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- 2. Learning Objectives Explain the mechanics of compounding. Use a financial calculator to determine the time value
- 3. Compound Interest and Future Values Compound interest is interest on interest. If you take interest earned
- 4. How Compound Interest Works How does $100 placed in a savings account at 6% grow at
- 5. How Compound Interest Works What will the account look like at the end of the second
- 6. How Compound Interest Works Example: You receive a $1000 academic award this year for being the
- 7. The Future-Value Interest Factor Calculating future values by hand can be difficult. Use a calculator or
- 8. The Future-Value Interest Factor The amounts in the table represent the value of $1 compounded at
- 9. The Future-Value Interest Factor Previous example: What is the future value of investing $1000 at 5%
- 10. The Rule of 72 How long will it take to double your money? The Rule of
- 11. The Rule of 72 Example: If an investment grows at an annual rate of 9% per
- 12. Compound Interest with Nonannual Periods Compounding periods may not always be annually. Compounding may be quarterly,
- 13. Compounding and the Power of Time Manhattan was purchased in 1626 for $24 in jewelry and
- 14. The Importance of the Interest Rate The interest rate plays a critical role in how much
- 15. Present Value Present value is the value of today’s dollars of money to be received in
- 16. Present Value Finding present values means moving future money back to the present. This is the
- 17. Present Value PV = FVn[1/(1 + i)n] PV = present value of a sum of money.
- 18. Present Value Tables can be used to calculate the [1/(1+i)n] part of the equation. This is
- 19. Present Value Example: What is the present value of $100 to be received 10 years from
- 20. Present Value Example: You have been promised $500,000 payable 40 years from now. What is the
- 21. Present Value You’ve just seen that $500,000 payable 40 years from now, with a discount rate
- 22. Annuities An annuity is a series of equal dollar payments coming at the end of each
- 23. Compound Annuities A compound annuity involves depositing an equal sum of money at the end of
- 24. Compound Annuities Example: You deposit $500 at the end of each year for the next 5
- 25. Compound Annuities Example: You need $10,000 for education in 8 years. How much must you put
- 26. Compound Annuities Example: You deposit $2000 in an IRA at the end of each year, and
- 27. Present Value of an Annuity To compare the relative value of annuities, you need to know
- 28. Present Value of an Annuity Example: You are to receive $1,000 at the end of each
- 29. Amortized Loans Annuities usually involve paying off a loan in equal installments over time. Amortized loans
- 30. Amortized Loans Example: You borrow $6000 at 15% interest to buy a car and repay it
- 31. Perpetuities A perpetuity is an annuity that continues forever. Every year this investment pays the same
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