11

nnuities
OArdinary

Chapter 11
McGraw-Hill
McGraw-HillRyerson
Ryerson

11-1

11

Learning Objectives
After completing this chapter, you will be able to:

LO-1

Calculate the
payment size in ordinary and
deferred annuities

LO-2

number of payments in ordinary

and deferred annuities

LO-3

McGraw-Hill Ryerson

interest rate in ordinary annuities

11-2

11-3

11

Usingyour
yourfinancial
financialcalculator
calculator
Using
solve for payment number or
size or interest rate using the
same steps as before
we need to reorganize the formulae to solve
algebraically
McGraw-Hill Ryerson

11-4

11

Finding the Payment Size.

PMT
McGraw-Hill Ryerson

FindingPayment
PaymentSize
Size
Finding

11

11-5

an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary

Your life partner somehow convinced you that you cant

afford the car of your dreams, priced at $28800. You are
advised to Save up for 4 years and then buy the car for
PMT
cash. How much would you
have to save each month, if
you could invest with a return of
10% compounded monthly?
You need to decide if this situation involves
a PV or a FV and then use the appropriate formula...
As you have to save up the $28,800, i.e. in the future,
FV = $28,800
Assume you have no savings PV = 0
McGraw-Hill Ryerson

11

an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary

Yourlife
life partner
partner
Your
somehow convinced
convinced you
you
somehow
that you
you cant
cant afford
afford the
the
that
carof
of your
yourdreams,
dreams,
car
priced at
at $28800.
$28800. (At
(At least
least
priced
not right
right now).
now).You
You are
are
not
advised to
to
advised
Save up
up for
for 44
Save
years and
and then
then buy
buy the
the car
car
years
for cash.
cash.
for
How much
much
How
would you
you have
have to
to save
save
would
each month,
month, ifif you
you could
could
each
invest with
with aa return
return of
of
invest
10% compounded
compounded
10%
monthly?

McGraw-Hill Ryerson

11-6

FindingPayment
PaymentSize
Size
Finding

PMT =

- 490.44

12

10
28800

0
48

Formula solution
solution
Formula

11

Which Formula?
Formula?
Which

11-7

Algebraic Method
Method of
of Solving
Solving for
for PMT
PMT
Algebraic

PV = PMT

1-(1+ i)-n
i

n
(1+
i)
-1
FV = PMT
i

1.1. (a) If the payments form a Simple Annuity go directly to 2.

(b) If the payments form a General Annuity, find c and
If the annuitys
2.
If
the
annuitys
2.
FV is known,
PV is
substitute values
known, substitute
of FV, n, and i
values of PV, n,
into FV formula.
and i
McGraw-Hill Ryerson

into PV
formula.

i2

& 4.4.
3.3. &

11

11-8

Which Formula?
Formula?
Which
Algebraic Method
Method of
of Solving
Solving for
for PMT
PMT
Algebraic

PV = PMT

1-(1+ i)-n
i

3.3.

Calculate the quantity within the square brackets.

4.4.

Rearrange the equation to solve for PMT.

Applying Method
Method
Applying

McGraw-Hill Ryerson

n
FV = PMT (1+ i) - 1
i

11

11-9

FindingPayment
PaymentSize
Size
Finding

an
ofofan
OrdinarySimple
SimpleAnnuity
Annuity
Ordinary

Which Formula?
Formula?
Which

Yourlife
life partner
partner
Your
somehow convinced
convinced you
you 2.2. As the annuitys FV is known,
somehow
that you
you cant
cant afford
afford the
the
therefore, the FV formula is used
that
carof
of your
yourdreams,
dreams,
car
priced at
at $28800.
$28800. (At
(At least
least
n
priced
(1+
i)
-1
FV
=
PMT
not
right
now).
You
are
not right now). You are
i
advised to
to
advised
Save up
up for
for44
Save
Extract
necessary
data...
years
and
then
buy
the
years and then buy the
carfor
forcash.
cash.
car
How FV = 28800 PV = 0 n = 4*12 = 48
How
much would
would you
you have
have to
to
i = .10/12 c = 1 PMT = ?
much
save each
each month,
month,
save
ifif
you could
could invest
invest with
with aa
you
return of
of 10%
10%
return
compounded monthly?

