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Financial Applications of Geometric Sequence

This document discusses various financial applications of geometric sequences and series, including simple interest, compound interest, inflation, annuities, and amortization. It provides formulas and examples for calculating future values under different interest rates and compounding periods. For example, it explains that compound interest calculates interest on previous interest amounts, allowing the capital to grow at an accelerating rate over time compared to simple interest. It also discusses how inflation affects the real value of investments.

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ibrahim fadel
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373 views

Financial Applications of Geometric Sequence

This document discusses various financial applications of geometric sequences and series, including simple interest, compound interest, inflation, annuities, and amortization. It provides formulas and examples for calculating future values under different interest rates and compounding periods. For example, it explains that compound interest calculates interest on previous interest amounts, allowing the capital to grow at an accelerating rate over time compared to simple interest. It also discusses how inflation affects the real value of investments.

Uploaded by

ibrahim fadel
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 PDF, TXT or read online on Scribd
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IB I- AI HL

Financial Applications of geometric sequences and series

Simple and Compound Interest

The amount of money you put in the bank is called the capital C or the present value PV. What
you get is the future value FV.

A- Simple Interest:

When the interest amount earned each year depends on the original present value, we call it
simple interest.

Example 1: Find the total amount of money that Joe will have if he deposits $2,000 earnings in
a bank that gives a simple interest at an annual rate of 5% for 4 years.
B- Compound Interest:

Compound interest is when the interest calculated over the given time period is added to the
capital (PV) and then the new capital is used to calculate the interest for the next time period.
n n
 r   r 
PV 1 +  = P( or FV = C 1 + 
 100   100 

If the interest is calculated:


• half-yearly, then k=2
• quarterly , then k=4
• monthly, k=12
• annually, k=1

Example 2:

Eva invests USD2000 at a nominal annual interest rate of 8 % . Calculate the value of her
investment after 5 years, correct to the nearest dollar. If the interest is compounded:

(i) half-yearly
(ii) yearly
(iii) monthly
(iv) quarterly
Example 3:

As soon as she was born, Zaira’s parents decided to put some money into an account
for her to have on her 18th birthday. They were offered the following investment
schemes from different banks that they approached:
• Scheme A: To invest 10,000 MAD at a simple interest rate of 5% per annum for
18 years.
• Scheme B: To invest 10,000 MAD at a compound interest of 4% per annum
compounded annually for 18 years.
• Scheme C: To invest 10,000 MAD at a compound interest rate of 4% per
annum compounded monthly for 18 years.
• Scheme D: To invest 10,000 MAD and get back double this amount at the end
of the 18 years.

How much interest would they receive under each one of the schemes?

Do Examples 7 and 8 pages 304 and 305 from the book


C- Inflation:

Inflation measure the rate that the prices for goods increase over time and, as a result,
how much less your money can buy.

Assume there is an inflation of i % and you are investing your money at a rate of r % per
annum compounded annually, then the real value of the investment becomes:

 r −i 
n

FV = C 1 +  .
 100 

Do Example 9 page 306.


Exercise 3,4 page 306
Exercises 6,7, and 8 page 307

D- Annuities and Amortization:

An annuity is a savings account in which money is deposited at regular intervals. The formula
is given by:

 r 
kn

A  1 +  − 1
  k100  
FV =   , where FV is the future value, A is the regular deposit amount, r is the
r
k100
annual interest rate, k is the compounding period, and n is the number of years.

Example:

1) Jolene deposits $100 every month into an annuity at 5% compounded monthly, for 9
years. Find the future value and the interest her account earned.

2) Dave wants to save $20,000 for a down payment on a really cool speedboat. He opens an
annuity at 4.25% compounded quarterly for 3 years. What is his quarterly payment?
Amortization is when a constant payment P, is made to repay a loan for a certain number of n
periods compounded at an interest rate of r %.

The formula is given as such:

 r 
kn

P   1 +  − 1
  k100 
n
 r   , where:
PV 1 +  =
 100  r
k100

PV is the initial amount taken as a loan,

P is the constant payments done to repay the loan,

r is the annual interest,

k is the compounding period,

n is the number of years.

Example:

The smiths buy a house that costs $300,000. They put down 25% and finance the rest through a
mortgage at 7.25% compounded monthly for a 30 year term. Find their monthly payment.

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