Compound Interest

Lesson 12 and 13
Created by: Marc Skarzinskas, Niagara College, 2020
 Lesson Topics
Lesson 12: Equivalent Payments

Lesson 13: Calculating compounding periods and

time periods
 Lesson 12
Equivalent Payments
 Equivalent Payments
• A single payment or a set of payments, at a
given interest rate, can be replaced by a single
equivalent payment or an equivalent set of
payments on any common date, known as the
focal date. (Pg. 168)
 Explaining Further
• Hilary was unable to fulfill a payment of $1500
one year ago. She also has another payment
of $3000 due in 4 years. What single
equivalent payment can she make in 2 years
time to satisfy her debt, if interest is 4.5%
compounded semi-annually during this time.
Creating a Timeline and Focal
Date
• Hilary was unable to fulfill a payment of $1500 one year ago. She
also has another payment of $3000 due in 4 years. What single
equivalent payment can she make in 2 years time to satisfy her
debt, if interest is 4.5% compounded semi-annually during this
time.
1500 (Not Paid) 3000 Due

1 Year ago Today 2 Year 4 Years

Finishing the Example

1 Year ago Today 2 Year 4 Years

n = (2)(3) = 6 n = (2)(2) = 4
c/y, p/y = 2 c/y, p/y = 2
i/y = 4.5 i/y = 4.5
PV1 = 1500 PV2 = -2,744.53
PMT = 0 PMT = 0
FV1 = -1,714.24 FV2 = 3000

Equivalent Payment 2 years from now is equal

to FV1 + PV2 = $4,458.77
Set of Equal Payments
• A scheduled payment of $5000 due in three months is to
be replaced by two equal payments. One payment is due
in 1 month, while the other is due in six months.
Calculate the size of the equal payments if money earns
6% compounded monthly.
$5000

Today 1 Month 3 Months 6 Months

Assume that the equal payments are $1, and

then divide accordingly.
Set of Equal Payments
$5000

Today 1 Month 3 Months 6 Months

n=2 n=3
c/y, p/y = 12 c/y, p/y = 12
i/y = 6 i/y = 6
PV1 = 1 PV2 = -0.985148759
PMT = 0 PMT = 0
FV1 = -1.010025 FV2 = 1

$5000 ÷ (FV1 + PV2) = $2,506.05

 Unknown Payment
You are given 2 options to settle a loan:
i) $3000 today, and another $2500 in two years
ii) $2500 in six months, and the remaining balance in 3 years.
Interest is 8% compounded semi-annually.

i) $3000 $2500

Today 6 Months 2 Years 3 Years

ii) $2500
 Calculating the Unknown
Payment
Interest is 8% compounded semi-annually.

i)
$3000 $2500

Today 6 Months 2 Years 3 Years

ii) $2500

The final unknown payment at 3 years

for method ii) would be $3,458.32
 Lesson 12
Calculating N and t
Calculating Time and
Compounding Periods
• How long (in years and months) will it take for
an investment of $50,000 in a mutual fund to
mature to $125,000 provided its growing at a
rate of 9% compounded quarterly.
n=
c/y, p/y =
i/y =
PV =
PMT =
FV =
 Time and Compounding
Periods
• How long (in years and months) will it take for an investment
of $50,000 in a mutual fund to mature to $125,000 provided
its growing at a rate of 9% compounded quarterly.

n = 41.18047891 Recall that n = (Compounding Frequency)(Time in Years)

c/y, p/y = 4
i/y = 9
PV = -50,000
PMT = 0
FV = 125,000

Therefore, it would take 10 years and 4

months to reach a value of $125,000.