1

Ch
apt
er-3
T
imev
alu
eofMo
ney
T
imev
alu
eofMo
ney
:
T
hec
onc
epto
fin
ter
esti
son
eoft
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orei
dea
sinf
ina
nci
alma
nag
eme
nt.I
ndi
vi
dua
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swe
lla
s,
b
usi
nes
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gan
iza
tio
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req
uen
tlye
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ers
it
uat
ion
sth
ati
nvo
lvec
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ipt
san
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men
ts
o
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odo
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me. Wh
ent
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app
ens
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ter
estr
ate
san
din
ter
estp
ayme
ntsb
eco
me
i
mpo
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ntc
ons
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ion
s.
Bu
sin
esso
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niz
ati
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eal
swi
thi
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teswh
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nt
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iall
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ine
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eas
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ter
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ate
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il
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ves
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uip
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ate
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o
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ofi
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sto
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omp
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pec
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em.S
inc
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nt
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cte
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oth
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ter
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etu
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e
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omp
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efo
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ste
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e
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th
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ete
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ase
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ice
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e,a
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imet
o

2
ma
tur
it
y.I
nth
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ase
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ter
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ig
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an5
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sey
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e
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E
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itI
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te:T
hee
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ic
iti
nte
res
tra
ter
efe
rst
oth
ein
ter
estr
atet
hati
sex
pli
ci
tl
yst
ate
din
al
oano
rin
ves
tme
nta
gre
eme
nt.I
tist
her
atea
twh
ichi
nte
res
tisc
har
gedo
rea
rne
dont
hep
rin
cip
al
a
mou
nt.T
hee
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ic
iti
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sty
pic
all
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nic
ate
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orr
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rin
ves
tor
sup
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ema
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ons
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ter
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romab
ankwi
tha
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ci
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i
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l
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ase
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ter
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e
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ndd
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di
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hen
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c
omp
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rio
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Ge
ner
alA
ssu
mpt
ion
sNe
ede
dinCo
mpu
tin
gIn
ter
est
I
nor
dert
ofo
cuso
nin
ter
estr
atea
ndt
oav
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omp
li
cat
ion
sth
atwo
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det
hee
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c
onc
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hef
oll
owi
ngt
hre
ege
ner
ala
ssu
mpt
ion
sar
ene
ede
dtob
ema
de.T
hes
ear
e:

Ce
rta
int
y:-I
tist
hemo
str
est
ri
ct
iv
eas
sump
tio
n.A
llc
urr
enta
ndf
utu
red
atav
alu
esa
rea
ssu
medt
o
b
ekn
ownwi
thc
ert
ain
ty,
oras
eto
fte
chn
iqu
ese
xis
tsf
ore
sti
mat
inga
llu
nkn
ownv
ari
abl
es.Ce
rta
int
y
a
lsoa
ppl
ie
stot
hea
ccu
rac
yoff
utu
ree
ven
tsa
ndt
hei
roc
cur
ren
ces
.Th
isa
ssu
mpt
ioni
sus
edf
or
s
imp
li
ci
tys
inc
eun
cer
tai
ntyr
equ
ire
sth
ein
tro
duc
ti
ono
fte
chn
iqu
est
hatc
ann
otb
eea
sil
yun
der
sto
od.

Di
scr
eteT
imeP
eri
od:-T
imei
sdi
vi
dedi
ntoy
ear
lyi
nte
rva
ls.T
het
imet
hate
lap
sesb
etwe
ent
hel
ast
d
ayso
ftwoc
ons
ecu
tiv
eye
arsi
sex
pre
sse
daso
ney
ear
.Fo
rex
amp
le,
yea
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sth
eti
met
hate
lap
ses
f
romt
hel
astd
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fye
ar2a
ndt
oth
ela
std
ayo
fye
ar3
.Th
isa
ssu
mpt
iond
oes
n'tr
equ
irec
ashf
lows
t
ooc
curo
nth
ela
std
ayo
fea
chy
ear
.Wh
ati
sre
qui
redi
sth
atc
ashf
lowsh
avet
ooc
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int
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o
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met
hata
res
epa
rat
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yon
eye
ari
nte
rva
ls.T
hea
ssu
mpt
ion
,th
us,a
ll
owsu
stoa
bst
rac
tfr
om
s
pec
ifi
cca
len
dard
ate
san
dtome
asu
ret
imef
romt
hep
oin
tatwh
ichap
art
icu
lari
nve
stme
nto
r
f
ina
nci
ngp
rog
ramb
egi
ns.

Y
ear
lyI
nte
res
tCo
mpu
tat
ion
s:-i
nte
res
tisc
omp
ute
don
ceay
eara
ndt
hec
omp
uta
tio
nisma
dea
tth
e
e
ndo
fth
eye
ar.T
hisa
ssu
mpt
ioni
sth
us,c
ons
ist
entwi
tht
hed
isc
ret
eti
mep
eri
oda
ssu
mpt
ionma
de

3
a
bov
e.I
nre
ali
ty
,ma
nys
it
uat
ion
sin
vol
vemo
nth
ly,d
ail
y,a
nde
venc
ont
inu
ousi
nte
res
tco
mpu
tat
ion
wh
ereb
yma
nyc
omme
rci
alb
ank
san
dsa
vin
gsa
ndc
red
ita
sso
cia
tio
nso
ffe
rda
il
yorc
ont
inu
ous
i
nte
res
tco
mpo
und
ingo
nde
pos
it
ors
'mo
ney
.

Co
mpo
und
ingMe
tho
d
T
her
ear
etwowa
yso
fde
pos
it
ingp
ayme
nts(
mon
ey)i
ntoa
nin
ter
estb
ear
inga
cco
unt
.Th
esea
re
s
ing
lep
ayme
nta
nds
eri
eso
fpa
yme
nts
.

