tailieunhanh - Lecture Practical business math procedures (11/e) - Chapter 12: Compound interest and present value

After reading the material in this chapter, you should 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 Twelve Compound Interest and Present Value Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 12- Compare simple interest with compound interest. Calculate the compound amount and interest manually and by table lookup. Explain and compute the effective rate (APY). LU 12-1 Compound Interest (Future Value) – The Big Picture Learning unit objectives LU 12-2 Present Value -- The Big Picture Compare present value (PV) with compound interest (FV). Compute present value by table lookup. Check the present value answer by compounding. 2 12- 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) – The final amount of the loan or investment at the end of the last period 3 12- . | Chapter Twelve Compound Interest and Present Value Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 12- Compare simple interest with compound interest. Calculate the compound amount and interest manually and by table lookup. Explain and compute the effective rate (APY). LU 12-1 Compound Interest (Future Value) – The Big Picture Learning unit objectives LU 12-2 Present Value -- The Big Picture Compare present value (PV) with compound interest (FV). Compute present value by table lookup. Check the present value answer by compounding. 2 12- 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) – The final amount of the loan or investment at the end of the last period 3 12- Compounding Terms Compounding Periods Interest Calculated Compounding Annually Compounding Semiannually Compounding Quarterly Compounding Monthly Compounding Daily Once a year Every 6 months Every 3 months Every month Every day 4 12- Future Value of $1 at 8% for Four Periods (Figure ) Number of periods Compounding goes from present value to future value Present value After 1 period, $1 is worth $ After 2 periods, $1 is worth $ After 3 periods, $1 is worth $ Future Value After 4 periods, $1 is worth $ $ $ $ $ $ 5 12- Future Value of $1 at 8% for Four Periods (Figure ) Manual Calculation 6 12- Tools for Calculating Compound Interest Number of periods (N) Number of years multiplied by 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? .