Monday, December 12, 2011

How can I find the interest rate using a mathematical formula?

Compound interest is an example of an exponential equation. Given the formula A=P(1+i)^n where A = final amount ($), P = initial amount invested ($), i = interest rate per period (as a decimal) and n = number of periods that the interest is calculated, find the interest rate offered by a bank if $1000 invested for 3 years with interest calculated daily had grown to $1050 by the end of the 3 years.|||A = P(1 + (r/n))^(nt)





1050 = 1000(1 + (r/365))^(365*3))


1.05 = (1 + r/365)^1095


1.05^(1/1095) = 1 + r/365


1.05^(1/1095) - 1 = r/365


365[1.05^(1/1095) - 1] = r


0.0162637503876000038774475066119 = r


1.63% = r|||(1050/1000)^(1/3) - 1 = .01639 (or 1.639%)|||As the interest is added daily


1050 = 1000*(1+i/36500)^(3*365)


1.05^(1/1095) -1 = i/36500


i = 1.626% annual rate

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