Compound interest

# Compound interest - Interest is almost always compound...

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Interest is almost always compound interest (where the interest earns interest) Exercise: Using a time line, we work out the FV in the case below FV =? Term = 4 periods (months) PV = 100 i=5% per month one period

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i=5% per month 1 month 2 months 3 months 4 months This is more than we would have got with simple interest but we should use the formula for compound interest rather!
NB. You already know the formula But there are two different versions of formula and it’s VERY important not to get them mixed up interest rate per year number of compounds in a year r i m

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These are different versions of the SAME FORMULA
interest rate PER YEAR interest rate per compounding period number of compounding's per year the number of years and

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Calculate the FV of R10 000 1. 3% compounded annually after 10 years 2. 3% compounded daily after 10 years 3. 2.5% compounded quarterly after 5 years
Calculate the FV of R10 000 1. 3% compounded annually after 10 years 2. 3% compounded daily after 10 years 3. 2.5% compounded quarterly after 5 years

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Calculate the PV of an investment that will be worth R1000 in 1. 10 years time at 5% compounded annually 2. 5 years time at 4.2% compounded weekly. 3. 5 years time at 4.2% compounded monthly
Calculate the PV of an investment that will be worth R1000 in 1. 10 years time at 5% compounded annually 2. 5 years time at 4.2% compounded weekly 3. 5 years time at 4.2% compounded monthly

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Ex. If R1000 is invested at 12% p.a.The amounts in the account after 3 years will be 1(3) 2(3) Compounding Amount after 3 years 0.12 1 1000(1 ) 1404.93 1 0.12 2 1000(1 ) 1418.52 2 m Annual Semiannual Quarterly 4(3) 12(3) 365(3) 0.12 4
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