McGraw-Hill Ryerson

11

Yourlife
life partner
partner
Your
somehow convinced
convinced you
you
somehow
that you
you cant
cant afford
afford the
the
that
carof
of your
yourdreams,
dreams,
car
priced at
at $28800.
$28800. (At
(At least
least
priced
not right
right now).
now).You
You are
are .10
not
advised to
to
advised
Save up
up for
for44
Save
years and
and then
then buy
buy the
the
years
carfor
forcash.
cash.
car
How
How
much would
would you
you have
have to
to
much
save each
each month,
month,
save
ifif
you could
could invest
invest with
with aa
you
return of
of 10%
10%
return
compounded monthly?

McGraw-Hill Ryerson

n
(1+
i)
-1
Formula
Formula FV = PMT
i
FV = 28800 PV = 0 n = 4*12 = 48
i = .10/12 c = 1 PMT = ?

11-10

58.7225
0.4894
1.4894
490.44
1.0083
0.0083
12

48

1
28800
anotherexample
example
another

11-11

11

The
McGraw-Hill Ryerson

11

PV =

11-12
Yourparents
parents are
are discussing
discussing the
the terms
terms of
of the
the
Your
$100 000
000 mortgage
mortgage that
that they
they have
have offered
offered to
to
$100
hold in
in the
the purchase
purchase of
of your
yourfirst
first home.
home.
hold
They are
are considering
considering an
an
They
interest rate
rate of
of 5%
5% compounded
compounded monthly.
monthly.
interest
If you
you were
wereto
to
If
take 20
20 years
years
to
take
to
repay the
the mortgage,
mortgage,
repay
find the
the size
size of
of the
the
find
n
=
12
*20
=
240
$100000 FV monthly
= 0 payment.
monthly payment.
PMT =

12
5
0
McGraw-Hill Ryerson

240

-659.96
100 000
Formula solution
solution
Formula

11

Yourparents
parentsare
are
Your
discussingthe
theterms
termsofof
discussing
the100
100000
000mortgage
mortgage
the
thatthey
theyhave
haveoffered
offeredtoto
that
holdininthe
thepurchase
purchaseofof
hold
yourfirst
firsthome.
home.They
They
your
areconsidering
consideringan
an
are
interestrate
rateofof5%
5%
interest
compoundedmonthly.
monthly.
compounded
youwere
weretototake
take2020
IfIfyou
yearstotorepay
repaythe
the
years
mortgage,find
findthe
thesize
size
mortgage,
themonthly
monthlypayment
payment
ofofthe
..
McGraw-Hill Ryerson

11-13

Extract necessary data...

PV = $100000

i = .05/12
n =12*20 = 240
FV = 0
C =1

11-14

11

Choose appropriate formula and Solve

2.2. As the annuitys PV is known, the PV formula is used

-n
1-(1+
i)
Formula
PV
=
PMT
Formula

n =12*20 =240

PV = $100000 i = .05/12
-0.6314
1.0042
0.0042
0.3686
659.96
0.0015
151.53

.05

1
100 000

McGraw-Hill Ryerson

Sizeof
ofmonthly
monthly
Size
mortgage
mortgage
payment
payment

12
240

11

11-15

How much interest will you pay your

parents over the 20 year period?

Amount
$

Monthly Payment x Number of Payments

659.96
240
158,390.40
Amount Borrowed
Total Interest Paid

McGraw-Hill Ryerson

100,000.00
58,390.40

11-16

11

As this amount
of interest
shocks you,
you discuss the
possibility of
making payments
of $700/month,
to save some time
and interest
costs.
Determine the time
it will take you to
repay your

McGraw-Hill Ryerson

PMT
N
= = 217.52
-700
700

218 payments
payments == 18
18 yrs
yrs 2months
2months
218

Formula solution
solution
Formula

11

Formula
Formula

i = .05/12

PV i
PMT

ln 1
n

ln 1 i

PV = $100,000 PMT = $700 C = 1

-0.4048
-0.9045
1.0042
0.5952
0.0042
-217.52
217.52
.05

12

100 000
700

218 payments
payments == 18
18 yrs
yrs 2months
2months
218
McGraw-Hill Ryerson

11-17

11

Formula
Formula

ln 1
n

PV * i
PMT

11-18

ln 1 i

Developing the Formula

1. Base formula
2. To isolate n, divide both
sides by PMT

[
[

PV PMT
PV PMT
PMT PMT
PV
PMT

]
]

1 (1 i)-n

1 (1 i)-n

1 (1 i)-n

Continue
Continue
McGraw-Hill Ryerson

11

from 2.

