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Chapter 3 Mathematics of Finance - page 20 / 20

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Barnett/Ziegler/Byleen Finite Mathematics 12e

20

Strategy (continued)

Step 2.  If a single payment is involved, determine whether simple or compound interest is used.  Simple interest is usually used for durations of a year or less and compound interest for longer periods.

Step 3.  If a sequence of periodic payments is involved, determine whether the payments are being made into an account that is increasing in value -a future value problem - or the payments are being made out of an account that is decreasing in value - a present value problem.  Remember that amortization problems always involve the present value of an ordinary annuity.

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