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Mathematics of Finance: Chapter 3-C Compound Interest

This document contains examples of calculating compound interest over periods of time including partial periods and changing interest rates. It shows how to calculate compound interest for 3 years and 5 months at 7% compounded semiannually by finding the compound amount for the full 6 periods then adding simple interest for the remaining 5 months. It also provides an example of calculating the final amount when the interest rate changes from 6% compounded quarterly for 4 years to 7% compounded semiannually for 2 more years.

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49 views

Mathematics of Finance: Chapter 3-C Compound Interest

This document contains examples of calculating compound interest over periods of time including partial periods and changing interest rates. It shows how to calculate compound interest for 3 years and 5 months at 7% compounded semiannually by finding the compound amount for the full 6 periods then adding simple interest for the remaining 5 months. It also provides an example of calculating the final amount when the interest rate changes from 6% compounded quarterly for 4 years to 7% compounded semiannually for 2 more years.

Uploaded by

Ehab hoba
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Faculty of commerce – English Section mathematics of finance

Second year
Chapter 3-C Compound Interest

Interest for part of a period


When there is a part of a period, the usual practice is to allow simple interest for this time on the compound
amount at the end of the last whole period

Example 1: At 7% compounded semiannually, $2,000 will amount to how much in 3


years and 5 months?
The compound amount at the end of the 6 whole periods is
S = P (1 + i) n
2000 2458.51 2530.22
= 2,000 (1+.035)6
= $ 2458.51 Compound interest Simple interest
The simple interest for the remaining 5 months is
I = Prt
= 2458.51 × .07 × 5/12 = $71.71
So, the amount at the end of 3 years and 5 months is 2458.51 + 71.71 = $ 2530.22

Amount at changing rates


Example: A principle of $900 earns 6% converted quarterly for 4 years and then 7%
converted semiannually for 2 more years. Find the final amount
I1= 6% /4 = 1.5% n1= 4 × 4=16 P= $900
I2= 7% /2= 3.5% n2= 2 × 2 = 4
The amount at the end of 4 years:
S = P (1 + i) n
= 900 × (1.015) 16 = $ 1142.09
The final amount:
S = P (1 + i) n
= 1142.09× (1.035) 4 = $ 1310.57
OR
900 × 1.2689855477 × 1.1475230006 = $ 1310.57

1
.E.H

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