Applied 40S May 7, 2009
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Applied 40S May 7, 2009

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The Rule of 72, nominal vrs effective interest rates.

The Rule of 72, nominal vrs effective interest rates.

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    Applied 40S May 7, 2009 Applied 40S May 7, 2009 Presentation Transcript

    • Credit Cards and Interest Rates current Canadian rates My favorite Credit Card by flickr user .KM.
    • Solve for FV (the future value) ... You decide to invest $6500. The bank offers an interest rate of 8.25% compounded annually. What will your money be worth in 7 years if the interest rate remains unchanged? HOMEWORK N= I%= PV= PMT= FV= P/Y= C/Y= PMT: END BEGIN
    • HOMEWORK Watching Money Grow ... N= Calculate the final balance I%= if $7500 were invested at PV= 8% per year, compounded PMT= semi-annually for 6 years. FV= P/Y= C/Y= PMT: END BEGIN How long will it take $12 000 N= invested at 7.2% per year, I%= compounded quarterly, to PV= grow to $15 000? PMT= FV= P/Y= C/Y= PMT: END BEGIN
    • Investing Regularly ... HOMEWORK N= Calculate the final balance if $1500 were I%= invested at 8% per year, compounded semi- PV= annually, with additional investments of $1 000 PMT= at the end of every six months for five years. FV= P/Y= C/Y= PMT: END BEGIN How long will it take to save $35 000, if $2 500 N= were invested at 7.2% per year, compounded I%= quarterly, followed by an additional $400 at the PV= end of each 3-month period? PMT= FV= P/Y= C/Y= PMT: END BEGIN
    • Investing Frequently ... A financial institution offers an annual interest rate of 6%, compounded monthly. Compare $1200 invested at the end of each year to $100 invested at the end of each month. Option 2: $100/month Option 1: $1200/year N= N= I%= I%= PV= PV= PMT= PMT= FV= FV= P/Y= P/Y= C/Y= C/Y= PMT: END BEGIN PMT: END BEGIN
    • Doubling Our Money ... $1200 is invested at 6% interest compounded annually. How long will it take to double? N= N= I%= I%= PV= PV= PMT= PMT= FV= FV= P/Y= P/Y= C/Y= C/Y= PMT: END BEGIN PMT: END BEGIN
    • The Rule of 72 Here's a handy way to figure out how long your investment will take to double in value. It is called the Rule of 72. (Interest Rate %) x (Years to Double) = 72 To find the number of years given a percentage: Years = 72 (Interest Rate %) To find the percentage required to double given the years: Rate = 72 Years Numbers 72 by flickr user szczel
    • Scenario 1: You have an investment that compounds annually at 7%. How long will it take to double? Scenario 2: You are shopping for an investment that will double in 6 years. What interest rate are you looking for?
    • Use the Rule of 72 to estimate the doubling time for these interest rates: (c) 24% per annum, (b) 8% per annum, (a) 4% per annum, compounded annually compounded annually compounded annually Use the TVM solver in your calculator to calculate the the compound amount of a $100 investment for the doubling times estimated above. N= N= N= I%= I%= I%= PV= PV= PV= PMT= PMT= PMT= FV= FV= FV= P/Y= P/Y= P/Y= C/Y= C/Y= C/Y= PMT: END BEGIN PMT: END BEGIN PMT: END BEGIN How accurate does the Rule of 72 seem to be?
    • Understanding Credit Card Interest Rates or The Difference Between Nominal and Effective Interest Rates Credit Cards by flickr user Andres Rueda
    • Nominal vrs. Effective Interest Rate You have money to invest in interest-earning deposits. You have determined that suitable deposits are available at your bank paying 6.5% per annum compounded annually, at a local trust company paying 6.4% per annum compounded monthly and at the Student Credit Union paying 6.45% per annum compounded semiannually. Which institution offers the best rate of interest? N= N= N= I%= I%= I%= PV= PV= PV= PMT= PMT= PMT= FV= FV= FV= P/Y= P/Y= P/Y= C/Y= C/Y= C/Y= PMT: END BEGIN PMT: END BEGIN PMT: END BEGIN
    • Nominal Rate of Interest - The stated rate of interest applied to your investment. 6.5% per annum compounded semiannually 6.4% per annum compounded annually 6.45% per annum compounded monthly Effective Rate of Interest - The interest rate if an annuity is compounded annually.
    • HOMEWORK Marge invested $2500 at 6.5% per annum N= compounded quarterly. Calculate the value I%= of her investment after three years. PV= PMT= FV= P/Y= C/Y= PMT: END BEGIN Calculate the effective interest rate. N= I%= PV= PMT= FV= P/Y= C/Y= PMT: END BEGIN
    • HOMEWORK Credit Card Interest Calculate the effective interest rate of $1.00 invested at 18.5% compounded daily for one year. N= N= I%= I%= PV= PV= PMT= PMT= FV= FV= P/Y= P/Y= C/Y= C/Y= PMT: END BEGIN PMT: END BEGIN
    • Shaina wishes to invest $2000 given by her grandfather. She has an option of a guaranteed investment certificate earning 8.85%, compounded quarterly, or a savings bond of 9%, compounded semi- HOMEWORK annually. Which investment N= N= should she choose? I%= I%= PV= PV= PMT= PMT= FV= FV= P/Y= P/Y= C/Y= C/Y= PMT: END BEGIN PMT: END BEGIN If each investment term is 5 years, what will be the difference in their values at the end of the term?