Ch2 Interest HO

Ch2 Interest HO - not play a roll in whether they earn...

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Interest : Simple vs Compound Simple Interest = interest on previous principal (“deposits” or “withdrawals”) only i s = simple interest rate per interest period End of Year EOY n Beginning Balance ($), B n-1 Interest ($), I n = i s * P n-1 Ending Balance ($), B n = B n-1 + I n 0 1 2 3 Substituting for I n : B n = B n-1 + i s * P n-1 Compound Interest = interest on previous balance of (principal + interest) i = interest rate per compounding period Round Interior Terms to nearest dollar End of Year (EOY) n Beginning Balance ($), B n-1 Interest ($), I n = i * B n-1 Ending Balance ($), B n = B n-1 + I n 0 1 2 3 Round at End End of Year (EOY) n Beginning Balance ($), B n-1 Interest ($), I n = i * B n-1 Ending Balance ($), B n = B n-1 + I n 0 1 2 3 Substituting for I n : B n = B n-1 * (1 + i) Compound interest is the only logically defensible type, because the source of the funds should
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Unformatted text preview: not play a roll in whether they earn interest, so we will assume compound interest from now on. Equivalent Cash Flows Interest, i = 7% Single flow at beginning, EOY n Begin Balance ($), CF + B n-1 Interest ($), I n = i * (CF + B n-1 ) Cash Flow ($), CF End Balance ($), B n = B n-1 + I n 0 1000 1000 1 2 Sum = Multiple flows at different times, EOY n Begin Balance ($), CF + B n-1 Interest ($), I n = i * (CF + B n-1 ) Cash Flow ($), CF End Balance ($), B n = B n-1 + I n 0 1 600 2 503 Sum = Comparison of Uneven Payment Series using Present Worth Interest, i = 7% Single flow at beginning, PW = $1000 Multiple flows at different times, EOY n Cash Flow ($), CF Present Worth ($), P 0 0 1 600 2 503 Sum =...
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This note was uploaded on 01/12/2012 for the course ENG 73689 taught by Professor Ralphaldredge during the Winter '10 term at UC Davis.

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Ch2 Interest HO - not play a roll in whether they earn...

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