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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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View Full Document 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
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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View Full Document Back to Example 2.7.1
What rate of return,
j
, did the investor
earn over the 4year period?
Solution
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 5years.
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.
 Spring '09
 Kopp

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