628 Chapter 9. The Mathematics of Finance EXAMPLE 1 Solution Self check | Compound Interest In this chapter, we discuss the mathematics of finance-the rules that govern investing and borrowing money. 1 Compound Interest 1 Bank Notes 4 Effective Rate of Interest 1 Present Value In this section, we revisit the concept of compound interest, as preparation for more ‘complicated business formulas, Compound Interest ‘A deposit in a savings account earns interest, which the bank pays for the privilege of using someone else’s money. The amount deposited is called the principal, and the interest, paid at regular intervals, is usually « percentage of the amount currently fon deposit. Any interest left in the account also earns interest. In that case, the account cams compound interest, ‘Yolanda deposits $10,000 in a savings account paying 6% interest, compounded an ‘ually. Find the balance in her account after each of the first three years, At the end of the first year, the interest earned is 6% of the principal, or 0.06($10,000) = $600 is added to the principal; after one year, the balance is $10,600. year’s earned interest is 6% of the current balance, or 0.06($10,600) = $636 This interest is also added to the principal, giving a second-year balance of $11,236. The interest eared during the third year is 0.06¢811,236) = $674.16 ving Yolanda a balance of $11,236 + $674.16, or $11,910.16, after three years. ‘What will be the balance in Yolanda’s account after two more years? ' ‘We can generalize this example fo find a formula for compound interest calcul tions. Suppose that the original deposit, the prineipa, is P dollars, that nterstis paid aan annual rate r, and thatthe accumulated amount or the future value inthe accountat the end of the fist yearis A. Then the interest earned that years Pr, and theoriginal’ ‘the inierest! depo a ceatned. ‘The amount fer cieyer | omsals9.1 Compound interest 629 Factor out the common facto, P ‘The amount, A, atthe end of the first year is also the deposit atthe beginning of the second year, The amount at the end of the second year, A, is Mreamonl Mer) gu, | tHeaMOUNE | ayy, onleanoum | twoyeary ‘after one year Ay Ai + Ay (tn Factor out he common ft, Ay PU+ ACL +) Sabwie C+ 9 foe Ay Pcl + Simp By the end of the third year, the amount will be Aa = PUL + The pattern continues, and we have the following result Compound Interest A single deposit P, called the principal, earning compound interest for n years (Annual Compounding) at an annual rae , will grow to a future value FV according to the formula Fv =Pa+n" EXAMPLE 2 For their newbom child, parents deposit $10,000 in a college account that pays 8% interest, compounded annually. How much will the account be worth on the child's V7th birthday? Solution We substitute P = 10,000, r = 0.08, and » = 17 in the compound interest formula ‘and use a calculator to find the future value, FV= Pa +n FV = 10,0001 + 0.08)" = 10,000(1.08)"” = 37,000.18054801 ‘To the nearest cent, $37,000.18 will be available on the child's 17th birthday. Self Check If the parents leave the money on deposit for two more years, what amount will be available? 1 Interest compounded once each year is compounded annually. Many financial institutions compound interest more often. For example, instead of paying an annual rate of 8% once a year, they might pay 4% twice each year, or 2% four times each ‘yeat. The annual rate, 8%, is also called the nominal rate, and the time betwee ‘terest calculations isthe conversion period. If there are k periods each year, interest is paid a the periodic rate given by the following formula,630 Chapter 9. The Mathematics of Finance Periodic Rate Compound Interest Formula cp EXAMPLE 3 Solution Self Check annual rate Periodic rate = *e ~ Sumber of periods per year ‘This formula is often written as ig where iis the periodic interest rate, ris the annual rate, and kis the number of times interest is paid each y Ifinterest is calculated & times during each year, in n years there will be kn con- versions, Each conversion is at the periodic rate i. This leads to another form of the compound interest formula, ‘A principal P, earning interest compounded k times a year forn years at an ‘annual rato r, will grow to the future value FV according to the formula FV = Pat where i ~ 1s the periodic interest rate {is the periodic interest a Interest paid twice each year is called semiannual compounding, four times ceach year quarterly compounding, twelve times each year monthly compounding, ‘and 360 or 365 times each year daily compounding, If the parents of Example 2 invested that $10,000 in an account paying 8%, but com pounded quarterly, how much more money would be available after 17 years? We first calculate the periodic rae, i Substitute r= 008 and k= 4 4 = 002 ‘We then substitute P = 10,000, i = 0.02, & = 4, and = 17 inthe compound inter est formula, and use a caleulator. Fv=Pa+om 10,000(1 + 0.02)" = 10,000(1.02)% = 38,442.50502546 ‘To the nearest cent, $38,442.51 will be available, an increase of $1,442.33 over ‘annual compounding. a, What would $10,000 become in 17 years if compounded monthly at a nominal rate of 897 b, How does this compare with quarterly compounding?8.1 Compound interest. 631 GROWTH OF MONEY. We can use a graphing calculator to find the time it would take a $10,000 invest ment fo ripe, assuming an 8% annual rate, compounded quarterly Inn years, $10,000 earning 8% interest, compounded quarterly, will become the future value 10,000(1.02)*" ‘To watch this value grow, we enter the function Y, = 10000 * 10244 * x), in a graphing calculator, and set the window to 0 = 0 = Y = 40000 (for the dollar amount, ‘The graph appears in Figure 9-1(a). To find the time it would take forthe in- vestment to tiple, we use TRACE to move to the point with a Y-value close to 30,000, The X-value in Figure 9-1(b) shows thatthe investment would triple in about 13.9 years 10 (for 10 years) and [y= TOo00 FLOOR X= 19.99617.. Y= 90158,784 ® Figure 9-1 EXAMPLE 4 Solution Bank Notes ‘When a customer borrows money from a bank, the bank is making an investment in it person, The amount of the loan is the bank’s deposit, and the bank expects to be repaid with interest in a single balloon payment at a later date. These loans, called notes, ate based on a 360-day year, and they are usually written for 30 days, 90 days, of 180 days. We use the formula for compound interest to calculate the terms of the Joan, A student needs $4,000 for tution. His bank writes 2 9%, 180-day note, with interest compounded daily. What will he owe at the end of 180 days? In making the loan, the bank invests the principal, $4,000, The amount to be repaid is the expected future value, Fv=Pa+i632 Chapter 9. The Mathematics of Finance lu vere the principal Ps $4,000; the fequency of compounding kis 360; th pad i rate iis i = 0.00025; and the term n is 0.5 (180 days is one-half of 360 days.) | rv= maim il PV~ 4000 + eamnsy*s wh = 4,0041,00025)" Wh = 4,184.087907996 Use cabal Hi = 418409 So ‘The student must repay $4,184.08. Self Check A woman borrows $7,500 for 90 days at 12%. If interest is