Teacher2Teacher |
Q&A #297 |
From: Mary Lou
(for Teacher2Teacher Service)
Date: Mar 24, 1998 at 20:52:43
Subject: Re: Math on the job
Hi, Scott,
Recently I was at a presentation by a regional manager (his name was also
Scott) for Priamerica Financial Services organization. He was explaining to
his trainees, who act as financial managers for clients, what the rule of 72
is and where it is applied.
If you have taken Algebra II and done exponentials and logarithms you have
done problems that ask you how long it takes for an amount of money invested
at x% interest to double. The Rule of 72 says to take (72/ interest rate)
times (100) = number of years. For example, for $100 invested at 6% interest
to double to $200 takes (72/.06)(100) = 12 years.
In your math class you would be looking at the equation:
200 = 100 (1+.06)^T
2 = (1.06)^T which is the same as (ln 2) = T(ln 1.06) or
(ln 2)/(ln 1.06) = 11.9 years or approximately 12 years.
Any individual involved in the securities industry knows this rule. I can
tell you, however, that most of them do not know why it works. However, you
do!
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