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lecture2 - Math 006 (Lecture 2) Compound Interest Example...

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Math 006 (Lecture 2) Compound Interest Example 1. If \$1,000 is deposited at annual interest rate 10% and the bank provides interest (a) annually; (b) semiannually; (c) quarterly; (d) monthly. What is the amount after 4 years. 1

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Theorem 1. Let the annual interest rate be r . Let P be the principal (present value). If the bank provides interest m times per year, then after t years, the amount (future value), A , is given by A = P ± 1 + r m ² mt . Notes 1. When the number of compounding periods in a year ( m ) is getting larger and larger, the limiting situation is the so-called continuous compounding . We will learn more about it in Chapter 11. Example 2. How much should you invest now at 10% compounded quarterly to have \$8,000 toward the purchase of a car in 5 years? Example 3. How long will it take \$10,000 to grow to \$12,000 if it is invested at 9% compounded monthly? 2
Example 4. A zero coupon bond is a bound that is sold now at a discount and will pay its face value at some time in the future when it matures. That is, no interest payment

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This note was uploaded on 09/04/2010 for the course MATH MATH006 taught by Professor Forgot during the Fall '09 term at HKUST.

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lecture2 - Math 006 (Lecture 2) Compound Interest Example...

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