Chapter 5 Mathematics of Finance Compound Interest In the last class session, we covered the basics regarding compound interest Tonight, we build on these results to get some help for working with financial investments.
Mathematics of Finance
Suppose compounding is quarterly and we want to know the equivalent annual rate of interest
a, ar, ar2, ar3, … ,arn-1 where a ≠ 0 is called a geometric sequence with first term a and common ratio r
Example: Suppose $100 is invested at 6% for 4 years. Then the compound amounts at the end of each year is a geometric sequence and can be written as: 100(1.06), 100(1.06)2, 100(1.06)3, 100(1.06)4