Section2.78-3.12

Section2.78-3.12 - Compound Interest at Changing Interest...

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Compound Interest at Changing Interest Rates (section 2.7) In all examples/exercises so far, the interest rate was assumed to be constant throughout the term of the investment frequently, however, the interest rate changes over the term of a loan or investment to handle situations where the rate changes, we simply treat the situation as if it were two (or more) compound interest problems
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Example 2.7.1 A person invests $1000 today in a fund earning j 2 = 8% for the first 18 months and j 2 = 10% thereafter. How much has been accumulated at the end of 4 years? Solution 2.7.1
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Note An investor usually wishes to know how much money he/she has at the end of the term of an investment, AND what annual rate of return, j , they earned each year on the investment if interest rates changed over the term
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Back to Example 2.7.1 What rate of return, j , did the investor earn over the 4-year period? Solution
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Example 2.7.2 The 1994 Canada Savings Bond issue was the first time these bonds had offered increasing rates of interest: 5.75%, 6.75%, 7.5%, 7.75% and 8.0% over the first 5-years. What effective rate of interest would you earn over these 5 years? Solution to 2.7.2
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How much do you need to invest today in order to have $8000 in 4 years times if the interest rate is j 12 = 9% for the first 1.75 years, j 4 = 9% for the next 0.75 years, j 6 = 9% for the last 1.5 years? Solution to 2.7.3
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This note was uploaded on 04/14/2010 for the course ACSCI 2053 taught by Professor Kopp during the Spring '09 term at UWO.

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Section2.78-3.12 - Compound Interest at Changing Interest...

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