Chapter 3

Section 3.1
1. a. End b. Stay the same c. Increase
2. Perpetuity
3. a. They decrease b. They increase
4. a. $5,000 b. $5,000
c. Both have payments that exceed forever, unless the original loan or initial
deposit decreases, the periodic payment size increases, or the interest rate
decreases.
5. No, 1/12 is too much money for the account to remain a perpetuity. The interest
accrued in one month is less than 1/12 of the set amount of money.
6. $60,000
7. 4.4%
8. $2,500,000
9. 14
10. 15
11. a. $800 b. $1,500
12. a. $1,666,666.67 b. $833,333.33 c. $2,500,000 $1,250,000
13. a. $1,689,867.85 b. $856,215.04 c. $1,667,068 d. $833,534
14. a. 19 years b. 27 years c. 65 years d. $42,750
15. a. $1,000,000 b. $1,250,000 c. $1,153,478.31
16. a. $1,250,000 b. $1,087,368.48 c. $958,751.71 d. $860,244.09

Section 3.2
1. Larger
2. Increases
3. Decreases
4. Increases
5. Decreases
6. 𝑎̅̅̅
𝑛|𝑖 is the present value of $1 paid out for n periods, whereas 𝑠̅̅̅
𝑛|𝑖 is the future value of
$1 paid out for n periods
7. $1 will be paid out infinitely; perpetuity
8. $38,608.67
9. $62,311.05
10. $30,722.84
11. $83,395.81
12. $84,836.29
13. 0.969273
14. Effective interest rate = 1.51%; APR = 1.50%
15. a. 25.9 b. 32.1 c. 46.6 d. An infinite amount
 16. a. $36,790.88 b. $3,029.90 c. 4.96432%
17. a. Forever b. 495 months c. Forever
18. a. $862,128.84 b. $848,386.13 c. $852,744.20 d. $866,338.67
19. a. $3,438.65 b. $3,933.61 c. $3,762.06 d. $3,762.06
e. Answers are the same. This is because both accounts are earning the same
nominal interest rate
1−𝑣 𝑛 (1+𝑖)𝑛 −1
f. 𝑃 ( ) ∗ (1 + 𝑖)𝑛 = 𝑃 ( )
𝑖 𝑖
20. a. $57,142.86 b. $55,001.78 c. $49,955.30 d. $51,725.56 e. $51,619.67
21.
a. A = ‘amount needed today’; P = payment per period; n = number of total periods
b. i.
𝑃 𝑃 𝑃
A(1 + i) = 𝑃 + + 2
+ ⋯+
(1 + 𝑖) (1 + 𝑖) (1 + 𝑖)𝑛−1
ii.
𝑃
A(1 + i) − A = 𝑃 +
(1 + 𝑖)𝑛
iii.
𝑃
Ai = 𝑃 +
(1 + 𝑖)𝑛

iv.
𝑛
1
1−( )
(1 + 𝑖)
𝐴=𝑃
𝑖
( )
End of chapter
1. D
2. D
3. B
4. A
5. A
6. E
7. A
8. E
9. B
10. B
11. A
12. A
13. E
14. B
15. D
16. D
17. D
18. D