Chapter 10 Review (1) - Chapter 10 Review Topics from...

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Chapter 10 Review February 10, 2016 Topics from Chapter 10: 1. Compound Interest. The formula is: F = P (1 + i ) n where F is future value, P is principle, i is the interest rate per period, and n is the number of compounding periods. 2. Effective Interest Rate/Annual Percentage Yield. The formula is: APY = r eff = (1 + i ) m - 1 where i is the interest rate per period, and m is the number of compounding periods in one year. 3. Increasing Annuities. The formula for the future value is: F = (1 + i ) n - 1 i R where i is the interest rate per period, n is the number of compounding periods, and R is the payment. 4. Decreasing Annuities. The formula for the present value is: P = 1 - (1 + i ) - n i R where i is the interest rate per period, n is the number of compounding periods, and R is the withdrawal. 5. Mortgages. The formula for the unpaid balance is the same as the formula for a decreasing annuity: P = 1 - (1 + i ) - n i R 1
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where i is the interest rate per period, n is the number of compounding periods left until the loan is paid off , and R is the payment. Note that at the beginning of the loan, this calculation gives us the amount borrowed originally. 6. Balloon Payments: Use compound interest for balloon payment, and use decreasing annuity formula for the remaining payments. 7. Traditional and Roth IRAs - use compound interest or increasing annuity formula as applica-
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