Actuarial Science 2053 Lecture 1: chapter2.pdf
12 Oct 2014
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The interest earned in any given period of time is added to the principal and it thereafter earns interest. Interest is calculated on the original principal only during the whole term of the investment (or loan), at the stated annual rate of interest. This is the time between two successive interest calculations. The time unit need not be a year. You may find the terms such as: payable quarterly, compounded semi-annually, convertible monthly. Determine the interest earned on over a 2-year period if interest is calculated at 10%, compounded quarterly. Compare it with the simple interest earned on for 2 years at 10% per annum. S = accumulated value of p n = term of investment in interest periods m = number of interest periods per year mj. = nominal rate of interest, is compounded (payable, convertible) m-times a year (actuaries use ) (mi i = interest rate per interest period.
