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Tables constructed to show the amount of INTEREST that will accrue on a given

convenient (round number) sum, e.g., $1, $100, or $1,000, at different rates of interest

for various intervals of time, rendering unnecessary separate and independent

computations for each interest transactions.

Interest tables are prepared in many different forms with varying degrees of detail and

refinement in decimal places, interest rates, and time intervals, to meet a wide variety of

uses. The following list, illustrated by appended tables, includes the more important

types of interest tables.

1. Simple interest computed on a given principal. The formula for computing annual

simple interest is

I = Pr

where P = principal and r = rate of interest per year. For example, if principal of $1,000

is invested at a 5% annual rate of interest, the dollar interest per year (assuming that

the interest is not reinvested) is

I = 1,000(0.05)

I = 50

Ordinary simple interest is computed on the basis of a 360-day year (see Table 1), while

exact simple interest is computed on the basis of a 365-day year (366 days in leap

years). To determine the dollar amount of interest for principal invested for less than

one year (using exact interest basis of 365-day year), the formula is

I = (PR)(D /365)

where D = the number of days for which the principal is invested. For example, if

principal of $1,000 is invested for 31 days at an annual rate of interest of 5%, the dollar

interest for the 31-day period is

I = 1.000(0.05)(31/365)

= 50(0.0849315)

= 4.2466

By contrast, to determine the dollar amount of interest for principal invested for less than

one year (using ordinary interest basis of 360-day year), the formula is

I = (PrV)(D/360)

so that

I = 1.000(0.05)(31/360)

= 50(0.086111)

= 4.3056 (1,4.1667 for 30 days plus 0.1389 for 1 day)

Thus the 360-day year basis, although simpler to calculate, results in higher

interest. Simplicity of calculation is illustrated by the 60-day, 6% method:

$10,00 (simply point off two decimal places)

-8.8333 (1/6th less, or 1%/6%, for 5% rate)

or 1/12th (30/360) of the $50 interest for one year (1,000 x 0.05) equals $4.1667 for the 30

days.

2. Compound interest – the amount of interest that a given principal will accumulate

if invested at specified rate, compounded at specified frequency for specified

total number of periods, if the interest generated is reinvested at the same

rate. The formula for the compound interest as such is

(1 + r V)n = 1

or the compound amount of $1 invested at rate r per interest period for a specified

number of interest periods n minus the principal of $1.

annually for 10 years, is as follows:

(1 + .05)10 = 1.6289

1.6289 – 1 = 0.6289

The compound amount of $1,000 invested at 5%, compounded annually for 10 years,

therefore is as follows:

C = P(1 + r)n

= 1000(1 + 0.05)10

= 1000(1.6289)

= 1,628.90

To adjust for a specified frequency of compounding, divide the annual rate of interest by

the frequency of compounding per year to obtain the interest rate per period; multiply

the specified number of years by the frequency of compounding to obtain the total

number of interest periods. For example, if the 5% rate above is compounded quarterly,

rate of interest per interest period is

___ = 0.0125(1.25%)

4 (frequency of compounding)

10 x 4 = 40

so that the compound amount of principal and the amount of compound interest may be

determined as above, based on this adjusted interest rate and adjusted number of

interest periods.

at the end of each period will accumulate at compound interest. The basic

formula is

where S – future value, P1, P2, . . ., Pn = the payment at end of each period, r= interest

rate, and n = number of periods. The value of (1 + r)n-1 can be derived from Table

3. For example, the future value at the end of two years of payments of $1,000 and

$2,000 at the end of the first and second years, respectively, invested at 5%, will be

= 1000(1.05) + 2000

= 1050 < + 2000

= 3050

4. Future value of an annuity. This is a special case of the future value formula

above. It is the future value of a series of equal future payments for a given

number of periods, at specified interest rate. Applying the future value formula,

the future value of an annuity is

+ P(1 + r)0

periods. Since P, the payment for each period, is equal, the formula can be simplified to

S = P(1 + r)n-1}/r

The value of { (1 + r)n-1}/r can be found in Table 4, for the specified interest rate r and

the number of periods n over which the annuity will extend. For example, the value at

the end of 10 years of an annuity of $1,000 invested at a 10% interest rate will be

= 1000(15.9374)

= 15,937.40

periodically (annually, semi-annually, or quarterly) that at a specified rate of

compound interest will accumulate to a total sinking fund sufficient at specified

maturity to retire the principal of a given amount of funds. To determine the

periodic payments, the formula for calculating the future value of an annuity may

be used, as follows:

