ACTSC231 Lecture 2: Actsc 231 Lecture 2

• School: University of Waterloo
• Department: Actuarial Science
• Course: ACTSC231
• Professor: Ryan Freeland

Document Summary

Recap it = annual effective rate of interest in year t. a(t) = accumulative function = (1 + i1)*(1 + i2)* . * (1 + it) a(t) = a(t-1)*(1 + it) => a(t) a(t-1) = it*a(t-1) Simple interest | linear accumulation function a(t) = c + st. c is capital, and s is annual effective rate of interest. a(0) 1 => c = 1; a(1) = 1 + i1 => s = i1; Exact simple interest: t = ; use 365 also in a leap year. Ordinary simple interest(30 / 360): t = ; ex. Borrow on may 5th and return on july 7th, t = . In simple interest, the effective rate (i) is decreasing. Assume a constant annual effective rate, so it = i1. a(t) = . In compound interest, the interest earned each period is increasing and the effective rate is constant. Always use compound interest unless the question mention to use simple interest rate.