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19.a
Interest Formulas
1.
Singleperiod:
The future value FV of $A invested for 1 year at an interest rate R is A(1+R). The present value PV of $B paid in 1
year, at an interest rate of R is B/(1+R).
FV=A(1+R)
PV=B/(1+R)
Example 1: $10 placed in the bank for 1 year at 5% interest will grow to $10(1.05)=$10.50 after 1 year.
Example 2: A bond that promises to pay $108 in one year, when the market rate of interest is 8%, will be worth $108/(1.08)=$100
today. Note that as the interest rate R rises, the price of the bond will fall. For example, if the market interest rate were 9%, the same
bond would be worth $108/1.09=$99.08.
2.
Multiple periods:
The future value FV of $A invested for n years at an interest rate R is A(1+r)
n
. The present value PV of $B paid
in n years, at an interest rate of R, is B/(1+R)
n
.
FV= A(1+r)
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This note was uploaded on 05/05/2010 for the course ECON 303 taught by Professor Cheng during the Spring '07 term at USC.
 Spring '07
 Cheng

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