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Chapters 5, 7
Chapters 5, 7
Chapters 5, 7 Savings Plans
Savings Plans
Savings Plans
Regular Savings Plan
Regular Savings Plan
A series of payments made over time. !
A series of payments made over time. !
Regular Savings Plan A series of payments made over time. ! The amount you now have

The amount you now have will generate interest. !

time. ! The amount you now have will generate interest. ! The fixed amounts added on
The fixed amounts added on a regular basis will also earn interest.
The fixed amounts added on a regular basis will
also earn interest.
• Example 5.1: Regular savings plan I ! An one - year regular savings plan

Example 5.1: Regular savings plan I !

• Example 5.1: Regular savings plan I ! An one - year regular savings plan which
An one - year regular savings plan which o ff ers an annual interest rate
An one - year regular savings plan which o ff ers
an annual interest rate i ( 12 ) = 3.87 % . !
o ff ers an annual interest rate i ( 12 ) = 3.87 % . !
o ff ers an annual interest rate i ( 12 ) = 3.87 % . !

We open an account on Jan 1 with $ 0 balance. !

% . ! We open an account on Jan 1 with $ 0 balance. ! We

We make an installment of $ 500 into the savings account at the end of each month, starting from January 31. !

savings account at the end of each month , starting from January 31. ! How much
savings account at the end of each month , starting from January 31. ! How much
How much will we get on Dec 31 of the same year?
How much will we get on Dec 31 of the same
year?

Jan 1

Jan 31

Feb 29

Dec 31

 
         
         

 

0

 

1

 

2

12

 
  …
 

$

0

$

500

$

500

$

500

i

3.87 %

A

n

$

500

12 periods

12 periods

i 3.87 % A n $ 500 12 periods P $ 0 r i^ ( 12
i 3.87 % A n $ 500 12 periods P $ 0 r i^ ( 12

P

$

0

r

i^ ( 12 ) / 12

P 0 = 0

P 1 = A

P 2 = P 1 (1 + r ) + A

P 3 = P 2 (1 + r ) + A

When the account was just opened, Jan 1.⇥ (1 + r ) + A P 3 = P 2 ⇥ (1 + r

After 1 month, Jan 31.(1 + r ) + A When the account was just opened, Jan 1. After 2

After 2 months, Feb 28.

Jan 1. After 1 month, Jan 31. After 2 months, Feb 28. . . . P

.

.

.

P ` = P ` 1 (1 + r ) + A

.

.

.

P n = P n 1 (1 + r ) + A

After 12 months, Dec 31.

` = P ` 1 ⇥ (1 + r ) + A . . . P
• Mathematical model: 8 9 > P 0 = $0 > > > > >
• Mathematical model:
8
9
>
P 0
= $0
>
>
>
>
>
>
i (12)
= 3 . 87%
>
>
>
>
>
<
=
i (12)
r
=
12
! P n
>
n =
12
>
>
>
>
>
>
>
>
A = $500
>
>
>
:
;
P `
= P ` 1 (1 + r ) + A,
` = 1, 2 ,
,n
• Example 5.2: Regular savings plan II ! Consider a savings plan of 12 installments,

Example 5.2: Regular savings plan II !

• Example 5.2: Regular savings plan II ! Consider a savings plan of 12 installments, with
Consider a savings plan of 12 installments, with the fixed interest rate i ( 12
Consider a savings plan of 12 installments,
with the fixed interest rate i ( 12 ) = 3.87 % . !
with the fixed interest rate i ( 12 ) = 3.87 % . ! We have
with the fixed interest rate i ( 12 ) = 3.87 % . ! We have

We have to make the 1 st installment when we open the account, say, on Jan 1; the 2 nd installment will be made on Jan 31, and then regularly pay the same amount on the last day of each month for 12 times. !

same amount on the last day of each month for 12 times. ! If the installment
same amount on the last day of each month for 12 times. ! If the installment
same amount on the last day of each month for 12 times. ! If the installment
same amount on the last day of each month for 12 times. ! If the installment
same amount on the last day of each month for 12 times. ! If the installment

If the installment amount is $ 500, how much will we get on Dec 31 of the same year?

day of each month for 12 times. ! If the installment amount is $ 500, how

Jan 1

Jan 31

Feb 29

Nov 30

Dec 31

           

 
 
 

0

 

1

 

2

11

12

 
 

  …  
 

$

500

$

500

$

500

$

500

$

0

In total, 12 installments were paid. ! We didn’t have to pay for Dec 31, since we have already paid on Jan 1.

