Example 1.

8 (textbook)
Monthly compounding of interest

Sam has just received a credit card with a
credit limit of 1000$. The card issuer
quotes an annual charge on unpaid balances
of 24%, payable monthly. Sam immediately
uses his card to its limit. The first statement
Sam receives indicates that his balance is
1000$ but no interest has yet been charged.
Each subsequent statement includes interest
on the unpaid part of his previous months
balance. He ignores the statements for a
year, and makes no payments towards the
balance owed. What amount does Sam owe
according to his thirteenth statement?



Example 5 (Section 2, FM
manual):


Suppose that the nominal annual
interest rate compounded 12 times
per year is 18%. Find the equivalent
annual effective rate of interest and
the equivalent nominal annual
interest rate compounded twice per
year.









Example 1

Smith borrows 1000$ per one year with a
quoted rate of 10% with interest payable in
advance.

This means that he will pay

1000$ * 10% = 100$ at time 0.

This means that he will actually receive at
time 0 just 900$.

It is possible to calculate an annual
effective rate of interest, i:

i= 11.11%

d=10%
Example 2

The rate of discount is 7% per year.
Calculate the accumulated value of 4,000$
after 5 years.














Example 8 (SOA):
(FM manual, section 2)
At time t=0, J ohn deposits 1000 into
a fund which credits interest at a
nominal interest rate of 10%
compounded semiannually. At the
same time, he deposits P into a
different fund which credits interest
at a nominal discount rate of 6%
compounded monthly. At time t=20,
the amounts in the funds are equal.
What is the annual effective interest
rate earned on the total deposits,
1000+P, over the 20-year period?





Example 9 (SOA)
(Section 3, FM manual)

On 1/1/97, Kelly deposits X into a
bank account. The account is
credited with simple interest at the
rate of 10% per year. On the same
date, Tara deposits X into a
different bank account. The account
is credited with interest using a
force of interest .
From the end of the 4th year until
the end of the 8th year, both
accounts earn the same dollar
amount of interest. Calculate k.