B. For each of the following, use the formula to find the effective rate to the nearest 0.01%.

no
1
2
3
4
5
6
7
8
9
10

Nominal Rate
15 %
17%
19%
14%
12 %
16 %
9%
10%
8%
7 %

Compounded
Semiannually
Semiannually
Quarterly
Quarterly
Monthly
Monthly
Monthly
Monthly
Semimonthly
bimonthly

C. Solve these problems. Show each rate to the nearest 0.01%.

1. Find the true rate of annual interest that is equivalent to 11% compounded monthly.
2. Find the true annual rate of interest that is equivalent to 13.5% compounded bimonthly.
3. Which is better for the depositor: an account that (a) yield 14% compounded monthly or (b)
yields 14.76% compounded annually?
4. Which is better for the investor: an investment that (a) earns 16.08% compounded
semiannually or (b) earns 15.9% compounded quarterly?
5. Find the effective rate of interest for (a) a saving account that earns 8% compounded quarterly
and (b) another that earns 7 % compounded monthly. (c) Which is better for the depositor,
(a) or (b)?
6. Find the effective rate of interest for (a) a checking account that earns 5.3% compounded
monthly and (b) another that earns 5 % compounded daily based on a 360-day year. (c)
Which is better for the depositor, (a) or (b)?
7. A company plans to earns on its investments an average of 11.5% compounded monthly.
Would an investment that pays 12% compounded annually provide a yield that is smaller
than,equalto, or larger than the desired average.
8. The financial officer of Golden Capital Corporation hopes to average 14% compounded
annually on company investmant that yields 13.5% compounded quarterly be larger than,
equal to, or smaller than the desired average?
9. A deposit if $6,000 was made into a saving account that paid interest at 6% compounded
monthly. After three years, the rate was changed to 7% compounded daily based on the 360day year. (a) How much would be in the account 8 weeks after the new rate started? (b) what
was the effective rate in the beginning? (c) What was the effective rate after the rate changed?
10. A $10,000 certificate of deposit earned interest at 12% compounded monthly for 2 years. The
certificate proceeds were then placed in a60-day account that paid 14% interest compounded
daily based on the 360-day year. (a) What was the compounded amount when the 60-day
account matured? (b) What effective rate did the certificate earn? (c) What effective rate did
the account pay?

Computing Present Value at Compound Interest

The present value of a compound amount that is due sometime in the future is the
principal which, invested now at a given rate per period, willl grow to the compound amount.
If invested at 6% interest compounded semiannually, the value of $1 grows to $1.0609 in one
year. From a different perspective, one may say that the present value of $1.0609 is $1. Of
course, because money has earning power, its future value is greater than its present value.
Computing present value at compound interest answer tjis question: What principal
invested now (or presently) at a given rate for a certain length of time will yield a specific
compound amount?
Compound discount is the difference between a compound amount and its present
value. In other words, compound interest on the present value of an investment is the same as
the compound discount on the maturity value (compound amount) of that investment. For
example, if $9,057.81 (present value) is invested at 8% interest compounded quarterly, it will
grow to $20,000 (compound amount) in ten years. In the example, the compound discount is
$10,942.19($20,000-$9,057.81).
Using a Present-Value Table. The following example reveals how to find the present
value of an amount by multiplying the present value of 1 ( found in a table) by the amount. To
facilitate finding the present value of amounts, tables that show the present value of 1 at
various rates for numerous periods have been prepared.
To find the present value of a compound amount by using Table 10-2, follow this procedure:
1. Find in the table the present value of 1 at the periodic rate for the number or periods
to maturity.
2. Find the present value of the amount by multiplying the present value of 1 by the
amount.
Example A:

Use Table 10-2 to find (a) the principal that will amount to $5,000 in 2 years at 12%
compounded quarterly and (b) the compound discount on the amount.

Solution:

(a) 8 periods at 3% = 0.78940923

0.78940923 x $5,000 = $3,947.05
(b) $5,000 - $3,947.05 = $1,052.95

present value of 1
present value of $5,000
compound discount

Present value is the principal (P) of a compound amount (S). The compound amount
formula,therefore, can be used to find present value:

If P ( 1+i )n=S
then P=

S
n
(1+ i)
Of course, the formula can be used for any rate of interest and for any period of time.

Recall that
Example :

r
m .

i=

Vicki Dimopoulos owes $12,000, the maturity value of a note that will be due in 2
years. If money is worth 11.5% compounded monthly, what is the present value of
this note?

