe mest ay, When this station encountered he ‘ein fequacary piven in Seon 1.7 canbe aphid dire. However it importa fo note at he newer wl ped onthe prod of tine en for he comparson Since ners varying he ae da wold be equivalent ver a pero of one length would pt be he sme as tat over a period of & ‘ie rat “The send ye of variton considered ivolves «force fiers which vases fom ped to ps ti constant drag cach pera We have & etaonl ple snc the bol Brees oa consis vain feof TAs Before i, eae te ees te of tet dng teh prod fiom he ne of ivesment whee Rape Ieper. Wecan then define 5, AS the (evel fore of interest ule of uring he A period. By aan foomata (1.3) we obo ete) = eu aa beg” = FT 4, = Infte4) aan “Ten for postive inege 21 we can mat formula (L270 give oo Themen of eet 3 tacoma Te compong om pr tes wb eure aay for pusve ieges#21 his evond peo varition ay nally siete reader ax carious, nt overt ufc mist of continous and tre proces However is toquenly aed in more advanced fancial analysis beyond he Scope of his tak Als is quit ary to apply in practice os wl be lustre in Example 1. ‘Example 17 Find th accumulated value of $100 a the end of 18 years (the eect of intern forthe ft § years 412% forthe secand S ers and 0 forthe thd Sears. gee, Be wee 1m 05(.051.05" «519805, Ecample LI An investor in common ack meseresinreconent retin’ auc sing a aecte rte of ners. Tha nestor ears 15% daring the {Fes ser, -5% daring the second yar, and 8% daring the hrd yar. Find he ‘puilent evel fective rte of rar over he hear prod wet eis ee en omy wih ed Teepe ee leaner demi fom at) = (ea! = (asa KI = Gagosian vce += (019K 99100)38 Theory meet camp 19 Rewerk Beample 118 he rcs honor contin mamares forces of tres, rhe than fcr rs. We oe hee adn me a ee fe fe er tinal ven oma 142g ee oe vee ane 3 oe ‘espindacton cma te 3 one teppei ea by 20) oe ee st 0 968 Ne gt ti nye ‘inn. ociay Be opraet ire came mum & Sm sniper an ning eet ce 11 SUMMARY OF RESULTS “able 1 sarin mh of he teil of eshte “al 1 Samnary o eanie Chape Tiargnces Tia ormtant ae Tepe ‘raceme “eflattmeteat) anne ai rl ni a atte Temes of tet 39 APPENDIX 1 Simpl interest for fractional periods A core rigors materiel approach 10 the defnton of a) for ronitga ves oft canbe developed by saring with he flloming propety ‘ne woul want simple inet poses: a(t +5) © at) + 9) — 1 for 120 aed #20, as esos, formule (14) says that under Single erst te amu of ret ‘ame’ by a0 nal invest of one nit over ++ pes is eal the ‘epur of rest eared over peas lis the anon interest ard Over = ‘eins. The is ecessary i orl (48, since eters there weld be lnvesnet of two units on te ight hand Se ofthe equi. ‘Assuming? fered rom the defintion of te derivative we a(0) = (0) econo. = Repacing by rand imegring both sides beeen he mis ands, we ave at9-2f0) = 270) att) = tor@(0)10 Meery ef tet Awe lett= Landrememberta a1) = 164, weave alt) = 141 = Fee) otha (=i Tas stating back we hae te fairest ety = 14 fee 120. as “Te above derivation oes nt depend on Being a pose igen vali oral, ‘Compound interest for fractional periods ‘We san with he fotowing propery we woud want compo! meet 12 poses ofre4) = alto(2) for £20 and #20. as, sn eee, formula (148) says ha ender compound interest te amo of {treat eed by an iia invest of oe mover + eis ig 10 (fe mncunt of eet eared Hf he invesment i emit a be ex of (sth and he secured vale a hat pots ediaely reinvested for an ‘sens pds. Aang) ileal, from he dfion ofthe desivnve we have 0) au a= oa = ygtetee ag" = aft} (0). a Sey 7 ah ot) = 200) Temeancene fret 41 Aepacng by rand inert both side Between he its and we ave sine tm o(0) 0M welet= 1 and remember af) 15 me have 1m aft) = te (141) = a0}, “Ts subating back we hve terest nat) © rin(hed) = ine at) = (teil Ge 20, ow “Te above derivation does ot depen on! eing ose iter and is valid foeale20,12 Meteora | a | 12 Tecan an am cn | 1 Cok amano) | 1) Fe oman camo fon at 1) Vey tat cunts te Boe proper fe acum ac. 2) Powe ain)-A(0)=h 614 +h 2) Neal ner be ea pedo. 1 Forte S00 nein given nal. te amen tet ae age mind ow efavninen Ls Sewn es 123 ed = 14 iow at soe fom ab Ove in acum 2 $12 coc fod ecm abet ne 01 SOD vest te 5 13 The tect rato interest 5. Ata ut 2100 3 faa 5 Ae tA Orme v1.9 1, Stow tate) Ale ibn isp neg WA) 100 a: wre i apie fi AD, 1 Simple interest 2 0) At wa mf sng ster il $0 carte SISin2 1 ee? 3) iy yen $50 aruoie 30 78% mp : SSeS SS er ene Temeanrenen ere 43 Simple ee of (4 ting ri 6 ad In wich pd eit emanated ST tacoma of compound ze wl nee 2a es? linen {o3inb yan en Swi acme Sine yan, Sw nae Ohne, orae nu taon fs ‘Acme fete aves oe yea afr fpr gee 1 be he ene wen th amount of ecard ct compound inet at nn single mart a equ whet = 24 Pd te ta 9. 16 Present valve ‘The te sof pipet a avn hy wih ine tog money neni 1 oy SILO pe efor yeu ome oe cn rg Se Geiger he favre ve rps 8 de feseetween cote of Gramps AB ‘hes fhe eset lug | pda be coda pineal a ee of Bpeeiel Pst sO2 n he hrf ree a moun hat nave of 50 wl nero HOD at 30 yur Find he tof te preset aes of te payment $100 eh wich wl (Sone end fa ya 1.7 The effective rate of docount 2 cance et Fn te facie rio ico a wich «payment of $0 dint 29 $300 ‘ne as na oc S00 es rn ey ‘he ann mere camel A eee Yea $36 whe de eget emt Fd te pea va of 80016 pd the co 25 mt an of cen 88 comertie qa 1) Anan ong oc ese 2 Asan seg cm ug tn i {Ed de pen tg ing St Pin badd 1 Nominal res forest and dssumt 4 Eapes watetcnof 5 expen a ttt 0) Saw =a 003, 3 Sealy epee cae to Fn ie cama vat of $1004 nd of es ©) de pon onl if wet convene ue Teemeamrome of ert 48 29, Given = ANd at ND fn 19 Forest interes and decoomt 5 Ra 6d di, and inane of mane wing m> 3. 0) Ota asprin 4A) =a Mt A cums esage eet mo, Fan acum ig ‘iowa we af Pode pam i tne whi ef tee oe ‘tse ‘Seo degree polyoma. The sana ac of cre eared rng he fa of {eye 58 onverhe emul The electve ro ee cme he yearend 2 Find w exon the tin «pia which be ees wcumet ‘Siete wale ner coop’ tee ina 1.10 Varying intrest 2. eee fev nt one on ve Je pr whch quent 0 sees rod 7 bef, Pee Ye mdTe hy of rat 1) Pind cca ao 1 the en pr ae ein a of oerfarmem prod P= oem weedy bert @eat 1) Show hems) cane ete a eon aj ‘veer mats dey dyed ear a vr coins un eof ire) of on mee a Whe sre sean er at be (toed oe he Subse ine ease ke eevee ae a of A= Orermosrss, Pd money ames ta elev ie Anant af Wave ech ind fr 30 yuh ale of and Xtc 9 ye rales pete wendy Casas neo Psa ie elev eof coun eu Li 6 ME + 06 or 123 nk ‘heel filme oe be a er ps Miscellaneous problems You we gent Al) i x eumd deme pom for 05152 sa {A011 Aa) e198 5) Decmie oat dic ttt = Sad 015. ©) Deemie (0 Pde pre valve 0 dae 125 vd ie 128. ‘Yeu wotaton scons uc ich a inert concen Ot {au me caren! by 98 oe bye ee See of {Sma mad on etn pce oie ee 8 ‘Sei ed cane), Te caren eo ne weed 3 Yo ‘sme soc oe wl ae cy eer oye p t San00 wit tone wn ote pu) ee oS es a en Eremens Premeamrmente rt A deena Xin seria ine wich sities mia a Songoie eismany 8 epost 2 aos lent sigs at SS pes sep rt tt a of Ad B he ae at af ‘nes arag eat ato bef your Ca ‘Asm ech pen po nk aun ie A dps 0, ie 8 eps func Av ect aa hI ya eK The anf et ‘ee scent rag tI youre aio X Calas br 10. eran one ariel beeen ine and 9 cate ee Yoon pen 8 se ih na Medal A uses single net oer Sl fea pri, wie Med 8 ‘Se ingle dro ve fil faa pero Te sama eevee of lms 208. Fd e a o'be pra we payne LS rs ‘ated ude Mad Att cp ine Mea 2) Lae hnnot 2 Seen tncnetat 1s Meer fret nao ao ® ere an een for af) suming 6 Tae and posting, ie deeb, when a>Omb>0 Pad te coma eee dung mips fom he dt of orem xeon for esming J, exponent and ove. (bn weama> Oundb>0 at ee revlon auc dag eh pri fom Oe dat of 2 Solution of problems in interest 21 INTRODUCTION “The basi rips inthe theory of interes ae elatvly few. Uh Chap vovous quuitaive measures of intrest wore aalyzed. Chapter 2 dunes ‘oer principles tobe folled ine roiion of problem i intrest. The rps ofthis chapters vo develop a syste approach by which the baie ciples fom Chater I an be appli ve complex ancien With thorough understating ofthe Fist cwo chaps ts pose she ‘problems inners. Sucesive capers hve two Wain purposes: 1. To fama the ede with nore complex pes of Gauci ensctions, inctig dein tems, which ocar in price 2. To prove a systematic unas ofthese nancial warsactions, which will fen ed toe efficient handing of the problem than ering wo bic inci [As ares of he second pargace stove, on ocason simpiying fomulas il te eed. Foul, be numberof foul equiing menerizato ‘all Even #0, common sure f iia for rome ind reane ot formule witout an undeotanding of te bai principles upon which he ermal we bused.” W ix important 49 raze tha problems inet can ‘neal besolved fom bse rns ud than many ass esoring bse Deincpes netfee astm ia spent50 Metheny feet Froquemly itis nce to ot america newer for problems involving interest. This pedis comderably fctinedby the widespread vali of inexpensive fianil aclaters and pesonal computer. The exisence of hese modern tools has greatly reoced, or even clined mete combersone ‘cmputionl and apposition aprsches required in the pst Computational problems a Chaps! wd ? an realy be sive ing any pocket cacluor with exponential a logan tons. Frm Chap 3 feral the use ofa nn calculor commended ike adratags of Special func algorithm ail een ‘This bok dos not dcty ade the a Of pra computers 0 sve ‘umputatioral problems i intrest However, sanded spreateet softer i ‘Welly sted to solve a wide-range of problems in interest ivi dice ocescs. The mat of problems ecounered in paca appctons of ‘eres ive sch process. The ede i ncournged to practice developing Spreadsheet suis fr various appatonstrcaghou the book. 22 THE BASIC PROBLEM Broken down int it singlet ems an nee probe involves four basic quan: 1. The principal orginal ives 2. Thelengtot he oven period. 