F
utu
re(
comp
oun
d)v
alu
eofs
ing
lep
ayme
nt
Ab
irry
oud
epo
sit
edi
nani
nte
res
t-b
ear
inga
cco
untt
oda
ywo
rth
'sy
oumo
rei
nth
efu
tur
ebe
cau
set
he
a
cco
unte
arn
syo
uani
nte
res
tont
hemo
neyy
ouh
aved
epo
sit
ed.T
hep
roc
esso
fgo
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romt
oda
y's
v
alu
es,
orp
res
entv
alu
es(
PV)t
ofu
tur
eva
lue
s(F
V)i
sca
ll
edc
omp
oun
din
g.S
upp
osey
oud
epo
sit5
00
Bi
rri
nani
nte
res
t-b
ear
inga
cco
unta
tab
ankt
hatp
aysa
nan
nua
lin
ter
estr
ateo
f7%.Y
ouwa
ntt
o
k
nowh
owmu
chy
ouwi
llh
avea
tth
een
doff
ivey
ear
s.
P
V = P
res
entv
alu
e,o
rth
ebe
gin
nin
gamo
unt
,iny
oura
cco
unt
.He
re
P
V=5
00Bi
rr
.
i = i
nte
res
tra
tet
hatt
heb
ankp
aysp
ery
ear
.Th
ein
ter
este
arn
edi
s
b
ase
dont
heb
ala
ncea
tth
ebe
gin
nin
gofe
achy
eara
ndi
tisa
ssu
medp
aida
tth
een
d
o
fth
eye
ar.He
re,
i=7
%,o
rex
pre
sse
dasad
eci
mal
,i=0
.07
.
I
NT = Bi
rro
fin
ter
esty
oue
arnd
uri
ngt
hey
ear
,wh
ichi
seq
ualt
oth
e
Be
gin
nin
gamo
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lti
pl
ie
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.He
re,
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.07=3
5Bi
rrf
ort
hef
ir
sty
ear
.
F
Vn = F
utu
rev
alu
e,o
ren
din
gamo
unt
,iny
oura
cco
unta
tth
een
dofn
Y
ear
s.Wh
ere
ast
heP
Vist
hev
alu
eno
wort
hep
res
entv
alu
e,F
Vist
hev
alu
eoft
he
mo
neya
fte
rny
ear
sin
tot
hef
utu
re,
aft
ert
hee
arn
edi
nte
res
tsh
aveb
eena
dde
dtot
he
a
cco
untb
ala
ncee
ver
yye
ar.
n = n
umb
ero
fpe
rio
dsi
nvo
lve
dint
hea
nal
ysi
s,He
ren=5
.
I
nou
rex
amp
leh
ere
,wh
eren=5
,th
efu
tur
e(c
omp
oun
d)v
alu
eca
nbec
alc
ula
teda
sfo
ll
ows
:
F
V = F
V1 =P
V+I
NT(
int
ere
st)
=P
V+P
V(i
)
=P
V(1+I
)
=5
00(
1+0
.07
)=5
00(
1.
07)=5
35Bi
rr
.

4
Gi
ven
:
P
V=5
00Bi
rr(
ini
ti
ald
epo
sit
)
i=0
.07(
int
ere
str
atep
ery
ear
)
Us
ingt
hef
ormu
laF
V=P
V*(
1+i
)^n
,wec
anc
alc
ula
tet
hef
utu
rev
alu
es:
F
V1=5
00*(
1+0
.07
)^1
=5
00*1
.07
=5
35Bi
rr
F
V2=5
00*(
1+0
.07
)^2
=5
00*1
.14
49
=5
72.
45Bi
rr
F
V3=5
00*(
1+0
.07
)^3
=5
00*1
.22
504
3
=6
12.
52Bi
rr
F
V4=5
00*(
1+0
.07
)^4
=5
00*1
.31
079
61
=6
55.
40Bi
rr
F
V5=5
00*(
1+0
.07
)^5
=5
00*1
.40
255
12
=7
01.
28Bi
rr
T
her
efo
re,
att
hee
ndo
fea
chy
ear
,th
efu
tur
eva
lue
swo
uldb
easf
oll
ows
:
F
V1=5
35Bi
rr
F
V2=5
72.
45Bi
rr
F
V3=6
12.
52Bi
rr
F
V4=6
55.
40Bi
rr
F
V5=7
01.
28Bi
rr
I
nge
ner
al,t
hef
utu
rev
alu
eofa
nin
iti
als
uma
tth
een
dofny
ear
sca
nbef
oun
dbya
ppl
yi
ngt
he
f
oll
owi
ngg
ene
rale
qua
tio
n.

n
f
v V(
=P 1
+i)

I
nte
res
tTa
ble

5
 n
T
hef
utu
rev
alu
ein
ter
estf
act
orf
oria
ndn(
FV1
Fi,
n)i
, sd
efi
neda
s(1
+I),a
ndt
hisf
act
orc
anb
efo
und
b
yus
ingar
egu
larc
alc
ula
tor
.In
ter
estt
abl
eist
het
abl
eth
ati
sco
nst
ruc
tedb
yus
ingt
hef
utu
rev
alu
e
i
nte
res
tfa
cto
rs.I
tco
nta
insf
utu
rev
alu
ein
ter
estf
act
ors(
FV1
Fi,
n)v
, a
lue
sfo
rth
ewi
der
ang
eofIa
nd
n
nv
alu
es.S
inc
eth
ete
rm(
1+i
) ise
qua
ltot
heF
V1F
i,
n,t
hef
utu
rev
alu
eeq
uat
ionf
ors
ing
lep
ayme
ntc
an
b
ere
-wr
it
tena
s:

