Name: ______________________________ CG: __________

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1
500
 5.26%
9500

2
•

t th t , t 0
t A(t )

A(t ) = P (1 + rt ) , t  0, t 

(1+ rn ) = (1+ rr )(1+ ri )

3
  6
= $860 1 +  = $883.11
 12 

 10 
= $860 1 +  = $898.52
 12 

a1 = P + rP = P (1 + r )
at = A (t −1)(1 + r )
t  0, t 
a0 = P
a2 = P (1 + r ) + r  P (1 + r ) = P (1 + r )
2

at = P (1+ r ) , t  0, t 
t

at = P (1+ r ) , t  0, t 
t

$100 (1+ 0.04) = $121.67 $100 (1+ 0.08) = $146.93

5 5

$100 (1 + 0.04) = $480.10 $100 (1+ 0.08) = $2172.45

40 40

4
5
 Interest (dollar):
output denoted by “up” arrow

Period

Principal (dollar): The length of an arrow denotes

input denoted as a “down” arrow the magnitude of the input or
output.

r t

FV = PV (1 + i )
t

$4.50 $4.68
$4 $4.16 $4.32

Years

$100

6
(number of periods)
(nominal interest rate)
(present value)
(periodic payment)
(future value)
(payments per year)
(compounding periods per year)

7
 $16.99 $21.67
$4 $8.16 $12.49

Years

$100 $100 $100 $100 $100

requires the following

information:

$2000 $2000 $2000 $2000 $2000

$1000 $1000 $1000 $1000 $1000

Period

8
 h0
rh ( t )

rh ( t )  h
t +h

C 1 + rh (t )  h

h =1
t =1
r1 (t ) = r (t )

rh ( t )

rh ( t ) = rh

9
 1
h= rh ( t ) = 0.12
12
1
Effective rate of interest = ( 0.12) = 0.01 $100 ( 0.01) = $101
12

1
h=
p
r ( p) r1 p
1
p

r ( p)
1+
p

r ( p)

r1 12 = r (12) = 12%
12%
r= = 1%
12

t0

1 2 7 1 1
365 365 365 12 4
rh ( t0 )


( 0.115)  = $1022.21
7
$1000 1 +
 365 
 1 
$1000 1 + ( 0.11375)  = $1009.48
 12 

10
 r

ln 2
t=
ln(1 + r )

$2 = $1 (1 + r ) = (1+ r )
t t

ln 2 = t ln (1 + r )

ln 2
t= .
ln(1 + r )

ln 2
t= = 10.24 years
ln(1 + 0.07)

ln 2 ln 2
t=  using Maclaurin series (since 0  r  1)
ln (1 + r ) r2
r−
2
   r  ln 2 1 + r 
 +  2
2  
ln 2  1  ln 2 1
=   since r is small
 r =  2
r  1−  r  r  r
 1− 
 2  4 

11
 70
r = 0.02 t
r

72
r = 0.08 t
r

ln 2
t= = 17.67
ln(1 + 0.04)

70
t = 17.5
4
72
t = 18
4

t0 rh ( t0 )
1 1
4 365

rh ( t0 )
 (t )

lim rh ( t ) =  (t )
h →0+

h → 0+

 (t )  (t )

12