Initial principal is not zero in this example, since we make 1 st installment when
Initial principal is not zero in this example, since we make
1 st installment when we open the account.
8
9
>
P 0
= $500
>
> >
>
>
>
i (12)
= 3 . 87%
>
>
>
> >
>
>
>
i (12)
>
<
r
=
=
12
n =
12
! P n
>
>
>
>
A = $500
> >
>
>
> >
>
>
>
= P ` 1 (1 + r ) + A,
` = 1, 2 ,
,n
1
>
P `
> >
:
;
P n
= P n 1 (1 + r )
Since we’ve paid 1 st installment when we opened the
account, we can skip the last installment. In total, n = 12
installments were made throughout the plan period.
Cyclic & Irregular Plans
Cyclic & Irregular Plans
New type of savings plans, where installments are not paid on a regular basis. !
New type of savings plans, where installments
are not paid on a regular basis. !
where installments are not paid on a regular basis. ! Customers enjoy greater financial flexibility and

Customers enjoy greater financial flexibility and the money in the account earns interest even though you do not make regular monthly payments.

financial flexibility and the money in the account earns interest even though you do not make
• Example 7.1 ( Cyclic plan, 4 months per cycle ) : ! Open an
• Example 7.1 ( Cyclic plan, 4 months per cycle ) : ! Open an

Example 7.1 ( Cyclic plan, 4 months per cycle ) : !

Example 7.1 ( Cyclic plan, 4 months per cycle ) : ! Open an account on
Open an account on Jan 1, and immediately deposit HK $ 1,000; !
Open an account on Jan 1, and immediately
deposit HK $ 1,000; !
an account on Jan 1, and immediately deposit HK $ 1,000; ! Then, make an installment

Then, make an installment of $ 500 at the end of every month, except April, August, and December. !

end of every month, except April, August, and December. ! If the annual interest rate is
end of every month, except April, August, and December. ! If the annual interest rate is

If the annual interest rate is 2.78 % , what will be the balance after 3 years?

interest rate is 2.78 % , what will be the balance after 3 years ? 𝓵
interest rate is 2.78 % , what will be the balance after 3 years ? 𝓵
𝓵
𝓵

1

2

3

4 5 6 7 8 9 10 11 12
4
5
6
7
8
9
10
11
12
Jan 1 Jan 31 Feb 29 Mar 31 Apr 30 May 31 … Dec 31
Jan 1
Jan 31
Feb 29
Mar 31
Apr 30
May 31
Dec 31
0
1
2
3
4
5
12
$
1000
$
500
$
500
$
500
$
0
$
500
$
0
This pattern repeats itself for 2 more years.
8 9 > P 0 = $1 , 000 > > > > > >
8
9
>
P 0
= $1 , 000
>
> >
>
>
>
A = $500
>
>
>
>
>
>
>
i (12)
= 2 . 78%
> >
<
=
i (12)
r
=
! P n
>
12
>
> >
>
n = 12 ⇥ 3 = 36
>
>
>
>
>
>
>
P `
= P ` 1 (1 + r ) ,
` = 4 , 8 , 12
,n
>
> > >
:
,
otherwise .
;
P `
= P ` 1 (1 + r ) + A,
• Example 7.2 ( Irregular Plan ) : ! Open an account on Jan 1
• Example 7.2 ( Irregular Plan ) : ! Open an account on Jan 1

Example 7.2 ( Irregular Plan ) : !

• Example 7.2 ( Irregular Plan ) : ! Open an account on Jan 1 and
Open an account on Jan 1 and immediately deposit an initial amount of $ 2,000.
Open an account on Jan 1 and immediately deposit
an initial amount of $ 2,000. !
1 and immediately deposit an initial amount of $ 2,000. ! Make an installment of $

Make an installment of $ 500 at the end of each month for 3 years, except for the prime number months, i.e., the 2nd, 3rd, 5th, etc. !

the prime number months, i.e., the 2nd, 3rd, 5th, etc. ! If the rate is still
the prime number months, i.e., the 2nd, 3rd, 5th, etc. ! If the rate is still
the prime number months, i.e., the 2nd, 3rd, 5th, etc. ! If the rate is still

If the rate is still 2.78 % , how much will we have after 3 years?

