ak st paid on lst payment-#6 ,400(0.04)=P256 rest ‘paid on 2nd payment= 6,000(0.04)= 240 Interest paid on 3rd payment= 5,600(0.04)= 224 Interest paid on 16th payment= 400(0.04)= 16 Total interest paid=B256+240+224+...+16. This is an arithmetic progression whose sum is B(w2se + 16) = B2,176. Total amount paid = principal + interest = BO,400 + B2,176 = P8,576. Ans. 3-10. EXAMPLES ON COMPOUND INTEREST, 3-06. If the sum of 12,000 is deposited in an account earning interest at the rate of 9% compounded quarterly, what will it become at the end of 8 years? SOLUTION: 9 pep12,000; i - B -2.25%620.0225; neBxu32; Po? = P (B/P,i%,n) = Pl + i)? 2 = 12,000(1 + 0.0225)74 « 12 ,000(2.03810303) 2 po4,457-24 Ans. ,3-07. At-a certain interest rate compounded quarterly, 21,000 will amount to B4,500 in 15 years. What is the amount. at the end of 10 years? ee ee ee ee SOLUTION: sR i - ay For 15 years, P=81,000; ‘F = 24,500; n=15x4 = 60. Fis PCB/P,i%n) ~ “4,500= 1,000(144)©° a ore (1 + 1)?,- 4.5 Led = (4,5)1769_ 102538 | 1=0.02538=2.538%/quarter For 10 years, n= 10x4= 40 P oR P1,000(1.02538)"° - 22,725.68 Ans. 3-08. A man possesses a promissory note, due 3 years hence, whose maturity value is B6,700.48. If the rate of interest is 10% com- pounded Qnegern | what is the value of this note now? SOLUTION: : ac + 0% cay" oe F2P6 700.48; i= 5% =5%<0.05; n= 3x2 = 6; Pa? P= F(P/F,i%,n) = F(l + i) P = B6,700.48(1+0.05) ~°=6 ,700-48(0.7462 1540) " 25,000.00. Ans. eosFor 12.5% compounded annually, Effective rate = 12.5% Thus, 12% compounded monthly is better. Ans, 3-13. Find the nominal rate compounded monthly which is equivalent to 12% compounded quarterly. What is the corresponding effective rate? _. SOLUTION: Let i = rate of interest per month, which will correspond to 3% quarterly. Thus, | (1 + 4)? = @ + 0.0394 L+ai = (1.03) - 1.0099. i 2 0.0099 Nominal rate = 12i = 0.11882 F 11.882% compounded monthly. Ans. Effective rate = (1.03)*-1-0.12551-12.551%,. Ans. Also, effective rate = (1.0099)2@_1 = 12.55%, 3-14. Calculate the effective rate corres- ponding to each of the following interest rate: (a) 9% compounded semi-annually; (b) . 9% compounded quarterly; (c). 9% compounded bi-monthly; (d) 9% compounded monthly; ‘ (e) 9% compounded daily. ~ SOLUTION: (a) Effective rate=(1+ $392)? 1-0.092025 or 9.2025%SS Se er ee (b) For interest compounded monthly, i= i = 1.25%=0.0125; 10 years=120 periods, and 6 years = 72 periods. In this case, (1.0125)72° x Xx P1,000(1.0125)7”" 1,000(1.0125)8-21 815.35. Ans. u “3-UL. If B1,000 becomes P1,811.36 after 5 years when invested at an unknown rate of interest compounded bimonthly (every two months), deter- mine the unknown nominal rate and the correspond- ing effective rate. SOLUTION: P = B1,000; F = P1,811.36; n = 5x6 = 30; i =? F = P(1+i)™ 1,811.36 = 1,000 (1 + i)%° (214i)? = 1.81136 lei = (2.81136)173° = 1,02 i = 0.02 = 2% per period q Nominal rate=6i = 12% compounded bimonthly. Ans. 7 Effective rate = (1502)°-1 = 0.12616 = 12.616%.: Ans. 3-12. If you are investing your money which is better: 12% compounded monthly or 12.5% com- pounded annually? SOLUTION: Compare the effective rates; For 12% compounded monthly, Effective ratex(1+ 2:3)1°-1 = 0.12685 = 12.683%3-09. The expansion plan of a business : quires the purchase of a parcel of land. o; which to build a structure, which they will neeqg 5 years hence. The current costs are: land, B1,000,000; building, 23,500,000. Since these are not needed immediately, the firm plans to de- fer the purchase of the land and construction of the building until they are needed. If the value of land and the cost of the building are expected to appreciate at the rates of 20% and 8% per annum, respectively, what will be the total cost of the land and structure 5 years hence? SOLUTION: The costs 5 years hence will be: Land: ; 21,000,000(1.20)?= 2,488, 320.00 Building: 3,500,000(1.08)?= 5,142,648.27 Total cost 5 years hence = B27 ,630,968.27Ans. Y3-10. What payment X 10 years from now is equivalent to a payment of $1,000 6 years from now, if interest is 15% compounded (a) annually, and (b) monthly? SOLUTION: (a) For equivalence of the two payments, equate their present values. Present value of X = (1.15)71x, present value of 21,000 = 1,000(1.15)> (2.15)72°x 1,000(1.15)-6 x 1,000(1.15)*=21,749.01. ADs(b) Effective rate=(1+ 2:09)4 1 - 0.093083 or 9.3083%. (c) Effective rate=(1+ 2:09)6_1 _ 9, 093443 or 9.3443%, (4) Effective rate=(1+ 9*99)12_1 ~ 9.093807 or 9.3807% (e) Effective rate=(1+ a = 0.094162 or 9.4162%. 