Interest Rates

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com
Interest
The amount of interest earned in a year is the difference between the amount in the account at
the start of the year and the amount in the account at the end of the year (assuming no further
deposits or withdrawals are made).
Interest rate
The annual interest rate i in effect for a year is the amount of interest earned during the year,
divided by the amount in the account at the start of the year.
Let’s say a person deposits £1,000 into a bank account. One year later, the account has accumulated
to £1,050. This amount consists of £1,000, representing the initial deposit or capital, and £50,
representing the interest earned on the deposit over the year. The amount of interest earned over a
period of time is simply the difference between the accumulated account value at the end of the
period and the accumulated account value at the beginning of the period.
For any amount of interest earned over a given period, we can also calculate the associated interest
rate. The interest rate in effect for a one-year period is the amount of interest earned over the year
divided by the initial accumulated value.
In this example, the interest rate for the year is:
At this point, let’s keep things simple by considering annual time periods only.
When money is invested in an account paying simple interest, interest is only earned on the initial
deposit. Interest is not earned on the interest that has previously accrued.
Enamul Hoque enamhoq.hrm@gmail.com
When money is deposited into an account paying compound interest, interest is earned on the initial
deposit and the interest that has previously accrued. This is analogous to using simple interest, but
periodically the interest is credited to the account and the interest rate then applies to the new, larger
balance.
Example:
Accumulated value
We have already learnt how to accumulate a single payment into the future. The same can be
done for several payments.
Interest = Accumulated Value – Principle

Accumulated Value = Principle + Interest
the value now, ie at time 0, of a payment to be made in the future, taking into account any interest
that will be earned during the investment period. This is known as the present value of a future
payment. The process of allowing for future interest in determining a present value is also known as
discounting a payment.
The present value of £X payable in t years is the amount that, if invested now at an annual effective
interest rate i , will accumulate to £X at time t yeaTk.
For example, suppose that the annual effective interest rate is 5%, and we need to make a payment
of £100 in one year’s time. What is the present value of the £100 payable in one year?
Clearly the answer must be less than £100. If we have £100 now, we can invest it at 5% to obtain
£105 in one year. So, how much do we need to invest now at 5% in order to have £100 in 1 year? If
we denote this unknown quantity as PV , then PV can be found by solving:
Example:
Example:
So far we have considered simple and compound interest rates. Given an annual interest rate i, if an
investor deposits or loans £1 at time 0, a payment of (1+ i ) is returned at time 1 year.
The interest of i is paid at the end of the time period.
Another valid approach is to view the interest as being paid at the beginning of the time period.
When interest is paid at the beginning of the time period, interest is paid in advance, and it is known
as discount.
Let’s work through a simple example to explain this. Consider the case of a one-year loan of £1.
The lender loans £1 at time 0. The borrower pays discount (ie interest) to the lender at time 0, and
returns a payment of £1 at time 1 year. The interest is paid at the beginning of the time period.
If interest were payable on the loan at the end of year, the amount of interest payable at that time
would be i . But the discount is payable at the beginning of the year, so we must find the present
value of the payment of i . Hence, the discount payable at time 0 is:
The rate of discount, which is denoted by d , is defined as the amount of the discount ( iv ) divided
by the accumulated value at the end of the year (£1).
Hence, the discount rate is:
d = iv
We can derive an alternative expression for d :
Effective and Nominal interest rates convertible pthly

