tailieunhanh - Time Value of Money Concepts6Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights

Compound interest includes interest not only on the initial investment but also on the accumulated interest in previous periods. Assume we will save $1,000 for three years and earn 6% interest compounded annually. What is the balance in our account at the end of three years? | Time Value of Money Concepts 6 Copyright 2007 by The McGraw-Hill Companies Inc. All rights reserved. 6-3 Learning Objectives Explain the difference between simple and compound interest. 1 6-4 Simple Interest Interest amount P xi X n Assume you invest 1 000 at 6 simple interest for 3 years. You would earn 180 interest. 1 000 X .06 X 3 180 or 60 each year for 3 years 6-5 Compound Interest Compound interest includes interest not only on the initial investment but also on the accumulated interest in previous periods. Principal Interest 6-6 Compound Interest Assume we will save 1 000 for three years and earn 6 interest compounded annually. What is the balance in our account at the end of three years 2 6-7 Compound Interest Original balance First year interest 1 Balance end of year 1 1 Balance beginning of year 2 Second year interest _ 1 Balance end of year 2 1 Balance beginning of year 3 Third year interest _ 1 Balance end of year 3 1 6-8 Learning Objectives Compute the future value of a single amount. 6-9 Future Value of a Single Amount The future value of a single amount is the amount of money that a dollar will grow to at some point in the future. Assume we will save 1 000 for three years and earn 6 interest compounded annually. 1 X 1 and 1 X 1 and 1 X 1

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