Chapter 6

Section 6.1
1. Increases; by approaching a limit
2. The force of interest is the nominal annual interest rate with continuous compounding.
3. 4% force of interest.
4. Investment C will give you the largest return; investment B will give you the smallest
return.
5. No, a quick calculation, 𝑖 = 𝑒 0.05 − 1 = 0.0513, shows that the largest effective interest
rate a 5% nominal rate of interest could be is 5.13%, which would be the case under
continuous compounding.
6. $510.10
7. $975.31
8. 1.5%
9. 3.0%
10. 2.9963%
11. $2,003.66
12. $13,080.85
13. $16,550.63
14. $9,446.44
15. a. 4.1% b. 12.7% c. 3678.3% d. No, in continues indefinitely.
e. Effective annual rate = lim ((1 + 𝑖)𝑚 − 1) = ∞
𝑚→ ∞
2𝑡+3
16. ∂ = 𝑡 2 +3𝑡+3
b. $133 c. You will make some interest.
𝑡𝑖
17. 2𝑃 = 𝑃𝑒 b. ti = 0.69315 c. 69.315 d. Increased, because there are less
compounding periods, so a slightly longer time is needed to double the investment.
𝑖 (m) 1
18. a. If 𝑥 = 𝑚⁄𝑖 (𝑚) , 𝑚 = 𝑥𝑖 (𝑚) and m
=𝑥
b. Since i(m) is a fixed number (a constant), it can be “ignored” when computing the limit.
𝑖 (𝑚)
𝑥 1 𝑥 (𝑚)
Since we know lim (1 + 1/𝑥) = 𝑒, the lim ((1 + ) ) = 𝑒𝑖 .
𝑥→ ∞ 𝑥𝑖 (𝑚) → ∞ x
𝑚
𝑖 (𝑚)
c. Since 𝑖 = (1 + ) , as m approaches infinity, or 𝑖 (∞), there is a leveling off at certain
𝑚
(∞) (∞)
number. Thus, 𝑖 becomes 𝛿, and 𝑒 𝑖 = 𝑒 𝛿 .
19. The effective annual rate is equal to this equation, but you must subtract 1 from each
side.
Section 6.2
1. Future value
2. Future value
3. Effective discount rate
4. 1
5. Yes
6. 4.17%
7. 2.56%
8. $480
9. 4%
 10. $824.74
11. 0.98
12. 5.26%
13. Highest rate of return: option 2; lowest rate of return: option 1
14. $2,631.44
15. a. $542.53 b. $542.08 c. $541.72
16. $2,811.40
17. 2.07%
Section 6.3
1. Decrease
2. Worse
3. Better
4. They are the same.
5. False
6. $493.75
7. 5%
8. $9,997.75
9. 5.84%
10. 5.13%
11. a. $516.59 b. 3.21% c. 3.32% d. No
12. a. $542.53 b. $542.08 c. $541.72 d. $541.64
13. $2,846.63
14. 1.25%
15. a. 10% b. 10.8%
End of chapter
1. E
2. B
3. B
4. B
5. C
6. C
7. A
8. E
9. A
10. E
11. A
12. C
13. C
14. A