compounded daily, how ‘much will she owe at the end of 90 days? 1 IE Effective Rate of interest ‘The true performance of an investment depends on the compounding frequency as well as the annual rate. To help investors compare different savings plans, financial | institutions are required by law to provide the effective rate-—the rate that, i eom- vi pounded annually, would provide the same yield as the plan that is more frequently i compounded. } To derive a formula for effective rte, we assume that P dllas are invest for } ‘years at an annual rate r, compounded k times per yeat: That same principal P, a ‘compounded annually at the effective rate R, would produce the same accumulated \ value, We have the equation { © ale R, compounded annually °4"""*Compoundeed k times per year. i PU + RY = PUL +! isthe protic rate f= § ‘We can solve this equation for PUL+ Ry = PO wae a+r sate Divide both sides by P. ] [CL + RY" = (C1 + D7 Raise both sides to the Un power. | 1+ R=(1+ 98 Mutiptytheexponens 1 R= (14 D'= 1 Subwact | from both sides, we Effective Rate of interest The effective rate of interest & for an account paying a nominal rater, com pounded k times per year, is | R= +H 1 { where ‘is the periodic rate, i = 4 Te hore is the periodic rate, =F BERD exampre 5 A sant ites te savings pans sown in the able, Calculate te effective nesSolution Self Check 9.1 Compound Interest. 633 a. Money, Certificate Savings plan __matketfund of deposit ‘Annual rate 65% 1% Compounding quarterly = monthly fective rate a. For the money market fund, r ~ 0,065 and k = 4, 80 = { = °% = 0.01625. To find the effective rate, we substitute & = 4 and i ~ 0.01625 in the formula for ef- fective rate R=(1t+nF-1 R= (1 + 0.01625) — 1 = 0,0666016088, Use acaleulator = 0.0666 Round to the nearest ten thousandth, Asa percent, the effective rate is 6.65%, or approximately 3% b. For the centifcat of deposit, = 0.07 and k = 12, s0 007 ~ 0,00583333 (1 + 0.058333)" ~ 1 = 00722900809 Use acaleulator = 0.0723 Round tothe nearest en thousandth, Asa percent, the effective rate is 7.23%. A passbook savings account offers daily compounding (365 days per yeat) at an annual rate of 6%. Find the effective rate to the nearest hundredth, ' Present Value From the initial deposit (the principal P), the compound interest formula predicts the future value n years later. This is the situation suggested by Figure 9-2, where we ‘know the beginning amount and need to find the future value. — Keown principal P Unknown futre vale BY Figure 9-2 Often, the situation is reversed: We need to make a deposit now that will become a specific amount several years from now—perhaps enough (0 buy a car of pay tuition. As Figure 9-3 suggests, we need to know what single deposit now will accomplish that goal: What present value PV will yield a specific future value?| 634 Chapter 9. The Mathematics of Finance | i Unknown presen ale PY Known fare valve PY Figure 9-5 ‘To derive the formula for present value, we replace P in the compound interest formula with PV and solve for PV. FV = PV(L + i! —Theprincipal is now the present value PY, Pvasa* = PUT vie bth sides by (+ ati rv aw ei, ato" ‘Simplify. PML" = PY etn detnen often Present Value ‘The present value PV that must be deposited now to provide a future value, FV, n years from now is given by the formula Pv = Fv +o where interest js compounded & times per year a an annual ater (tis the periodic rate, f) BERD exam ce 6 Whena media sent seats in yas, se wl ed $25,700 toy medial Tomer hs fou oan? Solution Use the annual rate (r = 0.08) and the frequency of compounding (k = 2)to find the | periodic rate: 0.08 008 0 k 2 va. In the present value formula, we substitute the number of years, » the periodic rate, = 0.04, te frequency of compounding, k = 2, and the future value, FV = 25,700 1 Pv= FV +i™ PV = 25,700(1 + 0.04) ** ' = 25,700.04)" Useacatntator 13,721.44 Round tthe nearest cea ‘She must deposit $13,721.44 now to have $25,700 in 8 years, 7 1 Self Check Ifthe student decides to take wo extra years to complete medical school, her obli- fy gation will be $27,000, What present value will meet her goal?interest ® me atyear) find the PU 1, $13,382.26 2. $43,157.01 3. 4, $7,728.37 5. 6.18% 6. $12,322.45 MEA exercises VOCABULARY AND CONCEPTS Fill in the blanks. 1. A bank pays: ‘money. for the privilege of using your 2, If interest is left on deposit to earn more interest, the account earns interest. 3, Interest compounded once each year is called —__ compounding, 4, The initial deposit is called the value, or the 5, Aftera specific time, the principal grows to a value. 6, Interest is calculated as a deposit. 7. Future value of the amount on earned rate, rincipal + 8, The annual rate also called the — °. . annual rate " —— ™ umber of periods per year 10. ‘The time between interest calculations is the period, 11. In the future value formula FV = PUL + i), Pis the. iis the kis the and n isthe 12, In the present value formula PV = FV + 7*, FVis the — iis the i isthe ‘and n is the 13, Tohelp consumers compare savings plans, banks ad- vertise the rate of interest 14, If after one year, $100 grows to $110, the effective rate is _%, PRACTICE Assume that $1,200 is deposited in an account in which interest is compounded annually at a rate of 8%. Find the accumulated amount after the given number of years. 15, 1 year 1. 5 years 16, 3 years 18, 20 years a, $38,786.48 9.1 Compound interest. 635 b, $343.97 more than with quarterly compounding ‘Assume that $1,200 is deposited in an account in which interest is compounded annually atthe given rate. Find the accumulated amount after 10 years. 19.3% 20, 5% 21, 9% 22, 12% ‘Assume that $1,200 is deposited in an account in which interest is compounded at the given frequency, at an ‘annual rate of 6%. Find the accumulated amount afer 15 years, 23. k= 2 25, k= 12 We k= 4 26. k= 365 Find the effective interest rate with the given annual rate r and compounding frequency k 28, r= 8%, k= 12 30. r= 10%, k = 360 Find the present value of $20,000 due in 6 years, atthe ‘given annual rate and compounding frequency. 31. 6%, semiannually 32, 8%, quarterly 33. 9%%, monthly 34, 7%, daily (360 days/year) APPLICATIONS 35, Saving for college At the birth oftheir child, the Fieldsons deposited $7,000 in an account paying 6% interest, compounded quarterly. How much will be available when the child turns 18? 36, Planning a celebration When the Femandez family made reservations at the end of 1997 for the December 2003 New Year's celebration in Paris, they placed $5,700 into an account paying 8% interest, ‘compounded monthly. What amount was available at the time of the celebration?636 Chapter 9 The Mathematics of Finance 37. Planning for retirement When Jim retires i 12 years, he expects to live lavishly on the money in a retirement account that is earning 74% interest, compounded semiannually. If the account now contains $147,500, how much will be available at retirement? 38, Pension fund management ‘The managers of a pension fund invested $3 milion in government bonds paying 8.73% annual interest, compounded semiannually. After 8 years, what will the investment be worth? 