Chapters 5, 7

Savings Plans

Savings plans - 11 September, 2014

Regular Savings Plan

A series of payments made over time.!
The amount you now have will generate
interest.!

The fixed amounts added on a regular basis will

also earn interest.

Savings plans - 11 September, 2014

 Example 5.1: Regular savings plan I!

An one-year regular savings plan which oers
an annual interest rate i(12) = 3.87%.!

We open an account on Jan 1 with $0 balance.!

We make an installment of $500 into the

savings account at the end of each month,

starting from January 31. !

How much will we get on Dec 31 of the same

year?

Savings plans - 11 September, 2014

Jan 1

Jan 31 Feb 29

Dec 31

12

$0

$500

$500

$500

3.87%

$500

12 periods

$0

i^(12) / 12
4

Savings plans - 11 September, 2014

P0 = 0

When the account was just opened, Jan 1.

P1 = A
After 1 month, Jan 31.
P2 = P1 (1 + r) + A
After 2 months, Feb 28.
P3 = P2 (1 + r) + A
..
.
P` = P`
..
.
P n = Pn

(1 + r) + A

(1 + r) + A

After 12 months, Dec 31.

Savings plans - 11 September, 2014

 Mathematical model:
8
P0
>
>
>
(12)
>
i
>
>
<
r
>
n
>
>
>
>
A
>
:
P`

=
=
=
=
=
=

9
>
>
>
>
>
>
=

$0
3.87%
i(12)
12

12
$500
P` 1 (1 + r) + A,

` = 1, 2, . . . , n

>
>
>
>
>
>
;

! Pn

Savings plans - 11 September, 2014

 Example 5.2: Regular savings plan II!

Consider a savings plan of 12 installments,
with the fixed interest rate i(12) = 3.87%. !

We have to make the 1st installment when we

open the account, say, on Jan 1; the 2nd
installment will be made on Jan 31, and then
regularly pay the same amount on the last
day of each month for 12 times.!

If the installment amount is $500, how much

will we get on Dec 31 of the same year?
7

Savings plans - 11 September, 2014

Jan 1

Jan 31 Feb 29 Nov 30 Dec 31

$500

$500

11

$500 $500

12
$0

In total, 12 installments were paid.!

We didnt have to pay for Dec 31, since we have
already paid on Jan 1.

Savings plans - 11 September, 2014

Initial principal is not zero in this example, since we make

1st installment when we open the account.
8
P0
>
>
>
(12)
>
i
>
>
>
>
<
r
n
>
>
>
A
>
>
>
>
P`
>
:
Pn

=
=
=
=
=
=
=

$500
3.87%
i(12)
12

12
$500
P` 1 (1 + r) + A,
Pn 1 (1 + r)

` = 1, 2, . . . , n

9
>
>
>
>
>
>
>
>
=

>
>
>
>
>
>
1 >
>
;

! Pn

Since weve paid 1st installment when we opened the

account, we can skip the last installment. In total, n = 12
installments were made throughout the plan period.
9

Savings plans - 11 September, 2014

Cyclic & Irregular Plans

New type of savings plans, where installments
are not paid on a regular basis.!

Customers enjoy greater financial flexibility

and the money in the account earns interest
even though you do not make regular monthly
payments.

10

Savings plans - 11 September, 2014

 Example 7.1 (Cyclic plan, 4 months per cycle):!

Open an account on Jan 1, and immediately
deposit HK$1,000;!

Then, make an installment of $500 at the end of

every month, except April, August, and December.!

If the annual interest rate is 2.78%, what will be

the balance after 3 years?

6
11

10 11 12
Savings plans - 11 September, 2014

Jan 1 Jan 31 Feb 29 Mar 31 Apr 30 May 31 Dec 31

0

$1000 $500

$500

$500

$0

12

$500

$0

This pattern repeats itself for 2 more years.

12

Savings plans - 11 September, 2014

8
P0
>
>
>
>
A
>
>
>
(12)
>
< i
r
>
>
>
n
>
>
>
>
P`
>
:
P`

=
=
=
=
=
=
=

9
>
>
>
>
>
>
>
>
=

$1, 000
$500
2.78%
i(12)
12

>
>
>
12 3 = 36
>
>
>
P` 1 (1 + r), ` = 4, 8, 12, . . . , n >
>
;
P` 1 (1 + r) + A, otherwise.

13

! Pn

Savings plans - 11 September, 2014

 Example 7.2 (Irregular Plan):!

Open an account on Jan 1 and immediately deposit
an initial amount of $2,000.!

Make an installment of $500 at the end of each

month for 3 years, except for the prime number
months, i.e., the 2nd, 3rd, 5th, etc.!

If the rate is still 2.78%, how much will we have

after 3 years?

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

14

Savings plans - 11 September, 2014

 A prime number is an integer larger than one

and is divisible only by itself and one.!

Prime numbers less than 100:!

2, 3, 5, 7, 11, 13, 17, 19, 23, 29, 31, 37, 41, 43, 47,
53, 59, 61, 67, 71, 73, 79, 83, 89, 97

15

Savings plans - 11 September, 2014

Jan 1 Jan 31 Feb 29 Mar 31 Apr 30 May 31 Dec 31

0

$2000 $500

$0

$0

$500

$0

12

$500

Note: This pattern does not repeat itself.

16

Savings plans - 11 September, 2014

8
P0
>
>
>
(12)
>
i
>
>
>
>
>
r
>
<
n
>
A
>
>
>
>
P`
>
>
>
>
>
:
P`

=
=
=
=
=
=
=

9
>
>
>
>
>
>
>
>
>
>
=

$2, 000
2.78%
i(12)
12

12 3 = 36
$500
P` 1 (1 + r),

>
>
>
>
if ` = 1, 2, . . . , n >
>
>
>
>
and is prime
>
;
P` 1 (1 + r) + A, otherwise.

17

! Pn

Savings plans - 11 September, 2014

 Suppose that we have the following function to

check whether a number is prime:!
!

isPrime(`) =

1, if ` is a prime number
0, if ` is not a prime number

Then, the model can be rewritten as:

8
P0
>
>
>
(12)
>
i
>
>
>
>
<
r
n
>
>
>
A
>
>
>
>
P`
>
:

=
=
=
=
=
=

$2, 000
2.78%
i(12)
12

12 3 = 36
$500
P` 1 (1 + r) + A (1
for ` = 1, 2, . . . , n
18

9
>
>
>
>
>
>
>
>
=

>
>
>
>
>
>
isPrime(`)) >
>
;

! Pn

Savings plans - 11 September, 2014

User defined EXCEL function

Function IsPrime(number)!
Dim j, k, r As Integer!
If number = 1 Then!
IsPrime = 0
Exit Function
End If!
j = Int(number)!
If j <> number Then!
IsPrime = 0
Exit Function
End If!
j = Sqr(number) !
For k = 2 To j!
r = number Mod k!
If r = 0 Then!
IsPrime = 0!
Exit Function!
End If!
Next k!
IsPrime = 1!
End Function
19

Savings plans - 11 September, 2014