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j
1 1
m
r
t
1
j m 1 rt n 1
Required: r = ?
Solution:
j
1
m
r
t
1
4
0.0675
1
1
2
r
0.0710 7.10%
2
Required: j = ?
Solution:
j m 1 rt 1
1
n
j
1 1
m
d
n
j
t 1
m
n
1
jm
1
1 dt
Required: d = ?
Solution:
t 1
m
1
n
0.1125
1
4
d
0.1050 10.5%
4
0.1125
1 1
Required: j = ?
Solution:
jm
1 dt
1
n
j 12
1 (0.105)(2)
1
24
1 11.84%
Find the nominal rate which, if compounded semiannually, is equivalent to the accumulated simple
interest rate of 7% in an 8-year transaction.
O = F(1+i)n F treated as P
i moneys worth
O = F(1+i)-n F treated as F
i moneys worth
F = P(1+rt) Simple
Int. Rate
F = P(1+i)n Nominal
Rate
O = F(1+i)n
O = F(1+i)-n
Example 2.14
A P65,000
obligation due in
2 years bears
interest of 21%
compounded
monthly. If money
is worth 5%
compounded
semi-annually,
find the value of
this obligation
a) At the end of 2
years
b) Now
c) In 4 years
Payment / s Obligation / s
STEPS:
1.Draw a time diagram
specifying the periods
2.Write the payment/s ABOVE
the time diagram on the
specified dates and the
obligations BELOW
3.Choose a comparison date
4.Bring the payment/s and
obligation/s to the chosen
comparison date
5.Let x be the unknown
payment
6.Set the equation of values
7.Solve for the unknown
variable
Payment / s Obligation / s
Example 2.17
Mrs. Cabrera borrowed P15,000
from EOL Lending Corporation
due in 5 months with
accumulated interest from
today at 10% compounded
monthly. Three months before
the loan is due, Mrs. Cabrera
won in a lottery game. She
decided to pay her debt on the
same day she won the lottery.
How much should she pay EOL
Lending Corporation if the
value of money at that time is
6.5% compounded semiannually? Use the present time
(t=0) as comparison date.
Example 2.23
An investor placed P100,000 in a fund that
pays 10% compounded semi-annually for
the first five years, 8% effective for the next
five years and 8% compounded quarterly
for every year in excess of ten years. If the
money was invested for 12 years, how
much was in the fund at the end of the
term?
F = compound amount
P = principal
j = nominal rate that is compounded continuously
t = term
e = a constant whose value is approximately equal to 2.71828
F = Pejt
F = compound amount
P = principal
j = nominal rate that is compounded continuously
t = term
e = a constant whose value is approximately equal to
2.71828
Exercise 2.24
Find the amount of a P10,000 investment at the
end of 4 years if it is invested at a rate of 5.5%
compounded continuously.