39, Real estate investing Property values in the suburbs have been appreciating about 11% annually. If this trend continues, what will a $137,000 home be worth in four years? Give the result tothe neatest dollar. 40, Real estate investing Property in suburbs closer to the city is appreciating about 8.5% annually. If this {tend continues, what will a $47,000 one-acre lot be worth in five years? Give the result to the nearest dollar, 41. Gas consumption The gas uilties expect natural ‘24s consumption 0 increase at 7.2% per year for the next decade. Monthly consumption for one c ‘currently 4.3 million cubic feet, What monthly demand for gas is expected in ten years’? 42, Comparing banks Bank One offers a passbook account with 4.35% annual rate, compounded quat- terly. Bank Two offers a money market account at 4.3%, compounded monthly. Which account provides the better growth? (Hint: Find the effective rates.) 43, Comparing accounts A savings and loan offers the {wo accounts shown in the table, Find the effective rates, ‘Anal ‘ecve ae rate Compounding rate NOW 72% quarterly agent a ‘Money 6.9% monthly ‘market 44, Comparing accounts A credit union offers the two accounts shown in the table, Find the effective rates ‘Anal fective rae Compounding tate Cerca 6.2% semiannually of deposit Passook 5.25% "quarterly 45, Car repair Craig borrows $1,230 for unexpected car repair costs, His bank writes a 90-day note at 12%, with interest compounded dily, What will Craig owe? 46, Fly now, pay later For a 7-ay Hawaii vacation, Beth borrowed $2,570 for 9 months at an annual rate of 11.4%, compounded monthly. What did she 47. Buying a computer A man estimates that the ‘computer he plans to buy in 18 months will cost $4,200. To meet this goal, how much should he deposit in an account paying 5.75%, compounded monthly? 48. Buying a copier An accounting firm plans to deposit enough money now in an account paying 7.6% interest, compounded quarterly, to finance the purchase of a $2,780 copier in 18 months. What should be the amount of that deposit? DISCOVERY AND WRITING 49. Adding to an investment To prepare for his retire- ment in 14 years, Jay deposited $12,000 in an account paying 7.5% annual interest, compounded monthly. ‘Ten years later, he deposited another $12,000. How ‘much will be available at retirement? $0, Changing rates Ten years ago, a man invested $1,100 in a 5-year certificate of deposit paying 10%, compounded monthly. When the CD matured, he invested the proceeds in another 5-year CD paying 8%, compounded semiannually. How much is avail- able now? 51. The power of time “A young person's most power: ful money-making scheme,” said an investment advisor, “is rime.” Write a paragraph explaining what the advisor meant, Watching money grow 10%, compounded annually. Use a graphing cal- (or to find how long it will take for the accurmu- lated value to exceed $1 million, REVIEW Simplify each expression. Assume that all vari ables represent positive numbers. = 2-15 8 yo aros $4, 3xG? ~ 5) = @? - 20) GB=He +3) 58, =P+9 56. -VP= 649d 3 Annuity Future Value Term sir. Ordinary Annuity count hy 1 aying vail: what 9.2 Annuities and Future Value 637 Annuities and Future Value 1 Future Value of an Annuity Sinking Funds Future Value of an Annuity Financial plans that involve a series of payments are called annuities. Monthly mort: ‘gage payments, for example, are part of an annuity, as are regular contributions to a retirement plan nan rina oan Gp faye a ide ee In this book, we will ony consider ordinary annuities with equal periodic pay ‘ments made fora fixed term, ‘Tounderstand how an annuity works, imagine a savings account that pays 12% annual interest, compounded monthly. Its periodic rate is 28, or 1%. Imagine also that each month fr the next year, we deposit $100 in that account To determine the future value of this annuity, we think of each monthly payment 25 aone-time initial contibaion to & compound-interest savings account The future value ofthe annuity i the sum of the accumolated values of 12 individual accounts. [As Figure 9-4 suggests, the fst deposit eans interest for 11 months, the second for 10 months, and soon, Because the last deposit is made athe end ofthe year, teams no interest few minute's work with a calculator shows the total to be $1,268.25 Contribution made at the end of month number: edat 1 sah 100 203 4 5 $100 $100 $100 ‘$100 $100 $100 $100 $100 $100 6 7 8 9 wow u p ‘$100 $100 1 month 1001.01)" = 100.00 100(1.01)' = 101.00 1001.01)*. = 102.01 100(1.01)° = 103.03 2 month 3 months 100(L.0b? = 109.37 100(1.01)"" = 110.46 100(1.01)"" = 111.57 Value at end of year = 1,268.25 9: months 10 months, LL months Figure 9-4638 Chapter 9_The Mathematics of Finance We will now generalize this example to derive a formula forthe futur value of am anmity. Consider an annuity with regular deposits of P dolls and with Inrce compounded times pet yen for n years, at an annual ater (period rate During myers, there willbe periods and deposits ‘The last deposit, made atthe end ofthe lst period, cars no interest. The net to-ast deposit ears interest for one pio, and soon The fst depot made aa end ofthe fit period, earns compound intrest for kn ~ | prio 5 future value of = a + thenexttorlast) +--+ | cf : iy deposi FV = P+ PUD! + Ut oF + PL DS t+ PUL + 1 MO aie RRR i sD rv ‘We summarize this result Future Value of an Annuity ‘The future value FV of an ordinary annuity with deposits of P dollars made reg- ‘lary & times each year form years, with interest compounded ktimes per year at an annual rat ris P+" = 1) | FV ‘where iis the periodic rat, 1 BERD EXAMPLE 1 Vexy te uur sae fh anny ond n Figure 9-40 page 637 | We then calculate the periodic interest rate: # = f ‘numbers inthe formula for the future Value of an an Pato — = 0.01, and substitute these sity rv. eet) _ 100(C1 + 0.01) — 1) mvs 0.01 _ 1001.0" = 1) O01 ~ 1,268,25030132 Use cael, 1,268.25 Round tothe nearest ent,Ue of terest next. tthe these Self Check 92 Annuities and Future Value «639 ‘The annuity of Figure 9-4 will provide $1,268.25 by the end of the year. Under the payroll savings plan, Hogan contributes $50 @ month to an ordinary annuity paying 74% annual interest, compounded monthly, How moch will he have ins years? 1 GROWTH OF MONEY “The value ofan annity accumulates reply To watch the accumulated amount in the annuity of Example 1 grow, we graph te fnction y = Hooton" = 1) wv 0.01 = 10,000(1.01" = 1) We enter the funtion YY, = 10000*(1.014(12*X) ~ 1) ‘on a graphing calculator, set the window values fo be 0 = X = 50 and 0 Y = 1,000,000, and graph it, as in Figure 9-5(a). Note how the amount increases more rapidly as the years go by. Using TRACE, as in Figure 9-5(b), we see that over $1 million accumulates in just 39 years. {vi =TOOOS OETA Xo 98020787 .