As we have seen, an interest rate can be quoted as an annual effective rate or as a pthly effective
rate for a time period of length 1/p . We can also quote an interest rate as a nominal interest rate
convertible p times per year, which can also be described as a nominal interest rate convertible
pthly.
A nominal interest rate convertible pthly is denoted i(p) . The word ‘nominal’ may be stated
explicitly in a question, or this type of rate may just be referred to as a ‘convertible’ rate. A nominal
interest rate is obtained by multiplying the effective pthly rate of interest by the number of time
periods per year, p. For example, if the effective monthly rate of interest is 0.3%, then the nominal
interest rate convertible monthly is 0.3%12  3.6%. This can be written as:
Since a nominal rate of interest convertible pthly is obtained by multiplying the effective pthly
interest rate by p, we can express the effective pthly rate of interest as the nominal rate of interest
convertible pthly divided by p:
Example:
Example:
Problem 01: Find the accumulated value of principal of Tk. 250 invested for 10 years at
compound interest of 6% p.a.
Problem 02: The amount with compound interest of a certain principal at 5% p.a. is Tk. 3969
Find that principal when the period is 2 yeaTk.
Problem 03: The amounts for a certain sum with compound interest at a certain rate in two
years and in three years are Tk. 8820 and Tk. 9261 respectively. Find the rate and the sum.
Problem 04: Find the present value at rate of interest of 6% per annum of Tk. 300/- payable 5
years hence.
Problem 05: A promises to pay B a sum of Tk. 200 at the end of 3 years and another Tk. 400
at the end of 5 years from now. What immediate cash payment should B accept in lieu of the
above payments, if interest is reckoned at 5% p.a.?
Problem 06: Find the present value at rate of interest 7% p.a. of Tk. 500/- payable at the end
of 4 years and 3 months.
Problem 07: Find the effective rate p.a. corresponding to the nominal rate of 8% p.a.
convertible quarterly.
Problem 08:
Find the nominal rate p.a. convertible quarterly corresponding to an effective rate of 8% p.a.
Problem 09:
Find (i) the rate of discount corresponding to a rate of interest .06 and
(ii) the rate of interest corresponding to a rate of discount of .08.
Problem 10:
Find the present value of Tk. 1000 due 10 years hence at a rate of discount 5% p.a.
Problem 11:
A sum of Tk. 2000 is invested at a rate of interest of 5% p.a. After 7 years, the rate of interest was
changed to 5% p.a. convertible half-yearly. After a further period of 3 years, the rate was again
changed to 6% p.a. convertible quarterly. What is the accumulated value at the end of 15 years from
commencement?
Problem 12:
Find the accumulated of Tk. 100 invested for five years at rate of interest of 5% p.a.
Problem 13:
Find the accumulated amount of Tk. 525 invested for 10 years at a rate of interest of 4% p.a.
Problem 14:
A Sum of Taka 500 is invested for 20 years at a rate of interest of 6% p.a. Find the following
(a) The accumulated amount after 20 years
(b) The interest earned over the period of investment.
Problem 15:
Find the amount to which Tk. 100 will accumulate at 6% effective for next 15 years, 5% effective for
next 10 years and 4% effective for next 5 years.
Problem16:
Find the present value at rate of interest of 5% p.a. of Tk. 500 payable after 5 years.
Problem 17:
What is the present value of Tk. 500 payable at the end of 20 years, the rate of interest being taken
1
as 32 %.
Problem 18:
What is the present value of Tk. 500 due at the end of 10 years, the rate of interest being 5% for the
first 4 years from now and 6% convertible half-yearly for next 6 years?
Problem 19: Find the value of v62 @4%
Problem 20:
Find the accumulated value of a unit of money for a period of 17 years 3 months @ 9% p.a.
Problem 21:
1
Find the accumulated amount of Tk. 300 at the end of 42 years at 4% payable quarterly.
Problem 22:
Find the approximate number of years after which a sum of money doubles itself at 10% rate of
interest p.a.
Problem 23:
A sum of money is invested at 4% p.a. effective. How long will it take to double itself?
Problem 24:
Find the effective rate p.a. corresponding to the nominal rate of 6% convertible half yearly.
Problem 25:
Find the effective rate p.a. corresponding to the nominal rate of 10% payable quarterly.
Problem 26:
Find the nominal rate p.a. half yearly, corresponding to an effective rate of 6% p.a.
Problem 27:
Find the nominal rate p.a. payable quarterly, corresponding to an effective rate of 10% p.a.
Problem 28:
Find the amount of Tk. 1000 at the end of 8 years at nominal of interest of 12% payable half yearly.
Problem 29:
Find the amount of Tk. 1000 at the end of 10 years at effective rate of 4% per quarter.
Problem 30:
Find the present value of Tk. 1000 due 10 years hence at the nominal rate of interest of 12%
payable half yearly.
Problem 31:
Find the present value of Tk. 1000 due 10 years hence at an effective rate of 2% per quarter.
Problem 32:
Find ( i) the rate of interest corresponding to a rate of discount of 0.05 and
(ii) the rate of discount corresponding to a rate of interest 0.04.
Problem 33:
Find (i) the effective rate of discount corresponding to the nominal rate of discount of 5% p.a.
convertible 4 times a year and
(ii) the nominal discount p.a. convertible half corresponding to the effective rate of interest of 6%
p.a.

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Enamul Hoque enamhoq.hrm@gmail.

Interest = Accumulated Value – Principle

Effective and Nominal interest rates convertible pthly

Problem 19: Find the value of v62 @4%

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