P=

Solution :

P=

0.115

S
n
(1+i )

12,000
0.115 24
(1+
)
12

24 = 2 x 2 x 3

12+1 ====

M+ 12000

MR =

9544.8688, means

$9,544.87
EXERCISE 10-5
No
1
2
3
4
5
6
7
8

A. Use table 10-2 to find (a) the present value and (b) the compound discount
for each of the following.

Amount
$2,000
3,500
475
1,360
980
4,600
8,295
17,400

Rate
11%
16%
14%
12%
8%
12%
10%
6%

Time
10 years
5 years
15 years
2 years
20 years
7 years
25 years
4 years

Compounded
Annually
Quarterly
Semiannually
Monthly
Semiannually
Quarterly
Annually
Monthly

B. Solve these problems.

1. if money is worth 9% compounded annally, find (a) the present value of $24,000 due in 8
years and (b) the compound discount.
2. Find (a) the present value and (b) the compound discount of $28,500 due 10 years from now
if money is worth 12% compounded quarterly.

3. Find the present value that must be deposited now to amount to $24,500 in 5 years at 8%
compounded quarterly.
4. The compound amount of 1 is 1.282432 for a certain period of time in a savings account.
How much principal must be placed in the account now to amount to $30,000 at the end of
that period of time?
5. An investment made 7 years ago has accumulated to $32,500. How much was invested
originally if the 13% interest has been compounded semiannually.
6. Lee Trusler borrowed some money 5 years ago at 15% interest compounded semiannually.
She paid $6,700 on the due date to cover the principal and interest. How much did she
borrow?
7. Bruce Williams holds a note that calls for the payment of $75,000 plus interest at 11.5%
compounded semiannually. He has offered to sell the note, which is due in 15 years,
forpresent value based on 13% interest compounded quarterly. Find the selling price of the
note.
8. Roberta Page borrowed $60,000 by promising to repay it in 12 years with interest at 11.75%
compounded annually. Four years later she inherited $100,000. How much of her inheritance
should she invest at 11.24% compounded semiannually to have just enough to pay off the
debt when it falls due?

ANNUITIES
In the preceding part of this chapter, compound interest on a single sum of money is
considered. In this part of the chapter , compound interest is applied to a series of equal
payments that are made on the interest conversion date.
An annuity is a sequence of usually equal payments made at regular intervals of time.
Individuals or institution that want to save money or to eliminate debts may do so by making
payments regularly , such as monthly , quarterly, semiannually , or annually. Thus , regular
deposits into a saving account , payments of bond interest, installments on a mortgage , and
payments from life insurance are but a few examples of annuities.
The time between the succesive payments is the payment interval or payment period.
The time between the first payment period and the last payment period is the term of the
annuity.
When classified by term, annuities fall into three categories: contingent annuities,
annuities cartain , and perpetuities. A contingent annuity has an indefinite term. It is an
annuity for which the beginning or end of the sequence of payments, or both, happen to be
contingenton some specified condition that cannot be predicted accurately. For example,
payments made to the beneficiary of a life insurance policy form a contingent annuity because
the beginning of the payments depends on the death of the insured. An annuity certain is one
for which the term begins and ends on definite dates. Thus , payments on a mortgage are an
annuity certain. A perpetuity is an annuity in which the payments continue forever, such as the
interest payments on perpetual bonds.
Two important kinds of annuities certain are ordinary annuities and annuities due. In
an ordinary annuity, the payments are made at the end of each period. Conversely, the
payments are made at the beginning of each period in an annuity due.

ORDIN ARY ANNUITY

The amount of an annuity is its accumulated value at the end of its term. It is a
compound amount that includes the principal and the accumulated compound interest on a
series of deposits. Notice figure 10-1 and the example which follows.
Figure 10-1 amount of an ordinary annuity

1
$100

$100

$100

4
JUM
LA
Bunga majemuk waktu 1 H
$100

Bunga majemuk waktu 2

Bunga majemuk waktu 3

Example :

For the past year, Zelma newsome has deposited $100 at the end of each month in a
savings account that pays 12% interest compounded monthly. Find (a) the amount
and (b) the compound interest in the account at the end of the fourth month.

Solution :

(a) Payment at end of first month .................................................................$100.00

Interest for second month ($100 x 0.01)..................................................................1.00
Payment at end of second month..........................................................................100.00
Amount at end of second month........................................................$201.00
Interest for third month ($201 x 0.01)................................................................2.01
Payment at end of third month........................................................................ .100.00
Amount at end of third month............................................................$303.01
Interest for fourth month ($303 x 0.01)..............................................................3.03
Payment at end of fourt month.........................................................................100.00
Amount at end of fourth month..........................................................$406.04

(b) $406.04 (4 x $100) = $6.04

compound interest

Finding the amount of an ordinary annuity by using an annuity table. Tables

have been prepared that show the accumulated value (amount) of different series of 1
investment at various rates of interest. To find the amount of an ordinary annuity by
using table 10-3 follow this procedure:
1. Find in the table the accumulated value of a series of 1 deposits
compounded at the periodic rate for the number of periods in the
annuity.
2. Find the amount of the ordinary annuity by multiplying the amount
found in step 1 by the periodic payment.