¥ «10217848 0 o Figure 9-5 Sinking Funds If we know the amount of each deposit, we can calculate the future value of an annuity using the formula on page 638. The situation is often reversed: What regular deposits, made now, will provide a specific future amount? An annuity created to produce a fixed future value is called a sinking fund. To determine the required periodic payment P, we solve the future value formula for P. PIG + 9 — 1) FV ' ‘To{solatoP, muliply both aaa TS SimplifyaM Nn \ m4 640 Chapter 9. The Mathematics of Finance Sinking Fund Payment For an annuity to provide a future value FV, regular deposits P are made k times peer year for n years, with interest compounded k times per year at an annual rate The payment P is given by Fvi ator where és the periodic rate, i = 4. : k BERD EXAMPLE 2 an accoing Sim wl sat $1700 in 5 years ep is computer syst wil abo tol Solution We substitute the given values in the formula to find the sinking fund payment future value: FV = $17,000 annual rate r= 0.09 term: number of periods per year: periodic rate Fvi aan =1 ay Ps 000,0.0225) (1+ 0.0228)"5 = ~ 682.415203056 u 682.42 Round tothe nearest cet a caleulator Quarterly payments of $682.42 will accumulate to $17,000 in 5 years, Self Check What quarterly deposits to the above account ate required to raise the $50,000 startup cost of a branch office in7 years? 1 1. $3,626.36 2. $1,301.26 MEE excacises VOCABULARY AND CONCEPTS Fill in the blanks 4, ‘The time over which the payments are made i the of the annuity 1, Plans involving payn sate called. 2. In an ordinary annuity, payments are made at the ‘of each period, 3. The future value of an annuity isthe sum of all the —and nls made at regular i tn Pa + "= 5. In the future value formula, FI Pis the — nc. ae and mis the he 6 PE of po Ass fre 28,system, ual rate 6. An annuity created to fund a specific future obliga- tion is a fund, PRACTICE Assume that $100 is deposited at the end of each year in an account in which interest is com: pounded annually at a rate of 6%. Find the accumulated amount after the given number of years. 7. 10 years 9. 3 years 8, 5 years 10. 20 years Assume that $100 is deposited at the end of each year into an account in which interest is compounded annually atthe given rate. Find the accumulated amount after 10 years, 1 4% 12, 1% 1B. 9.5% 14. 8.5% ‘Assume that $100 is deposited at the end of each period in ‘an account in which interest is compounded at the given Jrequency, at an annual rate of 8%. Find the accumulated ‘amount after 15 years, 16. 18, 1 Find the amount of each regular payment to provide $20,000 in 10 years, at the given annual rate and com- pounding frequency. 19. 4%, annually 20, 6%, quarterly 21, 9%, semiannually 22, 8%, monthly APPLICATIONS. 23, Saving for a vacation For next year's vacation, the Phelps family is saving $200 each month in an account paying 6% annual interest, compounded ‘monthly. How much wall be available a year from now? z Planning for retirement Hank's regular $1,300 quarterly contributions to his retirement account have earned 6.5% annual interest, com- pounded quarterly, since he started 21 years ago. How much is in his account now? 25. Pension fund management The managers of « ‘company’s pension fund invest the monthly employee contributions of $135,000 into a government fund paying 8.7%, compounded monthly. To what value will the fund grow in 20 years? 9.2 Annuities and Future Value 641 26, Saving for college A mother has been saving egu- Ialy for her daughter’ colege—$25 each month for 11 Yeas, The money hes been earning 74% annua n- teres, compounded monthly, How mich i now inthe 27, Buying office machines _A company’s new corp- tate headquarters wl be completed in 24 yeas, At that ime, $750,000 will be needed for ofte equip- ment, How much shoud be invested monthly tnd that expense? Assume 9.75% interest, compounded sonthy. 28, Retirement lifestyle A woman would like to receive a $500,000 lump-sum distribution from her retirement account whe she retires in 25 years, She bepins making monthly contributions now to an annuity paying 8.5%, compounded monthly Find the mount of that monthly contribution Comparing accounts Which account will equre the lower annual contibutions to fund a $10,000 obi gation in 20 years? (Hint: Compare the yearly total contributions) BankA 5.5%; annually BankB 5.35%; monthly 29, 30, Avoiding a balloon payment The last payment of a home mortgage isa balloon payment of $47,000, which the owner is scheduled to pay in 12 years. How much extra should he start including in each monthly payment to eliminate the balloon payment? His mort- sage is at 10.2%, compounded monthly. DISCOVERY AND WRITING 31. Retirement strategy im will retire in 30 years. He will invest $100 each month for 15 years and then let the accumulated value continue to grow for the next 15 years. How much will be available at retirement? Assume 8%, compounded monthly, 32, Retirement strategy Sim's brother Jack will also retite in 30 years. He plans on doing nothing daring the first 15 years, then contributing twice as much— {$200 montlily—to “cateh up.” How much will be available at retirement? Assume 8%, compounded monthly, 33. Changing plans _A woman needs $13,500 in 10 years. She would like to make regular annual con- {tibutions forthe first 5 years and then let the amount ‘grow at compound interest for the next 5 years. What should her contributions be? Assume 9%, com- pounded annually.642 Chapter 9. The Mathematics of Finance 34, Talking financial sense How would you explainto REVIEW Solve each equation. a friend who has just been hired for her first job that e to start thinking about retirement? 3s, 265 8 36. now is the a) @ Present Value of an Annuity 25x ~ 12) Se 37, Vie +3 =3 38. Vix +3 =x Present Value of an Annuity; Amortization 1 Present Value of an Annuity 1 Amortization Present Value of an Annuity Instead of using an annuity to create a future value A, we might ask, “What single deposit made now would create that same future value?” The one deposit that gives the same final result as an annuity is called the present value of that annuity. ‘To find a formula for the present value of an annuity, we combine two previous formulas. A series of regular payments of P dollars for n years will grow (o a future value FV given by P+ OM = 1 FV From a formula in Section 9.1, the present value of a future asset is given by PV= FV +0) We find the present value of a series of future pa hhand side of Equation 1 into Equation 2 py= FV +a Equation 2 ments by substituting the right- epee ieee setae MO P= Ny ary FV in Equation 2. Pra +9 + = 10 +) Pua +o) Use the distributive propery. Simply ‘The present value PV of an annuity with payments of P dollars made é times per year for n years, with interest compounded k times per Year at an annual rate 7, i8 _Pu-a+)*) Py where isthe periodic rate, 7 = 7. e k“hat single that gives © previous (oa future the right ioe vet imes pet Irate 7 is EXAMPLE 1 Solution Self Check 9.3 Present Value of an Annuity; Amortization «GAS, To buy a boat in 2 years, the Higgins family plans to save $200 a month in an account that pays 12% interest, compounded monthly. a, What will be the total ofthe pas Iments? b. What will the value of the account be in 2 years? ¢. What single ‘deposit in that account now would do as well? 8. At $200 per month for 24 months, the total amount contributed