Chapter 4

interest formulas

UNIFORM SERIES (AL

uniform amount repeated every period between p BF

* * * F >
- F = FofA ,
+ fofA2 + f of A3 + f of A4

O ↑*
25
↓
A(( 1)
i)
A/(1 24 1) n)
+
2) P A(P/A
+
f A(f/A i %,
-

= = , 1 %, = =
,

P i( + isn
- -
factor
present worth factor
uniform series compound uniform series

ex .
deposit 500 $ of end of each year for 5 years ,
bank pays 5 % interest ,
at the end of 5 years how much will

you have ?
i = 0 . 05 f =

A(x 1) 1)
+ -

=
(500) /
<+
0.515 ↓ -
1
= 23

n = 5

A = 500 Profit = 2763-(500 x 5) = 263

--

: ↑ without interest

ex . how much money do you put every mouth to have 1000 end of year with 12 % interest ?

= 0 . 005 =
2 %

f
a(( 14 1)
+

f(( -ne) (1000 )

-

12 months a 81 10
monthly
=
n = - =
= = .

sin_
f = 1000

deposit bank with interest to withdraw all money at end of

ex
. on I jan 5000 in 8 % want
you a
, you

year in 5 equal quantities ,

how much will you withdraw ?

5000
↑ =

Scia) P [ - Str") (5000)(20 I

08)(1 + 0 08
P
.

A ee
.

n = 5 = A >
-
=
=

i = 0 . 08 (1 + 0 . 0835 -
1

ex-payment of 140 end of each month for 5 years ,

first payment is due in 1 month ,
17% int

He offers to sell the contract for 6800 cash today would ,

you accept offer ?
A = 140 >
- to find how much it cests today find p then compare offers if more

n = 60 = 5X12 accept ,
if less reject
i = 1%

:
[ii] /1 01160]
+ 0 0 e

P (140) 6293 to
.

= =
=

10 017(170
RETECT
. .

less than 6800

ex .
year cash flow : find F after 5 years with i = 15 %
100 100 100
I 100

sing
+

2 + 100
3 + 100 a year : cant apply unifor a
4 O

5 F There are I ways to sefue this :

-

1st i 2nd ,

find Fat as then make it

Principle for find fat no , fat 43 = Fat n2 and sum

ns PCHi)" (100) (1 + 15) " 174 90

Fay
>
-
the real Fat n3 N2 1 =
=
0 . = .

/ + +3 7 En
<H
1 Fi = (100)
0 -1
= .
347
z
= (100) (1 + 0 .
(5) 3 = 152 08-

Fn2 = /100) < / + 0 .

15)== 132 . 25

.
2 F = P(( + i) = (347 20)(1 + . 0 .
15) = 459
F=
.
2
fay + faz Faz + = 459 20 .
ex .
given i = 15 % find p
O O 2030 20

Cmain
· 44 44
( 234
*
P
principle for uniform is to start from 1st Period : this didn't so i can't use uniform formula

similarly to previous example :

1st :

il"
"

P= F , 17 + F2)l + i) + Fl + in
I
P = 20 (1 15) .
2
+ S0 (1 .
15(3 +
20 (1 . 15)" = 107

ex .

given i = 10 %, find p
Ior 10o +I l loo
n

↑
an a

po 24
5

100
[100 at
-

>
- since A is the same after i can assume n = 3

can solve it by
you
1st : 2nd :

P , from - of n = 1 P = A(P/Ac i > n)

and same for m = 2 to n = 5 = ALP/A ,
i - 5) - A(P/A ,
i ,
3)
= 180/3 791) . -
10060 7513) . = 303 97 .

finde
given 10 %,
ex -

C↑ ↑ P = 250 (P/F > 1

,
n = 2) - 100 (P/Asi ,
n= 4) + 150 (P/7 , 1
,
n= 3)
-&
↓-33
I
4

* P = 250/0 8264) .
-

100(3 .

170) + 150 (0 . 7513) = 2 . 295

P Ivo 100 100 100

P = 2 295.
> (+
- 1 P is down if (-) p is
up

ex .

given i = 10 % find P
10 10 10 10 10 P = 10(P/Asi > n = 5) + 50(P/- , i n = 8)
f 50

· 4 ↑
=

P = 10(3 791) . + 50 (0 . 4665) = 61 235

.

pb ' 345678

>
- can't assume because its not the same after

ex .

given i = 10 % find F
20 20 20 20 20 20 F = A(F(A - 10 % -n = 6)

·
it at it stat F = 20(7 7161 = 154 32. .