3. Continue to isolate n.
(a) Multiply both sides by i

(b) Reorganize equation

PV
PMT

1 (1 i)-n

11-19

[
[[

]
i i]

PV*i 1 (1 i) -n *i
i
PMT
PV*i 1 (1 i) -n
PMT
PV*i
-n
1

i)
(1
PMT

(c) Now Take the natural logarithm -n* ln (1 i) ln 1 PV*i

PMT
(ln or lnx) of both sides
(d) Solving for n
divide both sides by
ln(1+i)
McGraw-Hill Ryerson

PV
PV
**
1

ln
1
-n* ln(1 i) ln
PMT
PMT
n
ln ln(1+i)
1 i
ln(1+i)

11-20

11

Approximately how much money do you save

in interest charges by paying $700/month,
rather than $659.91/month?

Monthly Payment x Number of Payments

659.96
240
700.00

217.52
Total Interest Saved

McGraw-Hill Ryerson

Amount
$

158,390.4
0
152,264.00
6,126.40

11-21

11

If you could
see your way to a
further increase
of $25/month,
(a) how much
faster would you
pay off the
mortgage, and
(b) approximately
how much less
interest would be
involved?

PMT
N
= =

205.62
-725

725

Paying $725
$725
Paying
206 payments
payments == 17
17 yrs
yrs
206
2months
2months
Formula solution
solution
Formula

McGraw-Hill Ryerson

11

Formula
Formula

i = .05/12

PV * i
PMT

ln 1
n

ln 1 i

PV = $100,000 PMT = $725 C = 1

-205.52
-0.8550
-0.4253
1.0042
205.52
0.0042
0.5747
.05

12

100 000
725

206 payments
payments == 17
17 yrs
yrs 2months
2months
206
McGraw-Hill Ryerson

11-22

11

11-23

Amount
$

Monthly Payment x Number of Payments

700.00
217.52 or 218
152,264.00
725.00
205.62 or 206
149,074.50
12
(a) Payments Saved
(b)Total Interest Saved
3,189.50

McGraw-Hill Ryerson

11

McGraw-Hill Ryerson

11-24

FindingPayment
PaymentSize
Size
Finding

11

11-25

ininaa

Deferred
Annuity
Deferred
Annuity
York Furniture has a promotion on a bedroom set

selling for $2250. Buyers will pay

no money down and no payments for 12 months.
The first of 24DEFERRAL
equal monthly payments is due
12 months from the purchase date.
What should the monthly payments be
PMT
if York Furniture earns 10% compounded monthly on its
account receivable during both the deferral period
and the repayment period?
Since you want the furniture now, this involves a PV
PV = $2250 Once you repay the loan, FV = 0
Payments are deferred for 11 months.
McGraw-Hill Ryerson

11

11-26
York
Furniture
has
a
promotion
on
a
York Furniture has a promotion on a
bedroom set
set selling
selling for
for $2250.
$2250. Buyers
Buyers will
will pay
pay
bedroom
no money
money down
down and
and
no
no payments
payments for
for 12
12 months.
months.
The first
first of
of
no
The
24 equal
equal monthly
monthly payments
payments isis due
due 12
12 months
months
24
from the
the purchase
purchase date.
date.
from
What should
should the
the monthly
monthly payments
payments be
be ifif
What
York Furniture
Furniture earns
earns 10%
10% compounded
compounded monthly
monthly
York
on its
its account
account receivable
receivable during
during both
both
on
the deferral
deferral period
period and
and the
the repayment
repayment period?
period?
the
In effect,
effect,York
York furniture
furniture has
has
In

given aa loan
loan to
to aa buyer
buyer of
of $2,250
$2,250
given
on the
the day
day of
of the
the sale!
sale!
on

Whenthe
thepayments
paymentsbegin,
begin,the
thebuyer
buyerowes
owes$2,250
$2,250
When

plus accrued
accruedinterest!
interest!
plus

McGraw-Hill Ryerson

11-27

11

11

$2250

12

PMT PMT
n = 24
PVAnnuity

d = 11
i = 0.10/12

$2250

McGraw-Hill Ryerson

35 36 Months

13

FV

PMT Payments
PV of
of the
the payments
payments at
at
PV
the end
end of
of month
month 11
11
the

