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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...
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 Fall '11
 
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