3-15. Compare the accumulated values at the end of 10 years if ®100 is invested at the rate of 12% per year compounded annually, semi- annually, quarterly, monthly, daily and con- 310.58 . &) tinuously. SOLUTION: We use the formula: F = P(1 + i)”. Annual compounding: F=P100(1+0.12)19 zB Semi-annual compounding: F=P100(1+ O12 520. 320.71 Quarterly compounding: F=P100(1+%22)"° - 326.20 Nonthly compounding: F=P100(1+2=22)19_ 330. o4 Daily compounding : PoP 100(1+2528)7070. 331.95 Continuous compounding: F=-#100e0*12(10) 332.01 Note that the accumulated amount increases as the length of the interest period becomes smaller.ired for 3-16. How many years are require B1,000 to increase to B2,000 if aayenu eee 9% per year compounded annually, semi-annua, iy; quarterly, monthly, daily, and continuously? , SOLUTION: P = 81,000; F = 82,000. Annual compounding: P2,000=P1,000(1.09)"; (1.09)™ = 2. ‘ ni Ss = 8.04 years. Ans. Semi-annual compounding: 22 ,000=21,000(1+ 2302)9; (1.045)" = 2. n = 15.75 half-years = 7.87 years. Ans. Quarterly compounding B2 ,000=P1,000(1+ 2509)2, (1 9225)" = 2 n = 31.15 quarters = 7.79 years. Ans. Monthly compounding: 2 ,000-B1,000(1+ 299)2, (4 9075)7 = 2, n = 92.77 months = 7.73 years. Ans.- Daily compounding: = 4, 0.0 P2 ,000=P1 ,000(14 oop)", (10002466) = 2 n = 2,811.44 days = 7.703 years. Ans. Continuous compounding: | F = Pe? ' B2,000 = P1,000e9-092 , ,0.09n_ ae ae 0.09n = 1n2; ne 7.702 years. Ansa oe . The accumulated amount in the fund right : after the sixth deposit will be F=2 ,000(1.10)7+1,800(1.10)"+1 ,600(1.10)? + 1,400(1.10)®+1 ,200(1.10)41 ,000 3 221.0242 ,635.38+2 129.6041 ,694.00 + 1,320.00 + 1,000.00 P12,000.00. Ans. W ¥ 3-20. A man wishes to bequeath to his son 220,000 ten years from now. What amount should h invest now if it will earn interest of 8% com- pounded annually during the first 5 years and 12% compounded quarterly during the next 5 years? SOLUTION: F -20,000 P, Q Oo Ff 2 3 4 5 6 7 8 9 10 Years Sperlods 20 periods; | = 3% Fig. 3-02. Let P = amount invested now, Q = amount in the fund at the end of 5 years. Q = P(1 + 0.08)? = (1.08)°P P = Q(1+ 0.03)°.= (1.03)2q 220,000 = (1.03)°°. (1.08)°P P -20 " 20 ,000(1.03)7*°(1.08)7? 37,536.45 Ans. ;. “3-21. A company expects to retire an . existing machine at the end of 1982 and will re- place it with a new machine for the same task at an-estimated cost of 260,000. The old machine is expected to be sold for #5,000 when it is re- placed. To provide for replacement, the company intends to deposit the following amounts in an account earning interest at 8% compounded quar- terly: 20,000 at the end of 1979, P15,000 at the end of 1980, B10,000 at the end of 1981. What additional amount is needed at the end of 1982 to purchase the new machine? SOLUTION: P5,000 1979 '9]82 YEARS QUARTERS P10,000 P15,000 20,000 Fig, 3-03, Deposits in the replacement fund, Let Q be the amount needed at the end of 1982. Considering that interest is compounded quarterly, the equation of value with the end of 1982 as the valuation date is 2 220,000(1.02)+ + B15,000(1.02)8 4 P10,000(1.02)* + B5,000 +.Q = P60,000 B25 , 364.84 + 174974-89+10 ,824..32+5 ,000+9=60,000 Q = P1,235.95 ans.VY 3-23. A debt of 215,000 was paid for as follows: 84,000 at the end of 3 months, #5,000 av che end of 12 months, #3,000 at the end of — 15 months, and a final payment F at the end of 21 months. If the rate of interest was 18% com- pounded quarterly, find the final payment F. SOLUTION: Months Periods 3,000 Fee 5,000 Fig. 3-05. Cash flow for repayment of loan. Here, each period consists of 3 months, and 9) is 18% _ 4.5%. We equate the sum of the present values of all payments to the amount of the loan, 215,000. Thus, = < 2 P4,000(1.045)7 4P5,000(1.045)~ "43 ,000(1.045)79 + F(1.045)7? = 215,000 F215 ,000(1..045)74,0000,.045)°-5 ,0000..045)2-3,000 (1.045) 20 ,412.93-5 ,209.04-5 ,705.83-3 ,276.08 PG 221.98 Ans. W