Scribd
Upload
38 views13 pages

Ch3 New

Uploaded by

ibrahim.m.alzoubi01
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
38 views13 pages

Ch3 New

Uploaded by

ibrahim.m.alzoubi01
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 13

Factors Notation Calculation

Compound Amount Factor (F/P,i,n) F = P (1 + i)n


Present worth factor (P/F,i,n) P = F / ( 1 + I )n
Series Compound Amount (F/A,i,n) F=A([(1+i)n–1]/i)
Factor
Sinking Fund Factor (A/F,i,n) A=F(i/[(1+i)n–1])
Series Present Value (P/A,i,n) P=A([1–(1+i)–n]/i)
Capital Recovery Factor (A/P,i,n) A=P([i/1–(1+i)–n])
Relationships of Discrete Compounding

1
( P/F , i % , N ) 
( F / P, i % , N )
1
( A/P, i % , N ) 
( P/ A, i % , N )
1
( A/F , i % , N ) 
( F / A, i % , N )

( F/ A, i % , N )  ( P/ A, i % , N )( F/P, i % , N )
N
( P/ A, i % , N )   ( P/F , i % , K )
k 1

N
( F / A, i % , N )   ( F / P, i % , N  K )
k 1

( A/F , i % , N )  ( A/P, i % , N )  i
Deferred Annuity

• Deferred annuities are uniform series that do not begin until some
time in the future.
• If the annuity is deferred J periods then the first payment (cash
flow) begins at the end of period J+1.
Present Equivalent of a Deferred Annuity
To illustrate the preceding discussion, suppose that a father, on the day
his son is born, wishes to determine what lump amount would have to
be paid into an account bearing interest of 12% per year to provide
withdrawals of $2,000 on each of the son's 18th, 19th, 20th, and 21st
birthdays.

P17  A( P/ A,12 % , 4)  2000 (3.0373)  6074.6$

P0  F17 ( P/F ,12 % , 17)  6074.6 (0.1456)  884.46$


Deferred future Value of an Annuity

When you take your first job, you decide to start saving right away for your
retirement. You put $5,000 per year into the company's 401(k) plan, which
averages 8% interest per year. Five years later, you move to another job and start
a new 401(k) plan. You never get around to merging the funds in the two plans.
If the first plan continued to earn interest at the rate of 8% per year for 35 years
after you stopped making contributions, how much is the account worth?

F5  A( F / A, 8 % , 5)  5000 (5.8666)  29,333$

F40  P5 ( F /P, 8 % , 35)  29,333 (14.7853)  433,697$


Interest Rate that Vary with Time
Nominal and Effective Interest Rate
‫ﻗﯾﻣﺔ اﻟﻔﺎﺋدة اﻻﺳﻣﯾﺔ واﻟﻔﻌﻠﯾﺔ‬
• The annual rate is known as a nominal rate.
• A nominal rate of 12%, compounded monthly, means an interest
of 1% (12%/12) would accrue each month, and the annual rate
would be effectively somewhat greater than 12%.
Consider a principal amount of 1000$ to be invested for a year at a
nominal rate 12% compounded semiannually.
Interest rate = 6% per 6 months.
The interest earned during the first 6 months = 1000×0.06 = 60$
Total interest and principal at 6 months = 1000+60 = 1060$
The interest earned during the second 6 months = 1060×0.06 = 63.6$
Total interest earned during the year = 60+63.6 = 123.6$
Effective annual interest rate = 123.6/1000 = 12.36%
M
 r 
i  1    1
 M

M is the number of compounding interest per year


i is effective interest rate per year
r is the nominal interest rate per year
‫عدد السنوا الي بتوزع فيها ال نسبه الفائدة‬

Effective Annual Interest Rate


A credit card company charges an interest rate of 1.375% per
month on the unpaid balance of all accounts. The annual interest
rate, they claim, is 12(1.375%) 16.5%. What is the effective rate
of interest per year being charged by the company?
M
 r 
i  1    1
 M
12
 0.165 
i  1    1  0.1781  17.814%
 12 
Compounding More Often than Once per Year

Future equivalent when Interest Compounded quarterly


Suppose that a $100 lump-sum amount is invested for 10 years
at a nominal interest rate of 6% compounded quarterly. How
much is it worth at the end of the 10th year?

F  P( F /P,1.5 % , 10)  100(1.015)40  181.4$


Compunded quarterly ‫ اشهر‬3‫————— الفائدة كل‬quarter 1/4 1year
6%/4=1.5%
F=p(1+1.5%)^40
=100(1.15%)^40
Example:
A loan of 15,000$ requires monthly payments of 477$ over a 36-
month period of time. These payments include both principal and
interest.
1.What is the nominal interest rate?
A P ( A / P, i, N )
477 15000 ( A / P, imo ,36) 477/15000=0.0318
‫ سنوات‬3 ‫ اي‬36 ‫بدور بالجدول ع هاد الرقم في الشهر‬

( A / P, imo ,36)  0.0318  i  0.75 per month


nominal interest rate = 0.75 ×12 = 9%

2. What is the effective interest rate per year


M 12
 r   0.09 
i  1    1  1    1  9.38% per year
 M  12 
P ‫ لهيك طلعنا‬principle ‫ون حكا‬
3. Determine the amount of unpaid loan principle after 20 month?

P20  477( P / A, 0.75%,16)  477(15.0243)  7166.59


F36  ?

You might also like