3. Thera or fre of ret or cou 4, Teeaccumule value of the picpl atthe end ofthe invest prod 1 any tre of ese qunites we known, ten the fou guinity can be (gta tenta)y “Te left side ite te preset vale which ced he reset vale given bythe mead of quate ine one ight hands. Thus, the vate of from {fama 22) aves gener thane te valu of foal 2.) Sao robles iret 67 EXERCISES 23 Bquatons ove 1 tue fo ayes of S200 ofa SE a he lf aro ire gs oy $05 nelson tn na een (ec nde re ous Fadl Menno be aca payment = 06 You hie an naive cet at wih SDD cueanding mp ane Tit pare cet dures of 1% col ery Yon we ‘Biew mle« pen of 20 one oth fay 00 fre mem fo “ky, Ped hua hat yo wi be py Bre ane Foy eam) yf ht cad ee (Re Wek pon wha ean tae Yon ‘Ser sae sec pec pee a Cape 3) 1 Ae hc eet pene fhe flange amen pee a (Sma te ent yp 50m te eto 0 ye ‘Ae same iret $10 ave oe pls $ID he df $y, ‘il senlart Patten of Oyen, Cae Ane me oe dot nd ted 13a $y The ‘om ef be dp oie OK 025 Fd a fe end ‘anit nlf cman vel wyatt 5. Wheres he he of «compan at Mt so eon me ied caylee ese amet id of pln an Be [ald 1 yeah ett payaso 10 ech Bt ‘Ste pad omelet be rondo be ld we eS yu Ae ‘unl ets cane fon edt ch pjesme ae Tecate 5 ra6 esearof eet 24 Unkoown te (5nd tow ng 100s ee si 68 ee ok ont ee some’ a 0c S10 eid esa ne 7. You inves 530 ya pao ves sce St yuan ay. You pl wth S901 ean ane S00m nS yom cu eg {pat ese secant dt ne elev me ont atl a A Theyen ake ofwo pment S100 che male acaba eure S100 Wi 08 de kel vy Pd vol yt ae fo 10. You we ted dev men mona wag kes mney re Fat sere nape ge, 1 A degss 10 ale and sme 3 ean ting ingens 10 per ye B wl ake Ow ane wo cept bate I wl he epee om oy wt 30 wl be eed ys fn ny. Bs eps ca a ssn elec me of 9%. AT eed af 10 yard me ao Sept equate nami ao A's eat Cae 2 Find Amcunaits ia of 12% came mat, Fd 8 comune w ‘eco ea = 1/6 Attn = Deep ane eh Fn seston ewe 28 Unknown rate of atest ‘Se pm 50 wea fo yr md HOD he so Jal ‘romans S90 cad otowyeos Solan of proms nero 1S. Yvan nee sof etl opments lta 20 ied 0 ie 2 mi te ret fe ee ie 9 a 1% Ns knoe da ins of 100 wil cam S15 a Be et a 10 Yes Is msane at Benen ce get te ana It 0,2 tg Weyer, ov deg be ope "she daa acu of ome wil el ee 0 yen vain feo itt 8 = Pad ancrenin 1% Tes of he atm fe df he ya a cern tae ede peat alo be pd ed ofthe ear at ‘cierto sensory ele, Fd em 2.6 Determining tine pris "te invest wat msec ey he Uni Ses ened Wat Wr ie Diss 2. 14, ad wat ermine oe df ro Ang TS, ow yyw mewey ane "Onde wuaicatbas? % amet sian rhe tt ym op ln 2 Ananya ge ae. © hermngue sete oan sale mere 1 Sow Gt he Banke le sly me rie he eke ha nti sep nes, 1 Rab cowersan a) ft hich pe noshTe eof eet 127 Praca examples Abita S00 pr S96 te abet iF The inl of ct nee que eae by pce 1) Tema steiner mee ected ye Pras A oy eine dp py ana elie nf 9. The pact ‘ie opm pepemen pnles en ey whe "A arene ine rf e078, 2B let oe mnt re nord tsi te pcr a itn sich on oa cone he a of the pce ander Opn ohne der Opin he een ofp ‘The ABC Bk tn ety win py for cee eat (CDs wich ‘sateen gh mney sy a wie ‘Site athe CO maa teat at lB dol by LA fr ne ier ath we CD eee nt A cng cole ean ve [So ino trove CD wi mle of te al SA compe ‘vty on Soper tO Spf be eT se ied 2 (fic oe ory on eps al oye ro hep arc i od ‘Shyer ne eit ho ay fe pone ew so ‘Setar snd il so be CD ona de Many bs act wo fee on crit of Sept (CDe tank ue 518 compan! iy, he a fhe APY (ame gee il a ‘etd fru, ‘A svg adh section a 7 ito ets te nd fe Deter fern tae youn 3% bsp one bac a ie Fd Chesive rowed by ven te waney lon pot ‘The spe erty wiv nd all CDs a ihe caf em. Ding he nent yas the a wl Cie fe ee nA ves \epot SI0D fhe ek. Caee he ein mc at an be ato Miscelteous problems ‘or is ruming «proms ing wih somes av pons eee (Optom Oe py Sof pce pce to ahr a fe ‘Opton Two to eat Xf pce pce apy eon ea fe een eh mie en pn A mateo pre mite wo hopin ying oe ‘wal pce inet a 25% lowe al pre mat Fide aa {ec eof et wach th eer weld ner rece ori You depot St nt hk ace Te bra ret mm ‘Sse geet aan eas Th ac sein ee Is Calta Xa dr Find A srl 68 five nd Rd B aces 8 ine A he def 20 rasa be we a 28. eo 10 yan eat ‘a Fing Aha tar Pd Wh he a ft ind esd 572 The theo of antes 12 An ver dept SIO «tk. Ding fet yo. be ak os ‘Seal eave af te Dig sed ye, bk de ma 120075 Wie wold i so ace ve en nd ee yrs he 53. Aiwa yt oe or 3100 es 930 fm he ak A df toate Amer spemer of $288 Anurag ingle Sonn wht un St 3 Basic annuities [41 INTRODUCTION An anny maybe defined sa seis of payments made equa intervals of sine Annie are common in our econoni IMe. Hote ret, Bonga -prmens inline payments on atomobi, and ire payments Ot money Invesed we all examples of amuties,Ongialy the mening of the word “Seni” we rected anal payment, ult has been extend 1 into ‘payments mde other egulrinevas aswel ‘Conier an any sch at payment are cei oe made for «fed riod of time. An amity with Bese properties called an annul The ited prod of time for which payments remade eid the ter ft suit. For example, engage pares ot Home OF buies const a8 Noval anaes are anmutiecerain, An anmity under which he payments eno cnaia io be made called 4 comingnt cena A cosmo Ope of ‘emtnget ant soe in which payments ae made oly if «peon alive ‘Such an ao called a if aay. or example, monty eiremen benef frm a peaion plan, which conus forthe feo « rete, consi ie nis tok, we wil reset our teson 6 antes erin. (oweves, the "ik of deta nonpayment wil be weed in Seton 9) Ht wl oe Be1 Tete eet ‘convenient o drop the word "se” and jut se the tem "anity" 10 refer to avamaiy cera, The interval between nmi paymens scaled the pment period. tn his ‘hap, we conser smiles fr wich the paymen! pei thd te nest ‘convertion pero are ula cole, and for which the payment a of eel mount Sethe pymen pei and the rest converon pio ae ea tn coincide we wilt we te em prodfr bh. Ie Caper anus for which peyment ae made oe oles eqn than interes i converted ted anuies wid varying payments ar examine {2 ANNUTTY-IMMEDIATE Consider an annity under wich payments of ar made atthe end ofeach ‘ei form pero, wee mia postive neg Such an aay called oa Cutvinmedate (or possibly ordinary ann). Figure 3. a time ‘Gagan for sich an say Arow 1 appean one getiad before the it [agment is made. We te athe at fret er eid. where > 0 "The presen vabe ofthe amity ths pot inne is enced by 0. AoW 2 appear pesos afer arow 1, jst ae the last payee 6 tad. The {tecumlted vale of he arma his point in me sda by t ‘ier Ta gra ru ny eet ot We an derive an preston or gat a cquton of value ae beganig of he int pod The preset valve opment of | made a the end of te ‘tpi is» ‘The present Yale of a payment Of made the end of te second ped sv! Ths process ia cond unt the preset vale of ‘yment of | rade x he ed ofthe mh pried x The al presen ae ‘mo egal tes of he presatvatue each aye Og eve a on as ies 75 ‘Tis oral could be wod to evaluate, but it would become iecet (or tag nis ponable tw derives ore compact expression by ecopizng tat formule @.1) sa geometric progesion wie oa An expression or 5 canbe derived in an mlogous manne san equation of ale ate endo the mh prod. The accumulated value of payment of 1 trade athe ed ofthe Gt period (1+) The accumula ale of « ven of made the end of tesco peo i (1+ i) Ts process it omtmed atl he scared vale oft pest of | made ate end of be ih pede ut |. The ol scaled value us eqeal he sum of he ‘Scuralae values ofeach payment Tell death gal 03 ‘Asi, me compact expreson can be evel by suring the geome rgresion see LaLa apes gate oo ‘On occasion te intestate is writen the ower ght of he abl exer Sag Ste hs tends to luter te symbols. we wil hs only i ‘te could ety embiaiy concerning te ieet te usd in evahating ‘Seaman78 Meshes mere Ins ponriblet give vraiment formule 2) writen a: = lage Conse te ivesiment of for pie. Each period the investment I wl Sellinet of pai at tee oe eid. Tae present vale of th iter pment Ky. At he end of prods he eign investment of 1, whose cient vale fe, fe etre. Thus, oh sie ofthe equation reeset te resent vale ofan ivesnert of ate dt of ivestent A slr veal Ieterpreiion cn be pes female 3.) "Trew simple relatos beween 0, a 5g afl +f. 5] ‘This reaiontp i obvious fom a comparison of eer Formas (3.1 and (3) or om formas (3.2) and (34). is als obvios fom he ie dg, inc Sp ise vale ofthe ste payments aso, only the vale i taken pss "Anais eaionship betwen, and sy it bets cr “Teast can be derived as follows: ‘mul 2.6) wil be suite sgn in anotber contest in Chapter 5. A veal Iamargretation of th formula il be given a tha me Numerical valves for anmtir we frequely gue in practice. One ‘sepronch cogent als ig the form (32) an accurate Pan 77 sates ng formule (24, This meta ecient and cane dane on any yocke clear mith expert and logesitiac facto ‘Atematvely, saaity ves can cecly be cane using facial ‘cll. Readers we enouragd to become fair withthe capes of Fania calcu. Alou sch a caleultor sot equied to eval the mentary anaes comer in this sect, i willbe requ for ther Facil calclins atria he chaps. Daten fiancee have dierent labels and eysoke otis, However the spcal Gnocal ealelaor wil ave five Hey wed to erate N= the umber payment em) 1 eet ae ecetge (1000 PV — present vale ie) PMT amu payment FY — fare ae ie 53) (ne uit in wing fan cauator i the covet hat ll each Nos in ‘one dction must he postive wie al ash Nos the apes drecin must be negative For example fanclub is being wed 1 evaluate na pose va or PV ised th inp vale fr PMT mst neue Example 31 Find the present valu of an ansay which payt $500 the dof each half yar for 20 oars if the rae of inert i 9% comertle numa, “tem $a ce etd gam 3 seo.) soyinsis) « #000. oo stan)1 Meare cea sedconge PY ctning Example 3.2 UY col freshman ines «$1000 get 8% er annam converte quarter how much on be withdrew tthe oad of ey quarter (omer ap the und ex a the ond of four yrs of ope? La te te eat of ech witha, The an fw he of acy = 1000 Tone ae Te ite od wit Ot ae hb lg al o Ne = fxm «2 vet Ste sedcongue PMT cig Example 