The Mathematics of Money

(Darren Dugan) #1
122 Chapter 3 Compound Interest

used to develop our formulas, and we could use exactly the same reasoning in each of these
cases. Thus, it is mathematically legitimate to use the compound interest formula in these
cases. The following example will illustrate:

Example 3.3.10 Using the information given above, fi nd the current suggested
retail price of TWS-42 sneakers.

FV  PV(1  i)n
FV  $75.49(1.048)^7
FV  $104.81

The “future value” here represents the current price, so we conclude the current retail price
is $104.81.

It is left as an exercise (Exercises 29 to 31) for the reader to work out the other three
examples.
In this book, we will usually distinguish actual interest from situations such these which
are analogous to, but not really the same as, interest. We will use the more generic terms
growth rate and compound growth when the growth may not actually be interest. You
should be aware, though, that in practice people are often not so precise, and the terms
“interest” and “interest rate” will often be used for things that really aren’t. While this is an
abuse of terminology, it is a mostly harmless abuse, and in business it is just an unspoken
assumption that everyone understands the real deal.

EXERCISES 3.3


A. Comparing Interest Rates

Don’t be afraid to do calculations to answer these questions, but try to avoid doing calculations that aren’t really necessary.


  1. Luis is shopping around for the best rate on a deposit account. Which of the following is offering the best rate?


Bank Rate Compounding
Lockport National 5 .07% Monthly
Brockport Mutual 5.15% Monthly
Rockport Savings and Loan 5.09% Monthly


  1. K.T. is shopping around for the best rate on an auto loan. Which of the following is offering the best rate?


Bank Rate Compounding
Whitney Point National 8.37% Daily
McGraw Mutual 8.11% Daily
Homer Savings and Loan 8.08% Daily


  1. Robinson plans on opening a new savings account. Which of the following is offering the highest rate?


Bank Rate Compounding
Bank A
Bank B
Bank C

2.44%


2.44%


2.44%


Quarterly
Monthly
Daily (Bankers Rule)
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