The Mathematics of Money

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

2. 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

3. 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)