Finding total interest

Suppose that $2,000 is deposited at a compound interest rate of 6%

annually. Find (a) the total account value after 12 years and (b) the total
interest earned in those 12 years.
FV = PV(1 i)n
FV = $2,000(1 0.06)12
FV = $4,024.39

Total interest $4,024.39 - $2,000 = $2,024.39

Finding present value
How much money should I deposit today into an account earning
7.375% annually compounded interest in order to have $2,000 in the
account 5 years from now?
FV = PV(1 i)n
$2,000 = PV(1 0.07375)5
$2,000 = PV(1.42730203237)

PV = $1,401.25
The Rule of 72
The Rule of 72 is a useful rule of thumb for estimating how quickly
money will grow at a given compound interest rate.
Jarron deposited $3,200 into a retirement account, which he expects to
earn 7% annually compounded interest. If his expectation about the
interest rate is correct, how much will his deposit grow to between now
and when he retires 40 years from now? Use the Rule of 72 to obtain
an approximate answer, then use the compound interest formula to
find the exact value.
Using the Rule of 72, we know that his money should double
approximately every 10 years, since 72/7 = 10.2857, a bit more than 10.
So in 40 years, his account should experience approximately 40/10 = 4
doublings. Thus:
FV = $3,200(2)(2)(2)(2) = $3,200(24) = $3,200(16) $51,200
Using Future Value Formula
FV = $3,200(1.07)40 = $47,918.27
Compounding Frequencies
Find the future value of $2,500 at 6% interest compounded monthly for
7 years.
The PV is $2,500, but the values of i and n require some work. Since the interest is compounded monthly, the 6%
(per year) needs to be divided by 12 (since each month is 1/12 of a year) to make it monthly. By the same token,
the term of 7 years must be expressed in months, and so we must multiply it by 12 (since there are 12 months per
year.) So

FV = PV(1 i) n

FV = ($2,500)(1 + 0.005)84
FV = $3,800.92
Find the future value of $5,000 in 5 years at 8% interest compounded annually, semiannually, quarterly, monthly, biweekly,

weekly, and daily.

Find the future value of $5,000 at 8% interest for 5 years, assuming that the interest compounds every minute.
Effective Interest Rates
The annually compounded rate which produces the same results as a
given interest rate and compounding is called the equivalent annual
rate (EAR) or the effective interest rate. The original interest rate is
called the nominal rate.
• So, for example, we could say that if the nominal rate is 8.00%
compounded daily (bankers’ rule), then the equivalent annual rate (or
the effective rate) is 8.33%.
Find the equivalent annual rate for 7.35% compounded quarterly.
FV =$100(1 + 0.0735 /4 )4 = $107.56.
So the Effective annual rate is 7.56%