23 Compare he total amount of tere tht would b pai on 51000 lan ovr a 10-eur pring, the cit raeof intrest pr ‘ennam, under th following tres ropeymen! mathds (1) The entre Toa plas ocrumulaed irs spl x one lump-sum athe endo 10 your. ©) tr pl chy wre ad ell peo el T0yeur. (2) Troan rp by eel payment over the LO yar prod. 1. Tessie we fee beef yan i on.) «23636 “The a ete pe ieee ch youre on ses tf 1000.08 = 500 a a ‘mere paiiconal Lede loepemenbe An gain of me fr at he epson of ean i ag = 100 “Ton hea amet es pa uo 13842) 100 = 555820. “There sel ay by gee ening lve acne sce he ie repent meds The lee perm ema cnn Her ‘Sot ie il, Cavey. owe pen we mae eee Yemen finer Altgh al ao fp ds 1 Sheet te po to porn a 0, ea ea 133 ANNUTTY.DUE 1 Section 3.2 te aaugylnmetie was defied at am ent in which yet a nade athe ead fe prod. In i secon, we wil easier he mind m which payens ae sae a he beginning of the period intend “The we ofthe terme “alten” ad “uty he” fete, ce teeters rot dei of eprops of hese nan gue 32s tine ing for an period mye, Aro Lappe a ‘eine the Get payments nde The present value te ant Xs post1 Meer ire ‘in ime i ented by 3. Amow 2 appear npriods afer row Ie pid here lt payment made ‘The sora ale of the nay ai pot {atime ident yy ‘We on write a epreson for 3, nalogous to formal (31) as By tee ear on Azan summing te geomet progression oa] hich is analogous formal (32 ‘Simlry Tor iy. we have te following formulas analogous 16 formas aan) Sy onbo(ledaoasap a(t 69 (eit-a - Wyn (wi 10) 1s inactive to comgare formulas (2) and (38). The menor eave: Hower, thedenoranato (3.2) is aed the denominator (3) Under he anulty-inmedae, pyrene mad at he nd ofthe pei a ‘reac meres payne ate end of te pti Unde te omy om ‘payments remade ate bepnning of he perio and da mess of ites Per ae ping te plod compton fom (4 wl (810 les sant rea The above ropa, ring te ie anny payment ede to the smear of ies i the denominator is bof in remembering any on ‘fool anlogous to formal (26). The derivations of females (11) and (12) ae sila those of formals .8)and 3.6 11s possible to ela the anutyinmedte an he analy. Ove ype sf eon it a = as) 623) or Forms (313) can immesinly be derived by compan formule (3.1) and (G2. formals (3.2) and (1). Sie each payment under is made ove ‘rod cater than ach payment nde te foal preset vale rst berger tone pais imerest, Forfa (14) canbe derived mia ‘Tee is anoer type of relinship Between the annie andthe Bye dba ous This fomala canbe derived fom Figue 32. Them payments mae under ‘ane pl ito tei payment and herring n~ 1 peymess. The preset ae of the fst payment Te and te reset vale of the remsiing# = 1 Promensis 4, The som mus ive thew pesen valued ‘Sime an oan Fee tag 616) ‘This fomula cn ho be derived fom Figue 32. Temporal same tht a0 ‘tagearypaymect of tte athe ed fhe mh pv Then the tt secumalatlvae of fen + pment fp However we mus remove Be ‘cumulated vale ofthe agin pyre which sf 1. The ference Alves the secre aly2 Teter fort Considerable contuion has etn teen cred by tig the anne edie athe nuy-de s hey were grey en Act they ‘eles exely the sare sere of payment evant ferent oi i in Figure 33 clas ths oe "Numerical values for an anid can be diety clei wing citer onal (3) oF (10). NarecalYales fran amity due can sso ei bud wing nancial cleat. Typical nancial calls have nh ‘ey wade distinguish he anuty-de fo he oat -nmedae.Te iy immedi usual the eal Sting ot maybe dented by END to emt | Period). The aanity-due usu equi eecton dented by BEG or BGN (or being of per, ‘A interesting special casein evalusing anni the station wich {= On this cae formulas such ws (32), (34), GE) and (10) cana be ‘opie, sne diviton by zr is impossible. However, ay amity vale wi = 0 pte sum ofthe payment, sine nothing Is being semua ot scouted. Ths we have tien 0. an Bcample 54 Am inven wishes to acamalae 510,000 in fund for ‘romen atthe end of 12 yas. To accomplish this he iver plat 10 sake depots a the end of each yer, th fl payment 1o be mode one yur ‘Pree othe end of the investment peri. How large should ech depot be V ‘he fund earns effective? is pote sd acai Thee wb 1 py 2 Sic ee nee cutlets et payment ee ig = 10 whe Ris bem dep Sag Re be ‘Wise ca abo bese gsc ii wet (5 1aqon=7 Fv stom set ooyte PAT ning [4 ANNUITY VALUES ON ANY DATE ‘Thus far we have conse evaaming ames oly athe beginning ofthe tem either one pre before or on the date of, theft payer he nd fe em eon the df one pce eth tpn). However, ‘tis often necessary to evalu sour on oer ites. We wil dicts the folowing re cs (1) presen values ore than one psd beer the Rt ment dt, 2) accurate ves ore hn ne pride he et yen sat, ad (2) eunet values betwee he fest and ast payer ie, We wil ‘some tat he evaluedon de an integral amber of ped rom each Fyne. “ee vale of an ano on any die ould be found by scumlaing oF tocouning cach separate payer and summing the raul” However, it ‘method would become inefficient i large numer of payment are involved ‘We wil se that ii posse wo develo values for al ue csc in erm of tena symbol akeay eft ‘The move tes cases can best be tied by example. Consider an “nmi under which even pyre of | are made ath end eS roaTethers the i prod inclusive. Figure 3.4 i ine diagram for this aay. The ‘ales te ef the 2,3 han 10h perindere pven ey, Sir by unas recite or by arate dea be the ie dingra “The preset vale a the bean ofthe 15 period ea example of ae, ‘te accom vale athe odo he 12 pend ip an example eae 2 end ‘he curent vale a te co fhe oh pri isan example of ete 3. These ee ‘aes ae denoted by aw 2, and. epectvely. om the ine gram, Present ales more tha ae pera before the it payment date Inthiscase. the present valu fhe anette being oe 15 prod ‘sent be he present Yalu a the eb of he 2nd prind daca or te eid, Vay 10 pile wo develop an dra expeson fr this rset vad ly ‘in tems of amity valves, Temporal sain hat imapnary pyres of fe ‘made lhe end of he Is and 2d pends Then he preset vale ol sine Paymens aie 1 = 015 4y- However we mi remove he preset vale fhe img, wh Th alate xe re pet ent ‘This lematve expression offer wo computtionsl adanages, but det isotype of easing he ede wil find wef er conten, Ths pe of amity ten elled = defered any snc payments ‘commence oly ae «dele period. A symbol ven to a tinea ete form periods with emf peo afer he eel period neg ‘Thus the nm big its could be bed ly vis also pose to work with x defer sna de. The reader sould enya he awrite, expressed a aml, va = oy sym iat would Accumulated vale more than one period fer he st payment date tn his case, he accumite vale of the anya the end of the 12 ‘eid is ton fo be the sccuolted valve atthe end of he eh pero, ‘Soumulned forte periods. i sytteal ee lo ponte t develop an aemate eapesson sity intr of anny vale Temporiy, ume hat ainay payment of Lae made at ‘heed of he 10,18 and 12h periods Then he accom vale of al 10 Tmoments i fy However, we must remove te acumulied value of the Imaginary payin, which ir sy. Thus, an ere expression for the ‘scum vate Agni. is aso posible to wark with anu do intend f ame immediate. The reader shoul ven hat he nse in his ase expesid as soins . Stes? = & ~ %. Corn ales betwen the rat nd lst payment dates this ase, he cen vale ofthe ny een of he 6 pd sextet vee eto 2 ed cml fat perder he meal vate ate cd oe pe! Sct ee peste i ait = Her an able ee an aerate eapeina ty rm seni ae Sept een puja et fr payed2 Meth ofnret lat thre payments The aecumlted vale of te ft our pment i 5 and the preset vale ofthe at te payments ity Th, a era eepesion forte carat alee ‘Ain iis ako possible wo work with sami de insted of masts immedi. The ree shoal verify tae sewer inthis xe expres asa sary, Altea? = ve, = + a Summary {In generat pole wo exes the vale of an anit on any de which ‘sanity umber f sods romcach payment ae vty of ways The ‘ede soul racic sang oe form an ase ito aera rns The reader shoul aso be careful to oberve thatthe labels ow the tine ig ae merely a id in suing the payment old, bet they do ot sft the answer. er example, we coud abe te tine dag in Figure 3.4 ‘om 810 20 intend of Ot 12 andthe answers othe vases champls Would ok sarge: Te elements on te time gram Bat do fet the ower ae the ‘umber of payments ed he lcaton othe evasion dt or compare dat in ‘elon othe payments. ally, aecesay oid the va fa nity om ate which 20 negra mabe of prs tom cach pay dete vale shouldbe found ona date which is anime pare of pers om each payed and en the vl this dca be accumulated dito ore fractional period tothe actual evaluation date. This ution wale saad in th exercises 35 PERPETUTTIES ‘A perpen sa sry wos payments continue forever, Le. the em of ‘he sai is ct ie. Although i Seoms unlit have a smut with Payoens coming forever. examples do ex in practice The dividends ot Prefered sock wid wo resempon provision and the Bish consol which we ‘onrdeemable obligtins of the Bish goverment ae eximplet of ‘Pee. Prefered sock wl be defined and dicamed fun Chape 6. Pas mmies 67 ‘Te preset vl of «perpen inmedate is dence by. which can be talaed os the sam of infin zometc progression. ving ear ev ae op ny <0. Formul (3.18) can be terete verbally If pencigl af is invested at ee then inte 14 = 1 can be paid athena every ped freer, ‘eaving the oii principal net By an analogous argument fra perpeniy-ue we have ow "Should be noted that scum values for perpeites do not xis, since aymens conte forever. Ws inure 10 we the concep of papeuce to ge «verbal ‘merpeation forma (32) on Consider to perpen. Te ir pays 1 at heen ofeach prod and hae Present vale 1/1 The seconds deed ped ad, ths, as pee value li, The fleece i te rset value of pyres of 1a the end ofeach Peso ding ie defer pened, whichis88 Thuy tt ‘Some readers may (cl hat perp a of ined praca significance, However broader mage of mansacoes than panes lel continuing ferever can te lok up a equivalent to perpetites For example consider the