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Compound Interest

Compound Interest. Objectives. Calculate a periodic rate. Determine the number of compounding periods in a given amount of time. Calculate the future value of a compound interest loan. Calculate the annual yield of a loan.

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Compound Interest

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  1. Compound Interest

  2. Objectives • Calculate a periodic rate. • Determine the number of compounding periods in a given amount of time. • Calculate the future value of a compound interest loan. • Calculate the annual yield of a loan. • Calculate the present value of a compound interest loan given its future value.

  3. Vocabulary • compound interest • compounding period • periodic rate • annual yield • nominal rate

  4. Formulas Compound Interest Future Value Formula Interest Earned Annual Yield Formula (always 1 year)

  5. Find the periodic rate that corresponds to 12% annual interest compounded • quarterly • monthly • daily • biweekly • semi-monthly

  6. Find the future value of $12,350 at 6% annual interest compounded daily for 10 years.

  7. Find the annual yield corresponding to

  8. Find the present value that will generate $1000 at 8% compounded annually for 7 years.

  9. When Alan Cooper was born, his grandparents deposited $5,000 into a special account for Alan’s college education. The account earned 7¼ % interest compounded daily. • How much will be in the account when Alan is eighteen? • If, on becoming eighteen, Alan arranged for the monthly interest to be sent to him, how much would he receive each 30-day month?

  10. David Murtha wants to have an IRA that will be worth $150,000 when he retires at age sixty-five. • How much must he deposit at age twenty- • six at compounded daily? • If, at age sixty-five, he arranges for the monthly interest to be sent to him, how much will he receive each 30-day month?

  11. Find the future value of $7300 at 7% compounded annually for 13 years.

  12. National Trust Savings offers 5-year CDs at 8.25% compounded daily, and the Bank of the Future offers 5-year CDs at 8.28% compounded annually. Compute the annual yield for each institution and determine which is more advantageous for the consumer.

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