is $200(24) = $4,800 . To find the value after 2 years, we use the formula for future value of an annuity Pa +=) 2001.01"? ~ 1] rv 0.01 394.692971 ‘Use calculator = 5,394.69 Round to the nearest cent, . To find the present value of the annuity, we substitute the term, in years 2 the fequency of compounding: k= 12 the annual rate r= 012 the pa P= 200 oz the pero interest rate = 92 — 901 in the present value formula. py = Pil= a+ py = 20011 ~ + ory) ve 0.01 Oo[L ~ (1.01)-*4] Gat Simply = 4248677451 Use caeuator ~ 4248.68 Round tothe nearest cet ‘$4,248.68 is the present value of the annuity; that one deposit now will provide the same final amount, $5,394.69, as the annuity Forhis retirement in30 years, a man plans to make monthly contibuions of $25 to an ordinary annuity paying 8{% annually compounded monthly. a. What will be ‘he total of his contributions? b. What single deposit now will provide the same retirement benefit? ' State lottery winnings are usually paid as a 20-year annuity, That isto the state's advantage, because it can fund the annuity with a single amount that is much smaller than the total prize,FEBID «EXAMPLE 2 _Bita won ie ltr. She wi receive $75,000 pee month for the next 20 years iW total of $18 milion, What single deposit should the lottery commission make now Me fund Bria’s annuity? Assume 8.4% anal intrest, compounded monthly Solution The lottery commission finds the present value of the annuity, with the payment P= 75,000 the annual rate: 0.084 the frequency of compounding 2 r_ 0.084 he periodic p= 2 = 8 - 0.007 the periodic rate: on 07 the term, in years n=20 ‘These values are used in the formula for the present value of an annuity ay 75,0001 ~ (1.007)-"%) 0.007 ~ 8,705,700.365 Use aealulator: ~ 8,705,700.37 Round tothe neaest cent, ‘To fund the $18 million prize, the commission must deposit $8,705,700.37, Self Check The lottery pays a total prize of $120,000 in monthly installments, as a 10-year annuity. Assuming 8.4% interest, compounded monthly, what current deposit is needed to fund the annuity? 1 EXAMPLE 3 As a settlement in an automobile injury lawsuit, Robyn will receive $30,000 each year for the next 25 years, for a total of $750,000. The insurance company is offering 4 one-payment settlement of $300,000, now. Should she accept? Assume that the ‘money can be invested at 9% annual intrest. Solution Robyn should calculate the present value of an annuity with the payment P = 30,000 the annual rate: r= 0.09 i the frequency of compounding: & = 1 (annual) i r _ 009 i 1 periodic rate: pata ee i the pet te: za the term, in years n=25 She should use these values in the formula for the present value of an annuity ae Pv 30,000[1 ~ (1.09)-"25 609) ~ 294,677.3881 Use acaleulator 294,677.39 Round tothe nearest cent Pynr 9 Self check EXAMPLE 4 Solution reat itis 1 000 each soffering thatthe Self check iy FE 9.3 Present Value of an Annuity; Amortization G45 ‘The annuity is worth only $294,677.39, and the company is offering $300,000, Robyn should accept the $300,000. If Robyn could invest the settlement at 8% interest, should she still accept the Tump-sum offer? 1 ‘When a worker is employed, regular contributions are usually made to a retire: ‘ment fund. After retirement, those funds are given back, either as an annuity or as a lump-sum distribution, Carlos wants to fund an annuity to supplement his retirement income. How much should he deposit now to generate retirement income of $1,000 a month forthe next 20 years? Assume that he can get 944 intrest, compounded monthly Carlos must calculate the present value ofa future stream of income, with the payment P= 1,000 the annual ate: r= 00575 the frequency of compounding: k= 12 0087s the periodic rate: 0.008125 the term, in years value of an annuity He should use these values in the formula for the prese Pua +9 Py 1,000(1 — (1.0081: 0.008125 = 105,428, $105,428 put on deposit now will provide Carlos with $1,000 per month in retire ‘ment income for 20 years. If Carlos can invest at 83%, what deposit is needed now? 1 Amortization Before a bank will allow you to borrow money, you must sign a promissory note in- dicating that you promise to pay the money back. We discussed one-payment notes in Section 9.1, Most loans, however, are repaid in installments instead of all at once. Spreading the repayment over several equal payments is called amortization, ‘When a loan is made, the lending institution is buying an annuity from the borrower—the lender pays the borrower an agreed-upon amount and expects regular payments in return, To calculate the amount of these regular installment payments, ‘we solve the present value formula for P to get anes evi 1-a+o In this context, the present value is the amount of the Joan. Using the letter A (for amount) instead of PY, we have the following formula.646 Chapter 9._The Mathematics of Finance Installment Payments ‘The periodic payment P required to repay an amount A is given by Ai P — at where ris the annual rate, kis the frequency of compounding (usually monthly), iy ‘is the periodie rate, i= 5, and the periodic rate, = F ‘nis the term of the loan, EXAMPLE 5 The Almondi family takes a 15-year mortgage of $200,000 for their new home, at 10.8%, compounded monthly. a. What will be the amount of their monthly F payment? b, What is the total of their payments aver the full term? Solution a, In the formula for calculating the installment payment, we substitute the amount A= 200,000 uw | the annual rate: r= 0,108 | the equeny compounding: = 12 la the pedi rte = 0008 ; | ‘| p = £200,000)0.009) i 1 = (L009) | 2248.16 i Each monthly motgae payment willbe $2248.14 D, There are 12+ 15 = 180 payments of $2,248.14 each, for a total of $404,665— | | Self Check Instead of a 15-year mortgage, the Almondis considered a 30-year mortgage. daa Answer the two questions again, 1 | | 1. a, $9,000 b. $3,251.34 2, about $81,000 3. No; the annuity is now worth more than $320,243. fis 4, $113,159 5. a, $1,874.48 b, $674,814 MEE Exercises ) fu. VOCABULARY AND CONCEPTS Fill in the blanks. 2, The amount required now to produce a future stream ( of income is the of an annuity. nt worth of a future stream of income is the of an annuity. 3. A loan is called a torepay it because you promise4, Often, loan repayment is spread out over several S. Spreading repayment ofa loan over several equal payments is called the loan, 6. An amortized loan is also called a PRACTICE Find the present value of an annuity with the given terms. 7. Annual payments of $3,500 at 5.25%, compounded annually for 25 years 8. Semiannual payments of $375 at a 4.92% annual rate, ‘compounded semiannually for 10 years vome, at ‘onthly Find the periodic payment required to repay a loan with the given terms. 