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# Compund Interest Lesson

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### Transcript of "Compund Interest Lesson"

1. 1. Getting Rich via Compounded Interest<br />
2. 2. What would you do with all that Money?<br />Do <br />You<br />want to be a Millionaire?<br />
3. 3. How am I going to become a Millionaire?<br />How do I choose which idea to pursue?<br />
4. 4. Risk / Reward Model<br />Risk:<br />Reward:<br />What’s the RISK for pursuing …..<br />vs<br />What’s the REWARD for pursuing …..<br />
5. 5. Model for Evaluating Investment Ideas<br />Fill in the cells with the investment ideas from class discussion.<br />
6. 6. Model for Evaluating Investment Ideas<br />What else could be added to this model to make it better?<br />Tax implications<br />Likelihood of success<br />
7. 7. Objective<br />Using a compound interest model,<br />If you deposit your money in a bank ….<br /> that pays compound interest …..<br /> % / Time<br /> how long until<br />
8. 8. Compound Interest – What is it?<br />Interest - is a fee paid on borrowed assets.<br />It is the price paid for the use of borrowed money (auto loan, house mortgage)<br />OR<br />Money earned by depositedfunds.<br />Compound Interest?<br />Depositedfunds X interest in % / time = Money Earned<br />interest in units of %/time <br />=<br />/time<br />X<br />
9. 9. Compound Interest: Continued<br /><ul><li>Interest – money earned on funds deposited</li></ul>Compound Interest?<br /> DepositedFunds <br />X Interest <br /> Money Earned<br />The units of interest: [Interest] = % / Time<br />6% / year for example<br />For calculations, remember to convert %’s to decimals<br />
10. 10. An Example<br />Deposited Funds = \$10000<br />Interest = 6% / Year<br />What is the interest earned in 1 Year?<br />Interest Earned = Deposited Funds x Interest<br /> Interest Earned = \$10000 x 6/100<br /> Interest Earned = \$60<br />What is the future value of your deposit after 1 Year? <br /> Future Value = Deposited Funds + Interest Earned<br /> Future Value = \$10000 + \$60<br /> Future Value = \$10060<br />
11. 11. Compound Interest: Continued<br />OK, but what is <br />Compound Interest?<br />\$1000 Today <br />x 6% Interest / year \$60 earned in one year<br />Compound interest is interest earned on interest!<br />
12. 12. Compound Interest: Continued<br />If I leave \$1000 deposited for 2 Years, how much will I have at the end of 2 Years at 6% interest / year?<br />End of year 1<br />End of year 2<br />I got paid 6% interest on the \$60 in interest I earned!!<br />\$1060 X 0.06 = (\$1000 + \$60) X 0.06<br /> OR<br />(\$1000 + \$60) X 0.06 = (\$1000 X 0.06) + (\$60 X 0.06)<br />Interest on Interest!<br />
13. 13. Compound Interest: Continued<br />Compound Interest - arises when interest is added to the initially deposited funds or principal, so that from that moment on, the interest that has been added also itself earns interest.<br />Compound interest has a compounding period<br />Compounding period is the interval of time until earned interest is added to the principal<br />Example: 12% interest / year, compounded monthly<br />12% / Year<br /> 12 Months / Year<br />= 1% / Month<br />
14. 14. Compound Interest: Activity<br />In groups of 2,<br />Describe and demonstrate the concept of compound interest using anything BUT formulas and / or numbers<br />You may use words<br /> OR<br /> You may use drawings<br /> OR<br /> You may use manipulatives<br /> OR<br /> You may use ?<br />You have 10 minutes to create your solution. Pick a representative from your group and share your solution with the class.<br />
15. 15. Compound Interest: Example<br />You have recently graduated from Acme University with a Masters in Mathematics. Luckily for you, the economy was chugging along nicely when you graduated. Jobs were plentiful. You had several interviews and accepted a position at better than expected pay and benefits doing something that sounded good during the interview. Unfortunately, it sounded better than it is. After six years in college you have become acclimated to the college life and making the transition to the 40+ hours per week for 50 weeks a year has been tough. In fact, you hate it, and have vowed to find a way to retire young. <br />To retire you must have money to live on. Looking back at your spending habits during college, you have deduced that a million dollars in savings would be enough for you to retire with. Hence, you have decided to put your math skills to work to figure out how long it will take to save a million dollars.<br />