1 / 14

Compound Interest

Compound Interest. A word on terminology. You will find it useful to remember that compounding Annually means once a year Semiannually means twice a year Quarterly means 4 times a year Monthly means 12 times a year Weekly means 52 times a year Daily means 360 times a year. Not 365!.

davina
Télécharger la présentation

Compound Interest

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Compound Interest

  2. A word on terminology • You will find it useful to remember that compounding • Annually means once a year • Semiannually means twice a year • Quarterly means 4 times a year • Monthly means 12 times a year • Weekly means 52 times a year • Daily means 360 times a year Not 365!

  3. Many questions about financial transactions can be dealt with using the Compound Interest Formula. • But we’ll consider a different way of looking at compound interest. • We will extensively use the TVM solver of your TI calculator.

  4. To access this feature of your calculator, proceed as follows: • If you are using a TI-83+ or TI 84, • Select APPS, Finance, TVM Solver • If you are using TI-83, • Select 2nd, x-1, TVM Solver

  5. TimeValueofMoneySolver Open the TVMsolver and you’ll see something like: • N= • I%= • PV= • PMT= • FV= • P/Y= • C/Y= • PMT:End Begin. Note the TVMvariables:

  6. Defining the TVM variables • N: Total number of compounding periods • I: Annual interest rate • PV: Present value of money • PMT: Payment amount per compounding period • FV: Future value of money • P/Y: Number of payments per year • C/Y: Number of compounding periods per year

  7. Remarks about using the TVM Solver • P/Y will always be the same as C/Y. • Interest is entered in percent, not in decimal form. • Cash inflows (money received) must be entered as positive numbers • Cash outflows (money paid) must be entered as negative numbers. • At the bottom of the TVM Solver menu, make sure that End, not Begin, is always highlighted.

  8. We now consider a few of examples. • In each one, please try to see • how we interpret information to put in the TVM solver • how we interpret information obtained from the TVM Solver The emphasis is on getting used to the TVM Solver variables

  9. Example #1: An old problem revisited • A loan company charges 20% interest per year compounded quarterly for a 1-year $1000 loan. • What is the total interest for this loan?

  10. Example #2 Jane is 21 and wants to have $10,000 on her 25th birthday. How much money does she have to invest at 6% interest compounded monthly to achieve her goal?

  11. Example #3 Jim is the beneficiary of a trust fund established for him at his birth. If the original amount placed in the trust was $10,000, how much will he receive 21 years later, assuming the money has earned interest at the rate of 8% per year compounded quarterly?

  12. Example #4 Joe puts $2,000 into a savings account that earns interest at a rate of 4.5% compounded daily. How long will it take him to triple his investment?

  13. Example #5 Jim is the beneficiary of a trust fund established for him at his birth. If the original amount placed in the trust was $10,000, how much will he receive 21 years later, assuming the money has earned interest at the rate of 8% per year compounded quarterly? Monthly? Daily? 1000 times a year? 10000 times a year? Continuously?

More Related