invesment of $1000 a 10% anual efleive ene of nt. peyabeia inclines each ya, for a unkown period of ne, ae end of which he ‘rip of $100 ened. Sach 4 tanactie euvlet o ering the prevent vale of + perperity paying S100 ae end of ech yar at an festive rie free of 108. ample 35 below isis ater ype of practical aplicaion in which erp ae use Example 3 A eaves a estat of $10,000, Interest om the ett is pod to beneficiary B for theft 10 yor, beneficiary C forthe second 1 ears, ‘and to charky D heen. Find the reaive shares of B,C, and D le the ‘ut, fis sumed the ett wil ear a7 aml effective of interest. ‘erates en yg = rE) = BES te ee eng) = 7107)" (S) = AH 700 Nae hat ea of te de of Cand pa SUDO apc Ao vee tat the praat vane of Be ete we cal 20 ye Teno0(Lon)* 20H to te rt dae wich eal share Tis confi he fc a cay Deng ese ete epee eed (estab aes ated! 0 yas we uae nee _46 UNKNOWN TIME ‘hasan ny problems ving anes, we have sued ha ae zc tath known. ty Seton 36 we wil oie the casei which is unknown, Shulin Secon 3.7 we wil conser the as which is nko, {n gene poems involving kaow time wil at predare ec imegral wns form Before cklng the @etion of determing unkooen ine. ‘oiler at what the symbol ole epee where mse postive integer sed << 1, Formula (31) cat be ape, since trues han te # ftv integer Howerer, i pablo deve sult wich is consistent ‘Formal (3.2) 05 follows oe [tea ‘hes a nerctaon fr the symbol consent with he formula (2) is loth preset ve of ann prod wnat need of | per period las ost. oo Coit = rey final payment tine ns “Tae ont of this fil ep payment sem aber uous. A payment sha mg te more ema" soe renders he pyrene be ‘opus he nctona ime volved. Fortuny 6 esol ho CI ih cnt seny gh epson (i)! thorns, wel nee ty yb ntl ems dic ea psite. Fr earl sy oe a yl 8 fence pay ne menaene of oe ag y CSpot eva el pry ach bs 8 He expecuney of 157 yea, ten wa isthe comet vale of the any90 Meher et ‘The above approach for sling unknown tine problems is soe dda Practice Dectise of te inconvenience and cofision of making ¢ pnt a de whic so an integral uber pede om the hes al der payments se mde, For example. rating al pula payment only 1 ofeach Jaro 8 riod of years followed bya smal payment on Noverter 27 at convene for eiher pat tothe tanscon. ‘Wat is wimaly done in practice i eter to make salt sional ‘yma the same time he st er pyres. infect making pepe lage thn th rer payen called «Balloon permet o 1 make & alee payment one pi afer the last regular payment called» drop pamran, Naz the smaller pyre in hese ston ar ot eal oy would fier be equal he sole paymat rade at a iterate pit with formu 0.20) However al hes uments woul be ule in ave ‘Problems involving unkown ine can bet else by example Example 26 An investment of 51000 i tobe std fo make payments of {$100 athe end of erry year for a ong as patible. Uf the fund cars om anal eect rae of ners of 5%, find how many regular papmens can ‘made ad id the amount of be male Pym: (A) Tobe pad onthe date of the lat eps payne (2) Toe pid one your fr the at ear payment (3) To be pit daring the yar following he lst rela peymen, consistent ith formal (220) Treen tai tcompse 01a ec ean ye ean ewe Hower, Soe mevernttoer ont a ecats Thon cape py RENE tt penn Pg 39 sate dagen tr ee me me ls vo : heh igre The agra or Eran 36 tne age £2 ad a be le ol met bo eee scoot hed 3 oak cnt a in tc te 1 Teena ee ce eh ri voonge, = 808) 2 Teuton ove een be hy mks = 100.057 = 2X, = 00(09-10(45-1) 2on3)-209.44 uke ned ht 200705) 2107. tat i ger X63) The ade ty he by ee ning 2 Inticcue ean fe cas aay « 100Some ancl do ge 12087 a ecg aa of nig at ew ces a wig ler came wi aa (120) Fay. fl pr ame em 3200 ste 142087 A common prsimaton te tm wold eee ‘SOOT. The ec answer tae! les tren he ane pt an 2 ae Totter iste dt 20 ty ms a Example 3.7 A fund of $25,000 is Be accumalte by means of deposi 215100 made ot the end of eer yea lang ar nce, Uf the fund earns 2 eectve rate of inter of 1% find how may rgaar depot wil bo nceury and the se of final depot br made one yor fer the last reper dept. api. nia wed at 215 ‘The ke 1 rep dept ps ele fol ep. Te eqn of ae ate rnd eI yore Th . X= 5.00-100K5-1) "Wat yen re a at ep ep gst dc cough 25000 tat ures eo he at ya ae ce te FW teed {25000 The bm ne inated fe ie ere eos, = S242. ‘Than end att nd of th yur ih erty oe Be yi on) = sie ‘hh ines he did ey $153 The ea ro wih one Dove Te ‘Sonic shld tte argh op. oem a Sept ny ont td tare hr pl eat ed at are rt Be el ang 1\7 UNKNOWN RATE OF INTEREST Tn this section me concider the station in wich the ee of interes the unknown. Ar noted in Secon 25, problems valving the determination fan town ete ofits are wey cacoureed in paste, ‘By fre Best may fo determine an nknown rt f tres fr «bac snout ig ose a Fru calealmer The elle icra i wing an tts far enton a decid in Secon 25 and. Appedbt The ‘ala of sich «ower oo as an inexpensive fancier bas feeder obsolete Yanty of cumbersome fecigues and approximations idly se inthe pas ‘espe the wera avait of aac class, ts evens ‘marae 1 nt that simple approxinatio omulae dete an unkown ‘eof interest ext Thr imple sprornaton forma can even be mpdTht by ha, yeti ofen proces reasonable answers if high level face creed Consider te station ia which 2,2. An apposition fri pen by. a= Mama) aa ‘Te devon of fonnla (3.21) is given Append 3 athe endo the chapter, ‘Te compare fonmlata ould be wed to ed an approximate a fsa ‘ne ial met, uit ite int pplicalty,storecognine tat form (31) foe 9, and 03) for 5 ae mth degre polyoma. he rots thes th ‘ere polyoma are hen solved by agen ectigis fr This meee ener racial oly smal alas of Bzample 38 At what rae of tere, cone quar, $16,000 te prevent alae of $1000 pid tthe nd of every quarter fof oar? Le 20°16 st quo of aes . ou, = 150 era ‘Tie gbioniey at ap ea ae We et sete ng 1s ave Th wotne (220) = cons jr camp 19 Use the spprainate formula (221) 1 obtain on appracimase anos for Exumple 3 witht wing financial eer eta #520 aad 8, st rma 3.20 gee 2120-16) c “Toe sprosine awe be quel tee compres wih Be ct meer of BD four dein pce ced a Earp 3 “Ti mgr icy oan eprint fed it ty py Example 110. Find he rate of interest et which 5025, 1 is eampe me cat pear api, ing or 2.9) 8 - co = (oioti = 25, ‘Th we haves guna wich spi 2-5 = 0 lying he ude {38 VARYING INTEREST ‘Ts far we have astumed eel of inure houghnt temo be stout. Ini eton we wil oni the stuaton a which the eo eet ‘an vary etch pro, bat compound interest isl neff. Other pater of ‘aston nt involving compound ines ar cose in Sarton 38.58 Meter af res ‘Asin Chap et 4, dente he te of net applica fr prio | {forthe ine romime A 1 ouinek. We comer int te pees vee of ‘npetiod any medi. Tw panos of arate cold be involved. The fist atm weuld be for, 1 be be applicable te for period vegas of when the payment is de. Tis method could be clad + Weayoeay" ‘The secon pater would be to compute present ales wing ee 4, fot payment made a ime Hover lf pera. Tis method cod be eal te ture method (aterm ob defines a analyed in ore dtl in Seton 10.2) Tnthis case he preset alae becomes <0 de gre ete rset valoes ofthe anmuiy-ue ca be obisined fom preset values of he annuity media by sing formula 315). se 8 =F ‘We now tum w accumulated values. We wll ee values of re than 5, 50 ta all ae off for k= 12... sm wil ener the oem ‘Aine same two pater of vrai coal he involved. te aplae| ae foc prod J, regardless of when te payne i de (eto a ‘eta we hve (rapt eas - ET a Jah AME ahd #8) 29, eae omates 9 Abert if te payment made a tne Kear A ej over the et of ‘he secumulto prod curve mea we ave Le tebeten tent 035 Accum values of the anny imine canbe cena from sumed ‘ales of thant doe by wing forma 3.18) 6. y= “Teter hol! tings afl berwen the tw ere pet of computing imerest desced above, sce both ccc In practi. sen ‘emus (28) an (3.25) asame th ere rate for any given prod she sae for l payments whose variate by meres ring tha period. On the eter hand formulas (3.28) and (326) acme tha ech pyc san sind iieest re which remains level over the ene pend for which presen values or scumulated values ae being compe, tm prac, changes in incre res ayn orcur ech pero, bt nly once ery several periods ns cars, esc be ota ie fom amaly ‘les given eatin his cage. Tis approach pene eet se than "oct apply te moe genera formule given above and i ted in he fetowing wes expe, Example 3.11 Fad he accomulited valu of 1.yarennityimmediie 9 $10 per yor the efi rate of nee 3% for the fest 8 your and Oe frthe at yore. eit ly orde 0235 twee wing pad gh. Te "Te ates arm te endo yeas 4% rng Tesco a of ea fr peeMth of met fe H+] ss.) 204)) “i a ithsan fe ron eo” Ecampe 212. Rework Esample 311 he ft 6 payments arrested | ice rte of rst of aif he lS pms eed x ‘cn yl (26, pin singer pec ie Theta smarobae iimateaaee 10 [nattO"s ne] = nt 288 465] sso “Tem ston of “Yl cae to” Te eer od ty ia te fe oer Exar nd pe ing 519 ANNUITIES NOT INVOLVING COMPOUND INTEREST ‘The vat of nai not involving cong ine is lf pl anc requires exeful snlyisan inerpeton to oan resonable tesa “Mali values fo annie an rest, which in un reques qualification a tf the basis on which the valcs are acl. I fo, i to avd dealing id axles nt noting compound interest i pose, ‘Unfors its nt alwys posible to ated te sbject. Fo example, om ‘occasion Some cours hve requ he ue of simple ee a compute te ‘ale fan ant invelving ost ncome in pervonal inj a wrong death Invi. Te “sore procedure to compe sch vale io oly ambiguous ‘wt serous storns wil eu a sigalieat pedo tine inva in callin. ‘Section 39 sno anarental to an understating of he theory of ire td can safely be ignored bythe reader However lle wh ‘eferenee fr thse readers who, for wher reaoe, fd tematies n he ec ome: #9 nfornat postion of aying wo achieve some degre of comsiency fa an (rhe ananten fameneck Te woul seem logical © ret othe accuiion funtion the ss © ‘mute any values. The preset vale