↓+

ex .
given i = 10 % find F Non between n = 5 B F : n =

0
F= 10 (F/A 5) (10(P/A 42] / F/P 5)
' 10 do tof e
10
, i n = -
10 F= > i n= x > n =

· , F = 10 (6 105) .
-
10 = 51 .
05 OR F = (0 (3 (70) (1 . . 61) = 51 03.

↓ >
-
No values for n = 5
,
assume [18
-
10

ex .

given
i= 10 % find P
lo lo 2020 20 20 20
lo 10 10 P = A(PAsi <
n= 5) + 20 (f/A , i <n = 5) (P/F ,
i n = 15)
if ist it it i
,

Pets sa
·
,
8 a
, is
,
P = 10(3 791) .
+ 2016 .
105) (0 2394) .
= 67 .
14
,

- -
 ARITHMETIC GRADIENT (C)
fixed amount repeated every period

A + 26

N
-G At 2
A

Ent
I
=
M n +

JA
I
-

I
-

- I

P = G(P/0si n) , + A(P/A ,
i ,
n)

·
p = 6
/N in - ) = (P/ in e

6((( iCh 1) + in
f ( +66 on
- -

· = = e

· A =

0i -

x+ -1) = (A/6 , i ,
a)

ex . maintenance lest increase by 6 = 30 each year , maintenance cost for 1

year is estimated as 120 .
i = 5%

find P/A

o anno
yearly :
120 30 : e +
P/6

go toe
+ >
-

150

so
+ 30 180

jo
=
120 120120120 , 20

and so 434445
· ·
on ↑

P = A(P/A ,
i = 5 %
s
n =
5) + G(P/0 , 1 = 5 %, n = 5)
P = (120) (4 .
329) + (30)(8 237) .
= 766

ex . maintenance cost start at 100$ go up by 100 each year for 4 years , find uniform
maintenance cost if i = 6 %

G(A/6

i
4)
e
A = A + n = 6 % 3n =

230o
zo , ,
A , = 100
100 (1 427)
l
= 100 + 242 70
100
. = .

-
e
·
-

menthorn 4 findFree
ex A= Al 6 (A/6 10 % 4)

be e
i n =
-

= =
.
,

= 24K -
6K(1 381) .
=
15 , 714

OR

A =
(24k(P/A) -
6k(P/6) [A/P]
↓ bec
decreasing

GEOMETRIC GRADIENT (g)

presentage amount increase

I 152]
I (1 + 934CH +
(P/A 1n) if P= ACnCHiT]
-

P A, when
· =
itg =
, 9 , g = i
(+ i -
1 - g)

ex . find P using n =5
,
A ,
= 100 ,
9 = 10 %, i 8 = % + if it wanter future find then x
by F/P

b
gas
P = ACP/A ,

[ - <10.1531008 7 = 4 8042
.
=> P = 100(4 8042) . = 4804 e.
ex .
find P of building maintenance if 1 year will be 1000$ and will increase by 150$ for 10 years i = 10 %

P= A (P/A) + 6(P/6) = 1000/6 145) . + 150(22 . 89) = 9570 . 7

>
- A

A = P(A/P) = 9578 . 7/0 .

1627) = 1558

>
- F

F = P(f/P)

ex . find p if operation cost 1000 in 10 Bincrease by

years 5 %, : = 10 %

P =
A CP/A) = 1000 (7 .
439) = 7439 8 .

to solve P ,
not necessary to solve for n = to whole chart flow

>
- A
A =
P(A/P) = 7 439 8(0 . .
1627) = 1210 .
45

to solve A , must always solut for m =

to white diagram
H
>
-

F = A(f/A) = 1210 (15 937) . = 19283 7 .

or P(F(A) = 7439 8(2 .
. 594) =

ex .
find p if maintenance cost will start at 1000
B decrease by 7: every year for 10
years ,
iii.

%
gas l
[1-(1-007) 1
10 %

p AcP/A ( + 0 15 4 7847 180(4 7847) 4784 7

>P
. .

= = = =
.
= .

(1 +0 .
1 -
I -

0 .
07)
>
- A

A = P(A/P) = 4787 4(0 .

.
(627) = 778

>
- F

f = A(f/A) = 778(15 937) .

= 12398 9 .