9. $25,000 repaid over 15 years, with monthly payments ata 12% annual rate _ 10, $1,250 repaid in 18 monthly installments, stan annual rae of 19% 414, Funding retirement Instead of making quarterly contibution of $700 toa retirement fund forthe next 15 year, Jason would rather make only one contibu- tion, now. How mich should that be? Assume 6! annval interes, compounded quarry 12, Funding a lottery To fund Janie’s lottery winnings of $15,000 per month forthe next 20 years, the totery commission needs to make a single deposit nov. Assming 9.26 compounded monthly, what Should the deposit be? Money up front Instead of receiving an annuity of $12,000 each year fr the next 15 year, Manel would ike a one-time payiment, now. Assuming Manuel could inves the proceeds at 81%, what would bea fair amount? 04,665— © |. Funding retirement What single amount deposited 1 now into an account paying 73% annul interest, compounded quarterly, would fund an annuity paying $5,000 quarterly for the next 25 years? . Buying a car The Jepsens are buying a $21,700 car and financing it over the next 4 years. They secure an 8.4% loan, What will their monthly payments be? - Total cost of buying a car What will be the total amount the Jepsens will pay over the life ofthe loan? (Gee Bxercise 15.) stream ou promise 933 Present Value of an Annuity; Amorti tion G47 17. Choosing a mortgage One lender offers two mortgages—a 15-year mortgage at 12%, and a 20-year mortgage at 114%. For each, find the monthly payment to repay $130,000. 18, Total cost of a mortgage For each of the mort- ‘gages in Exercise 17, find the total of the monthly payments, DISCOVERY AND WRITING 19, Getting an early start As Jorge starts working now atthe age of 20, he decides to make regular contibu- tions to savings account. He wants to accumulate enough by age 55 to fund an annuity of $5,000 per ‘month until age 80. What should his monthly conti butions be? Assume that both accounts pay 8.75%, compounded monthly 20. Comparing annuities Which of these 20-year plans is best, and why? All are at 8% annually A. $1,000 each year for 10 years, and then let the ‘accumulated amount grow for 10 yeas. b, $500 each year for 20 years. . Do nothing for 10 years, and then contribute $2,000 each year for 10 years. 4. One payment of $8,000 now, and let it grow. 21. Changing the payment A woman contributed $8500 per quarter forthe first 10 years ofan annuity, but changed to quarterly payments of $1,500 forthe last 10 years. Assuming 74% annual intrest com- pounded quarterly, what is her accumulated value? 22, Changing the rate Amy contributed $150 per ‘month for 10 years to an account that paid 5% for the first 5 years, but 6.5% for the last $ years. How much hhas she saved? REVIEW Simplify each expression. Assume that all vari ables represent positive numbers. oV0 23, 24, 3v5 Vi-2 rae 38. 3V5e4 SVG 26.648 Chapter. 9. The Mathematics of Finance Problems and Projects Write a brief paragraph explaining the given terms. 1 interest and interest rate 2. present value and future value 3. compound interest and simple interest 4. annual rare and effective rate 5. annual rate and periodic rate 6 annuity an sinking fund ‘The United States gross federal debt in 1997 was ap- proximately $5.5 trillion. If the interest on that debt ‘was 5%, how much did each of the country's 260 tillion people owe in interest each year? With an annual inflation rate of 5%, $100 today will have the purchasing power (in today’s dollars) of $100(1.05)"¥, or $95.24, a year from now, At a 59% inflation rate, what monthly income would be re- quited in 20 years to provide the purchasing power ‘of $2,000 per month today? Project 1 In an installment loan, the borrower agrees to pay back principal and interest in a series of installments for a specified peviod of time. For a mortgage, the interest is calculated as compound interest. Another type of in- stallment loan uses simple interest, which is added on to the amount of the loan, This method, called add-on interest, is often used for car loans, For example, you need to borrow $1,000 for 2 Years at an add-on interest rate of 12%, The simple terest is $240, because T= Prt 1 = (1,000)(0.12(2) P= 1,000,r = 0.12,1= 2 = 240 ‘The amount to be repaid is $1,240, the sum of the interest and the ptincipal. The required monthly payment is A= 1240 In? the 24 month = SAO 1n2 yeas, her 24 monly payments =51.67 ach month's payment is $51.67 * If this had been a mortgage loan, what would the payment have been? * Notice that you have paid 2 years’ interest on the full amount, even though you will not owe the full amount for 2 years. Explain the effect this hhas on the real interest rate, To help consumers compare interest rates, the ruth-in-Lending Act requizes that all lenders state the true annual interest, called the Annual Percentage Rate (APR), It is calculated by the formula 2Nr ARENT where isthe total numberof payments and ris the addon intrest rate, Find the APR for this Joan, if satisfied in 2 years. * By doubling each monthly payment, this loan would be satisfied in 1 year. sit wise to pay off this loan carly? Calculate the APR and explain, (int: $240 interest on $1,000 for 1 year is no fonger 12%) Project 2 Another method for calculating the terms of an install- ‘ment loan is called the rule of 78 It is based on the fact that the sum of the fractions 12e 10 . BB 8 +38 is equal to I, Fora one-year loan, the interest charged is imple interest, but ¥ ofthat interest is repaid the fist month, jj of the interest the second month, and so on. # Show that +24 BH Reh + Fora loan of $1,000 for one year at 12%, simple interest of $120 would be added to the prinipal, and each month’s payment would be of $1,120, or $9933, OF this first month's payment, 12 of $120, or $18.46, would be interest, OF the last month’s payment, 7 of $120, or only $1.54, ‘would be intrest. Make a table showing how he monthly payment is divided between interest and princi- pal for each ofthe 12 months. ‘+ Ia “rule of 78” Joan is paid back early, the bor- roweris entitled to areumm of the unpaid intrest. ‘Suppose the previous loan ($1,000 at 12% for one year) is repaid in 6 months. What interest will be refunded? Why is this not one-half of $1202648 Chapter 9. The Mathematics of Finance Problems and Projects Write a brief paragraph explaining the given terms, 1. interest and interest rate 2. present value and future value 3. compound interest and simple interest 4. annual rate and effective rate 5. annual rate and periodic rate 6. annuity and sinking fund 7. The United States gross federal debt in 1997 was ap- proximately $5.5 trillion, Ifthe interest on that debt ‘was 5%, how much did each of the country’s 260, ‘million people owe in interest each year? 8. With an annual inflation rate of 5%, $100 today will hhave the purchasing power (in today's dollars) of $100(.05)-", or $95.24, a year fom now. Ata 5% inflation rate, what monthly income would be re- quired in 20 years to provide the purchasing power (of $2,000 pet month today’? Project 1 In an installment loan, the borrower agrees to pay back Principal and interest in a series of installments for a specified period of time. For a mortgage, the interest is calculated as compound interest, Another type of in- stallment loan uses simple interest, which is added on to the amount of the Joan, This method, called add-on interest, is often used for ear loans For example, you need to borrow $1,000 for 2 ‘years at an add-on interest rate of 