FV of
of the
the $2,250
$2,250 loan
loan
FV
at the
the
at
end of
of month
month 11
11
end

11

11-28

FindingPayment
PaymentSize
Size
Finding
ininaa

DeferredAnnuity
Annuity
Deferred

York Furniture
Furniture
York
has aa promotion
promotion
has
on aa bedroom
bedroom set
set selling
selling
on
for$2250.
$2250. Buyers
Buyers will
will pay
pay
for
no money
money down
down and
and no
no
no
payments for
for 12
12 months.
months.
payments
The first
first of
of 24
24
The
equal monthly
monthly payments
payments isis
equal
due 12
12 months
months from
from the
the
due
purchase date.
date. What
What
purchase
should the
the monthly
monthly
should
payments be
be ififYork
York
payments
Furniture earns
earns 10%
10%
Furniture
compounded monthly
monthly on
on
compounded
its account
account receivable
receivable
its
during both
both the
the deferral
deferral
during
period and
and
period
the repayment
repayment period?
period?
the
McGraw-Hill Ryerson

Find the amount owed

after 11 months:
FV =

12

2,465.06

10

11

2250

$2,465.06 is
is the
the PV
PV of
of the
the annuity
annuity
$2,465.06

11

11-29

FindingPayment
PaymentSize
Size
Finding
ininaa

DeferredAnnuity
Annuity
Deferred

York Furniture
Furniture
York
has aa promotion
promotion
has
on aa bedroom
bedroom set
set selling
selling
on
for$2250.
$2250. Buyers
Buyers will
will pay
pay
for
no money
money down
down and
and no
no
no
payments for
for 12
12 months.
months.
payments
The first
first of
of 24
24
The
equal monthly
monthly payments
payments isis
equal
due 12
12 months
months from
from the
the
due
purchase date.
date. What
What
purchase
should the
the monthly
monthly
should
payments be
be ififYork
York
payments
Furniture earns
earns 10%
10%
Furniture
compounded monthly
monthly on
on
compounded
its account
account receivable
receivable
its
during both
both the
the deferral
deferral
during
period and
and
period
the repayment
repayment period?
period?
the
McGraw-Hill Ryerson

Now find the PMT of the annuity

PMT
113.75
FV = =
PV
- 2,465.06
2,465.06
2465.06
24

24monthly
monthlypayments
paymentsof
of$113.75
$113.75
24
willrepay
repaythe
theloan.
loan.
will
Formulasolution
solution
Formula

11

11-30

FindingPayment
PaymentSize
Size
Finding
ininaa

DeferredAnnuity
Annuity
Deferred

York Furniture
Furniture
York
has aa promotion
promotion
has
on aa bedroom
bedroom set
set selling
selling
on
for$2250.
$2250. Buyers
Buyers will
will pay
pay
for
no money
money down
down and
and no
no
no
payments for
for 12
12 months.
months.
payments
The first
first of
of 24
24
The
equal monthly
monthly payments
payments isis
equal
due 12
12 months
months from
from the
the
due
purchase date.
date. What
What
purchase
should the
the monthly
monthly
should
payments be
be ififYork
York
payments
Furniture earns
earns 10%
10%
Furniture
compounded monthly
monthly on
on
compounded
its account
account receivable
receivable
its
during both
both the
the deferral
deferral
during
period and
and
period
the repayment
repayment period?
period?
the
McGraw-Hill Ryerson

Find the amount owed

after 11 months:
Formula FV = PV(1 + i)n
Formula
FV = 2250(1 + 0.10/12)11
= $2,465.06
1 (1 i)-n
PV PMT

2465.06 = PMT [1-(1+.10/12)-24]

.10/12
PMT = $113.75
24monthly
monthlypayments
paymentsof
of$113.75
$113.75
24
willrepay
repaythe
theloan.
loan.
will

11-31

11

i.e....Number Of Payments

McGraw-Hill Ryerson

11

FindingNumber
NumberOf
OfPayments
Payments
Finding

11-32

ininaa

Deferred
Deferred
Annuity
Annuity

$20,000 is invested in a fund

earning 8% compounded quarterly.
The first quarterly withdrawal
of $1,000
DEFERRAL
will be taken from
the fund
five
N
years from now.
How
many withdrawals will it take to deplete
thethe
fund?
The FV of $20,000 after
deferral, becomes the
PV of the annuity ...