ofan w-period went need ‘lt the sum ofthe present vues of the india payments. Ths. {reeled venion of formal 18 “ia om ‘We tum esto fnding x ae or. we ase ht invested aie wee = 12. wissen, te oul ave =e d om ‘This would seem to be an appropri procedure in ein css, eg «problem lavoting a varying ores of iere ove npr However i does not produce comet resus in all case, For example ‘suppose we wish find he mecumlted value of an m peta ete ‘0 ich each payment is invested simple intrest fo the date of peyent sl bee them patio. The accunulited vale of ch any would te Lathe jett apes fl fea is eats ton genera version afoul 2) 0 om tic i proce he cect anser forthe above imple interest example. However, ican easly be stow tht formas (328) and (329) do no roduc the same res oder spleens. In fc, can be sho tat formas (428) wd (3:29) do ot proce te same fst in pene for ty bute finer oer dan compound ies100 he deryf er Fer those readers who like symmey and completeness, we could ue orm (3.29) (fad water expesson ft 0, v7 Eig saa be . ot aig tt em 27 00 pe rt en steep ema earns oo eps imc, Cne aera neta parang mes at cletnptsinied creche Set dag none ea ce coe Serpe db neces ce Sorat ay net sym cimemanmre ‘enh sn ti a or me sinter ee ocean sere Sat ea Sainte sence Treks wes ori me i one od sctaaisi tate cuntanesteaeuanye Neale Spa tata cea Geen seve nee pr fe ed? et pas ton eso ee iets pov td Piao mae tn Siete re tne cen Fo SIT EL atte pte = tceanhodt apattna Ras net na Tike omens ont = Me ay oa Miia enka e100] = ay e(ie Ly) es ces ota forfour oe yeu be ale Fad he cedotat aie tat aft sttet.atoquy seats] dhe balance if Fund 2s 20. However, tetas in Fan 1 mt io be sete il weal. Ths ee ttt yt wich is he value of 2, ung compound intrest. We will discover in (Chpcr $ tha this is eoiedence” "The ret of this approach a summarize in Tale 31 “ete 41 Fn Despre: Wires Fd ‘rts Pd tr ga es a a eos os | The ther extreme case would be 10 witaw payments fran Fund 1 never possible, and f0 withdaw fom Fund 2 only when Fund 1 it ‘used In view of the ansuer above, we wll asame hal Fund Becomes ‘suse at he en ofthe th pers wil be essay fo confirm tha be "snr obtained i consent wid sesamin,heer fier ‘athe nd of the Fest peo inert of 1K is care on Fund 1 and epee Fund 2. A wd of 1 i then made ih al of coming (fom Pend Ths leaves anew (Rie cd of he scone! pei net of 1(K =I) cared. Fad | ad plied Fnd A wal of then nae wih all ft coming fom Fee Le This aver new bale of K-2 io Fund 1 ed Tee (Kk =t}220 1 in and 2, 1s pcs comiwed fortwo more pei we have K=4 in Fund I, Afra tie (4-2) 1-3) nd 2 Ath ed of he ith prod ites of 10 ~ 4) seared on Fund 1 snd depots oo Fund 2. A wir of Us then ade with ~4 of Trond hich i now esbaoed, The rest of he payoent. Le “Tis anower is val since the asumpton wat made that 4 < K <5. TC [iver bad teen oboe oosile thi tera the problem woud! have 1 ‘Racca unten answer consistent with the assumption about the a rand Is oboe Therese of tis approsch ae smart iT a2 eae 7 na 37 Nk 7 ess 8 ee en ee ea eta 02 unt ee alae as M60 0 = 1.02 We nest apply Formal (3.27 rect and ota +b n as — sc ewe om ne me ty Ae si (Lhe on apc oem isaac ‘Fond | and Fund 2 between the (wo extremes. ‘ocainn of ihm om we py loma30) we hic ies outside he eange bounded by the two extremes, Thus, we mst reeset erat 30) pe «el wih wy ret nce tate i rate The ok of a104 reer fir ‘Fak 33 Comparten of Comput at 10% Sipe erat ‘ofa trent Bam moet Highest cal [At tis point te reader should be thoroughly convinced tht nding nwiy alos at simple meres surah indeed. Furthermore simple aco would presen jut ar many iculis. The reader now sos aly precine he emonion vee easly i this secon to 0H! computing ‘uty valoes ot involving compound irs fatal posible! sample 2.13 Compare the nal of 10 ners: (Assuming compound interes. (2) Using formal (2.20) (2) Using formal (229) 1, Using smn ere a 10 noo Answer) eles snl net Ye eed on ech pen fa eet | (Spon othcad fe cya ps a vse” Anes sr Oh te ‘ae, eng he rer set ia comp Eeample 314 Find tg5f 42.00 for 05 1 35. scant ih payment om eto pit ead Bre erode aneg ce of mat we owe o ie sfeet Avenel. forage ni ce, We be a0) = elite ser setlettet tet eet eet) ‘ie ges th ane ied it pip shove,106 heer et APPENDIX 3 Approximate forma for unknown rate of interest Conder 4 sition in which ag, =f. The goal is prado an sgprotmaton ong only the given vaues of gad Taking tbe recipe of formals (3.2) ves, hich isa series expansion in cared oo tems cine by doing «binomial ‘xpnsion in the denomintr flowed by a unpleasant ony divin. We he ea “The analogous rma ba could be wed ond an approsimateansner far gne lt om ‘The sition of ola (322) similar, ac omer 10 EXERCISES [32 Anouletemediate 1, Alay wit cule $5000 i cole sactonn h d f29 rar Uy epost S100 a he fe ef ech te fi 0 ra S100 + Xin fn te ed ch he cd 10 ped 2 ek 2 Te cash pce fa ato SIO. Te tye i wtng face he rete a 108 converte wy ad ae pens S250 odo ‘Seb mh fry Find be Swe ra et le ces, 1 Asparscar ens ed fms $000 he lpr ic of (i Alans ed aig 8 ly evel pape wih ee ging ‘Svetle nndly, Hower tend fre perth he oy st ‘es 4300 mol pyc yc a Th ae dere eg he an ‘fer wit te $00 payer and hen ies ae a wd Ea an ‘i «itt efr o73% cenverble mony make op the se et ‘vee by efi ha, F he ua of hy payne eo 4 Aber $2900 ya and pays then with eval payment he Sd ech ye Bs tows S200 fo 8 yea tt py ny at le cach yaad plans rep nie een oe yp, eth toms ay on eerie ee ae 915%, Hom tach site lB py ‘han A puoi Ke oft an? 5 An aiy provi payment om te ed fc ec fos ean. Th ‘tecive ae es Wht the psa be ey? = can gg # yess daa nti fa. 353 Annuly-doe 2. Fada te eine ref deni 10.1 Ther fin 1 Fd he pict va payments of S20 every st oes ring inmediy fe cong gh far yur rm Oe eet aa SIO ee ik woah ‘erates ong en oa oe pen =O 9A weer ge 40 wef acids and eet by epg SEO (eben of ech ye fr 3 ya Shreya ge 5 teers 0 ake {Seu wien he ening ofr at Asaing al pat ruin be ne fn he on of ech ice sary wage 5 1 Be ‘Sar al, tellin eof eres BR ang he it 2 pes ly Wo) Sowa, =a 1 Soo ih age 1) Meta mre ees (oa mt le ‘34 Annuity vals on any date 12. Payee S10 pe gue ae me omen 7.2 ough Deenber,Z +1 fcc, We rin of let cane guy 8% 1 Bodh rae brn Septet 7-1 18. Sinty g(t +0 8) one sma eadoter Ami Amat a oie Youu rent og = Syl Fn (ee fn ep 8 er i of i on ‘itererctmrens caverns wei ae mem A 3S Perpetutes Depots $100 place io a he ging ch rf et ys Aer 3 yea mul payment comes td con ee wl Fey eet 3 ye Fa rn mat Sah A ete epi begi payen tin widh mpemen ef $100) ery en ab pet ae ca 96 le recat fad ‘ses inberiane st fad tty meter ey he nl oe el ey 5000 a of ah oy ‘se: Ste usted 0 ad dee 2 a al spy Sector She wide xcuge hve fe eer fan tne wich wl uy ber 3 ye ated mtd og as firemen sy wah tee! paymen ae edo ech jar 20 oad folowing he Ser deta peed. She mek he 0 eign ee ‘ot fd se 2 payers ate I be te aes her pep wach ‘col etree nome weld erie? Te tet hd ering a aad ‘ecient egal Awe mars ae (A tenor eves an href foe cies A.B, Cand Th wa eras aes of eve payne ah nf ech os fore at Singer A. 8 aC she ech pment pay All payers ser ne oem We zn es of ec oA, aD a ‘Atv pecan it shar A.B, C.D, A esis ft ements B ihe seed n payment Ce hd payee oD a pp ‘Sa shyt ho ep of Cc AaNo Theory fest ». 36 Unknown tine Cong ay if 5 wing twig defi: 4) Fort 320, Dy peymeato 2 aie 323. A peymeto 2 atime ‘Aton oS100 15 be rep ty mm pent of 10 1 commence whee ‘ti eran tc er freon ws cer). Pd ie sad Som of fal pen Gal pen to be per thn Be epee ne amy ey thee ich year year. Anode sy pay 5 evn often yom for It ars. The pet vnes of tthe we ul een yn 1 td caning 8% te i ting aoe with payee of $50 gain at ch year for 20 yu Fade usu mer wb S100 tom te made a Oe edt of your wer be ee Oot to ‘rehash Gone ap en fe 2 pt tumor he loin no pt fr epi (Sy mehy py of 10 weed ch nth, (i) nage ppt SDD he mo. Inet oh sms a0 2 cane mem. Te wo ps ve tesa prt ae dK 2 Vang te med opel ie eda econ 17 Unknown rate of interest ‘Ane on 0 512.000 canbe compe pi ot wih ey yen (So mie wth edt ech mca Wa fe sad me of ee ‘wre met n ot? 12) Comp on at ba ith al cae, 2) Appoint by fama 320 au com | bert env # 100 sce Heft the nelly es he fered bu 1p syn, uma ay SSH. a ‘Siar sommes pcan esl pet wl be S107 Bah ‘ve aed ne se ec re et. Fd ‘epee vies te alonng ee aa ope {5 peeing on yn can on a tne O foweacard ae =e (ui year ample paige yr, ate ota ana [aecne urea) = ‘38 Varying interest 2) Fine pent wae of ana ite ih pe a ead of ach tate ore yeu, the te iret 8 conrrle eamaly ft ‘ees yaad" ve sly teat re oes Fa he penn ve of mented wich pet ch Sater re er te poet fe fe Ys td 5 cree sly nd eye re at 8 ra aly tom gel rig a er ) eager te eo Fd te pent ae of a0 sauna fr fue year. es if {=06e0tenI) orto 23e3 whee ¢ epee tig ‘Ata of Ps be rep 10m art Deng 6 ot me te lean. The fir peso be alg rhe er Fer Bt #12 3ea ite a ec he omadr fh ae re tie Find expan ("Wie camet ae ie 22420 my io et (i) The mal ee ine er yrs Pad X gen ee eer an fo fa2 They of rt 39 Anoules not involving compound interest 26 Feta exrio fr 9, tming ch ppm i ved singe docu mi 2 Wat oa xeon ft 3 by ety king ee a-ma ret ae ote pom. BE. Genin 6 3h. 120, fd 5 29, Fortine 0d ect edby 0 oF ‘A five ay hs payne of Va ies 1,23, 4S. A eter fret aa fh ety aie Oey. Howe uae Be ‘iment aren he ol ice at =1 8 2B en mui te rh By 25). By tow much ote mer of Aan ene Mlscellneout problems |. an nm tie ners tof, fe loin emai ve eet (0) 20 yaaa meine wit ancl amen ofS. (i) 220 somaya hse pape py 20 pe pe 41 To seman $000 ed fn yas eons SH ema ted eho etm yr on S106 a tt etn yc To sna et tet nase Ye ven (si) = 2 Dae 4 Ala 3100 a et he ohn pcs veo mt tad eh yr or 2a ye, pn ‘ised |atdecadeonh of tntnjene 36 (oT ron ig? pe |. eepoor ps $1000 bak sco tt py sl ee et ‘cof 610 yeas. Wa wihrewn le rng et 72 ye, 8 ly (15m of he wibienalanca ae Te ptr wits Ket ed ttc of yeas 6,6 a7 The Blane in th as th fd fp 1D ‘Stoo Fn Xe ear de smi Bo4 More general annuities 441 INTRODUCTION Capes 3 we das anmties for which he payment pred and inert conversion period areal ud cine, Fr wich ibe payer ot evel umount. Ip Cher ¢ ances for which payment ar made we Tess fern than ners i converte and antes wih vying sibs considered 442 DIFFERING PAYMENT AND INTEREST CONVERSION PERIODS We fr adress anus for which the payment peso. ad te i ‘omverionpetiod ier ad for which the payments ar level There ae

