This chapter and the next four chapters cover the five standard and most commonly met compound interest functions. A chapter on bond price calculation follows the chapter on annuities certain.

This chapter covers the fundamentals of the compound interest equation. It also covers some mathematical techniques that will be used throughout the book. We develop these techniques together during the chapter so that the compound interest calculations will illuminate the mathematics used. You should understand both the interest equations and the mathematical techniques if you want to get the most out of this chapter. Even if you don t have a strong math background, you should at least have an intuitive understanding of the mathematical concepts involved in this chapter.

When you finish this chapter, you should understand how the compounding of interest works and the equations for interest compounding. You should also understand compounding within a period and the meaning of a nominal annual rate, compounded periodically. Depending on your mathematical skills, you should have at least an intuitive understanding of continuous compounding and when it might be used. You should be able to use compound interest tables to solve problems, and you should be able to solve most problems involving only compound interest calculations. You should understand mathematical models and when they might be used. You should understand the fundamentals of the bisection method of numerical approximation for the solution of many equations. You should be able to use tables to approximate the solutions to compound interest problems.