Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Mr. Elsesser
Introduction to
Financial Management
 Interest rates play a key role in borrowing, taking
loans, and receiving earnings on your
savings/investments.
 Interes...
 Another name for interest rates is APR.
 YOU MUST KNOW THESE WHEN:
 Trying to decide where you will get the best
deal ...
 The Federal Reserve Bank plays a large role in influencing
interest rates, especially to stimulate the economy.
 When I...
 The Federal Reserve Bank plays a large role in influencing
interest rates, especially to stimulate the economy.
 When I...
 TIME VALUE OF MONEY:
 Savings accounts and other investments pay
interest on the money you deposit, which
increases the...
Time
Money
Time, Money and the Rate of Interest
The more time you have to save the
more money you will have at the end
of ...
 There are 2 ways you can receive interest payments:
 1. Simple Interest:
 A quick method to calculating the interest c...
 If you had $100 in a savings account that paid 6% simple
interest, during the first year you would earn $6 in interest.
...
NEFE High School Financial Planning Program
Unit Three – Investing: Making Money Work for You
Investing Annually to Achiev...
 There are 2 ways you can receive interest payments:
 2. Compounded Interest:
 Interest is paid or received on the orig...
 If you had $100 in a savings account that paid 6% interest compounded annually, the first
year you would earn $6.36 in i...
Another Compounded Interest Example
Compounding – the idea of earning
interest on interest
Assume you have $100 in an acco...
Example Answer
Compounding –
the idea of earning interest on interest
Answer = $121.00
USING SIMPLE INTEREST:
100 x 10% x ...
NEFE High School Financial Planning Program
Unit Three – Investing: Making Money Work for You
Investing a $10,000 Lump Sum...
NEFE High School Financial Planning Program
Unit Three – Investing: Making Money Work for You
Investing $1,000 Annually
11...
To determine how long it will take to
double your money, you need to use the
RULE OF 72::
72
Interest Rate
=
Years Needed...
Example #1:
 Assuming you can earn 6% on your money, how
long will it take $100 to grow to $200?
72
Interest Rate
=
Year...
 Example #2:
 Now, let’s say you have a set time period in mind to
double your investment. If you have $200 today and ne...
It’s all about:
 RISK AND RETURN:
 The more risk you take with your money,
the potential you will have for a higher
ret...
Interest Rate
3%
24 Yrs.
$800
4%
6%
8%
12%
6 Yrs. 9 Yrs. 12 Yrs. 18 Yrs.
$400
$400
$400
$200
$200
$200
$200
$200
 The more frequently your money is
compounded the better your return on
savings:
 Therefore, it is better to choose an
a...
INFLATION:
 The rate at which the general level of prices for goods
and services is rising, and subsequently, purchasing...
 Impact of Inflation on:
 Interest Rates:
 Increase/Decrease has a direct relationship on the cost of
borrowing.
 Purc...
Upcoming SlideShare
Loading in …5
×

Unit 4: Cost of Money

856 views

Published on

  • Tired of being scammed? Take advantage of a program that, actually makes you money! ■■■ http://scamcb.com/ezpayjobs/pdf
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • You are simply subject to the way the market bounces and that's the way it is. I found some very unique features with GINO SHEARER TRADING while trading as a real user. It’s one of the latest trading signal services that can send signals of business which are highlighted by the software randomly. The main point of loving this system should be that GINO SHEARER TRADING system does not require any major broker that adds to the lack of trustworthy of this tool. ?
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here

