Chapter 1

Section 1.1
1. Because the interest earned in one period is reinvested for subsequent periods, leading
you to be able to earn ‘interest on the interest.’ Over long enough of periods of time
and/or at high enough interest the interest earned on an account will eventually be more
than initial deposits.
2. No, the balances will be the same. If accounts have the same interest rate, it doesn’t
matter whether you combine balances and then compute the interest, or compute the
interest separately and then combine the balances.
3. Simple interest does not reinvest the interest, whereas compound interest does.
4. Realizing that compound interest means that an account balance can grow substantially
could lead someone to delay a purchase to allow their money to earn interest and buy
the item(s) later.
5. More.
6. K=$5,000; i =0.03; t = 2.
7. A(t) is the amount of money in account at time t when the account starts with any
amount K. a(t) is the amount of money in the account at time t, when the account starts
with K = 1.
8. $15.62 interest. Ending balance = $1578.10.
9. $150 interest. Ending balance = $5,150.
10. $4,565.23
11. $3,535 after one year; $3570.35 after two years
12. $3200
13. 3.2% interest rate
14. $9,960 if i = 0.004; $9615.39 if i = 0.04; $7140.86 if i = 0.4
15. $19,920.20 if i = 0.001; $19,219.61 if i = 0.01; $13,660.27 if i = 0.1
16. 12.5% if one year; 2.384% if five years.
17. $10,285.72
18.

t=
Compound Simple Compound Simple
Number
interest for interest interest for interest
of
i=0.01 for i=0.01 i=0.02 for i=0.02
years

0 $5,800.00 $5,800.00 $5,800.00 $5,800.00

1 $5,858.00 $5,858.00 $5,916.00 $5,916.00
2 $5916.58 $5,916.00 $6,034.32 $6,032.00
5 $6,095.86 $6,090.00 $6,403.67 $6,380.00
10 $6,406.81 $6,380.00 $7,070.17 $6,960.00
20 $7,077.10 $6,960.00 $8,618.49 $8.120.00
 $10,000.00
$9,500.00 Compound interest for i=0.01

$9,000.00 Simple interest for i=0.01

$8,500.00 Compound interest for i=0.02
$8,000.00
Simple interest for i=0.02
$7,500.00
$7,000.00
$6,500.00
$6,000.00
$5,500.00
$5,000.00
0 5 10 Year 15 20 25

The difference between compound and simple interest is larger for higher interest rates
and over longer periods of time. Compound interest outperforms simple interest.
19. Approximately $4,780.54 for each of the four summers
20. $4,419.27
21. $55.12
22. $1,061.68
Section 1.2
1. Effective rates are the actual interest rates earned per period. Nominal rates are a
shorthand used by banks to report interest rates, and are reported as the effective
rate per period times the number of periods in a year. APR is the most popular
‘nominal’ rate is computed as 12 times the effective monthly interest rate.
2. The nominal interest rate for the year. Dividing this values by 12 gives the effective
interest rate per month.
3. A nominal rate of interest of 6% compounded quarterly yields a 6.1364% effective
annual rate (more than 6%) because interest is compounded four times during the
year instead of only once.
4. A nominal rate of 3% compounded daily because interest is compounded more
frequently (daily vs. quarterly).
5. Increases because interest is being compounded more frequently
6. 12% nominal, compounded monthly because it is being compounded more
frequently.
7. 12%; 6%
8. 24%; 12%
9. 0.005; 0.061678; Monthly compounding
10. 1%; 12.6825%; Monthly compounding
11. $2,040.37
12. Annual = 3.25%; Semi-annual = 3.2764%; Monthly = 3.29885%; Weekly = 3.3023%;
Daily = 3.29885%; Biennial = 3.1988%
 13. a. $102,857.18, b. $106,408.91, c. $109,574.54, d. $110,210.02
14. a. K = initial balance; m = # of times compounded per year; 𝑖 (m) = nominal interest
rate for the year; t = number of years b. $5388.67
15. $8,870.53
16. Plan A earns 4% APY; plan B earns 4.0223% APY; plan C earns 3.9976% APY.
Plan B has the highest effective annual interest rate.
17. a. i.10.4713067%, ii. 10.5155782%, iii. 10.5170365%, iv. 10.5170913%, v.
10.5170927%. b. 10.5170918%
18. $4,050.25
Section 1.3
1. Sooner because the deposit has more time to earn interest.
2. Deposit money into a savings account early so that interest can be made on top of
interest (compound interest), making the large purchase more attainable.
3. You will earn more interest if you deposit money into a savings account monthly
rather than annually.
4. Add up the entire column labeled “Interest earned during the month”, or subtract the
total amount deposited from the ending balance on the last month.
5. (Day 1 of month balance) * (1 + effective interest rate/month) = end of month balance
6. 23.45 years
7. 11.90 years
8. Doubling the interest rate cuts the ‘doubling time’ approximately in half.
9. $607.20, $1,221.69, $1,843.55. Interest earned = $43.55
10. $4,998.15
11. $5,120.80
12. $20,171.91; $2,171.91
13. $20,616.07
14. Answers will vary.
15. a. $702,856.24 b. $930,597.05
16. $284.56
Section 1.4
1. Recursive
2. Non-recursive
3. Withdrawals are treated like a deposit, but their value (including interest) is
subtracted to find the final amount left in the account.
4. To value deposits and withdrawals that are not timed with compounding periods, first
determine the interest rate for the fractional period and then roll the amount forward
(or back) to the next compounding period.
5. Time
6. $1,505.01
7. $1,805.67
8. $1,806.34
9. $23,493.19
10. i = 0.053734
11. a. $25,116.87, b. $3,868.33
12. a. $12,125.80, b. 20.9%
 13. a. $12,689.79, b. $1,103.25
14. a. $306,675.71 b. $261,998.27 c. 585 months
15. a. $4,120.80, b. i = 3.30
16. 10.61%
17. a. 87 months, b. $276.25
End of chapter
1. B
2. C
3. A
4. D
5. E
6. D
7. D
8. E
9. E
10. A