Petroleum Department Third Stage Petroleum Economics Ex.10: Find the interest rate (with continuous compounding) if an investment of $8500 grows to $17000 in 10 years. Solution: Effective and nominal interest rates If 1$ is deposited at 4% compounded quarterly, a calculator can be used to find that at the end of one year the compounded amount is $1.0406, an increase of 4.06% over the original $1. The actual increase of 4.06% in the money is higher than the stated increase of 4%. The stated 4% is called the nominal rate of interest and the actual increase of 4.06% is called the effective rate. Effective Rate The effective rate corresponding to a stated rate of interest r compounded n-times per year is: re= (1+ 5)™—1 = (9) Ex.11: Find the effective rate of an investment at 5.2% compounded semiannually. Solution: Ex.12: A company agrees to pay $2.9 million in 5-years to settle a lawsuit. How much must it invest now in an account paying 8% compounded monthly to have that amount when itis due? Solution: Lecture3 8/12/2016Petroleum Department Third Stage Petroleum Economics Ex.13: $987.65 is invested at 0.4% annual interest for 5 years. a. Simple Interest Solution: b. Compound Interest Ex.14: Complete the following table using the appropriate simple and compound interest formulas: Principal= $500 Interest Rate = 1.3% Compound Interest, | Compound Interest, Time (in years) Simple Interest compounded compounded annually monthly ‘| | ; | * | 10 20 | 25 | 30 rT | Lecture3 8/12/2016Petroleum Department Third Stage Petroleum Economics Summary: Simple interest Compound interest A=P(1+r't) A=P(1+ or A=P (1#i)" x =o amy OF P=A/(1+ 9) (5) “ta yom P=A(1+=) =a or P=A(1#i)" i Simple Interest Compound Interest Continuous Compounding i i i 'A=PQ4+r) A=P(L+i" A = Pet ' i ae _ AL a a i ae Eee P=Ae i r\n i ! re=(1+) -1 maet—1 ! Lecture3 8/ 12/2016