1 / 12

COMPOUNDING

COMPOUNDING. FUTURE VALUE OF A PRESENT SUM FUTURE VALUE OF A SERIES OF PAYMENTS. Future Value of a Present Sum (Graphic). Assume that you deposit $5,000 at a compound interest rate of 8% for 2 years. 0 1 2. 8%. $5,000. FV 2. COMPOUNDING.

austin-mcintyre
Download Presentation

COMPOUNDING

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. COMPOUNDING • FUTURE VALUE OF A PRESENT SUM • FUTURE VALUE OF A SERIES OF PAYMENTS

  2. Future Value of a Present Sum (Graphic) Assume that you deposit $5,000 at a compound interest rate of 8% for 2 years. 0 12 8% $5,000 FV2

  3. COMPOUNDING FUTURE VALUE OF A PRESENT SUM FV n = PVO (1+i)n OR FUTURE VALUE = PRESENT VALUE * (1 + COMPOUND RATE) CONVERSION PERIODS

  4. Future Value of a Present Sun (Formula) FV1 = P0 (1+i)1 = $5,000(1.08) = $5,400 Compound Interest You earned $400 interest on your $5,000 deposit over the first year. This is the same interest you would earn under simple interest.

  5. Future Value of Present Sum (Formula) FV1 = P0(1+i)1 = $5,000 (1.08) = $5,400 FV2 = FV1 (1+i)1 = {P0 (1+i)}(1+i) = P0(1+i)2 =$5,000(1.08)(1.08) = $5,000(1.08)2 = $5,832.00 You earned an EXTRA$32.00 in Year 2 with compound over simple interest.

  6. General Future Value Formula FV1 = P0(1+i)1 FV2 = P0(1+i)2 General Future Value Formula: FVn = P0 (1+i)n or FVn = P0 (FVD in) -- See Table A1 etc.

  7. Valuation Using Table IA FVD I,nis found in Table A1

  8. Using Future Value Tables FV2 = $5,000 (FVD 8%,2) = $5,000 (1.166) = $5,830 [ due to rounding]

  9. PROBLEM: $5000 @ 8% COMPOUNDED ANNUALLY FOR 3 YEARS FV n = 5000*(1.08)3 FV n =5000(1.259712) = 6,298.56

  10. PROBLEM: $5000 @ 8% COMPOUNDED QUARTERLY FOR 3 YEARS FV n = 5000*(1.02)12 FV n =5000(1.2682418) = 6,341.21

  11. Example Problem Julie Miller wants to know how large her $10,000 deposit will become at a compound interest rate of 10% for 5 years. 0 1 2 3 4 5 10% $10,000 FV5

  12. Problem Solution • Calculation based on general formula:FVn = P0 (1+i)nFV5= $10,000 (1+ 0.10)5 = $16,105.10 • Calculation based on Table A1: FV5= $10,000(FVD 10%, 5)= $10,000(1.6105) = $16,105

More Related