S = P (1 + r)n-1}/r

In the above formula, the periodic payment is known, but the sum of the payments at

the end of the total period at specified interest rate is unknown. For the sinking fund

accumulation, the sum is known, but the periodic payment is unknown. Therefore the

annuity formula must be solved for P, the periodic payment, rather than S, the sum of

the accumulation. Therefore, the formula is

For example, to determine the amount to be set aside yearly at a 6% annual rate of

interest that will accumulate to $1 million at the end of 10 years, Table 4 provides the

value of { (1 + r)n – 1}/r, with r at 6% and n at 10, as equal to 13.1803. Therefore:

P = 1,000,000 / 13.1803

= 75,867.93

6. Present value of one or a series of payments to be received (or paid out) in the

future, discounted at specified discount rate. The formula for computing present

value is

PV = 1 + 1 +. . .

+ 1

(1 + k) (1 + k)2 (1 + k) a

where PV = present value, n = year of last payment received (or paid out), and k =

discount rate. For example, the present value of $1 to be received at the end of the first

and second years from the present time, discounted at 5% is as follows:

PV = 1 + 1

2

(1 + 0.05) (1 + 0.05)

= $1 + $1

1.05 1.1025

= 0.9524 + 0.9070

= 1.8594

Table 7 provides the present value of $1, received in 1 to 30 years, discounted at the

rate of 1% to 50%. Rather than divide each numerator by the denominator in the above

equations, multiply the numerator by the present value of $1 discounted at the specified

rate for the specified time period, found in Table 7. For example, to determine the

present value of a $100 inflow at the end of year one, $200 inflow at the end of year

two, and $50 outflow at the end of year three, we may multiply these flows by the

present value of $1 indicated in Table 7 for the respective years, as follows, at 5%

discount rate.

= 233.45

investment proposals is the net present value technique: cash flows each year

anticipated from net income plus depreciation for the full useful life of the proposed

investment in plant ad equipment are discounted at a selected discount rate; the sum of

such discounted present values is then compared with present investment outlay to

show net excess of sum of discounted present values over the investment outlay.

above is the present value of a sum of either equal inflows or equal outflows for a

given number of periods, discounted at specified rate. Adapting the present

value formula in 6 above, since the numerator ($1) is the same for each period,

the formula can be simplified to

PV = 1{1 - (1 + k)-n}/k

the value of which can be found in Table 8 at the specified discount rate k and the

number of periods n over which the annuity will extend. For example, the present value

of an annuity of $1,000 received at the end of each year for 10 years, discounted at

10%, may be determined by multiplying the $1,000 by the factor 6.1446, shown in Table

8.

PV = 1000(6.1446)

= 6.144.60

8. Doubling of principal. Given the interest rate, Table 9 will indicate the number of

years it will take a given principal to double in amount. For example, at 6%

compounded annually, it will take 11.896 years to double the principal.

The formula for determining the number of years in which a given sum will double at

different interest rates may be derived from the compound interest formula (above),

except that the equation is solved for the number of periods rather than the sum to

which the principal will grow. Thus, the compound interest formula is

S = P(1 + r)n

but S, the sum, is specified as equal to twice the principal (S = 2P), so that substituting

for S,

2P = P(1 + r)n

2 = (1 + r)n

n log(1 + r) = log 2

n = log 2

log (1 + 0.06)

= 0.301030

0.025306

= 11.896

9. Monthly savings to attain a specified estate. See appended Table 10 for the

amount to be saved per month, with interest compounded at 4% semi-annually,

to accumulate a specified sum at age 65.

10. Bond interest table. See appended Table 11 for the amount of accrued interest

on a $1,000 bond for 1 day to 6 months at coupon rates for every 0.25% from

3.5% to 5%, and 6%. The interest on a $1,000 bond at 4.5% for 4 months and

23 days would be $15.00 for 4 months and $2.875 for 23 days; total, $17.875.

11. Income from dividend stocks. See appended Table 12 for the approximate

current return, or YIELD, from dividend-paying stocks at prices from 20 to 200,

having a cash rate from $2 to $10 annually.

Simple interest tables for computing interest on short-term loans are based on a 360-

day and 365-day year. Commercial banks customarily use the 360-day tables, but the

Federal Reserve banks compute their transactions on the 365-day table. There are a

number of published tables showing the amount of interest on a given sum at various

interest rates from 1 to 365 days.

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