Appendix F – Math Essentials: Compounding
APPENDIX F
MATH ESSENTIALS:
COMPOUNDING
Learning Objectives
LO F.1: Use compounding to calculate the present and future value of money.
Appendix Outline
Compounding and Future Value (LO F.1)
The rule of 70
Problems and Applications
1. If you invest $250 at an annually compounded interest rate of 10
percent, how much will you have in 3 years? [LO F.1]
Answer: Future value = Present Value × (1 + i)n where i is the interest
rate and n is the number of years.
2. Suppose you invest $500 at an annually compounded interest rate of 3
percent. [LO F.1]
a. How much will you have in 10 years?
b. How much will you have in 20 years?
c. How much will you have in 50 years?
Answer: Future value = Present Value × (1 + i)n where i is the interest
rate and n is the number of years.
a. FV = $500 × (1 + 0.10)10 = $1,296.87.
3. Suppose you borrow $50 from a payday lender, who charges a monthly
interest rate of 5 percent, compounded monthly. [LO F.1]
a. If you pay back the loan in one month, how much will you owe?
b. If you pay back the loan in one year, how much will you owe?
c. If the interest rate is raised to 6 percent rather than 5 percent, how
much more will you owe if you wait for a year to pay o: the debt?
F-1
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Education.
Appendix F – Math Essentials: Compounding
Answer: Future value = Present Value x (1 + i)n where i is the interest
rate and n is the number of months.
a. FV = $50 x (1 + 0.05)1 = $52.50.
F-2
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.