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Q&A #297


Math on the job

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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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