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Evaluating Savings Plans

LO#4. Evaluating Savings Plans. Rate of return (or yield) Percentage increase in value due to interest Compounding - interest on interest Effective Annual Rate (EAR) calculates the effective return taking compounding into effect. EAR = (1 +km)m – 1 m = number of periods in year

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Evaluating Savings Plans

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  1. LO#4 Evaluating Savings Plans • Rate of return (or yield) • Percentage increase in value due to interest • Compounding - interest on interest • Effective Annual Rate (EAR) calculates the effective return taking compounding into effect EAR = (1 +km)m – 1 m = number of periods in year km = rate of return for one period

  2. LO#4 Evaluating Savings Plans • Inflation • Compare return with inflation rate • Tax considerations • Taxes reduce interest earned • Liquidity • Ease with which you can convert to cash with a minimal loss of principal

  3. LO#4 Evaluating Savings Plans • Safety • Canadian Deposit Insurance Corporation (CDIC) insures up to a maximum $100,000 per person per financial institution • Restrictions and Fees • Delay between when interest earned and added to your account • Transaction fees for each deposit or withdrawal • Interest paid only with minimum balance

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