EXAMPLE 1.8 - Terminology and Symbols

Last year Jane’s grandmother offered to put enough money into a savings account to generate $5000 in interest this year to help pay Jane’s expenses at college. (  a ) Identify the symbols, and (  b ) calculate the amount that had to be deposited exactly 1 year ago to earn $5000 in interest now, if the rate of return is 6% per year.

Solution 

(a) Symbols    P  (last year is 1) and   F  (this year) are needed.

(b) Let F = total amount now and P = original amount. We know that   F – P = $5000 is accrued interest. Now we can determine   P . Refer to Equations [1.1] through [1.4].
 
F = P  +  Pi   

The $5000 interest can be expressed as