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n
j
1 1
r m
t
1
j m 1 rt n 1
What simple interest rate is equivalent to
6.75% compounded semi-annually in a 2-
year transaction?
Required: r = ?
Solution: j
n
1 1
m
r
t
4
0.0675
1 1
2
r 0.0710 7.10%
2
Answer: A simple interest rate of 7.10% is
equivalent to a nominal rate of 6.75%
compounded semi-annually.
What nominal rate compounded semi-
annually is equivalent to 3.5% simple
interest rate in a 3-year transaction?
Required: j = ?
Solution:
1
j m 1 rt 1
n
1
j 2 1 0.035(3) 6 1 0.0336 3.36%
n
j
1 1
d m
n
j
t 1
m
1
1 n
jm 1
1 dt
What simple discount rate d, is equivalent
to 11.25% compounded quarterly in a 1-
year transaction?
Required: d = ?
n
Solution: j
1 1
m
d n
j
t 1
m
4
0.1125
1 1
4
d 4
0.1050 10.5%
0.1125
1 1
4
Required: j = ?
Solution:
1
1 n
jm 1
1 dt
1
1 24
j 12 1 11.84%
1 (0.105)(2)
Answer: A nominal rate of 11.84% compounded
monthly is equivalent to 10.50% simple discount rate.
What is the nominal rate that, if compounded
semi-annually, is equivalent to the accumulated
simple interest rate of 7% in an 8-year
transaction?
Payment / s Obligation / s
STEPS:
1.Draw a time diagram specifying the periods
Payment / s Obligation / s
Mrs. Cabrera borrowed P15,000 from EOL Lending
Corporation due in 5 months with accumulated
interest from present at 10% compounded monthly.
Three months before the loan is due, Mrs. Cabrera
received her stock dividends from her investments.
She decided to pay her debt on the same day she
received her dividends. How much should she pay
EOL Lending Corporation if the value of money at
that time is 6.5% compounded semi-annually? Use
the present time (t=0) as comparison date.
Different interest rates are applied during
the entire term of investment.
Maturity value at the preceding rate is
computed first before applying the
subsequent rate.
Maturity value at the previous rate is used
as the principal or present value of the new
rate.
Example 2.17
An investor placed P100,000 in a fund that
pays 10% compounded semi-annually for
the first five years, 8% effective for the next
five years and 8% compounded quarterly
for every year in excess of ten years. If the
money was invested for 12 years, how
much was in the fund at the end of the
term?
Interest that is compounded frequently such
as everyday, every hour, every minute or
every second.
Slightly increases the compound amount.
F = Pejt
F = compound amount
P = principal
j = nominal rate that is compounded continuously
t = term
e = a constant whose value is approximately equal to 2.71828
F = Pejt
F = compound amount
P = principal
j = nominal rate that is compounded continuously
t = term
e = a constant whose value is approximately equal to
2.71828
Exercise 2.18
Find the amount of a P10,000 investment at the
end of 4 years if it is invested at a rate of 5.5%
compounded continuously.