is still 2.78 % , how much will we have after 3 years? 𝓵 1 2
𝓵 1 2 3 4 5 6 7 8 9 10 11 12 13 14
𝓵
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
𝓵
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
• A prime number is an integer larger than one and is divisible only by
A prime number is an integer larger than one
and is divisible only by itself and one. !
Prime numbers less than 100: !
by itself and one. ! • Prime numbers less than 100: ! • 2, 3, 5,
by itself and one. ! • Prime numbers less than 100: ! • 2, 3, 5,

2, 3, 5, 7, 11, 13, 17, 19, 23, 29, 31, 37, 41, 43, 47, 53, 59, 61, 67, 71, 73, 79, 83, 89, 97

less than 100: ! • 2, 3, 5, 7, 11, 13, 17, 19, 23, 29, 31,
Jan 1 Jan 31 Feb 29 Mar 31 Apr 30 May 31 … Dec 31
Jan 1
Jan 31
Feb 29
Mar 31
Apr 30
May 31
Dec 31
0
1
2
3
4
5
12
$
2000
$
500
$
0
$
0
$ 500
$
0
$ 500
Note: This pattern does not repeat itself.
8 9 > P 0 = $2 , 000 > > > > = 2
8
9
>
P 0
= $2 , 000
>
>
>
>
= 2 . 78%
> >
>
>
>
>
i (12)
>
>
>
>
<
12
=
! P n
>
n = 12 ⇥ 3 = 36
A = $500
>
> >
>
>
>
>
>
P `
= P ` 1 (1 + r ) ,
if ` = 1, 2
,
,n
>
>
>
>
>
>
>
>
and is prime
>
> >
:
;
P `
= P ` 1 (1 + r ) + A,
otherwise .

>

>

>

i (12)

> > > i ( 1 2 )

>

r

=

>

• Suppose that we have the following function to check whether a number is prime:
Suppose that we have the following function to
check whether a number is prime: !
! isPrime( ` ) = (
1 , if ` is a prime number
0 , if ` is not a prime number
Then, the model can be rewritten as:
8
9
>
P 0
= $2 , 000
>
>
>
>
>
>
i (12)
>
>
= 2 . 78%
>
>
>
>
>
i (12)
<
=
12
n = 12 ⇥ 3 = 36
! P n
>
>
>
>
>
A = $500
>
>
>
>
>
> >
>
>
P `
= P ` 1 (1 + r ) + A ⇥ (1 isPrime( ` )) >
>
:
;
for ` = 1, 2 ,
,n

>

r

=

>

User defined EXCEL function

User defined EXCEL function Function IsPrime(number) ! Dim j, k, r As Integer ! If number

Function IsPrime(number) ! Dim j, k, r As Integer ! If number = 1 Then ! IsPrime = 0 Exit Function End If !

= 1 Then ! IsPrime = 0 
 Exit Function 
 End If ! j =
= 1 Then ! IsPrime = 0 
 Exit Function 
 End If ! j =
= 1 Then ! IsPrime = 0 
 Exit Function 
 End If ! j =
= 1 Then ! IsPrime = 0 
 Exit Function 
 End If ! j =
j = Int(number) !
j
= Int(number) !
= 0 
 Exit Function 
 End If ! j = Int(number) ! If j <>

If j <> number Then ! IsPrime = 0 Exit Function End If !

Then ! IsPrime = 0 
 Exit Function 
 End If ! j = Sqr(number) !
Then ! IsPrime = 0 
 Exit Function 
 End If ! j = Sqr(number) !
j = Sqr(number) !
j
= Sqr(number) !
= 0 
 Exit Function 
 End If ! j = Sqr(number) ! For k =

For k = 2 To j ! = number Mod k ! If r = 0 Then !

r
r
! For k = 2 To j ! = number Mod k ! If r =
! For k = 2 To j ! = number Mod k ! If r =

IsPrime = 0 ! Exit Function ! End If ! Next k ! IsPrime = 1 ! End Function

= number Mod k ! If r = 0 Then ! r IsPrime = 0 !
= number Mod k ! If r = 0 Then ! r IsPrime = 0 !
= number Mod k ! If r = 0 Then ! r IsPrime = 0 !
= number Mod k ! If r = 0 Then ! r IsPrime = 0 !
= number Mod k ! If r = 0 Then ! r IsPrime = 0 !