F
Vn=P
V(F
V1F
i,
n)
,

T
oil
lu
str
ateh
owt
ous
efu
tur
eva
luei
nte
res
tfa
cto
rs(
FV1
F)i
nco
mpu
tin
gfu
tur
e(c
omp
oun
d)v
alu
eof
a
nys
ing
lep
ayme
nt,
con
sid
ero
urf
ive
-ye
ar,
5pe
rce
nti
nte
res
tra
ted
epo
sito
f50
0Bi
rri
nth
epr
evi
ous
e
xamp
le.T
hef
utu
rev
alu
eoft
he5
00Bi
rra
tth
een
dofy
ear5c
anb
ede
ter
min
edb
ylo
oki
ngf
ort
he
F
V1F
7 5i
%, nt
hei
nte
res
tta
ble
.Th
isi
sdo
neb
ylo
oki
ngd
ownt
hef
ir
stc
olu
mnt
ope
rio
d5,a
ndl
ook
ing
a
cro
sst
hatr
owt
oth
e5p
erc
entc
olu
mn,
whe
rewer
eadt
hev
alu
eof1
.40
255
12wh
ichc
orr
esp
ond
sto
F
V1F
7%,
5.T
hisv
alu
eis
,th
en,
plu
gge
din
tot
hea
bov
eeq
uat
ion
.Th
ati
s:

F
Vs =P
V (
FV1
F7%,
5)

F
Vs =5
00(
1.
402
551
2)
F
Vs =7
01.
28Bi
rr
.

T
her
efo
re,t
hef
utu
rev
alu
eatt
hee
ndo
fye
ars(
n=5
)co
mpu
tedb
yus
ingt
hef
utu
rev
alu
ein
ter
est
f
act
orf
romt
hei
nte
res
tta
ble
,70
1.2
8Bi
rr
,ise
xac
tl
yth
esa
mea
sth
efu
tur
eva
lueweh
avef
oun
dby
u
sin
gth
ege
ner
alf
utu
rev
alu
eeq
uat
ionf
ors
ing
lep
ayme
nt.

P
ort
iono
ffu
tur
eva
luet
abl
efo
rsi
ngl
epa
yme
nt(
FV1
F7%,
5)

P
eri
od(
n) 4
% 7
%
1 1
,04
00 1
.05
00
2 1
.08
16 1
.10
25
3 1
.12
49 1
.15
76
4 1
.16
99 1
.21
55
5 1
.21
67 1
.40
255
12*
6 1
.26
53 1
.34
01

6
  I
tist
hef
utu
rev
alu
ein
ter
estf
act
ort
hatc
orr
esp
ond
stof
ivep
eri
ods(
n=5
)an
din
ter
est
r
ateo
f7p
erc
ent(
i=7
%).Y
ouc
anr
efe
rtot
hec
omp
let
efu
tur
eva
luet
abl
eofs
ing
le
p
ayme
nti
nth
eap
pen
dixt
oth
isma
ter
ial
.

Ot
herA
ppl
ic
ati
ono
ffu
tur
eva
luea
mou
nto
fsi
ngl
epa
yme
nt:

T
hef
utu
rev
alu
eeq
uat
ionf
ors
ing
lep
ayme
nts
tat
edi
nth
isma
ter
ialc
ana
lsob
eus
edt
ofi
ndi
nte
res
t
r
ate
s,a
swe
lla
s,me
mbe
rso
fye
arst
hatwi
llb
ene
ede
dfo
rth
eco
mpo
und
eda
mou
ntt
oeq
ualt
he
d
esi
redv
alu
e.

F
ind
ingt
heI
nte
res
tra
te-E
sti
mat
ingt
hei
nte
res
tra
teo
nth
ede
pos
it
edmo
neyi
sar
ecu
rri
ngp
rob
lem
wh
eni
tisn
ote
xpl
ic
itl
yst
ate
d.Au
sef
ula
ppr
oac
hist
otr
eatt
hei
nte
res
tra
tea
sani
mpl
ic
iti
nte
res
t
r
atea
ndf
oun
dbyu
sin
gth
ein
ter
estt
abl
e(f
utu
rev
alu
eta
bleo
fsi
ngl
epa
yme
nt)
.

T
oil
lu
str
ate
,as
sumet
haty
ouh
avei
nve
ste
d25
,00
0Bi
rrt
oda
yatab
ankwh
erei
tca
ngr
owt
oth
e
f
utu
rev
alu
eof3
200
0Bi
rrwi
thi
nfo
ury
ear
sfr
omn
owi
ntot
hef
utu
re.Wh
ati
sth
ein
ter
estr
atet
hat
t
heb
anks
hou
ldp
ayf
ory
oura
cco
unti
nor
dert
ofu
lfi
lly
ourd
esi
re?
T
oca
lcu
lat
eth
ein
ter
estr
atet
hatt
heb
anks
hou
ldp
ayi
nor
dert
ogr
owa
nin
ves
tme
ntf
rom2
5,0
00
Bi
rrt
o32
,00
0Bi
rrwi
thi
nfo
ury
ear
s,wec
anu
set
hef
ormu
la:
I
nte
res
tRa
te=(
FV/P
V)^
(1/
n)-1
Wh
ere
:
F
Vist
hef
utu
rev
alu
e(3
2,0
00Bi
rr
)
P
Vist
hep
res
entv
alu
e(2
5,0
00Bi
rr
)
ni
sth
enu
mbe
rofy
ear
s(4
)
Us
ingt
hes
eva
lue
s,wec
anc
alc
ula
tet
hei
nte
res
tra
te:
I
nte
res
tRa
te=(
32,
000/2
5,0
00)
^(1
/4)-1
=1
.28
^(1
/4)-1
=1
.06
35-1
=0
.06
35.
The
ref
ore
,th
ein
ter
estr
atet
hatt
heb
anks
hou
ldp
ayf
ory
oura
cco
untt
ogr
owf
rom2
5,0
00
Bi
rrt
o32
,00
0Bi
rrwi
thi
nfo
ury
ear
sis6
.3.
%(0
.06
35a
sad
eci
mal
).