Unit 4: Cost of Money

  1. 1. Mr. Elsesser Introduction to Financial Management
  2. 2.  Interest rates play a key role in borrowing, taking loans, and receiving earnings on your savings/investments.  Interest Rates:  A rate that is charged or paid for the use of money.  Expressed as an annual percentage of the principal.  Principal:  The amount of money that you invest or borrow.  When you borrow money:  Interest rates are the cost of borrowing.  When you invest or save money:  Interest rates are your earnings for allowing corporations or financial institutions to use your money.
  3. 3.  Another name for interest rates is APR.  YOU MUST KNOW THESE WHEN:  Trying to decide where you will get the best deal on a credit card, loan, or return on investment.  It is the law for credit card companies and loan borrowers to give customers a full understanding of the actual rates applicable to their agreements. When you invest or save money:
  4. 4.  The Federal Reserve Bank plays a large role in influencing interest rates, especially to stimulate the economy.  When Interest Rates are LOWERED:  Cheaper Borrowing Costs  Consumers will take out loans to finance greater spending/investments.  Incentive to Save Money Decreases:  Consumers will want to spend as opposed to hold onto their money.  Lower Interest Payments on mortgages, cars, etc.  Prices of Assets Increase  Large assets like home price will increase—as will the rise of wealth and consumer confidence.
  5. 5.  The Federal Reserve Bank plays a large role in influencing interest rates, especially to stimulate the economy.  When Interest Rates are RAISED:  Borrowing Becomes More Expensive  People will have less disposable income as more money will be paid in interest.  Incentive to Save Money Increases:  Consumers will want their money earning interest in savings accounts as opposed to spending  Spending and Consumption Decreases Across Economy  Prices of Assets can Decrease  Consumer Confidence Decreases
  6. 6.  TIME VALUE OF MONEY:  Savings accounts and other investments pay interest on the money you deposit, which increases the amount of money in your account over time.  Amount of earnings growth depends on the combination of time, money, and rate of return (interest).
  7. 7. Time Money Time, Money and the Rate of Interest The more time you have to save the more money you will have at the end of the time period. The more money you have to save the more money you will have at the end of the time period. Interest The higher the rate of interest you can earn, the more money you will have at the end of the time period.
  8. 8.  There are 2 ways you can receive interest payments:  1. Simple Interest:  A quick method to calculating the interest charge on a loan or payment on a deposit.  The charge/payment is always based on the original principal.  Mainly used for short-term loans  Simple Interest Formula:  Interest = PRINCIPAL x RATE x TIME  Principal = original amount of deposit/loan  Rate = Interest Rate of Return/APR (Annual Percentage Rate  Time = Period of time  Usually measured in years
  9. 9.  If you had $100 in a savings account that paid 6% simple interest, during the first year you would earn $6 in interest.  Steps:  1. Write the formula:  I=PxRxT  2. Identify your values:  P=$100, R= 0.06, T=1  3. Plug in your values:  $100 x 0.06 x 1 = $6  At the end of two years you would have earned $12.  The account would continue to grow at a rate of $6 per year, despite the accumulated interest.
  10. 10. NEFE High School Financial Planning Program Unit Three – Investing: Making Money Work for You Investing Annually to Achieve a Goal Value of $20 1 Year 2 Years 4 Years 6 Years 4% 5% 6% 8% 10% $20.80 $21.00 $21.20 $21.60 $22.00 $21.63 $22.05 $22.47 $23.33 $24.20 $23.40 $24.31 $25.25 $27.21 $29.28 $25.31 $26.80 $28.37 $31.74 $35.43 Building….
  11. 11.  There are 2 ways you can receive interest payments:  2. Compounded Interest:  Interest is paid or received on the original amount of the loan or deposit, plus any interest earned.  Compounded Interest Formula:  Amount = PRINCIPAL x (1 + I)  Amount = original amount in account  Principal = original amount of deposit  Interest = Interest Rate of Return expressed as decimal  N = Number of years compounded 1=1yr To Understand the concept, you need a scientific calculator to do the math n