1296, The simple in terest is $240, because I= Prt 1= (1,000)(0.12)2) P= 1,000, r= 0.12,¢= 2 = 240 ‘The amount to be repaid is $1,240, the sum of the interest ‘and the principal. The required monthly payment A is 1,240 24 = 51.67 Tn 2 years, there are 24 monthly payments Each month's payment is $51.67. * Tf this had been a mortgage loan, what would the payment have been? ** Notice that you have paid 2 years” interest on the full amount, even though you will not owe the full amount for 2 years. Explain the effect this thas on the real interest rate, * To help consumers compare interest rates, the ‘Truth-in-Lending Act requires that all lenders sate the true annual interest, called the Annual Percentage Rate (APR). It is calculated by the formula where Nis the total number of payments and ris, the add-on interest rate, Find the APR for this loan, if satisfied in 2 years By doubling each monthly payment, this loan would be satisfied in 1 year: Is it wise to pay off this loan early? Calculate the APR and explain, (Hint: $240 interest on $1,000 for I year is no longer 12%.) Project 2 ‘Another method for calculating the terms of an install- ‘ment loan is called the rule of 78, It is based on the fact that the sum of the fractions Bu, w,9 1 B Woy B ' B * is? B is equal to 1. For a one-year Ioan, the interest charged is simple interest, but ofthat inteces is epaid the first ‘month, Hf ofthe interest the second month, and so on, * Show that 2+ 4+ 84 Bod ‘+ Fora loan of $1,000 for one year at 12%, simple interest of $120 would be added to the principal, and each month's payment would be of $1,120, ‘or $99.33, OF this frst month's payment, # of $120, or $18.46, would be interest. OF the last ‘month’s payment, + of $120, or only $1.54, ‘would be interest. Make @ table showing how the monthly payment is divided between interest and princi- pil for each ofthe 12 month. « If.a“rulo of 78” loan is paid back early, the bor- roweris entitled to a return ofthe unpaid interest. Suppose the previous loan ($1,000 at 12% for one year) is repaid in 6 months. What intrest will be refunded? Why is this not one-half of $1207Chapter Summary 649 Chapter Summary thy concerts REVIEW EXERCISES te MEN compound interest ders Funds in a savings account eam | 1, $2,000 is deposited in an account in which interest is compounded annu- ua erest aan anna rate. ally at 9. Find the vale in 5 years. 1 the ‘The amount deposited is the principal, P. Interest left in the account earns compound Interest The accumulated amount or | 2, Brian borrows $2,350 for medica ils, The bank waite a 6O-ay not a the future value FV after the 14%, with interest compounded daily. What wll Brian ove? term of yeats is found by the lean formula y off FV= PUL + ten (annual compounding) is no Iinterestis calculated ktimes | 3. $2,000 eas interest compounded quarterly, tan annual rate of 7.6% for each yar then the periodie rate} 16 years. Find the future valve i= Fd eft vis FV= Pil + i (compounding times a per year) Theelfective rate Ris used to | 4, BigBank advertises a savings account ata 6.3% rae, compounded quar- compare different savings plan, terly. BestBank offers 6.21%, compounded dil. Calculate each effective ae tne and choose the beter acount sedis ‘The present value PV is the 5. What amount deposited now in an account paying 5.75% interest, com- 2 first single deposit now that will pounded semiannually, will yield $7,900 in 6 years? yield a specific future value, FY, Py = Fv +p as Annuities and Future Value An annuity is series of peri- odie payments made at regular intervals. The future value FV of an annuity is the sum of all onthly the payments and the interest rinci- those payments earn. The time ‘over which the payments are eee made is called the term of the terest annuity. In an ordinary prone annuity, the payments are made vill be atthe end of each time interval $120?650 Chapter 9_The Mathematics of Finance ‘The future value FV of an ordi- nary annuity with deposits of P dollars made regularly k times, each year for n years, with inter- est compounded k times per year at an annual rate ris, _ PIG + 9" = 1) rv Where fs the periodic rate, ‘An annuity with the purpose of funding a future obligation is a sinking fund. ‘To yield a specific future value FV, regular deposits P are made ‘times per year for n years, with interest compounded ke imes per year at an annual rate r, The payment P is a+am=1 where fis the periodic at, ‘The present value of an annuity is the current worth of a future stream of income, ‘The present value PV of an annuity with payments of P dollars made k times per year for rn years, with interest com- pounded k times per year at an annual rate r, is re eel Loans are often paid off in in- ‘stallments, If equal installments payments are amortized. 6. $500 is deposited at the end of each year into an annuity in which interest is compounded annually at 5%. Find the accumulated amount after 1B years, 7. $150 is deposited monthly into an account that pays 8% annual interest, ‘compounded monthly. Find the future value after 20 years. 8. The owners ofa small dry cleaning shop will need $40,700 to open a second shop in 7 years. What monthly payments toa sinking fund earning 7.5% interest, compounded montily, will meet that obligation? Present Value of an Annuity; Amortization 9. An annuity pays $250 semiannually for 20 years. Ata semiannually compounded rate of 6.5%, what isthe present value? 10. The lottery must fund a 20-year annuity of $50,000 per year. At 9.6%, ‘compounded annually, what must be invested now? 9%Chapter Test 651 interest terest, L ation? ally 9.6%, The periodic payment P re- quired to repay an amount A is given by a where rris the annual rate, eis the frequency of compound- ing, ‘isthe periodic rate, = 5, and ‘nis the term of the loan 11. What are the monthly payments for a $150,500, 15-year, 10.75% mort- ‘gage? What is the total amount paid? 12, Answer the previous question, but for a 30-year mortgage. Chapter Test In Problems 1-8, fill in the blanks. 1. When interest is left on deposit to eatn more interest, the account earns interest, 2, ‘The annual rate of interest divided by the number of periods is called the interest rate, 3. ‘To compare different savings plans, compare the rates of interest. 4. The nominal rate of interest is also called the rate, 5. Plans involving regular periodic payments are called 6. An annuity to fund a specific future obligation is a 7. ‘The current value ofa series of future payments is the of an annuity. 8. Repaying a loan over several regular, equal payments is called the loan, 9. $1,300 is deposited into an account that earns 5% in- terest, compounded annually. What will it be worth in 10 years? 10. 4. 