7
T
hef
utu
rev
alu
ein
ter
estf
act
ori
nth
ein
ter
est(
fut
urev
alu
eofs
ing
lep
ayme
ntt
abl
e)c
orr
esp
ond
ing
t
oth
eun
kno
wni
nte
res
tra
te(
i)a
ndap
eri
odo
f4y
ear
sn=4
)is1
.28
.He
nce
,lo
oku
pth
eth
reey
ear
(
n=4
)ro
wan
dre
adh
ori
zon
tal
lyu
nti
lyo
ufi
ndt
het
abl
eva
lue(
fut
urev
alu
ein
ter
estf
act
or)t
hati
s
e
qua
lort
hec
los
estt
oth
eco
mpu
tedv
alu
eof1
.28
.Th
erei
snot
abl
eva
luet
hati
sex
act
lye
qua
lto
1
.28
.Th
eta
blev
alu
eof1
.26i
sfo
undt
obet
hec
los
estv
alu
eto1
.28a
ndi
tco
rre
spo
ndst
o6.
3pe
rce
nt.
T
hus
,th
ein
ter
estt
hatt
heb
anka
ctu
all
yha
stop
ayt
oyo
ura
cco
unti
ssl
ig
htl
ygr
eat
ert
han6
.3p
erc
ent
.

F
ind
ingt
hen
umb
ero
fye
ars
:-T
hef
utu
re(
comp
oun
d)v
alu
eofs
ing
lep
ayme
nte
qua
tio
nca
nbeu
sedt
o
e
sti
mat
eth
enu
mbe
rofy
ear
sth
ata
rer
equ
ire
dfo
rag
ive
namo
unto
fmo
neyd
epo
sit
eda
tas
pec
ifi
c
i
nte
res
tra
tet
opr
odu
ceo
rde
sir
edc
omp
oun
damo
unt
.As
sume
,fo
rex
amp
le,
ade
pos
ito
f30
00Bi
rri
s
ma
dei
nani
nte
res
tbe
ari
nga
cco
untt
hatp
ays8p
erc
entc
omp
oun
dedy
ear
ly.Y
ourg
oala
sad
epo
sit
or
i
stoc
oll
ect5
,50
0Bi
rra
fte
ranu
nkn
ownn
umb
ero
fye
ars
.Ho
wma
nyy
ear
ssh
oul
dyo
uwa
itf
ort
he
d
esi
reda
mou
ntt
ober
eal
iz
ed?

T
ode
ter
min
eho
wma
nyy
ear
syo
ush
oul
dwa
itt
oac
cumu
lat
e5,
500Bi
rrf
roma3
,00
0Bi
rrd
epo
sitwi
th
a
nin
ter
estr
ateo
f8%c
omp
oun
dedy
ear
ly,
wec
anu
set
hef
ormu
laf
orf
utu
rev
alu
e:
F
V=P
V*(
1+i
)^n
Wh
ere
:
F
Vist
hef
utu
rev
alu
e(5
,50
0Bi
rr
)
P
Vist
hep
res
entv
alu
e(3
,00
0Bi
rr
)
ii
sth
ein
ter
estr
atep
ery
ear(
0.0
8or8
%)
ni
sth
enu
mbe
rofy
ear
swewa
ntt
ofi
nd
Wen
eedt
oso
lvef
orn
.re
arr
ang
ingt
hef
ormu
la,
weh
ave
:
(
5,
500Bi
rr
)=(
3,0
00Bi
rr
)*(
1+0
.08
)^n
Di
vi
di
ngb
oths
ide
sby(
3,0
00Bi
rr
),weg
et:
1
.83
333
333
333=(
1.
08)
^n
T
oso
lvef
orn
,wec
ant
aket
hel
oga
rit
hmo
fbo
ths
ide
s:
l
og(
1.
833
333
333
33)=l
og(
(1.
08)
^n)
l
og(
1.
833
333
333
33)=n*l
og(
1.
08)
Di
vi
di
ngb
oths
ide
sbyl
og(
1.
08)
,wef
ind
:

8
n=l
og(
1.
833
333
333
33)/l
og(
1.
08)
Us
ingac
alc
ula
tor
,wec
anc
omp
ute
:
n≈7
.87
=8
T
her
efo
re,
yous
hou
ldwa
ita
ppr
oxi
mat
ely7
.87
=8y
ear
stoa
ccu
mul
ate5
,50
0Bi
rrwi
tha
n8%i
nte
res
t
r
atec
omp
oun
dedy
ear
ly.S
inc
eth
enu
mbe
rofy
ear
smu
stb
eawh
olen
umb
er,
rou
ndi
ngu
p,y
ouwo
uld
n
eedt
owa
itf
or8y
ear
stor
eac
hyo
urd
esi
reda
mou
nt.
A
gai
niti
spo
ssi
bl
etol
ooku
pth
e8p
erc
entc
olu
mni
nth
efu
tur
eva
luei
nte
res
tfa
cto
rs(
fut
urev
alu
e)
t
abl
ean
dre
adv
ert
ica
ll
yun
tily
ouf
indat
abl
eva
luet
hati
seq
ualt
o1.
833o
rcl
ose
stt
oit
.Th
ecl
ose
st
t
abl
eva
luei
s1.
833
4,wh
ichc
orr
esp
ond
stoe
igh
tye
ars(
n=8
).T
hatme
ansi
fth
e30
00Bi
rri
ske
pti
n
t
hea
cco
untt
hatp
ays8p
erc
entf
orf
ivey
ear
s;t
her
esu
lti
ngc
omp
oun
din
gamo
untwi
llb
e1.
833
4Bi
rr
.
T
hisa
mou
nte
xce
edst
hed
esi
reda
mou
nto
f5,
500Bi
rr
.Ift
he3
000Bi
rri
ske
pti
nth
eac
cou
nto
nly
e
igh
tye
ars
,th
eta
blev
alu
eis1
.83
34Bi
rr
.He
nce
,th
e30
00Bi
rrh
ast
obek
epti
nth
eac
cou
ntf
ora
p
eri
ods
li
ght
lyg
rea
tert
han7y
ear
s.
P
res
ent(
Dis
cou
nt)v
alu
e;
A
ssu
met
hatA
was
hIn
ter
nat
ion
alBa
nk(
AIB)i
scu
rre
ntl
yof
fer
ing7p
erc
ent
,on5
-ye
art
imed
epo
sit
.
Ho
wmu
chs
hou
ldy
oud
epo
sitt
oda
yint
het
imed
epo
sita
cco
unti
nor
dert
oge
tth
ein
dic
ate
damo
unto
f
7
01.
28Bi
rra
tth
een
dofy
ear5
,n=5
).

