Chapter 5_part2_student

# Thisiscalledinflation

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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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