Contemporary Business Mathematics

With Canadian Applications

Eighth Edition S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston

Chapter 9

Compound Interest—
Future Value and Present Value

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9-1
Finding Periodic Rate of Interest
i= j/m

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Determining Compounding
Factor (1+i)n

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Calculation of Future Value

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Comparison of Simple and
Compound Interest

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Future Value of an Investment
FV = PV(1+i)n

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Finding FV When n Is a
Fraction

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Compound Discount
(continued)

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 Long-term Promissory Notes
•  Term of note longer than one year.
•  Can be bought and sold at any time before
maturity.
•  Subject to compound interest.
•  No requirement to add the 3 days of grace
in determining legal due date.

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Proceeds of Long-term
Promissory Note

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Calculating Proceeds of a Non-
Interest-bearing Note

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 Discounting an Interest-
bearing Note

•  Step 1 -- Find the maturity value of the

note.

•  Step 2 -- Find the present value at the

discount date of the maturity value.

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Finding the Proceeds for an
Interest-bearing Note

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 Finding Equivalent Values
•  Select a focal date. The focal date is a
specific date chosen to compare the time
values of one or more dated sums of money.
•  If the due date of the payment falls before
the focal date, use the FV formula.
•  If the due date of the payment falls after the
focal date, use the PV formula.

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Calculating Equivalent Values

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 Summary
•  With compound interest, earned interest is
added to the principal and thus “interest is
earned on interest” resulting in exponential
growth.
•  The future value of an investment at
compound interest can be expressed by the
formula FV = P(1+i)n .
(continued)
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 Summary
(continued)
•  The present value of a future amount at
compound interest can be expressed by the
formula PV = FV(1+i) -n .

Copyright © 2008 Pearson Education Canada Inc. 9-17

Contemporary Business Mathematics
With Canadian Applications

Eighth Edition S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston

Chapter 10
Compound Interest—
Further Topics

Copyright © 2008 Pearson 10-18

Education Canada
 Objectives
After completing chapter ten, the student will
be able to :

•  Determine the number of conversion periods.

•  Find equated dates.
•  Compute periodic and nominal rates of interest.
•  Compute the effective rate of interest.
•  Compute equivalent rates of interest.

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 10.1 p392 Finding N
•  In how many years •  P/Y 4
will $2000 grow to •  2nd CLR TVM
$2440.38 at 4% •  2000 – press PV
compounded
quarterly? •  2440.38 press FV
•  I/Y 4
•  CPT N
•  But what is N?

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 Equated Date
•  The equated date is the date on which a
single sum of money is equal to the sum of
two or more dated values.

•  Use t = 0 as the focal date when setting up

the equation of value for finding an equated
date.

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 Example 10.1F
•  A loan of $2000 taken out •  PY 12; 2nd CLR TVM
today is to be repaid by a •  FV 1200; IY 12
payment of $1200 in six •  N 6; CPT PV – 1130.45
months and a final
payment of $1000. If •  2000=1130.45+final
interest is 12% payment of 1000 (N?)
compounded monthly, •  PV – 869.55; FV 1000
when should the final •  IY 12
payment be made? •  CPT N 14.048 (months)

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10.2 p400 Finding i and nominal
interest rate
•  Example 10.2A •  PY 1; 2nd CLR TVM
•  What is the annual •  PV – 200; FV 318.77
compounding rate if •  N8
$200 accumulates to •  CPY IY
$318.77 in eight
years? •  6 (annual: be careful!!)

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 10.3 p404 Effective and
Equivalent Interest Rates
•  The effective rate of •  To go from nominal to
interest is the rate of effective:
interest compounded •  2nd ICONV
annually that yields the •  Enter NOM =
same amount of interest
as a nominal rate of •  Arrow down to C/Y =
interest compounded a enter number of times
interest compounds in a
number of times per year
other than one year
•  Arrow up to EFF = and
press CPT

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 Example 10.3A p406
•  Assume you are given a •  2nd ICONV
choice of a term deposit •  NOM 7.2 ENTER
paying 7.2% compounded •  C/Y 12 ENTER
monthly or an investment
certificate paying 7.25% •  EFF = CPT (7.44)
compounded semi- •  2nd CLR TVM (why?)
annually. Which pays •  2nd ICONV
better interest? •  NOM 7.25 ENTER
•  C/Y 2 ENTER
•  EFF = CPT (7.38%)

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 Summary
•  Effective and equivalent interest rates can
be used to compare different nominal rates
with varying compounding intervals.

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Contemporary Business Mathematics
With Canadian Applications

Eighth Edition S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston

Chapter 11

Ordinary Simple Annuities

Copyright © 2008 Pearson 11-27

Education Canada
 Objectives
After completing Chapter eleven, the student
will be able to:
•  Distinguish different types of annuities.
•  Compute the future value(or accumulated
value) FV for ordinary simple annuities.
•  Compute the present value (or discounted
value) PV for ordinary simple annuities.
•  Compute the payment, number of periods,
and interest rate for ordinary simple
annuities.
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What Is an Annuity?

