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Showing posts with label log. Show all posts
Showing posts with label log. Show all posts

## Friday, July 26, 2013

### Interest Problems

In this section we cover compound interest and continuously compounded interest.
Use the compound interest formula to solve the following.

Example: If a \$500 certificate of deposit earns 4 1/4% compounded monthly then how much will be accumulated at the end of a 3 year period?

Answer: At the end of 3 years the amount is \$576.86.

Example: A certain investment earns 8 3/4% compounded quarterly.  If \$10,000 is invested for 5 years, how much will be in the account at the end of that time period?

Answer: At the end of 5 years the account have \$15,415.42 in it.

The basic idea is to first determine the given information then substitute the appropriate values into the formula and evaluate.  To avoid round-off error, use the calculator and round-off only once as the last step.

• Annual  n = 1
• Semiannual n = 2
• Quarterly n = 4
• Monthly n = 12
• Daily n = 365

One important application is to determine the doubling time.  How long does it take for the principal in an account earning compound interest to double?

Example: How long does it take to double \$1000 at an annual interest rate of 6.35% compounded monthly?

Answer:  The account will double in approximately 10.9 years.

The key step in this process is to apply the common logarithm to both sides so that we can apply the power rule and solve for time t.  Use the calculator in the last step and round-off only once.

Example: How long will it take \$30,000 to accumulate to \$110,000 in a trust that earns a 10% return compounded semiannually?

Example: How long will it take our money to triple in a bank account with an annual interest rate of 8.45% compounded annually?

Answer: Approximately 13.5 years to triple.

Make a note that doubling or tripling time is independent of the principal. In the previous problem, notice that the principal was not given and that the variable P cancelled.
Use the continuously compounding interest formula to solve the following.

Example: If a \$500 certificate of deposit earns 4 1/4% annual interest compounded continuously then how much will be accumulated at the end of a 3 year period?

Answer: the amount at the end of 3 years will be \$576.99.

Example: A certain investment earns 8 3/4% compounded continuously.  If \$10,000 dollars is invested, how much will be in the account after 5 years?

Answer: The amount at the end of five years will be \$15,488.30.

The previous two examples are the same examples that we started this chapter with.  This allows us to compare the accumulated amounts to that of regular compound interest.

As we can see, continuous compounding is better, but not by much.  Instead of buying a new car for say \$20,000, let us invest in the future of our family.  If we invest the \$20,000 at 6% annual interest compounded continuously for say, two generations or 100 years, then how much will our family have accumulated in that time?
The answer is over 8 million dollars. One can only wonder actually how much that would be worth in a century.

Given continuously compounding interest, we are often asked to find the doubling time.  Instead of taking the common log of both sides it will be easier take the natural log of both sides, otherwise the steps are the same.

Example: How long does it take to double \$1000 at an annual interest rate of 6.35% compounded continuously?

The key step in this process is to apply the natural logarithm to both sides so that we can apply the power rule and solve for t.  Use the calculator in the last step and round-off only once.

Example: How long will it take \$30,000 to accumulate to \$110,000 in a trust that earns a 10% annual return compounded continuously?

Example: How long will it take our money to triple in a bank account with an annual interest rate of 8.45% compounded continuously?

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### Graphing Logarithmic Functions

One way to graph logarithmic functions is to first graph its inverse exponential. Then use your knowledge about the symmetry of inverses to graph the logarithm. Recall that inverses are symmetric about the line y = x. For example,
Step 1: Find some points on the exponential f(x). The more points we plot the better the graph will look.

Step 2: Switch the x and y values to obtain points on the inverse.

Step 3: Determine the asymptote.

In practice, we use a combination of techniques to graph logarithms.  We can use our knowledge of transformations, techniques for finding intercepts, and symmetry to find as many points as we can to make these graphs. General guidelines follow:

1. Graph the vertical asymptote. All logarithmic functions of the form
have a vertical asymptote at x = h.

2. Find the x- and y-intercepts if they exist. To find x-intercepts set y = f(x) to zero and to find y-intercepts set x = 0.

3. Plot a few more points and graph it.

Graph the following logarithmic functions. State the domain and range.

In the previous solved problem, make a note of the rigid transformations.  If we start with the basic graph y = log(x) then the first translation is a shift to the left 3 units y = log(x+3).  Next we see a vertical shift up 2 units y = log(x+3)+2 .

In the above problem there was a reflection about the x-axis as well as a shift to the left 3 units.