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Essential Standard 4.00

Essential Standard 4.00. Understand the role of finance in business. Objective 4.03. Understand saving and investing options for clients. Topics. Saving and investing basics Saving and investing options Evaluation factors for savings and investing options.

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Essential Standard 4.00

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  1. Essential Standard 4.00 Understand the role of finance in business.

  2. Objective 4.03 Understand saving and investing options for clients.

  3. Topics Saving and investing basics Saving and investing options Evaluation factors for savings and investing options

  4. Saving and investing basicsEssential QuestionHow do investors determine appropriate saving and investing options?

  5. Saving and Investing Basics Reasons money is borrowed by the following: Individuals purchase large ticket items such as homes and cars. Businesses operate or expand their business, which may include purchasing a building, replacing old equipment, or offering new products. Government improve or expand transportation, schools, or other public services.

  6. Saving and Investing Basics • What is saving? • putting away money for future use. • What is investing? • using savings to earn more money for future financial security. • Saving influences on economic activity • by making more money available to be used by individuals, businesses, and the government. • When the borrowed money is spent, the demand for goods and services is increased, which creates more jobs and spending for workers.

  7. Saving and Investing Basics continued Main goals of savers and investors To have immediate income and long-term growth income. Growth of savings interest earned when others borrow your money. Simple interest the amount of money paid to saver on amount deposited for a period of time. Compound interest the amount of money paid to saver on money deposited and interest previously earned for a period of time.

  8. Calculating Simple Interest • How is simple interest calculated? • I=P * R * T. • I = Interest • P=Principal • R=Rate • T=Time and I=Interest Rate)

  9. Calculating Compound Interest • How is compound interest calculated? • Compound interest allows you to take the interest earned each compounding period and add it to the principal. • Impact of compound frequency on savings growth rate • The more times that interest is compounded the greater the growth of savings.

  10. How is compound interest calculated? • A = The amount of interest • P = principal amount (the initial amount you borrow or deposit) • r  = annual rate of interest (as a decimal) • n  =  number of times the interest is compounded per year • t  = number of years the amount is deposited or borrowed for.

  11. Calculating Compound Interest • An amount of $1,500.00 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. What is the balance after 6 years? 4(6) • A=1500(1+0.043/4) • A= $1,938.84 • So after six years you would have made $1938.84 and the ending balance would be $3,438.84

  12. Compound –vs Simple Interest • The previous example using compound interest yielded $1938.84. • What would the same amount invested using simple interest earn in six years? • I=???? • P=1,500 • R=4.3% • T=6

  13. Savings Growth Simple interest $1,000 at 10% Year 1: $1,000 * .10 = $100 $1,000 + $100 = $1,100 Year 2: $1,000 * .10 = $100 $1,100 + $100 = $1,200 What would the value be at the end of year 3? Compound interest $1,000 at 10% Year 1: $1,000 * .10 = $100 $1,000 + $100 = $1,100 Year 2: $1,100 * .10 = $110 $1,100 + $110 = $1,210 What would the value be at the end of year 3?

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