Payments are deferred for 19 quarters

McGraw-Hill Ryerson

11-33

11

PMT = $1000

i = 0. 08/4 = .02
Years

4.75

$20,000
PV1 d = 19
The $20000
earns
interest for 4
years 9
months
McGraw-Hill Ryerson

Payments of $1000/quarter
FV1

n=?
This FV1 then becomes the PV of the
annuity of $1000/quarter

11

FindingNumber
NumberOf
OfPayments
Payments
Finding

$20,000isis
$20,000
invested
invested
inaafund
fund
in
earning
earning
8%compounded
compounded
8%
quarterly.
quarterly.
Thefirst
first
The
quarterly
quarterly
withdrawal
withdrawal
of$1000
$1000will
willbe
be
of
takenfrom
fromthe
the
taken
fundfive
fiveyears
years
fund
fromnow.
now.
from
How
How
manywithdrawals
withdrawals
many
willitit
will

McGraw-Hill Ryerson

11-34

ininaa

Deferred
Deferred
AnnuityFind the FV of
Annuity

$20,000 in 4.75 years

FV = 29,136.22
4

19

20000

$29,136.22 is
is the
the PV
PV of
of the
the annuity
annuity
$29,136.22

11

FindingNumber
NumberOf
OfPayments
Payments
Finding

11-35

ininaa

Deferred
Deferred
Annuity
Annuity

$20,000isis
$20,000
invested
invested
Now find the PMT of the annuity
inaafund
fund
in
earning
earning
8%compounded
compounded
8%
quarterly.
FV== - 29,136.22
PV
N
29136.22
44.1
quarterly.
Thefirst
first
The
quarterly
quarterly
1000
29136.22
withdrawal
withdrawal
of$1000
$1000will
willbe
be
of
takenfrom
fromthe
the
taken
fundfive
fiveyears
years
fund
fromnow.
now.
from
How
How
manywithdrawals
withdrawals
many
willitit
will

McGraw-Hill Ryerson

0
44.1quarterly
quarterlypayments
paymentswill
willdeplete
depletethe
the
44.1
fund(44full
fullpayments
paymentsand
and11partial)
partial)
fund(44
Formulasolution
solution
Formula

11

ininaa

Deferred
Deferred
Annuity
Annuity
Find the FV of

$20,000isis
$20,000
invested
invested
inaafund
fund
in
earning
earning
8%compounded
compounded
8%
quarterly.
quarterly.
Thefirst
first
The
quarterly
quarterly
withdrawal
withdrawal

$20,000 in 4.75 years

Formula FV = PV(1 + i)n
Formula
FV = 20000(1 + 0.08/4)19
= $29,136.22

ln 1

of$1000
$1000will
willbe
be
of
n
taken
from
the
taken from the
fundfive
fiveyears
years
fund
fromnow.
now.
from
ln 1 - 29136.22 *.02
How
1000
How
manywithdrawals
withdrawals
many
ln(1.02)
willitit
will

McGraw-Hill Ryerson

11-36

FindingNumber
NumberOf
OfPayments
Payments
Finding

PV *i
PMT
ln 1 i

= 44.1 payments
or 11 years

11-37

11

When
number of compoundings per year

number of payments per year

McGraw-Hill Ryerson

11-38

11

Since you get paid

every second
Thursday you
decide to pay $350
every two weeks
to make your
budgeting easier.
Find the new term
of your mortgage if
the interest charges
remain at 5%
compounded
monthly.
McGraw-Hill Ryerson

C/Y=
N = = = 414.74
12
P/Y
PMT
-350
26

26

12

350

415 bi-weekly
bi-weekly
415
payments or
or
payments
15 yrs
yrs 11.4
11.4 months
months
15
Formulasolution
solution
Formula

11

Since you get

paid every second
Thursday you
decide to pay $350
every two weeks
to make your
budgeting easier.
Find the new term
of your mortgage if
the interest charges
remain at 5%
compounded
monthly.
McGraw-Hill Ryerson

11-39
Step 11 Determine c
Step

C=

number of compoundings per year

number of payments per year

C= 12 / 26 = .4615
Step 22
Step

Use c to determine i2

i2 = (1+i)c - 1
i2 = (1+ .05/12) .4615-1
i2 = 0.0019

Step 33
Step

11

Step 33
Step

11-40

Use this rate i2 = 0.0019 as the value for

i in the appropriate
annuity formula
PV * i

Formula
Formula

ln 1

PMT

ln 1 i

-0.7828
-0.4571
-414.74
1.0019
0.5428
0.0019
1
100 000

350

415 payments
payments or
or15
15 yrs
yrs 11.4
11.4 months
months
415
McGraw-Hill Ryerson

11

$100,000Twenty-year
Twenty-year
$100,000
Mortgage
Mortgage
Interest5%
5%per
perannum
annum
Interest

Scenario
Scenario

Terms
Terms

1.

