Compound Interest

• Work a program where $1000 is deposited for 3 years at 5%
• Do it for 3 years, but compounded annually
• Talk about compound interest formula.
• Talk about annually, quarterly, monthly, daily, ...
• A = P(1+r/n)^(nt)
• Do problems 7,8,9,13 page 675

• P = A/(1+r/n)^(nt)
• Do problems 15, 16, 17 page 675

• Do problems 19,25 on page 675

• Effective Annual Yield is the simple interest rate that gives the same amount of interest as the compound interest rate.
• Use A=p(1+r/n)^(nt) to find A, p = $1, t = 1
• r = A-1
• Do problem 30 page 676

Sinking Funds and Annuities

• An annuity is an account into which, or out of which, a sequence of scheduled payments are made.
• This is different from the problems above as we do not make regular payments in the above problems.
• This is:
  • Saving for retirement (you pay each month)
  • Spending out a retirement account (you get money each month).
  • A structured settlement (you get money each month)
  • Huge Lottery Winnings (you get money each month)
• A = p[(1+r/n)^(nt)-1]/(r/n)
• p = A(r/n)/[(1+r/n)^(nt)-1]
• Do problems 10, 13, 17 page 714-715