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Module 3 Lecture 3 Varying Interest and Continuous Compounding Varying Interest

1. The document discusses varying interest rates, sample problems calculating interest with changing rates, and continuous compounding. 2. For varying interest rates, the amount is first calculated at the previous rate before applying the new rate. Sample problems demonstrate calculating total interest for investments with changing annual rates. 3. Continuous compounding calculates interest converted very frequently, like daily or hourly. The formula for future value is F=Pe^jt and for present value is P=Fe^-jt, where e is the base of the natural logarithm. Sample problems demonstrate using these formulas.

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Gian Luigi Katigbak
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19 views4 pages

Module 3 Lecture 3 Varying Interest and Continuous Compounding Varying Interest

1. The document discusses varying interest rates, sample problems calculating interest with changing rates, and continuous compounding. 2. For varying interest rates, the amount is first calculated at the previous rate before applying the new rate. Sample problems demonstrate calculating total interest for investments with changing annual rates. 3. Continuous compounding calculates interest converted very frequently, like daily or hourly. The formula for future value is F=Pe^jt and for present value is P=Fe^-jt, where e is the base of the natural logarithm. Sample problems demonstrate using these formulas.

Uploaded by

Gian Luigi Katigbak
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Module 3 Lecture 3

Varying Interest and Continuous Compounding

Varying Interest
If the interest rate changes during an investment term, the amount of the previous rate is first
obtained before applying the new rate. (source: Mathematics of Investment by Ong and San Gabriel page
51)

Sample Problems
1. Find the amount in 15 years if P50,000 is invested at 18% compounded semi-annually in the
first 4 years, 15% compounded semi-annually in the next 5 years and 18% compounded
quarterly in the last 6 years?
Given:
P = 50,000
j = 18% or .18
m = semi-annually or 2
i = j/m or .18/2 = .09
t = 4 years
n = tm or 4 x 2 = 8

j = 15% or .15
m = semi-annually or 2
i = jm or .15/2 = .075
t = 5 years
n = tm or 5 x 2 = 10

j = 18% or .18
m = quarterly or 4
i = j/m or .18/4 = .045
t = 6 years
n = tm or 6 x 4 = 24

Solution
F = P(1 + i)n
F = P(1 + i)n (1 + i)n (1 + i)n
F = 50,000 (1 + .09)8 (1 + .075)10 (1 + .045)24
F = 50,000 (1.992562642) (2.061031562) (2.876013834)
F = 590,551.26

2. Jerome deposits P400,000 in a bank that gives 9% interest converted quarterly. How much
money would he have in 9 years and 3 months, if the interest rate increased to 10% converted
quarterly 5 years later?
Given:
P = 400,000
j = 9% or .09
m = quarterly or 4
i = j/m or .09/4 = .0225
t = 5 years
n = tm or 4x4 = 20

j = 10% or .10
m = quarterly or 4
i = j/m or .10/4 = .025
t = 4 years and 3 months or 4.25 years
n = tm or 4.25 x 4 = 17

Solution
F = P(1 + i)n
F = P(1 + i)n (1 + i)n
F = 400,000 (1 + .0225)20 (1 + .025)17
F = 400,000 (1.560509201) (1.521618261)
F = 949,799.71

Continuous Compounding
Interest may also be converted very frequently like weekly, daily or hourly. Interest converted
vey frequently is referred to as being converted continuously.

Formula
F = Pejt
P = Fe-jt
Note: the symbol “e” is constant and can be found in your scientific calculator.

Sample problems
1. Find the amount if P440,000 were invested for 10 years at 10% converted continuously.
Given:
P = 440,000
j = 10% or .10
t = 10 years

Solution
F = Pejt
F = 440,000 e.10 x 10
F = 440,000 e1
F = 440,000 (2.718281828)
F = 1,196,044.01
2. Find the present value of P580,000 due in 8 years at 9% compounded continuously.
Given:
P = 580,000
j = 9% or .09
t = 8 years

Solution:
P = Fe-jt
P = 580,000 e-.09 x 8
P = 580,000 e-.72
P = 580,000 (.486752256)
P = 282,316.31

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