Per
month

2.

11-41

Payment
Payment
Amount
Amount

of
## of
Payments
Payments

TotalCost
Cost
Total

$659.96

240

$158,390.40

Per
month

$700.00

218

$152,264.00

3.

Per
month

$725.00

206

$149,074.50

4.

Every
two
weeks

$350.00

415

$145,250.00

McGraw-Hill Ryerson

Best Scenario

11-42

11

N =
Youare
arenow
now
You
consideringdelaying
delaying
considering
thepurchase
purchase
the
yourfirst
firsthouse
housetoto
ofofyour
allowfor
foraalarger
larger
allow
downpayment
payment. .IfIf
down
yousave
save$350
$350per
perpay,
pay,
you
howlong
longwould
woulditittake
take
how
havean
anadditional
additional
totohave
$15000,ififyou
youcan
can
$15000,
earn 8%
8%compounded
compounded
earn
monthlyon
onyour
your
monthly
savings?
savings?
McGraw-Hill Ryerson

26

8
0

40.32

350
15000

12
FV
== FV

New Formula required

required
New

11-43

11

Step 11 Determine c
Step
Youare
arenow
now
You
consideringdelaying
delaying
considering
thepurchase
purchase
the
yourfirst
firsthouse
housetoto
ofofyour
allowfor
foraalarger
larger
allow
downpayment
payment. .IfIf
down
yousave
save$350
$350per
per
you
pay,how
howlong
longwould
would
pay,
taketotohave
have
itittake
anadditional
additional
an
$15000,
$15000,
ifif
youcan
canearn
earn 8%
8%
you
compoundedmonthly
monthly
compounded
onyour
your
on
savings?
savings?
McGraw-Hill Ryerson

C=

number of compoundings per year

number of payments per year

C= 12 / 26 = .4615
Step 22
Step

Use c to determine i2

i2 = (1+i)c - 1
i2 = (1+ .08/12) .4615-1
i2 = 0.0031

Step 33
Step

11

Formula
Formula

Youare
arenow
now
You
consideringdelaying
delaying
considering
thepurchase
purchase
the
yourfirst
firsthouse
housetoto
ofofyour
allowfor
foraalarger
larger
allow
downpayment
payment. .IfIf
down
yousave
save$350
$350per
per
you
pay,how
howlong
longwould
would
pay,
taketotohave
have
itittake
anadditional
additional
an
$15000,
$15000,
ifif
youcan
canearn
earn 8%
8%
you
compoundedmonthly
monthly
compounded
onyour
your
on
savings?
savings?
McGraw-Hill Ryerson

FV * i
ln 1 +
PMT

11-44

ln 1 i

0.1316
1.0031
1.1316
0.0031
0.1237
40.3
1
15000
350

40.3 bi-weekly
bi-weeklypayments
payments ==
40.3
approx 1yr
1yr7months
7months
approx

11

Formula
Formula

FV * i
ln 1 +
PMT

11-45

ln 1 i

Developing the Formula

1. Base formula
2. To isolate n, divide both
sides by PMT

[
[

FV PMT
FV PMT
PMT PMT
FV
PMT

]
]

(1 i) n 1

(1 i) n 1

(1 i) n 1

continued
continued
McGraw-Hill Ryerson

11

from 2.

