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Chapters 5, 7
Savings Plans
Regular Savings Plan
A series of payments made over time. !

The amount you now have will generate 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 which o ﬀ ers
an annual interest rate i ( 12 ) = 3.87 % . !

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

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

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

 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.

After 1 month, Jan 31.

After 2 months, Feb 28.

.

.

.

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

.

.

.

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

After 12 months, Dec 31.

• 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,
with the ﬁxed interest rate i ( 12 ) = 3.87 % . !

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. !

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

 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 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
New type of savings plans, where installments
are not paid on a regular basis. !

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

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

Open an account on Jan 1, and immediately
deposit HK \$ 1,000; !

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

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

𝓵

1

2

3

4
5
6
7
8
9
10
11
12
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
>
> >
>
>
>
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 and immediately deposit
an initial amount of \$ 2,000. !

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. !

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

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 itself and one. !
Prime numbers less than 100: !

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

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 . 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)

>

r

=

>

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

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

j
= Int(number) !

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

j
= Sqr(number) !

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

r

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