1, ba isnot an iege). Here nui, he est nyroach woul bef resort to bac princpe, et wie an expen a he ‘som of pein ales accused values of ach parse yet, then ‘o sum this expresion as a geonetc ropason. An Uktaon of his pe sso appears ithe execs shoud te ctnered that 9 one smo expression othe anny values ven by fouls (4.1 trough 46) have been defined. The ony expressions en nom etary ay symb ge yooe 1 rgh rene 4 Rework Example I ng epoch dep a Section 43. at eo fess 1 pr meh em ey i 4 eet comes snd wd eth peepee coin hee econ pea Ss iat ‘ty eee oad ae ‘re snwer ages wih ei ange Mere tee emis 128 cumple 5x inreriment of $1000 sede make payment of 1000 the nd ofeach yar or lng spose wih «smaller fll peymantoby (nade tthe tne of the ls reper pment. If intrest 7 comrerie ‘emiennally, fad the numberof payment end he amount of th tol inal pment Meequtf aois oe» mc clan ade epic deeming wo ine Ss a Soci 3 we fd Sar Hee 3 Th eg eye ad's lB ppm an be made Let ese aon as oe ne fe al pe Pome eed by Ten equnon of abr cot Iyus “Te al rl payment weal be S009. 44 ANMUITIES PAYABLE MORE FREQUENTLY THAN INTEREST 33 ‘CONVERTIBLE, 1m section tants payable mor requ tha tre i comets se fret analyzed alpemialy, In practice ames pablo rea” ‘aa irene comerie more cmon than suites payable ‘squad than interes converte, This ston wil be sbi ia the ‘towing areas” (1) aokyimmediue, (2) aomuitydee, and Q) oat ‘cosine. Annuity oumedte [etm be the urbe ayent periods in ove ines conversion psi ‘be ke erm ofthe amy measured in tere convenion pesto, and at Be Oe intestate pe ites! conversion pred. We wil assume hat cch eet ‘convenun petod cote anneal auber of payment pes; ha mand122 Tesoro ort zcboh pov inege, The mrber of any payment mde is me, which hoa potive nage “The preset vale of an anny which poy fm ate endo ach a ofan ‘nt converon ped fora woul of ere convertion pero i ested ty of" Apain by sumaig sgeometic progeston we have oe tear ey] an ‘Te scum yale ofthis ant inmedely arte st payee it ade denote hy ad we have oe «a Formals 4.7) and 8) sould be compre wo formu (3.2) and 3.4, seipegively. They ae Meea except ta the emonnars (47)and8) awe £ instead. Sie 1 ia mene of nerest p e end of mo titres conversion evo, the point a wich interest paid under is Imeasure re consistent wih the pints a which pameats ae mace This ‘oper, lang the manner in which payment re ade and the ese of ‘uae in the denote, was rginally mento in Seton 33, Anny due The present ate ofa annuity which pays Hm tthe beng cach meh fay ier conversion prio fora ttl of» terest convention prod tensed by 2 Weave ay More mera eis 2, ‘he derivation of forma (45) smi forma 4.7 ‘The sccunited vale ofthis anmaty ove mh of a intrest converon erode te st payen sade is dened by Hand we have Pee ur o 10) er. agai, he laoeship between the manner in which payment re made sete measur of tere inthe denen shouldbe noe [A number of other iteing snes svaving amis payable mehy ‘ca te developed. Seve ofthese ret ia Append 4a he end a the ‘apters elerace ore eater. er conerntont (On occasion a pereity payable more quer han inert comvee 's eocumted The following formulas we aalogus 10 formulas (3.1) and resis eed ) z aw eed aa [A second speci ese, very rarely encountered in practic,» satin a ic each inert conversion prod does tt conan an egal umber of ymca periods (em > Iba mi weg. I tis ese. he Des appa ‘ould be wo so 1 tas enipls, eto wre an expenion athe am of Present values or acumulted ales of each separ payment. 2 th tis expreaion asa geometric pogeson. Ax ilseon of is ype appears tees ‘One imoratconsidention in prc appictions involves th pope ‘veces for antes payble my. Esch pment made of ect Lim hil the coetieat f te symbol i in gener. he proper cota tbe nt pid during oe erst conversion prea a he amount ofeach ‘cal payment ‘Th amount paid daring on ners conversion pedi fen ‘Ale he annual rt fhe sity. Ti apyopi tr the ee126 The crf art conversion psd is on8 year, a often he cae: Dati config fe Interest conversion paid is ther tan one yet. Sometimes te tm period ‘re sont iead "ma ea” avoid hs cotusion Example 46 Rework Example 42 wsing the approach developed in Section £4, he ef tei pra ee em of ee nts cmesion evoh an ach met comerinn pra tas wo fet prs Tho th ect aie 2k, = 0 ee te en 28 ep te ym ema 1.) veanene vast] = oom rcs OPED 9 These ages ith al chad a Ean ¢2 Example 47 ALwht anual effective rae of terest is the preven alt of sre of payments of $1 every st months freer, withthe ft payment made immedi, eal io 510° ‘re mnonct aes Grameen Not ta pcp prc rs gue wl oO ol, ich ten Mor re nar 128 45 CONTINUOUS ANNUTTIES [A ogo case of armies payble more fogerty than imeest is cooverie sce which the fequency of payment becomes infinite, Le Froese ae sade coninoously. ARboogh fic 9 vnalie bm patie, & ‘Renimoes anny fof conadenbe heretical and anal sigifomoe ‘Noi wet tan apeosinaton to aenies payable wth pet equeney, sch ly. ‘We will dena the present vate ofan any payable contin fr cet conversion periade,sch tha he OUD pid dig each net onvenun period I,by te symbol Anexpresion fr 3, 8 ‘a am i since the ilo expen Vt ithe preset valve fhe payment dt made ‘sili expesson can be oktained by performing the negation = [ve a, a4 Formula (414) is logous to forma (32). Again there i consis terween the manner i which payment ae made ad the dominator of ‘xprson. Als formule (4.1) could ave ten chine a lls: ky “Tose connmous amity i een to be he lining cae of neues payable126 Tether efit ‘Te accurate vale of a conious anya the nd of he em of the ani dence by 5. The folowing rlaoships bl. ais, «16, ‘Adon insight into connmaous annaes can te bined by » of Formule (4.29). Simic, he presen vale of eet. de becomes si rey Ut then infinite geome progression diverges. andthe present alt fe perptity doe at exe. “he fede scautoned agi ety reying oo the mmberd formas Sevclped i this section. The present value or accumulated vale Of ‘auily whose payments vary oometric progression can be daly ‘xpssed a a new geomet progression and sumed. Such» fist principles ‘Porch co working problem a hs are can slays be appli ad wl rol ecenvely nw contming136 Tete fir sample 412 Ax snauly provides for 20 annual peymen te fist ppment ter hes eng $1000 The payments creat ache ‘Sik pment Ob gro then he preceding payment. Pind the present aie of enn af oneal effec ate of terest of ™ “prota sm ro —t stease Ecample 13 A pepetyde maker ennsalpryments which bern 5100 forte ft yur hen incre at pr yer Uo the 1 er, an | ‘hen remain eel href. Caealtethe preset value of hs pepe the cnnnal ec rae of inert i egal to 5, “The pest al of het 10 pen vite] co] ee at 0 rand payee ad ae £9 “Temes ae othe ett be pomens 8 J soe Margene cman 137 ‘ha lpr as Example 414 A partipent in «pension plan aged 45 cnrventy cars 5500 por yur. Ths paricpan pans o conta of salary a th ond of sch yar into the pension fond for 20 your Find the accumulated vee of sce 65 of thexeconaribsions, the paripan recies amma 3% salary ‘creases unl erm end he pension and ears "eft er Yur. The acme ae of he ontons mode ys ap he en 20 vewstce wages 900451077" s.0)00n"»-s(vF09N6199"] ‘ih rtd i om 9 4 sas 48 MORE GENERAL VARYING ANNUITIES ‘The varying amuies considered in Sections 4 and 47 asumed that te ‘aypent psod andthe intr conveion pce are eu and cole. Ik Section 48 wis rest fs med. pace, varying anmles with mens sue mere of es fequnly an inet is converBle cur ‘ntsc Ts oen pole wo apy the echnige isa in Seaton 42 0 this simon. io thet finest convertible te sue equney a payne "wee and hen aply he rea developed in Scions 46 and 47. ‘We wil net conser generalizations ofthe increasing ene. () in ich interest i conver ore o es equ than payment remade ‘er antes in wich pyres var in artes progression can be handled analogy. Consider fink the se in which payments ae made les frequent than Imereti converte. Lat te the numberof interest conversion pring nome Fiyment period, eb he on of he nuh eared ia neat conversion138 The hrf tert prio and He be te me of out per iret conversion paid. The be of payne n/ 4 uch isan iege Tat A bee prs bie of he pred ceasing any, Weave Aad eaen(taiytete (eda 2 tear wool fap efor Now ubcting he fest anon fom tbe second Ales] ster ootenete ty which canbe expensed a ae Female 4.38) isa gnelzd vein ffl (42) a he ae Stud wowed, Cone ete en which payments male mor funy a iewrat s eomvente Te flere at an depend on wee a ‘Trees come aes dng ech eet comenon pd. ‘Cone fie soon in whch e ao rye coset dng cx incre cvenon prod wit ieee oui only ome Pre ‘Srenlo pd, Wem ane fe os berwes he manner wich fen we mde we mena feet eomintr ob Falorng wld en ofan) wit = 5 Ferma (429) gives be preset ale of pind snail myn hich ch pyc ig tert tet envio pet sm Th arent dag be snd ince cove pes 2m a fd, {Sat ch pupmet ig tne coven pated am. a More eer 18 Conse nx the stuaton in which he me of payment changes wth each even period. Seppe tht on cening anit payable tte rae of Im (meet conven pero the end of he ret mh fan interes conversion Fated, 27m per ineret conversion prod ate end ofthe second mah of a Fret comers pari adv forth Tan he payment wil be Um the ‘frond wil be 2m, and 20 fork, Deming he present valve of sich an tent by af, weave Ural = [teats vam] gee a “he derivation f formal 440s ef as an eerie ‘Annes in wich he payments vary ingen progression nin the peymet period andthe intrest conversion period fle are ecasinaly