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Compound Interest

Compound Interest . Objectives: Determine the Future Value of a Lump Sum of Money Determine the Present Value of a Lump Sum of Money Determine the Time required to Double or Triple a Lump Sum of Money. Compound Interest: .

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Compound Interest

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  1. Compound Interest Objectives: Determine the Future Value of a Lump Sum of Money Determine the Present Value of a Lump Sum of Money Determine the Time required to Double or Triple a Lump Sum of Money

  2. Compound Interest: • Compound Interest: interest computed on your original investment as well as on any accumulated interest • Principle: a sum of money is invested at an annual percentage rate , in decimal form, compounded once per year • Amount of the balance: the accumulated value is determined when the interest is added to the principle at year’s end • n compounding periods per year: most savings institutions have plans in which interest is paid more than once a year or times a year • Time: time periods in years • Compounded continuously:

  3. EX: Find the amount that results from each investment • 1. $100 invested at 4% compounded quarterly after a period of 2 years • 2. $100 invested at 10% compounded continuously after a period of years

  4. EX: Find the amount that results from each investment • 3. You decide to invest $8000 for 6 years and you have a choice between two accounts. The first pays 7% per year, compounded monthly. The second pays 6.85% per year, compounded continuously. Which is the better investment?

  5. EX: Find the missing variable • 4. To get $100 after 2 years at 6% compounded monthly • 5. What rate of interest compounded annually is required to double an investment in 3 years?

  6. EX: Find the missing variable • 6. How long does it take for an investment to double in value if it is invested at 8% per annum compounded monthly? Compounded continuously?

  7. Effective Rate of Interest: the equivalent annual simple rate of interest that would yield the same amount as compounding after 1 year • EX: Find the effective rate of interest for compounded quarterly

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