Chapter 5_part2_student

Thisiscalledinflation

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: at 8% interest for 3 years. Simple interest Calculate the future value of the simple interest: A = P(1 + rt) = 1,000(1 + 0.08 × 3) = 1,000(1.24) = 1,240 Using simple interest, the future value in three years is $1,240. Compounding Periods Most banks compound interest more frequently than once a year. For instance, a bank may pay interest as follows: Semiannually: Quarterly: Monthly: Daily: twice a year or every 180 days 4 times a year or every 90 days 12 times a year or every 30 days 360 time a year Compounded interest Assume that the interest is compounded annually. This means that the interest is added to the principal after 1 year has passed. This new amount then becomes the principal for the following year. First year (t = 1) A = P(1 + rt) = 1,000(1 + 0.08) = 1,080 Second year (t = 1) A = P(1 + rt) = 1,080(1 + 0.08) = 1,166.40 Where A is future value, P is present value, i = r/n and N = nt n = number of times interest is calculate per yr N = number of compounding periods i = rate per period A = P(1 + rt) = 1,166.40(1 + 0.08) = 1,259.71 Using inte...
View Full Document

Ask a homework question - tutors are online