F
romt
hef
utu
rev
alu
eex
amp
lep
res
ent
edi
nth
epr
evi
ouss
ect
ion
,wes
awt
hata
nin
iti
ala
mou
nto
f50
0
Bi
rri
nve
ste
dat5p
erc
entp
ery
earwo
uldwo
rth7
01.
28Bi
rra
tth
een
dofy
ear5
.Yo
uar
ede
fin
ite
ly
i
ndi
ff
ere
ntt
oth
ech
oic
ebe
twe
en5
00Bi
rrt
oda
yan
d70
1.2
8Bi
rra
tth
een
doft
hef
ivey
ear
s,a
nd5
00
Bi
rri
sde
fin
eda
sth
epr
ese
ntv
alu
e,o
rPVo
fth
e70
1.2
8Bi
rrt
hati
sdu
ein5y
ear
s’t
imewh
ent
he
i
nte
res
tra
teo
rop
por
tun
ityc
ostr
atei
s7p
erc
ent
.

I
nge
ner
al,
thep
res
entv
alu
eofac
ashf
lowd
ueny
ear
sin
tot
hef
utu
rei
sth
eamo
untwh
ich
,ifi
twe
re
o
nha
ndt
oda
y,wi
llg
rowt
oeq
ualt
hef
utu
rev
alu
e.S
inc
e50
0Bi
rrt
oda
ywo
uldg
rowt
o70
1.2
8Bi
rri
n
5y
ear
sat5p
erc
enti
nte
res
tra
te,5
00Bi
rri
sth
epr
ese
ntv
alu
eof7
01.
28Bi
rrd
ue5y
ear
sint
he
f
utu
re.

F
ind
ingt
hep
res
entv
alu
eoft
hef
utu
rec
ashr
ece
ipt
s,o
rpa
yme
nti
sca
ll
edd
isc
oun
tin
g,a
ndi
tsi
mpl
y
t
her
eve
rseo
fth
eco
mpo
und
ingp
roc
ess
.Ify
ouk
nowp
res
entv
alu
e,P
V,y
ouc
omp
oun
ditt
ofi
ndt
he

9
f
utu
rev
alu
e,F
V.I
nth
esa
mewa
y,i
fyo
ukn
owt
hef
utu
rev
alu
e,F
v,y
oud
isc
oun
titt
ofi
ndt
hep
res
ent
v
alu
e,P
V.Wh
end
isc
oun
tin
gfu
tur
eva
lue
,yo
ufo
ll
owt
hes
est
eps
.

Ot
herA
ppl
ic
ati
ono
fPr
ese
ntVa
lueo
fth
eSi
ngl
ePa
yme
nt
Wi
tht
heh
elpo
fpr
ese
ntv
alu
eeq
uat
iona
ndt
abl
eyo
uca
nso
lvef
ora
nyo
nev
ari
abl
eint
hee
qua
tio
n
wh
ent
heo
the
rth
reev
ari
abl
esa
rek
nown
:

F
ind
ingt
heI
nte
res
tRa
te:A
lth
oug
hth
ete
rmo
fco
ntr
actma
ycl
ear
lys
tat
eth
ata
llt
her
ele
van
tca
sh
f
lows
,th
epr
obl
emo
fde
ter
min
ingt
hei
nte
res
tra
teo
rth
era
teo
fre
tur
ntot
hel
end
er,
ori
nve
sto
rma
y
s
ti
llr
ema
inu
nso
lve
d.Wh
ens
ing
lep
ayme
ntsa
rei
nvo
lve
d,t
hei
mpl
ie
din
ter
estr
atea
ppr
oac
hus
edf
or
c
omp
oun
din
gpr
obl
emc
anb
ead
opt
edf
oru
sei
nde
ter
min
ingt
hei
nte
res
tra
tei
nth
epr
ese
ntv
alu
e
t
abl
e.T
oil
lu
str
atet
his
,su
ppo
set
haty
ouh
avet
ake
nal
oano
f12
00Bi
rrt
oda
ywh
ichi
stob
epa
id
a
fte
rth
reey
ear
sto
get
herwi
thi
tsi
nte
res
tbyma
kin
gap
ayme
nto
f15
00Bi
rr
.Wh
ati
sth
era
teo
f
i
nte
res
tont
hel
oant
haty
ouh
avet
ake
n?