>
- G

NOMINAL B EFFECTIVE INTEREST

standard time is I year ,

can take interest more than 1 time in a
year

Time Period >

-
Period which interest is expressed (i. Per year
compound (SUB PERIOD]
period >
- Shortest time which interest is charged if i. Per month
compounding Period is I month

Frequency
compounding
>
- number of times compounding occurs within time period (m)

semi-annually m =z

quarterly m = 4

monthly m = 12

weekly m = 52

daily m= 365
1 year

>
- Nominal interest rate (r) >
- annual interest rate without considering sub period compounding
I will be mentioned in a
question
>
- Effective interest rate (in) - actual rate for a
period considering sub period compounding
"wont be mentioned

· ia =
(I + r/m)N -
I

find this then use equations or tables

when m= 1 ,
in = r
ex . interest rate of
-
12 % Per year , compounded quarterly
b -
Nominal m= 4

N = 12 use this as i to find

m = 4 Ps F > A >
-
you can enterpolate
effective rate =
12%
/4 = 3% Per quarter between 12 % B 13 % or

↑
use
equations
effective per
year = (1 + +/m)
*
-
1 = (I + (0 .
12/4)" -
1 = 0 . 1255 x100 = 12 55 %
.

6 invisting ($at 3%
quarterly is like investing /$ of 12 55 % .

annually

ex .
1 5 %
.
interest every 3 month ,
find nominal and effective interest rate per year
effective per 3 months = 1 5 .
%

Nominal per yearr= (ths 3

-
x 1 .
5 % ) = 6% Peryear
months

effictive Per year in = (1 + r(m) -

1 =
D +
%
/4) "- = 0 .
0613 x00 = 6 14 %
.

year
6

more than Nominal bec they

Part of principle every 3 months
Pay

ex . lok borrowed for 2 years at int rate of 24 %

per year compounded quartily ,
if same sum could
-
-
-
Nominal

be borrowed for same period at same interest rate 24 % per year compounded annually ,
how

much could be saved in interest charge ?

interest =
F-P - without-1

-Pia =
10000(1 +
24 %
/47244)
m= 4 for 2 years
F2 = Pia = 10000 [(1 + 24 % )2]

]
%
interest quarterly = 7-P =
(10000 (1 +
24
/4) -
10000 = 5938 48 .

interest annually = f-P =

[10,000 (1 + 24 % )
") -
10000 = 5376 .
00

Saving = 5938 48 .
-
5376 = 562 48 .

by monday give bak 60 % find

ex. if I gave you 50 , you Next
mondy , is in

+-P 60-50
r) charge per week = I
= 20 % Perweek OR : F = PIF/P , isn = 1)
p 50
m = 52 -
>
weekly 60 = 50(1 i)
+
=> i= 0 2 .

N= M X i = 52 X0 . 20 = 10 4 x180
.
= 1040 % Per year

ia) in = (1 + N/m) -1 = (1 +
10 .

4/52)" -

1 = 13 104 x 100 = 1310400 % per year

ex .
5000 with 8 % nominal int compounded quarterly , you want to withdraw money in 5
equal yearly
sums beginning Dec 31 , How much
of the first year should you withdraw each year (A)3
A
8) 4
M
A A MA 1 . find ia = (1 + %/m) -
1 = (I + -
1 = 8 24. %
yearly

5000
+ 8 1216 To

5
> 20
-
. A
2
months
= P(A/pci
bec
=

4 times
8 24 %
.

a
n=

year for
5) since
5
medone
years
OR
have

:
table for 8 24 %
.

you can interpolate

I 234

A =

Pficteln] = 5000
/00ulig.isa I
A = 1260 a
year
 CONTINUES COMPOUND
more than 1 time : m = = > /m = 0

· in = e -
1

Perh
Fern]er kn
· F =
etc
must match in periods - months , years ...

· P=

period not mentioned >

-
yearly
>
~
ex .

John deposit 2000 in an account that Pays 3 75 %

. interest compounded continuously

a) how much will he have in 5 years ?

(3 75 % )(5)
Pern
.

F = = 2000 = 24 12 46
.

b) hou long will it take him to double his money ?

&

Petn e 2(3 75/n

.

zP = >
- 2 = =

1375 % )n
en(2) = In

en(z) = (3 .75 % n >

- n = = 18 . 5 years
0 .
0375

1) what would interest rate need to be in order for john to double his money in 10
years ?

2p =
per - 2 = er = er(lo

en(2) = In ellor

(n(2) = (10) >

- N =
2 = 0 . 0693 = 6 93..