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IB Mathematics Applications and Interpretations HL Study Guide

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36 views2 pages

IB Mathematics Applications and Interpretations HL Study Guide

Uploaded by

sfbc0585
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
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ALGEBRA Finance

1.2.2 Compound interest

Compound interest refers to interest being added to an investment or principle sum


every compounding period (instead of e.g. being paid out each time). This means that
every time you calculate interest, you do so on a principle sum + previous interest. This
works like a geometric sequence.
where FV = future value,
‹kn PV = present value,
r

DB 1.4 FV = PV × 1 + n = no. years,
100k k = no. compounding periods per year,
r = % interest rate.

Besides using the equation Abbreviation Stands for


in your data booklet, you TVM Time Value of Money
can also use the N Number of payments
TVM Solver I% percentage Interest rate
PV Present Value - should be negative
(“Time Value of Money”)
PMT PayMenT
on your GDC to solve FV Future Value
compound interest P/Y Payments per Year
questions. C/Y Compounding periods per Year

Solving questions about compound interest

$1500 is invested at 5.25% per annum. The interest is compounded twice per year. How
much will it be worth after 6 years?

IB ACADEMY IB ACADEMY IB ACADEMY

Enter all known values Highlight cell of asked


Press menu , choose
For this example: value, in this case FV,
8: Finance ≈
N=12 (payments) enter
1: Finance Solver press
I=5.25 (interest rate)
PV=-1500 (present value)
negative because
investment represents cash
outflow;
PMT=0 FV=0 (future value)
P/Y=1 (payment/yr)
C/Y=2 (compound/yr)

So FV = $2793.62

8
ALGEBRA Finance 1

1.2.3 Annuities and amortization

Annuity a series of equal cash flows over equal periods in time

Amortization the process of spreading out a payment into a series of equal


instalments over time

Finding the payment amount of an annuity

Jerome would like to save $300,000 to buy an apartment in 15 years’ time. If he can invest
at an 8% interest rate per year, how much money would he need to invest at the end of each
year to reach his goal?

IB ACADEMY IB ACADEMY IB ACADEMY

Enter all known values Highlight cell of asked


Press menu , choose
For this example: value, in this case PMT,
8: Finance ≈
N=15 (payments) enter
1: Finance Solver press
I=8 (interest rate)
PV=0 (present value)
PMT=0
FV=300000 (future value)
P/Y=1 (payment/yr)
C/Y=1 (compound/yr)

PMT = −$11, 048.86, so he


would need to invest this
amount each year

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