T
oan
swe
rth
isq
ues
ti
on,f
ir
sto
fal
lyo
une
edt
oid
ent
if
yva
ria
ble
swh
icha
rek
nown
.Int
his
i
ll
ust
rat
ion
,th
epr
ese
ntv
alu
e,P
Vise
qua
lto1
,20
0Bi
rr
;th
efu
tur
eva
lue
,FVi
s15
00Bi
rr
,th
epe
rio
dof
t
hel
oan
,ni
seq
ualt
o3y
ear
s.T
heny
ous
ubs
ti
tut
eth
egi
venv
ari
abl
esi
ntot
hee
qua
tio
nan
dso
lve
f
ort
het
abl
eva
lue
:

P
v=

1
200=

L
ook
inga
tth
eye
art
hre
e(n
=3)r
owi
nth
epr
ese
ntv
alu
eta
ble
;tr
ytol
oca
tet
hep
res
entv
alu
ein
ter
est
f
act
or(
tab
lev
alu
e)t
hati
seq
ualt
oorc
los
estt
o0.
80.T
her
esu
lti
ngt
abl
eva
lue
sar
e0.
816
c
orr
esp
ond
ing7p
erc
enta
nd0
.77
4co
rre
spo
ndi
ngt
o8p
erc
ent
.Th
us,t
hei
nte
res
tra
tei
sbe
twe
en7
p
erc
enta
nd8p
erc
ent
.
2
.Ex
amp
le2
:Su
ppo
sey
ouh
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ake
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rrt
oda
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ichi
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acka
fte
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1
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ali
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he
t
wo-
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rio
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ati
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elo
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nth
ise
xamp
le,
thel
oana
mou
nti
s10
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dth
eto
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nta
tth
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ear
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rr
.Bys
ubt
rac
tin
gth
elo
ana
mou
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het
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hei
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res
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unt
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ichi
s
2
,50
0Bi
rr
.

P
v= =1
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0=1
250
0(1
/(1
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n

=1
1.8
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F
ind
ingt
heNu
mbe
rofY
ear
s:-T
hep
res
entv
alu
eta
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ndt
hep
res
entv
alu
eeq
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ors
ing
le
p
ayme
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eus
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ode
ter
min
eth
enu
mbe
rofy
ear
sre
qui
redf
ort
hep
res
entv
alu
etoe
qua
lit
s
f
utu
rev
alu
eatag
ive
nra
teo
fye
arl
yco
mpo
und
ing
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rin
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nce
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ear
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oun
eedt
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it
f
ory
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f10
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ogr
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rri
nas
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nga
cco
untt
hatp
aysi
nte
res
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mpo
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ing
y
ear
lya
t6p
erc
ent
?

T
oan
swe
rth
isq
ues
ti
on,l
ett
he1
000
Bir
rbet
hep
res
entv
alu
eoft
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utu
rev
alu
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rra
tan
i
nte
res
tra
teo
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ery
ear
. Bys
ubs
ti
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ntot
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res
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eeq
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ionf
ors
ing
le
p
ayme
nta
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ort
hed
esi
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abl
eva
lue
,yo
uge
t.
P
V=F
Vn(
PV1
Fi,
n)
1
000=1
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PV1
F6%,
)
n

P
V1F
6%,
nn=

T
henl
ooka
tth
e6p
erc
entc
olu
mni
nth
epr
ese
ntv
alu
eta
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fsi
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yme
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eadd
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he
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res
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ter
estf
act
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il
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uar
ri
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eva
luet
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ualo
ffa
ll
sbe
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omp
ute
d
t
abl
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,0.
833
3.T
het
abl
eva
luet
hatme
etst
hes
tat
edr
equ
ire
men
tis0
.79
2,a
ndi
tco
rre
spo
ndst
o
3y
ear
s,(
n=3
).T
her
efo
re,t
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avet
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omp
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efo
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tgr
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ede
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alu
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rr
.

T
oca
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eth
eva
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f"t
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hee
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1.
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wec
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hee
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n
a
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efo
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oll
ows
:
t=l
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1
1
L
et'
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ugi
nth
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dca
lcu
lat
eit
:
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t≈0
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t≈3
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ear
T
her
efo
re,
thev
alu
eof"
t"i
sap
pro
xima
tel
y3.
130
0.
A
nnu
iti
es
I
nfi
nan
ce,
ann
uit
iesr
efe
rtoas
eri
eso
feq
ualc
ashf
lowso
rpa
yme
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dea
tre
gul
ari
nte
rva
lso
ver
as
pec
ifi
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eri
odo
fti
me.T
hes
eca
shf
lowsc
anb
ere
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vedo
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ido
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epe
ndi
ngo
nwh
eth
ery
ou
a
ret
her
eci
pi
ento
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epa
yero
fth
ean
nui
ty
.
A
nnu
iti
esa
rec
ommo
nlyu
sedi
nva
rio
usf
ina
nci
alc
ont
ext
s,s
ucha
sre
tir
eme
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lan
nin
g,i
nsu
ran
ce,
and
l
oanr
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yme
nt.T
heyp
rov
ideawa
ytoma
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eca
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lowso
vert
imea
ndc
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est
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tur
edi
n
d
iff
ere
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ase
dont
hes
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ifi
cne
edsa
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oal
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vi
dua
loro
rga
niz
ati
oni
nvo
lve
d.
T
her
ear
etwoma
int
ype
sofa
nnu
iti
es:
1
. Or
din
aryA
nnu
iti
es:I
nano
rdi
nar
yan
nui
ty
,th
eca
shf
lowso
ccu
ratt
hee
ndo
fea
chp
eri
od.F
or
e
xamp
le,i
fyo
ure
cei
veamo
nth
lyp
ens
ionp
ayme
nt,i
two
uldb
eco
nsi
der
eda
nor
din
arya
nnu
ity
b
eca
uset
hep
ayme
nti
sma
dea
tth
een
dofe
achmo
nth
.
2
.An
nui
ti
esDu
e:I
nana
nnu
ityd
ue,t
hec
ashf
lowso
ccu
ratt
heb
egi
nni
ngo
fea
chp
eri
od.F
or
e
xamp
le,i
fyo
uma
kemo
nth
lyl
oanp
ayme
nts
,itwo
uldb
eco
nsi
der
eda
nan
nui
tyd
ueb
eca
uset
he
p
ayme
nti
sma
dea
tth
ebe
gin
nin
gofe
achmo
nth
.
A
nnu
iti
esc
ana
lsob
ecl
ass
ifi
edb
ase
dont
hed
ura
tio
noft
hep
ayme
ntp
eri
od.T
heyc
anb
eei
the
rfi
xed
-
t
erma
nnu
iti
es,
whe
ret
hep
ayme
ntsa
rema
def
oras
pec
ifi
cnu
mbe
rofp
eri
ods
,orp
erp
etu
iti
es,
whe
re
t
hep
ayme
ntsc
ont
inu
ein
def
ini
tel
y.
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era
ll
,an
nui
ti
esp
rov
ideas
tru
ctu
redwa
ytoma
nag
ean
dpl
anf
orf
utu
rec
ashf
lows
,an
dth
eyp
laya
s
ign
ifi
can
tro
lei
nva
rio
usf
ina
nci
alp
lan
nin
gan
din
ves
tme
nts
tra
teg
ies
.