2 13, 4 16 $1,300 is deposited in an account that earns 59% annual interest, compounded monthly. What will it be worth in 10 years? What is the effective rate of the savings plan in Problem 10? What single deposit now will yield $5,000 in 10 years? Assume 79 annual interest, compounded quarterly. Each month for 5 years, Bob made $700 payments to an account paying 7.3% annual interest, compounded. ‘monthly. Find the accumulated amount ‘What monthly payment to a sinking fund will raise {$8,000 in 5 years? Assume 6.5% annual interest, compounded monthly. . Find the present value of an annuity that pays $1,000 each month for 15 years. Assume 6.8% annual inter- est, compounded monthly. ‘What are the monthly payments for a 15-year, $90,000 mortgage at 8.959%?q | a CUMULATIVE REVIEW EXERCISES Solve each system by graphing Find the inverse of each matrix, if possible. uf ae ; wf J HH +" Evaluate each determinant | | 2-3 2 || lees ufo 1-1 q Solve each system. 1-201 | r= By +12 j a{erRt) | Setup the determinants to find x andy in the system det+y—2=7 4x + 3y = 11 | q adeno { on oy apg Do not evaluate the determinant ety 3e=2 Solve each system using matrices. to y= dw+y—2=0 | 8 {x-y +e | ee Decompose each fraction into partial fractions. | 2x = 2y +324 = ot | xtytotins . eth 1, 274, | 6) shay = 324 2=2 + NG +2) Gx - 5 | arty de — | Find each solution by graphing | 2 : taa[? ie-{3 3 few : 19. y= foo a TASB &B-A 9. AC 10. BY + 24 i iints, Write the equation of each circle with the given center O and radius 21. 00,0; r= 4 22, 02, -3)r= U1 Complete the square on x and/or y and graph each equation, Bete we t HH Write the equation of each ellipse. 2, Center (0, 0); horizontal major axis of 12; minor axis of 8 28, Center ( a = 5;¢ = 2, major axis vertical Write the equation of each hyperbola 29, Center (0, 0); focus (3, 0); vertex (2, 0) 30, Center (2, 4); area of fundamental rectangle is 36 square units; a = b; transverse axis parallel toy-axis, Find the required term of the expansion of (x + 2)). 31. 2nd term 32, 6th term Cumulative Review Exercises 653 Find each sum 33. 32 4. Sort Find the sum ofthe first terms ofeach sequence. 35. -2,1,4,. Find each vatue 37. PB, 4) 38. P24, 0) 39. C(12, 10) 40. P(4,4)* C(6, 6) 41. In how many ways can 6 men and 4 women be placed in a line ifthe women line up first? 42. In how many ways can a committee of 4 people be selected from a group of 12 people? Find each probabitie. 43, Rolling 11 on one roll of two dice 44, Being dealt an all-red 5-card poker hand from a standard deck Ifthe probability that a person is married is 0.6 and the probability that a married person has chil- dren is 0.8, find the probability that a randomly chosen person is married with children. 46, The probability that a student earns an A in algebra is 0.3, and the probability that a student cams a B is 0.4, Find the probability that a student earns a C or less, 47, Prove the formula by induction: 45. Gn +5) AETAION 2 + Gn + = 48. Compute the fair cost to play the following game. 1. Draw a card from a standard card deck. 2. Ifyou draw an ace, you receive $100. 3. Ifyou draw a king, you receive $10. 4, All other cards pay nothing What single deposit made now in an account that pays 8;% interest, compounded annually, will grow to $10,000 in 12 years? 50. A bank offers a $110,000, 20-year mortgage at 8.75%, Find the monthly payment. 49.A-34 Appendix Il! Answers to Selected Exercises 19. 10/2, 102, 10W% 24. 8,32, 128,512 23. 124 -29,504 27. ME 29,18 MGB 37. 23. "39, $69.82 41. aboutfe 43, about 86 x 10 45, $180,176.87 47. $2,001.60 49, $2,013.62 SH. $264,004.58 53, 1.8447 x 10” grains 51.531 59, 10+ 01 OL 48h 6. =i Exercises 85 (page 593) two 3neket m. Exercises 86 (page 601) wm act si nom a om 70-7 no 18351 299, s 21 23.1200 25,40 27, 2278 29, 144 31, 8,000,000" 33. 240 35.6 37, 4020 3. 1440041. 24,360 43, S080 45, 4847. 96, 49. 21051. 24.53, 5040 58, 2,721,600 57. 1,120 $9. 50400 “61. 272 "63. 28 65, 25267. 142,506 @.66°77.2 79.4 Bl twe 8. te Exercises 8.7 (page 608) nt) 1 experiment 3 - (C1, H), 2, H),,H), 4, fy & (HDG H.3.49, 4,40, 6.1), 6,1), (1, T, 2D. B.D, 4,1, (5,1. 6.) 7. (8,0, 644.6 FB Bs isi ks my 05,4155, 161, 0 ya) EWE a Bas Bind 90 Wf Wi 2S 27, shores x10" 29.0 BL 3b 38d 37, 39, (S = survive, SFR, SESE, FSSE, SFFS, FSPS, FESS, SFFF, FSFE, FFES,FFFF) 4} 43.) 48.147. FESR 3 49.4 51.018 53. 0.14 5, about33% 57, no 9. -10,4° 6 4 Bxereises 88 (page 613) 1. compound 3, mutually exclusive §. 1 ~ PA) TPA PB) 94 Ie Wh 15 9% Ws BR Re md wd 31.0973 338 38.4 372 92 1. 03 45. P= 10at(4,2) Exercises 89 (page 617) 1. oldsforanevent 3.$ S$ 7.5001 % ItoL Mg 133105 IS tel 17. 1012 19.310 2} 231090 28 1S—1 27.5 29. No; the expected winnings are $8. 31, 740 1 33. $172 38.654 37, silsy 39, lest than} AL 2+ 3y=5 4-3) +5 = 25 ‘Chapter Summary (page 620) La 720 b.3024 68 Dav tay tay ty b pt + Apa + 6g" + Apa’ + of ©. @? — Sath + 10a°b? — 104?" + Sab! ~ 5° a. 80? — 120° + Gab? — BP 3. a, S6a°H* b, BOC? c 84)" d. 439,040" a 63 5. a, 5.17.53, 161 b, 2,8, 128, 32,7686. a. 90 B60 6. L718 a ~360 "7a 117 by 281 © 92 8. 9. 25,40, 55,10, 85, 10. a, 3,320. b, 5,780 «5,220 | d. 1,540 Mag 13122 ead dhs 12, 2V2,4,4V2 13, 4,-8,16,-32 14, 16 16. 438 15.0 Bh 6560 Ea. AYR 1,16V2 tad BA Dat bl af dj 20. 9677581 21, 6516; 3104 22. 83,486.78 28. a. 6,720, 35 © 1 4.4050 ©. 564480. 840g 21h 665 1120 ity KE ke 26, 20,160 enosum dt 27. 90,720 29.24 30. jay 31. HBS 32. about 63x10? 3.4 ME 3 36 ats 31, about ——* a a9 40. 136 635010 M107 42 1olS 4310023 4H 48. 92 Chapter Test (page 624) 1144-2, 384 3. 10e'y 4, 11206" 5, 27 6-36 7.155 8 ~130 99,1419 10, 11, 255.75 12. about9 13, about $0.42 14, about$146c 16, 800,000 17. 42 18, 24 19.28 20.1 21.576 22. 120 23, 60 24, ((H,H, H), (8, HT), (A, TH), (A, T,1), (1, HH), GHD TW,GTD) 25.4 8 28. 2%. 40% 30,09 3h 328 33. M4. St Exercises 9. (page 635) 1 inerest 3, annual $. future 7, interest 9. periodic rate 11. principal, periodic rate, frequency of compounding, number of years" 13. effective 15, $1,296 17. $1,763.19 19. $1,612.70 21, $2,840.84 23, $2912.71 28. $2,94491 27. 6.14% 29, 9.7306 31. $14,027.60 33. $11,678.47 38, $20,448.10 31, $356,867.13” 39. $207,976 41, 8.62 million f° 1 1 if 2o) 2 ios of 1,296 13% 4B. 14%, 712% 48, SL267T4S 47, $3,853.73 49, $50,368.13, Bxercises 9.2 (page 640) 1. annuities 3. payments, interest periodic rate, frequency of compounding, nu 7, $1318.08 9. $318.36 1. $1,20061 13. $1,556.03 15, $5,608.49 17, $34,603.82 19, $1,665.81 21, $637.52 23, $2467.11 28, $86,803,923.58 21. $2,171.71 29, BankB 31. $114,432.12 33. $1466.08 38.12 37.3 Exercises 9.3 (page 646) 1, present value 3. promissory note §, amortiing 7. $48,116.14 9, $0004 1. $27,128.43 13, $99,650.84 15, $533.84 17, 15.yr- $1,560.22; 2o-yr $1,341.84 19, $220.13 24. $146,506.50 B.2V6 28, 13VSr ‘Chapter Summary (page 649) 1, $3077.25 2, $2,405.47 3, $6,670.80 4, BigBank, 6.45%; BesiBank, 64%; BigBank 5. $5,622.23 6, $8,856.49 7. $88,353.05 8, $360.89 9, $5,552.11 10, $437,563.50 11. $1,687.03; $303,665.40 12, $1,404.89; $505,760.40 ‘Chapter Test (page 651) 1. compound 2, periodic 3, effective 4, annual S. annuities 6, sinking fund 7. present value 8 amortizing 9. $2,117.56 10. $2,141.11 11. 5.116% 12. $2,498.00 13. $50,506.10 14. $113.20 1S. $112,652.71 16, $910.16 ‘Cumulative Review Exerelses (page 652) Appendix it 2» aL. 36. 50, . 17280 | 42. 495 048 46, 0.3 ‘Answers to Selected Exercises A35 o-4F _@-2F 5 7 9 32. L7M2ry' 3810 34 65 38.139, 66 40, 24 Gh 4 tho 48. about $8.46 49, $3,757.02 1 4 16"y 3 31 1,680 $972.08 35. 33