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Lesson 2 Apr 6 2010
 

Lesson 2 Apr 6 2010

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    Lesson 2 Apr 6 2010 Lesson 2 Apr 6 2010 Presentation Transcript

    • Interest Rates
    • Solve for FV (the future value) ... HOMEWORK 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? N= I%= PV= PMT= FV= P/Y= C/Y= PMT: END   BEGIN
    • Watching Money Grow ... HOMEWORK N= Calculate the final balance  I%= if $7500 were invested at  PV= 8% per year, compounded  PMT= semi­annually 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 Calculate the final balance if $1500 were  N= invested at 8% per year, compounded semi­ I%= annually, with additional investments of $1 000   PV= at the end of every six months for five years. PMT= 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 3­month period?  PMT= FV= P/Y= C/Y= PMT: END   BEGIN
    • Imagine that you have just won $500000.00 in a contest.  You invest it as 12% compounded semi­annually.  $30088.68 You decide to live off the investment.  Determine how much money you can withdraw each compounding  period if you want the money to last 50 years. N= I%= PV= 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 1: $1200/year Option 2: $100/month 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
    • Example 1: You have an investment that compounds annually at 7%.  How long will it take to double? Example 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: (a) 4% per annum,  (b) 8% per annum,  (c) 24% 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 interest­earning 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.
    • Marge invested $2500 at 6.5% per annum  HOMEWORK compounded quarterly. Calculate the value  N= of her investment after three years. I%= 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
    • Credit Card Interest HOMEWORK 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 annually. HOMEWORK 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?