F
utu
reVa
lueo
fanA
nnu
ity
A
nor
din
aryo
rde
fer
reda
nnu
ityc
ons
ist
sofas
eri
eso
feq
ualp
ayme
ntma
dea
tth
een
dofe
achp
eri
od.
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fyo
ude
pos
it1
00Bi
rra
tth
een
dofe
achy
earf
ort
hre
eye
arsi
nas
avi
nga
cco
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ent
p
ery
ear
,ho
wmu
chwi
lly
ouh
avea
tth
een
dofy
eart
hre
e(n
=3)
?Toa
nswe
rth
isq
ues
ti
on,
youmu
st
f
indf
utu
rev
alu
eofa
nan
nui
ty
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n.E
achp
ayme
nth
ast
obec
omp
oun
dedo
utt
oth
een
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eri
odn
,
a
ndt
hes
umo
fth
eco
mpo
und
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ayme
ntsg
ive
syo
uth
efu
tur
eva
lueo
fana
nnu
ity
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n.T
hisc
anb
e

1
2
s
hownb
yus
ingt
hef
oll
owi
ngt
imel
in
e.

0 1 2 3
1
00Bi
rr 1
00Bi
rr 1
00Bi
rr
1
1
05.
00Bi
rr=(
100
)(1
.05
)

2
1
10.
25Bi
rr=(
100
)1.
05)
F
VA3=3
15.
25Bi
rr
.

0 1 2 n
F
VAn=P
MT(
1+i
) +P
MT(
1+i
) +P
MT(
1+i
)+--
--
+PMT(
1+i
)
0
I
nth
ise
qua
tio
nth
efi
rstt
erm(
i.
e.P
MT(
1+i
))ist
hec
omp
oun
dedv
alu
eoft
hep
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nta
tth
een
dof
n
-1
l
asty
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earno
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ean
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typ
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il
eth
ela
stt
ermi
nth
eeq
uat
ion(
i.
e.P
MT(
1+i
) )i
s
t
hec
omp
oun
deda
mou
nto
fth
epa
yme
ntma
dea
tth
een
dofy
earo
ne(
n=1
).

T
hea
bov
eeq
uat
ionc
anf
urt
herb
esi
mpl
if
iedt
o:

F
VA=(
n P
MT)( wh
ereP
MTi
sana
nnu
ityp
ayme
ntd
epo
sit
ed,o
rre
cei
veda
tth
e

e
ndo
fea
chy
ear
.
T
hee
qua
tio
nca
nber
e-wr
it
tena
s:

F
VAn=(
PMT
)

Us
ingt
hisf
utu
rev
alu
eofa
nan
nui
tye
qua
tio
n,t
hef
utu
rev
alu
eoft
he1
00Bi
rrd
epo
sit
sma
dea
tth
e
e
ndo
fea
chy
earf
ort
hre
eye
arsa
tani
nte
res
tra
teo
f5p
erc
entwo
uldb
e:

F
VA=(
3 1
00) =(
100
)(3
.15
25)=3
15.
25Bi
rr

E
xamp
le2
:Su
ppo
sey
oup
lant
ode
pos
it$5
00i
ntoa
nin
ves
tme
nta
cco
unta
tth
een
dofe
achy
earf
or5
y
ear
s.T
hea
cco
unte
arn
sana
nnu
ali
nte
res
tra
teo
f6%.T
ofi
ndt
hef
utu
rev
alu
eoft
hisa
nnu
ity
,we
c
anu
set
hef
ormu
lame
nti
one
dab
ove
.

1
3
P
ayme
nt(
P)=$5
00
I
nte
res
tRa
te(
R)=6
%=0
.06(
dec
ima
lfo
rm)
Nu
mbe
rofP
eri
ods(
N)=5
F
utu
reVa
lue=$5
00*[
(1+0
.06
)^5-1
]/0
.06
F
utu
reVa
lue=$5
00*[
1.
338
225-1
]/0
.06
F
utu
reVa
lue=$5
00*0
.33
822
5/0
.06
F
utu
reVa
lue=$2
,81
8
T
her
efo
re,
thef
utu
rev
alu
eoft
hea
nnu
ity
,int
hisc
ase
,wo
uldb
eap
pro
xima
tel
y$2
,81
8.

Ot
herA
ppl
ic
ati
onsF
utu
rev
alu
eofA
nnu
ity
T
hef
utu
rev
alu
eofa
nan
nui
tye
qua
tio
nan
dta
blec
anb
eus
edt
oso
lvef
ort
hei
nte
res
tra
tev
ari
abl
e,
a
swe
lla
sth
enu
mbe
rofp
ayme
ntv
ari
abl
e,i
nth
ema
nne
rth
ati
squ
ites
imi
la
rtot
hatu
sedh
and
ing
c
omp
oun
damo
unt
,si
ngl
epa
yme
ntp
rob
lems
.