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 Annuity Terminology
•  payment interval - length of time between
successive payments
•  term of an annuity - length of time from the
beginning of the first payment interval to
the end of the last payment interval
•  periodic rent - size of each regular payment
•  annual rent - sum of periodic payments in
one year
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 Types of Annuities
•  Annuities certain -- fixed term
•  Contingent annuities -- indefinite or
uncertain term
•  Perpetuity -- infinite number of payments

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 Examples of Annuities Certain
•  The beginning and ending dates are known.
•  Rental payments for real estate
•  Lease payments on equipment
•  Installment payments on loans
•  Mortgage payments
•  Interest payments on bonds and debentures

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 Examples of Contingent
Annuities
•  Beginning date or ending date or both are
uncertain.
•  Life insurance premiums
•  Pension payments
•  Payments from an RRSP converted into a
life annuity
•  Payments from a trust fund for the
remaining life of a surviving spouse

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 Examples of Perpetuities
•  Payments considered to continue forever.
•  Size of periodic payment less than or equal
to the periodic interest earned by a fund.
•  Scholarship fund
•  University endowment fund

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 Annuities
•  Ordinary annuity -- Payments are made at
the end of each payment period.
•  Annuity due -- Payments are made at the
beginning of each payment period.
•  Deferred -- First payment is delayed for a
specified time period or for a time period
that may have to be calculated.

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 Annuities
•  Simple annuity -- Interest conversion period
is the same as the payment interval.

•  General annuity -- Interest conversion

period and payment interval are not the
same.

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 Ordinary Simple Annuity
•  Payments are made at the end of each
payment interval.(i.e. Ordinary)

•  Interest conversion period and payment

interval are the same.(i.e. Simple)

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Example of Simple Ordinary
Annuity
The interest rate is 6% compounded annually

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Future Value of an Annuity
Rate-6% compounded annually
Annual payments

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 Annuity example
•  You deposit $1000 a •  CLR TVM
month for five years. •  PY 12
Interest is 5%
•  CY 2
compounded semi-
annually. How much •  PV 0
do you have at the •  PMT -1000
end? •  IY 5
•  NOTE: N is number of •  N 12*5=60
payments x number of •  CPT FV 67,917.14
years
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11.3 Present Value Application

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Finding Cash Value: a present
value application
•  A vacation property is bought for $3000 down and
payments of $1000 at the end of six months for 12
years. The interest rate is 7% compounded semi-
annually. Find the cash value (purchase price)

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Example 11.4B p450 Finding the
periodic payment PMT
•  Sometimes we want to •  PY 12
know how to deposit (the
‘PMT’). Leave PMT to
•  CLR TVM
last, and then CPT PMT. •  PV 0
•  You want to have $5000 •  FV 5000
in 3 years. Size of monthly
deposits if interest is 4.5%
•  IY 4.5
compounded monthly? •  N 36
•  CPT PMT -129.98

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11.5 p455 Finding N (the term of
the annuity)
•  Example 11.5 B •  PY 12 CY 12
•  In how many •  PV 0
payments will your •  FV 3000
bank account grow to •  PMT -150
$3000 if you deposit
$150 at the end of •  IY 9
each month and the •  CPT N 18.7
account earns 9% •  About 19 months to
compounded monthly? accumulate $3000

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 Summary

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Education Canada
Contemporary Business Mathematics
With Canadian Applications

Eighth Edition S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston

Chapter 12

Ordinary General Annuities

Copyright © 2008 Pearson 12-46

Education Canada
 Objectives
After completing chapter twelve, the student
will be able to:
•  Compute the future value (or accumulated
value) for ordinary general annuities.
•  Compute the present value (or discounted
value) for ordinary general annuities.
•  Compute the payment, number of periods,
and interest rate for ordinary general
annuities.

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 General Annuity
•  Length of interest conversion period is
different from the length of the payment
interval.
•  In Canada, home mortgages are usually
compounded semi-annually and payments
are often made on a monthly, semi-monthly,
or weekly basis.

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Ordinary General Annuity

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 Using a Preprogrammed
Calculator to Find PV or FV of
an Ordinary General Annuity

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 Example 12.1 G p478
•  Find the FV of $2500 •  PY 2 CY 4
deposited at the end of •  2nd CLR TVM
every six months for •  PV 0
ten years if interest is
6% compounded •  IY 6
quarterly •  N 2*10 = 20
•  Note: PY 2 but CY 4 •  PMT -2500
•  CPT FV (67329.89)

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 Example 12.2C p481
•  A contract is fulfilled •  PY 1 CY 4
by making payments •  2nd CLR TVM
of $8500 at the end of •  FV 0
every year for fifteen
years. If interest is 7% •  IY 7
compounded •  PMT -8500
quarterly, what is the •  N 1*15 = 15
purchase price of the •  CPT PV (76516.38)
contract?

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Find PMT Using the Electronic
Calculator

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 Example 12.3A p484
•  What sum of money •  PY 4 CY 12
must be deposited at •  2nd CLR TVM
the end of every three •  FV 25000
months into an
account paying 6% •  PV 0
compounded monthly •  IY 6
to accumulate $25000 •  N 4*10 = 40
in ten years? •  CPT PMT (459.94)

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 Example 12.4A p488
•  What period of time is •  PY 12 CY 4
required for $125 •  2nd CLR TVM
deposited at the end of •  PV 0
each month at 11%
compounded quarterly •  FV 15000
to grow to $15000? •  IY 11
•  PMT -125
•  CPT N
(81.52) ...what?

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Finding i Example 12.5A p492

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 12.5 B8
•  What is the nominal annual rate of interest
compounded quarterly if a loan of $21,500
is repaid in seven years by payments of
$2000 made at the end of every six months?

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 Summary
•  In an ordinary general annuity, the payment
interval and interest conversion interval do
not coincide.(i.e. General)
•  It is necessary to calculate an equivalent
rate of interest so that the payment interval
and interest conversion interval do coincide.

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