Section2.12(2)

# Section2.12(2) - Chapter 2 Compound Interest Fundamental...

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Chapter 2 – Compound Interest Fundamental Compound Interest Formula (section 2.1) Compound Interest The interest earned in any given period of time is added to the principal and it thereafter earns interest the interest is said to be “compounded”

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Definition – Interest Period This is the time between two successive interest calculations for example, if interest is compounded quarterly (i.e. interest is calculated and paid 4 times a year), the interest period = 3 months Example Determine the interest earned on \$10,000 over a 1-year period if interest is calculated at 6%, compounded quarterly.
Solution

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Notation/Definitions P = original principal = present value of S = discounted value of S S = accumulated value of P n = term of investment in interest periods m = number of interest periods per year j m = nominal rate of interest, compounded m -times a year i = interest rate per interest period
S = P (1 + i ) n The term (1 + i ) n is called the accumulation factor Example 2.1.1 What is the accumulated value of \$1000 at the end of 3 years at j 2 = 9%? After 30 years? Repeat both questions using

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Section2.12(2) - Chapter 2 Compound Interest Fundamental...

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