F
ind
ingt
heI
nte
res
tRa
te:S
omef
ina
nci
alc
ont
rac
tsa
ndc
ert
aint
ype
sofi
nve
stme
ntsb
ybu
sin
ess
f
ir
msc
anb
ede
scr
ibe
dasy
iel
di
ngaf
utu
res
umi
nte
rmso
fsp
eci
fi
cnu
mbe
rofa
nnu
ity–p
ayme
nt
r
ece
ive
d.T
hei
nte
res
tra
tei
sani
mpo
rta
ntd
ete
rmi
nan
tina
cce
pti
ngo
rre
jec
tin
gsu
cho
ppo
rtu
nit
ies
,
b
uti
tisr
are
lys
tat
ede
xpl
ic
it
ly
.Th
eimp
li
edr
atec
anb
eob
tai
nedb
ytr
eat
ingt
hef
utu
res
uma
sth
e
c
omp
oun
dofa
nnu
ityp
ayme
ntsa
nds
olv
ingf
ort
hei
nte
res
tfu
tur
eva
lueo
fana
nnu
ityt
abl
e.
T
oil
lu
str
atei
nte
res
tra
tec
omp
uta
tio
n,t
hre
eeq
ualp
ayme
ntso
f3,
000Bi
rra
reo
ffe
redi
nre
tur
nfo
r
9
,80
0Bi
rrt
ober
ece
ive
dup
onma
kin
gth
ela
sta
nnu
ityp
ayme
nt.Wh
ati
sth
eimp
li
edi
nte
res
tra
te?

T
oan
swe
rth
isq
ues
ti
on,f
ir
sti
den
tif
yth
eva
ria
ble
sint
hec
omp
oun
din
gan
nui
tye
qua
tio
nth
ata
re
k
nowna
ndp
lugt
hes
ekn
ownv
alu
esi
ntot
hise
qua
tio
n.T
hec
omp
oun
damo
unto
fan
nui
ty
,FVAi
nth
e
i
ll
ust
rat
iona
bov
eis9
,80
0Bi
rra
ndt
hea
nnu
ityp
ayme
ntma
dea
tth
een
dofe
achy
ear
,PMTi
s30
00
Bi
rr
.Su
bst
it
uti
ngt
hes
efi
gur
ein
tot
hee
qua
tio
n,a
nds
olv
ingt
her
equ
ire
dta
blev
alu
e.

F
VAn =P
MT

9
,80
0=3
,00
0

1
4
A
sin
dic
ate
dea
rli
er, i
sth
efu
tur
eva
luei
nte
res
tfa
cto
rfo
rana
nnu
ity
,FVI
FAnf
i
, o
rag
ive
n

i
nte
res
tra
teIa
ndag
ive
nnu
mbe
rofy
ear
s,n
.Tod
ete
rmi
net
hei
nte
res
tra
te,l
ooku
pth
eth
ree
p
ayme
ntr
ow(
n=3
)int
het
abl
efo
rth
eta
blev
alu
est
hati
seq
ual
,orc
los
estt
o3.
266
.Th
eta
blev
alu
e
c
orr
esp
ond
ingt
o9p
erc
enti
s3.
246
,an
dth
eta
blev
alu
eco
rre
spo
ndi
ngt
o9p
erc
enti
s3.
278
.Si
nce
t
hec
omp
ute
dva
lueo
f3.
266l
ie
sbe
twe
ent
hes
etwot
abl
eva
lue
s,t
hei
mpl
ie
din
ter
estr
atei
sgr
eat
er
t
han8p
erc
enta
ndl
esst
han9p
erc
ent
.

F
ind
ingt
heNu
mbe
rofP
ayme
nt:
-Ift
hei
nte
res
tra
te,t
hes
izeo
fth
ede
sir
edf
utu
rev
alu
eofa
n
a
nnu
ity
,an
dth
esi
zeo
fea
cha
nnu
ityp
ayme
nta
reg
ive
n,y
ouc
anc
omp
utet
hen
umb
ero
fpa
yme
nts
r
equ
ire
dtoa
tta
int
hef
utu
res
umo
fana
nnu
ityb
yus
ingt
hef
utu
rev
alu
eofa
nan
nui
tye
qua
tio
nan
d
t
abl
e.

F
ore
xamp
le,h
owl
ongr
equ
irea
nnu
ald
epo
sit
sof1
000Bi
rre
achmu
stb
ema
dei
ntoa
nac
cou
ntt
hat
p
ays6p
erc
enti
nte
res
tco
mpo
und
edy
ear
lyi
nor
dert
oac
cumu
lat
e5,
500Bi
rri
mme
dia
tel
yaf
tert
he
l
astd
epo
sit
? He
re,t
he5
,50
0Bi
rri
sth
efu
tur
eva
lueo
fana
nnu
ity
,an
d10
00Bi
rri
sth
ean
nua
l
p
ayme
ntd
epo
sit
eda
tth
een
dofe
ver
yye
arf
il
lth
ete
rme
nds
.Ify
ous
ubs
ti
tut
eth
efu
tur
esi
ntot
he
f
utu
rev
alu
eofa
nan
nui
tye
qua
tio
n,t
hed
esi
reda
nnu
ityt
abl
eva
luewi
llb
e:

F
VAn =P
MT

5
500 =1
000(
FVI
FAi
,
n)b
eca
use i
seq
ualt
oFVI
FAi
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Dis
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ty
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o
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on,
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0 1 2 3
1
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9
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1
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8
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ort
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e
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P
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a
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nce
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s:
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n),
or

P
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r

1
7
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ide
rat
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i
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res
tra
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ear
s.S
ubs
ti
tut
ing
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hes
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sin
tot
hea
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uge
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ich
wa
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dua
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unt
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alu
edo
nth
eti
me.

P
VA3 =(
100
)

=(
100
)(2
.72
32)
=2
72.
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rr