Principle of Consistency in Interest Calculations

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Principle of Consistency in Interest Calculations

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Principle of consistency say that, in a consistent market, the future value is not depend on the course of action taken by the investor. That is

A(t₀, t_n) = A(t₀, t₁) A(t₁, t₂) A(t₂, t₃)…….A(t_n-1, t_n)

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Numerical Problem

Q. 1 An investor deposits $1000 in a bank account that pays 10% interest pa. Compare how much the investor would have after 3 years if the money were i) invested for 3 years ii) invested for 1 year and then immediately reinvested for 2 more years.

Calculate: Case 1 – Interest rate given in simple interest Case 2 – Interest rate given is compound interest

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