  12. 12.  If you had $100 in a savings account that paid 6% interest compounded annually, the first year you would earn $6.36 in interest.  Steps:  1. Write the formula:  Amount = PRINCIPAL x (1 + I)  2. Identify your values:  P=$100, I= 0.06, T=1  3. Plug in your values:  $100 x (1+.06) = $106  Using simple interest add your amount to new principal = $100+$6 = $106  With compounded interest, the second year you would earn $6.36 in interest. Here is the calculation using simple interest:  $106 x 0.06 x 1 = $6.36  $106 + $6.36 = $112.36-- new amount in account  USING COMPOUND INTEREST FORMULA:  100x(1+.06)^2 = $112.36 1
  13. 13. Another Compounded Interest Example Compounding – the idea of earning interest on interest Assume you have $100 in an account earning 10% interest per year…A the end of that one year, you have $110 in your account….In year two your account earns 10% - How much do you have at the end of the second year?
  14. 14. Example Answer Compounding – the idea of earning interest on interest Answer = $121.00 USING SIMPLE INTEREST: 100 x 10% x 1 = $10 (100 + 10) = 110 x 10% x 1 = $11 yr2 USING COMPOUND INTEREST Amount = Principal x (1 +I) 100x(1+.1)^2 = $121.00 n
  15. 15. NEFE High School Financial Planning Program Unit Three – Investing: Making Money Work for You Investing a $10,000 Lump Sum 11% 10% 9% 8% 7% 6% 5% 12% Interest Rate 5 Years 20 Years 15 Years 10 Years $12,763 $17,623 $16,851 $16,105 $15,386 $14,693 $14,026 $13,382 $16,289 $31,058 $28,394 $25,937 $23,674 $21,589 $19,672 $17,908 $20,789 $54,736 $47,846 $41,772 $36,425 $31,722 $27,590 $23,966 $26,533 $96,463 $80,623 $67,275 $56,044 $46,610 $38,697 $32.071 1
  16. 16. NEFE High School Financial Planning Program Unit Three – Investing: Making Money Work for You Investing $1,000 Annually 11% 10% 9% 8% 7% 6% 5% 12% Interest Rate 5 Years 20 Years 15 Years 10 Years $5,526 $6,353 $6,228 $6,105 $5,985 $5,867 $5,751 $5,637 $12,578 $17,549 $16,722 $15,937 $15,193 $14,487 $13,816 $13,181 $21,579 $37,280 $34,405 $31,772 $29,361 $27,152 $25,129 $23,276 $33,066 $72,052 $64,203 $57,275 $51,160 $45,762 $40,995 $36,786 1
  17. 17. To determine how long it will take to double your money, you need to use the RULE OF 72:: 72 Interest Rate = Years Needed to Double Investment 72 Interest Rate Required=Years Needed to Double Investment
  18. 18. Example #1:  Assuming you can earn 6% on your money, how long will it take $100 to grow to $200? 72 Interest Rate = Years Needed to Double Investment 72 6% = 12 years
  19. 19.  Example #2:  Now, let’s say you have a set time period in mind to double your investment. If you have $200 today and need $400 in 8 years, what interest rate do you need to earn? 72 8 years = 9% 72 Interest Rate Required=Years Needed to Double Investment
  20. 20. It’s all about:  RISK AND RETURN:  The more risk you take with your money, the potential you will have for a higher return.  The less risk, the less of a chance for a greater return  RATE OF RETURN:  How fast your money grows.
  21. 21. Interest Rate 3% 24 Yrs. $800 4% 6% 8% 12% 6 Yrs. 9 Yrs. 12 Yrs. 18 Yrs. $400 $400 $400 $200 $200 $200 $200 $200
  22. 22.  The more frequently your money is compounded the better your return on savings:  Therefore, it is better to choose an account that will pay you:  Daily over Weekly  Weekly over Monthly  Monthly over Quarterly
  23. 23. INFLATION:  The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.  The FED tries to monitor and control the rate of inflation in a attempt to keep the excessive growth of prices down.  Ex: If the inflation rate is 2%, than a $1 pack of gum will cost $1.02 next year.
  24. 24.  Impact of Inflation on:  Interest Rates:  Increase/Decrease has a direct relationship on the cost of borrowing.  Purchasing/Buying Power:  Increase/Decrease has a direct relationship on the amount of purchasing or buying power.  Who benefits most from inflation?  Borrowers and producers  Who benefits least from inflation?  Lenders/savers (APR is inflated), lower-income/fixed income families, individuals/businesses (rushed transactions).

×