3. Continue to isolate n
(a) Multiply both sides by i

FV
PMT
FV*i
PMT
FV*i

PMT

(b) Reorganize equation

(c) Now Take the natural logarithm
(ln or lnx) of both sides
(d) Solving for n
divide both sides by
ln(1+i)
McGraw-Hill Ryerson

11-46
n
(1 i) 1

[
[

(1 i) n 1

] *i
]

(1 i) n 1

(1 i) n 1 FV*i
PMT

[
[[

]
]

FV* i
1
+
n ln(1+ i) ln
PMT
FV* i
1
+
FV
*i
ln1 + PMT
n ln(1+ i)ln
PMT
n
ln(1+i)
ln(1+i)
ln 1 i

11-47

11

Already
Already
entered
entered
Youalready
alreadyhave
have
You
$10000saved
saved
$10000
foryour
yourdown
down
for
payment.IfIfyou
you
payment.
save$350
$350per
perpay,
pay,
save
howlong
long
how
woulditittake
taketotohave
have
would
anadditional
additional$15000?
$15000?
an
Assume
you
Assume
you
canearn
earn 8%
8%
can
compoundedmonthly
monthly
compounded
onall
allofofyour
yoursavings.
savings.
on
McGraw-Hill Ryerson

N=

8
26

37.25
350
25000

10000
12

37.5bi-weekly
bi-weeklypayments
payments
37.5
approx11yr
yr5months
5months
==approx

11-48

11

Youalready
alreadyhave
have
You
$10000saved
saved
$10000
foryour
yourdown
down
for
payment.IfIfyou
you
payment.
save$350
$350per
perpay,
pay,
save
forthe
thenext
next22
for
years,find
findthe
thesize
sizeofof
years,
youravailable
availabledown
down
your
payment. Assume
Assume
payment.
youcan
canearn
earn 8%
8%
you
compoundedmonthly
monthly
compounded
onall
allofofyour
yoursavings.
savings.
on
McGraw-Hill Ryerson

Already
Already
entered
entered

FV =

31430.12

8
26

350
52

12

10000

Formulasolution
solution
Formula

Formula Solution
Solution
Formula

11

Youalready
alreadyhave
have
You
$10000saved
saved
$10000
foryour
yourdown
down
for
payment.IfIfyou
you
payment.
save$350
$350per
perpay,
pay,
save
forthe
thenext
next22
for
years,find
findthe
thesize
sizeofof
years,
youravailable
availabledown
down
your
payment. Assume
Assume
payment.
youcan
canearn
earn 8%
8%
you
compoundedmonthly
monthly
compounded
onall
allofofyour
yoursavings.
savings.
on
McGraw-Hill Ryerson

11-49

This is more complicated

to solve when
using
algebraic
equations!
3 Steps
1.
1.

Find the FV of the $10 000 in 2 years

2.
2.

Find the FV of the $350 per pay

3. Add totals together

3.
The $10
$10 000
000 continues
continues to
to earn
earn
The
interest during
during the
the new
new savings
savings period!
period!
interest

11

Formula Solution
Solution
Formula
n
1.
Formula
FV
=
PV(1
+
i)
Formula
1.

= 10000(1 + 0.08/12) 24
= $11,728.88
(1 i) n 1
FV PMT

11-50
3.
3.

$
You
already
have
You already have
11,728.88
$10000
saved
$10000 saved
foryour
yourdown
down
2.
for
2.
payment.IfIfyou
you
i
payment.
c
save
$350
per
pay,
i
=
(1+i)
-1
2
save $350 per pay,
.4615
=
(1+
.08/12)
-1
for
the
next
2
for the next 2
years,find
findthe
thesize
sizeofof
= 0.0031
years,
youravailable
availabledown
down
your
= 350 [(1+.0031)52 1]
payment.
Assume
payment. Assume
youcan
canearn
earn 8%
8%
.0031
you
= $19701.24
19,701.24
compoundedmonthly
monthly
compounded
Total 31,430.12
onall
allofofyour
yoursavings.
savings.
on

McGraw-Hill Ryerson

11

McGraw-Hill Ryerson

11-51

11

11-52
lifeinsurance
insurancecompany
companyadvertises
advertisesthat
that
AAlife
$50,000will
willpurchase
purchaseaa20-year
20-yearannuity
annuity
$50,000
paying$341.13
$341.13atatthe
theend
endofofeach
each
paying
month.
month.
Whatnominal
nominalrate
rateof
ofreturn
returndoes
doesthe
the
What
annuityinvestment
investmentearn?
earn?
annuity
C/Y
I/Y =

12
240
1

McGraw-Hill Ryerson

50000

5.541
341.13
0

Theannuity
annuityearns
earns5.54%
5.54%pa
pa
The

11-53

11

to solve for i without

a financial calculator

McGraw-Hill Ryerson

11-54

11

This completes Chapter 11

McGraw-Hill Ryerson