Simple Equivalence

The interest rate formulas shown in Chapter 5 are actually statements of simple equivalence. The single-payment compound-amount (F/P) formula

F = P(1 + i)n

means that at interest rate i, the amount of money P at some point in time is equivalent to the amount of money F at another point in time n interest periods later. If someone thinks that the interest rate, i, was fair, he shouldn't care if he receives P dollars now or F dollars n interest periods from now. If he thinks the interest rate, i, is too low, he would probably rather have the P dollars now. Conversely, if he thinks that the interest rate is too high, he'd probably rather wait and get the F dollars later. The other forms are also expressions of equivalence:

  • Single-payment ...

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