Ccvomerd, However, sch annues preset ro new ius, They can be Fadil handld by expressing the arma vas «suamation of he presen ‘ae or srumalatd vale of ech pyre. Ths summation is a pom Frowesscn which an be direct evalu. This chaque wil be raed Example 416 Example 415 Find the present valu of «perpetiy which pay 1a nd of the tid yer, 2 the end of th th your, 3a he end of he mth Dest he pt af ie eet A. The Ae verte wing te ec ti fom et Mier) Potten etyExample 16 Find the accamalated value ot the end often pears of om nna x which payments ae made the epnning of eah hl yer for ie ‘oars The fst payment it $200, and cach payment i 9% of the pie | ‘rvment Interest creda 10% converte quart. Mean pian ger oft Th acai aes ooo saat." 9.02574 scone] 49 CONTINUOUS VARYING ANNUTTIES “The as ef vayng ay we wil consider is one in wich payments see eng male tinny as yy 8 Such anes we pay oor me ‘Comin esa any fn nce cane poi wih payment tig wade ony te a reid teat ome 1 pst vr fis may ected by (a) nd expen it ay = five wan since the diferent expression dt i the peseat valve ofthe payment at made tert mom ‘simplified expression can be obiine by performing an icgraion by pars, Weave More sommes 88 aa tn genera if the amour of he payment being made ot exact moment {A ena expresion forte presen value of an meri condauou arin ‘euy would be reve. as) ‘An even mor ener contituons varying smty would ot only Be oe i ‘hich he pment ae being nade connmusy sche ain ar cca ‘minus bu also oe ia which he force of rere varying conten ‘W caz, geen version of foul (44) would be Laine Example 18 Find a egesion foreprsn tof cotaoy incremang emmy with aterm of myours fhe force of retin the ‘rte of payment a ie tp anna. "a amy4420 SUMMARY OF RESULTS, cs of vel amin for “ale 4. unrest exressions or reset as of varoas payment prod and iret convenion prods. The anu stmied 6 per num fr 10 years 12% per anu “Tetley lati tr Lt Anois Caper — Pamen pri Moe pnd nti 143 APPENDIX 4 ‘Other formulas for annuities more: Isconvertible Payable more frequently than Interest he as) oo bn 4) ‘The flowing wo formulas compart fo anniie- de. ee, = at an oe a Oe os aa 2s following two formals ae vraton ofthe prior tw that wee sel before he advent of faunal calla as he 450) ‘The llowing to foomalas are comparbi fo continous nasties aoa sn 4s,1 Tether fire “The following to formas analogous formas (3.6) and (312) sy] a ‘Re ftwing fra sng os 319) 0.1), a abs a a aso] ‘etwas emer ars (319) 00.10. vm sa sn] Bam sn Alternative approach for payments varying in arithmeti} progression ‘An steraive apps fo fining expresions for varying unites is make sof th fllowing tes quantities ke as = The progr vale of payment been n pride Mee primates ES a- ¥ as 2 Terme eaten py Tipeyoat apa ccnp na he as ‘+The presen vale of increasing eet of 2 A Bat payment at end fx ero "Tes sybols are very wel in seting up egesins for ayingammles. By sgpeatly dese ing the pater of payment expresins for he amy can ‘immediatly writen down. + Example 1116 Te hrf ert EXERCISES 443. Diterog payment nd Interest conversion pried 1. de some ae 18 yo afer te St pa mn fmt (hi ewe peso SED ach ma wey ra Teal (fine coven 67, Ase te ars de 2 Find te poet va yar mi which pays SOD ae epi fh (rare Orbe ft 3 yur, rang 30 per ger ear The etl 2 Amol S100 pend i nd we einige ref ya. {We fn hance el a tas 50, Bd br fe at cured yd 4 emityinmetie at pys 40 quay fr et 10 yous cons $1000, (Coette he oana er cae Rhy ere Yo sme 443 Anmutes payne es troquency than interests coveriie 5. Res Exec | wing he ech eee a Scon 43. © ie reine of tn sag af it eon oe seat wr, ye he pape mf yo ch ee Pments of 2 ey 4 mont fr 2 re 2) Exp ano ie 1) Exped anno 1. ind sn eas oe pres a of a sy do ofS ea ae ‘city fr Ogee” = 8 Th ect ae erty ing a ee of ey ee ys 9 nd exes fhe reset a of myo hich payment we SCD at cqarerforfeyar ore mem ade 3 8, More omer emis V8) nd megan oe psn ve faye wich pee a a he egaaig ooh toe pd fr 2 you, un ee rt pt mc oe. 44 Annales payable more reqenty han interests converte Reo ui nt prac dere Sain 44 2) Veta meet teint 2) Stowe (A nm of $1000 i dt ay ford pep dee pring SID ey sit ‘ton even on egos nd pte and ta aso ef = 2 4 oa Fo an eps foe pst ae fa sy hp be bgig (ch Semper 2 ea, ae re mere eet pa 45 Coninoous annals Stow epee ely at 9, t Fad the reed ‘payment wich could be made a the end of ars 2 through: (i) Assuming he ee carmed reverts back agen aftr on yer. (2) Asuming he rae earned remains forth et ofthe yar period 1 Teta nee y= 9, an ea ae he ef efi pee ae lat Oe me em coat et o one = (iH wc poyiely 8, wus qa poeta of ei payments. Ts, dak = My Altera) = Wie Ma, = ea, xusien, = ule ‘aecepymcn wih Benguet Thos we (leiden 2X = Xs, x(tees,)1 heey of inter ‘4 SINKING FUNDS Rater han py 2 loa in insane bythe mortzation mad in some cases store ma choos f ep HB ears of on ump-sam NTE a fhe cad ota specie ped of ine. In many ofthese cases the bore will Slt od tht wl be slit onal epay the lun a then of he ‘pectned prof tine in facts sore exes the Tender wil nt tht he FRerower accurate sch a and. whichis fle called a sinking fond some ems pants st sinking fd may vary inept the scone borrower Howeve, we sal be email interest in those ‘Sein which ie payments fellow a rele pater, wee they ae some Form ofan anny ici uly que tat he bower pay interest om teenie ama of she lean perc ve the ter of he lo Sch ners is sorties called vce ob oan Ths he aroun of ea eins Const. ‘Soe te tame in the sinking fund at any pont cols presumably be pple inst be loan. he ne amt fe far sete tal amount ‘thn aa the acs value ofthe sinking find, This coer ays (fe ame role rte niking fond method tat the usaning han ale (Saco Secon 52, de oe station med Tri psi to sow that the te oft pid om te lan als | ra of terest cae he sinking ind hen the sicking find mba is ivan te amotizaton med Recall frmala (36 fom Caper 3 69 Conse loan of anova! | pd over peo’. The expression Wa is “sont ach payment asc py We oan by he ation method However tbe exes ithe psc sinking fn epost neces 1 ‘comitebamu of han t wdfn we e no mnie a ig 1S Ie imrucive to conser this equivalence fom an aerate viewpoint, Consider loan of amount beng repaid wh instant 1a thee fac peso form prods The amount of itr each pend i 2. Thus {a ile goo the sinking a each pid. However, be saking fd (tag) ag = ee a “which te gn amount of be oa, Aft hace st might see at eto methods canot equivalence fim Table SI, te inert pid in the amazin mh deceses Toe ys wl he tres pd Sinking fund metod oti ig, = Tv each period However, ach pred he she fund eas inert whieh exe oes the seeing dep oa tenet amount of inert the same fr the sinking fund mead a fre anotzation ees Fc example, dunng the wh period, whee = 1 2m the amount of teresa the amonizaton sched is ‘The met aount af meres in he sinking fond method is te amount of interes ra a, les he aroun of inert eae on the inking fad The sot the sinking fund i tacoma vale of he sinking and depts of i, tice of =I pers. (a) ‘os tentang ind etn pei fap-iitasjicg = (lev-¥ [te* I] Ten hem mf ae king fn eth he ‘Su ueraect loa cmeteatesoligtiads1 Mahony er ‘The equivalence inte to meade canbe sen fom «consideration of « sing fd schedule. Tae 8.3 king (and chee for he ae eagle sidered in Table 52. Le he sini fan deposit be denoted by D. Then we ‘The reader sould verte ene in Table 53. “ute Shing Fen Sede for 4 La of 51000 Reps Over Four Your at 8 Yor Mat, ite Soni, awe ‘The fellowing relionsipsbetwoon Table $2 and Table 53 should be te 1. The ol payment in he snking und etd, etre pid on te loam she sinking fu epost, ene he payment area othe amortization tho. 2. The net incre pi ia he saking fn meta, meres pido he a nus ites eared onthe sinking und. eqs the nest pid sa te 3 Te annua increment ine inking and, the snking fend depo pa he imerest eared on te sinking fund, ous the pil vps i the 44 The met amount of the lan in the sinking fd std, he orig sovnt of te loan minus the ameant in the sinking fd, sat te ‘outstanding lan tla inthe amoration ed Aeron cede en ig ands 167 1 90w reins to consider he operation of the iking fund meta when the rate finest are onthe sinking fund cies from thereof tet pid on She oan We wll dena the rae feet pid on he loan by and he eo intrest cud on the king fund yj 1m pace ji ually les han of elt K would be ns for a terrower to beable to accumalte money ina sinking fad at higher ate of inert than being pido te ou. Homever, thi io neces he case then nde folowing ans iva even ree than ‘The sume tsi apsch wil be sed forthe se in which 1 98 Wa previous} ase ia he cae hic the wo res were equ. The ol payment tr be spi in two pts. Feet tae wil pido the smut of the oan. Second be renainder of he wi paynent tasted or teres wil ‘be lace ime sinking fn acualag ta Le a, pC he pee vale ofan tity of 1 a heen of each period form pede under the coos Jas deserted Then fa fan of Ti rade te perio instalment unde the anoriation method wal be 13, ower fram he sinking fd met hs payment as py eet ate tbe leaned prove fo inking fund pon which wl accu tothe amount fhe oan athe ed a pigs. Ths May 69 fia)” Wecan now fad an expen fr 4, follow: on Tass, 6 Moa he noted hati = j.then Gy, A, a would be expecte ‘The consncion of sinking nd schedel a two rales of tere ery Sino the constuction ofa king und scede aa singh te fine. ‘Asan example conse «$100 loan fr four years on which an anal effetive "me of ites of 10% is charged If the bomower accumulates te amount6 Thethearfiere secs to repy he an by means ff ama! king fund eps ina ‘Sd eaing an anual effective ate of 8% The al Semanal payne made bythe boroweris 1000 _ 1000 ‘This example ta peneraon ofthe example conser in Table 53, Nowe ‘hate sing fd schedule e Weil 0 Table 53 enep da ach ney in ‘he ineret pe colume i S10 instead of S80 Tm genera, he hing fd sche to re finer idea wo sinking fag schedule atone a of terest quo he at of interes earned {he sinking fo excep hata constant adn of} es the moar oun alo emer pu colo, + 1000{10) = 2219210000 = 321.92, Example S46 A wishes to borrow 51000, Lender B offers loan in ‘the principal 0 be repaid othe end of four year. In the meantime I ‘Gfecive tobe pid on he loan and A iso accumulate the amount neces to repay th loom by means of ennual deposits in sinking fund earning effective Lender C offers loan for four yearsin which A repays the lon the amortization method What the largest eect rate of terest tha ‘cam char ro that Asner betneen he ars? nat i mae or pd pre neh ‘it ihn fd te sso rer nt cn, Tent amnion fl Cachan hee Amun des nd sions 10 ‘We cm we he ign of Secon 370 fr aoe of 0 it prt edema enone wea swat "i tl da tata amor pit pees is iy conc, dnl ht te ieee teen he aiton od a Sieg id ee Tae ay he ase of 108 ping ice me eg ‘etal deci, wel e fiwing pean ey felon 0 ‘omen pe er ici 1810-88) = ‘histo ene ete ‘romeo meng nae herein sg ced 1)" Sine meg eo ein fo pt ert ‘nectar hana) Tb le ep om hon "es ako nase comer yl eo is aman FA vets 1 Ate 8% Hower Alves iing in cheer en Bele Sot 1. Th cml ik tee y wheter Bhs abo eng te ikng find on why cid170 The hay nr Bzample £7. investor buy an myer any wih «present ral of $1000 computed at BK. The investor pepe price which wil permit the ‘placement ofthe orginal inveiment na sakng fund earning ™% and wil ‘ao produce an overall yield rate of 9% om the entre transaction. Fd the rice which the invester should pay for the anny. ‘Tis scone bie lige ot ete The ntl ea fem 1 Phe he ce pce a et ee inking an eon Now ht sa | symen i pt ino ame om he pre ie DBP ad ing ad Set overt oko at te cae vase hing fn er ema mt ‘SS DIFFERING PAYMENT. PERIODS AND INTEREST CONVERSION | In Sections 3.3 and ita been assumed tha the payment pei and Jers coneson period are eal and colnaie. Secon $5 dscuses he Impliaions of removing. this aston, Problems. inclhing fering frequencies ae best hdd from hai pipes rater than tempting 1 elo new eri, Amun hdler ond ing nde 171 Cones stan anorizaton hele in which payments ar made at a ere tequency tun ire convert. The anetzatiog sche wll ‘ai ine foreach payment. since the pinay purpose of he che 0 ‘vide each poyent between imerest pd aed pial epi I his ae, 4 ‘swostep prose aaogous to Seca 2, can be flowed 1. Fd hee of tre, conve a he sae ey 8 payeent are rede, equaleat oe given finer Using this new ne finest, const he amenizaon chee ng he ‘ecniges developed in Section $3 This approach i genera and ca be sed wher intrest conve moe of ess equ than payments are made Exar 58 iis titel Ie the case of snag funds, te apache sir, bat he etal ay be & at mote comple sre the Frequency ofthe flowing may Bier. (1) inst yn the loan, (2) sinking fend deposi, and) intrest conversion Pevod on he saking fond. Example 59 sista of uch case sample $8 A debt is being amorizad by means of monthly payments a om canal efecive rate of interest of 1% If th amount of principal in the ‘hid payments $100, find the amount of principal i the 33rd payment. Since ppt ewe monly md nee comer amy. pi said lun nt anu hol a poms pogo wih eo un The ppl a 3 ppt veoqts1/" = s15810 Example $9. A borrower takes out @ oan of $2000 for to year. onsruct a snkng fund schedule fhe lender ecives 10% effective onthe ‘oan and ifthe orower replace the amount of the lon wih semiannual ‘eps inking and earning 8% converse quart. ray 2 king a posse me ely ed) on be a ‘in conte uae“ate Sinking Fond Sch for Esme 39 ee gh ono Slt fe eae on eee |86 VARYING SERIES OF PAYMENTS. 1 oan eng reps by te amorizaton meh ts possible dat terower repays he fon with aaliments whieh ae nt level The ease i sich all be pgments ae level excep fora nega fal payment was “ose in Seton 53. In his seron we consider more geen pats ‘aren We wll sure tat he nr conversion period alte payment ‘eid ae eq ard oie ‘Cone fan to be repaid with m pero fatally Reon ue hyn, 10] Ametion hes an ign 17S (fen the serie of payments R follows some regu paren so tate ess of Srcvone 46nd Team be wed Tit is eve fo conte an anorization scale, can be conse oom basic pris as i Secon 53. Alemavly the ousndg loan talane colina canbe fend prospecvely, especialy, ecw, and then terest paid nd principal eas calurns an be eee ‘One pte of variant aly conan les te borowe making tov! pyment of principal Since sce outstanding lan alnces decrease, Semeve ners panei wil also decrease. Tas, socessive a paymeets Consisting of principal nd intrest wil decrease. Example S12 an illusion rope It posible that when lan is amore with vying payments, the iret de ima payment tlre thas the tol payment. In hs case, he Pipl repaid would te neglve and he oustanding loan balance would Ieee instead of decree. Theses the ouSanding lan blancs aries ‘ro eres deficiencies Heng cepted sad aed othe anout of te lan ‘This station is often called mepave amoricaon. Exarple 5.13 is an sz of is ype Tsao ponte to havea varying esis of gayens with he sinking fond rtd, We wll meth eles paid othe lender is constant each ‘eri that only he inking Fad depots vary. ‘sume tha the varying payee by he Borower a RFR, a a ‘1 Latte amount ofthe oan be decid by Then the snking fund deposit {sre nh ped nil. Since he aunt valve ofthe sinking fad he endo pends meat be we ave Lm int a +m —anN PER) Sansa, gaeu Sve Tim" Te tae, en176 Theshor of tere R= for #=12.-, tem foul (58) i seen 0 be o spel ease of foul (51) f= j. hen fra 1) becomes which is jst formula (5.10, Ts. th morization metho andthe sinking ud ‘thd at quale if 1 shoald be ated tat we have imply sured that the sinking fund epost Ril psi. Tat were mega, ten i would mean tht dhe pajeat i tha ear swt even suit py te inert on te an. We ‘ald then havea negative sinking fond deposi 0 withdrew fm the Sinking fond for that year. Example S14 san station of his pe Example S10 A borrowers repaying elon 5% cece with payments 1 the end ofeach year for TO years, such thatthe payment the fst yar 15200, the second yar 319, and 0 forth ul the 10h yar is 3170. (0) Find the amount of he oon (2) Find the principal end interest inthe th payment. 1 Hg 1(08), = 101772178) 10! 2 eg 10108 tent 1] 106 = w(t) oy-50757) = 50462 Example S11 Assuming the same payment pater a in Example $5.10, {find the amount ofthe lan the borrower pay GR effective on he loan and ‘ccumalaes sinking undo replace the amount ofthe oan a 3% eecire Aman cde ond sin fds 178 Tg oe Example 512-4 borrows $2,000 from B and agrees to repay it with 20 quel annual incallmens of principal plas niet om the unpaid alae ‘Me ffcive Afr 10 years B ells he right to futar payments oC at price ‘hayes € 5% eective over the remaining 10 years. Find the price which © ‘howl pay tthe nares dla. - gears cont et « om We o » igure: Time sagem for Bele 12 ach yur A ps 5100 piel ps orton apa Daler a3 Te mente shown ner eon gu. The pen © Cl eof 10 Saree pm wie ct tere pen 0 $210 +g 30S son 382-222 Ste ear dl The aver ut et sng alee of 1000,16 Theta f ie Example 5.13. borows $10,000 from B and agrees repay with series of tom incalmens oth end of 2h yar such hat each installment i ‘om reste han the preceding ntallment. There of nee om the lan i WR effective. Find the amount of principal repid in the frst three ‘astaliment. wal 1 <1 = (10000) » rm800 ‘wat shapes ate epg cet py inte on ea, 0 nop eye inguin. The oan acre toi cm eke = 190 28 ‘econ fre ie he soon se a: fy =1ak = (12472009) = 507 ig = (kuazm) = ost 12k, = (sn) = 10808 mim = (0a 95) = 104420 Ihnich, = inmaot- Joao = ~82 Amen chee and ining ade 177 ‘Th ano pip pine einen ioc aoe compas &,-B, The pacipl pid i eet nd sean Incnnprve a hele Siaey arin 2 a eco oe er “Taser egal mote or i ea e ba Example 5.14 What isthe masimaon amount that A can oro from B if Au wlling to make four rccesve annual payments of 109, 100, 100 and 1, if vo receive 12% efecive om the loam, and If A 1 replace the amount ofthe loan ia sinking and hel by Bearing 2% effective? 1s Le Be mat fh an Anal ert on he ne DL The foe seeking depose a en 100— 12 100= 12, 10012. and 100021. Ss the sound abe of he skng fed mut oil Be cal mast be ban webave (0-12) 5g ape = 06508901208) gop. (ta Howe: the ver jt etc. itv ae pay A rte {etn ar ae wt ise oy 812% on aun of om. Ta he king ‘so with gui. t t eea sme it hep sinking nd oat {cae tt wl np cl brow ene a Sone Be he ng fit wach ne ti one A wo ae Dow tT ‘ces i sn nih iin amt178 heer eet overs te mc mci ft a wh at be aca Be ing B= (100-128; Jon 10g, 001208) saggy Teng 7 Teta [87 AMORTIZATION WITH CONTINUOUS PAYMENTS. 11 possible to develop formas foe amotition of loans with continu payments Sach fomuln hive cone and heretical va, bot ae ot dely wed in practical appiains We st examane te eaves which the ale of payment icons, Consider 1 oan of, being pid wih conraous pment athe te of 1 per pod ‘over m pies We can really genera format (5.1) apd (52) find We ‘oustanding oan taunce ate ,051 ma ya er ved 5, 13] = alto ‘Aso, we kaow tat the continous payments re pally interest and pally sepayment of rn. at be the santaneoas ata which eet Isbeing paid nd bee imuanancus rae at wich principale being repel Sime By gona esoning he generalizations of fonmulas (4) and 9) come 19) hase 19) 1-58 19) Ameen het ond tig fonds 179 ‘We wil ey formas 3.14) and (5.15) ive mabe show ta. Par 4a -- sine the instantaneous rie of dete the ustanding oan balance mast ‘a ete of icp repayment Iw eee forma (3.12), we hee aie 3 = te atts = (leapt = Bijy-l = 6B rom formule (5.15, Serion 45 we developed the entity 34, ay and indie that tras puso gis the formula eb interpeaton, The ia west sites hough hr no required for the drvtion Ts desired ld he eve payment ‘Before can fe determi Ii mocssry to find the “esse” prod ‘sen he outstanding lon ale fr Beare ss than oe 1, Denote (hs drt yas that ah ale ner such hat ase o) “The progresion of lan tances ilusrued in Figure 53. gee 53 Outstanding on banc fx tn vig ‘septa a pice