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Lecture Practical business math procedures (10/e): Chapter 12 - Jeffrey Slater

Chapter 12 - Compound interest and present value. After you have mastered the material in this chapter, you will be able to: Compare simple interest with compound interest, calculate the compound amount and interest manually and by table lookup, explain and compute the effective rate (APY), compare present value (PV) with compound interest (FV), compute present value by table lookup, check the present value answer by compounding. | Chapter 12 Compound Interest and Present Value Compare simple interest with compound interest Calculate the compound amount and interest manually and by table lookup Explain and compute the effective rate Compound Interest and Present Value #12 Learning Unit Objectives Compound Interest (Future Value) – The Big Picture LU12.1 Compare present value (PV) with compound interest (FV) Compute present value by table lookup Check the present value answer by compounding Compound Interest and Present Value #12 Learning Unit Objectives Present Value -- The Big Picture LU12.2 Compounding Interest (Future Value) Compound interest - the interest on the principal plus the interest of prior periods Compounding - involves the calculation of interest periodically over the life of the loan or investment Present value - the value of a loan or investment today Future value (compound amount) - is the final amount of the loan or investment at the end of the last period Compounding Terms . | Chapter 12 Compound Interest and Present Value Compare simple interest with compound interest Calculate the compound amount and interest manually and by table lookup Explain and compute the effective rate Compound Interest and Present Value #12 Learning Unit Objectives Compound Interest (Future Value) – The Big Picture LU12.1 Compare present value (PV) with compound interest (FV) Compute present value by table lookup Check the present value answer by compounding Compound Interest and Present Value #12 Learning Unit Objectives Present Value -- The Big Picture LU12.2 Compounding Interest (Future Value) Compound interest - the interest on the principal plus the interest of prior periods Compounding - involves the calculation of interest periodically over the life of the loan or investment Present value - the value of a loan or investment today Future value (compound amount) - is the final amount of the loan or investment at the end of the last period Compounding Terms Compounding Periods Interested Calculated Compounding Annually Once a year Compounding Semiannually Every 6 months Compounding Quarterly Every 3 months Compounding Monthly Every month Compounding Daily Every day Figure 12.1 Future Value of $1 at 8% for Four Periods Number of periods Compounding goes from present value to future value Present value After 1 period $1 is worth $1.08 After 2 periods $1 is worth $1.17 After 3 periods $1 is worth $1.26 Future Value After 4 periods $1 is worth $1.36 $1.00 $1.08 $1.1664 $1.2597 $1.3605 Figure 12.1 Future Value of $1 at 8% for Four Periods Manual Calculation Tools for Calculating Compound Interest Number of periods (N) Number of years multiplied the number of times the interest is compounded per year Rate for each period (R) Annual interest rate divided by the number of times the interest is compounded per year If you compounded $100 for 4 years at 8% annually, semiannually, or quarterly What is N and R? Annually: 4 x 1 = 4 .