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Oct 15, 2014
 #8
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OK, rosala...look at this.....

Notice that if I have 33, I'm just really doing this.......3 * 3  * 3 = 27

So, look at our "formula"

We have ........4096 x (1 + r/n)nt .......note that the interest rate given is 12.5%.......but that's the rate for a yearly compounding.....we must divide this by 2, because we are compounding on a half-year basis !!!!

So...n = 2  (the number of compoundings per year) and r/n =12.5/2 = .0625........with me, so far????

Now...look at the "nt" exponent........n is the number of copoundings per year and t is the number of years. So, if we compounded for 1 + 1/2 years, that would be 3 compoundings   (2 the first year and one more for the next half-year !!). So, "nt" just  equals    (2 times / year)*(1 +1/2 years) = 3 times !!!

OK.......let's put all of this together...we have......

4096*(1 + .0625)3 ......notice that the expression in the parentheses is really just   1.0625........so this gives us........4096*(1 .0625)3

Now, forget the "4095" part and let's just look at the (1 .0625)3  part.....note what this really says is similar to our 33 example earlier....it says that we really have this:

(1.0625) * (1.0625) * (1,0625).......so now, let's add the "4096" part back and we have.....

4096 *(1.0625) * (1.0625) * (1,0625)    ...so......the first compounding is represented by the first multiplication......and 4096 * 1.0625 = 4352...and that's how much we have after one compounding (i.e., after the first half-year)

And the next multiplication  is just  taking this amount and multiplying again by 1.0635 = 4352 * 1.0625 = 4624...and this is the amount after the second compounding (i.e., one year).

So the final multiplication is just our accumulted anount (4624) multiplied again by 1.0625 = 4913 !!!! And that's the amount after 1 +1/2 years  !!!!!

Note that the result is growiing ever larger......hence the term, "compounding"

Also.....note that it would be extremely tedious using my example method if we had to calculate half-year compoundings for 30 years......we would have to multiply the initial amount by 1.0625 .......60 tmes !!!!

Fortunately....the modern calculator relieves us of this burden with the use of the xy key !!!

Does all this "resolve" the "mystery" some ????

 

Oct 15, 2014

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