Download - Lesson 2 Apr 6 2010
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Interest Rates
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Solve for FV (the future value) ...
You decide to invest $6500. The bank offers an interest rate of 8.25% compounded annually. What will your money be worth in 7 years if the interest rate remains unchanged?
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HOMEWORK
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Watching Money Grow ...
Calculate the final balance if $7500 were invested at 8% per year, compounded semiannually for 6 years.
How long will it take $12 000 invested at 7.2% per year, compounded quarterly, to grow to $15 000?
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HOMEWORK
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Investing Regularly ...Calculate the final balance if $1500 were invested at 8% per year, compounded semiannually, with additional investments of $1 000 at the end of every six months for five years.
How long will it take to save $35 000, if $2 500 were invested at 7.2% per year, compounded quarterly, followed by an additional $400 at the end of each 3month period?
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HOMEWORK
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Imagine that you have just won $500000.00 in a contest. You invest it as 12% compounded semiannually. You decide to live off the investment. Determine how much money you can withdraw each compounding period if you want the money to last 50 years.
$30088.68
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Investing Frequently ...A financial institution offers an annual interest rate of 6%, compounded monthly.
Compare $1200 invested at the end of each year to $100 invested at the end of each month.
Option 1: $1200/year Option 2: $100/month
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Doubling Our Money ...
$1200 is invested at 6% interest compounded annually. How long will it take to double?
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Here's a handy way to figure out how long your investment will take to double in value. It is called the Rule of 72.
(Interest Rate %) x (Years to Double) = 72
To find the number of years given a percentage:
To find the percentage required to double given the years:
The Rule of 72
Years = 72(Interest Rate %)
Rate = 72Years
Numbers 72 by flickr user szczel
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Example 2: You are shopping for an investment that will double in 6 years. What interest rate are you looking for?
Example 1: You have an investment that compounds annually at 7%. How long will it take to double?
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Use the Rule of 72 to estimate the doubling time for these interest rates:
(a) 4% per annum, compounded annually
(b) 8% per annum, compounded annually
(c) 24% per annum, compounded annually
Use the TVM solver in your calculator to calculate the the compound amount of a $100 investment for the doubling times estimated above.
How accurate does the Rule of 72 seem to be?
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The Difference Between Nominal and
Effective Interest Rates
Understanding Credit Card Interest Rates
or
Credit Cards by flickr user Andres Rueda
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Nominal vrs. Effective Interest Rate
You have money to invest in interestearning deposits. You have determined that suitable deposits are available at your bank paying 6.5% per annum compounded annually, at a local trust company paying 6.4% per annum compounded monthly and at the Student Credit Union paying 6.45% per annum compounded semiannually. Which institution offers the best rate of interest?
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Nominal Rate of Interest The stated rate of interest applied to your investment.
Effective Rate of Interest The interest rate if an annuity is compounded annually.
6.5% per annum compounded semiannually6.4% per annum compounded annually 6.45% per annum compounded monthly
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Marge invested $2500 at 6.5% per annum compounded quarterly. Calculate the value of her investment after three years.
Calculate the effective interest rate.
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HOMEWORK
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Credit Card InterestCalculate the effective interest rate of $1.00 invested at 18.5% compounded daily for one year.
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Shaina wishes to invest $2000 given by her grandfather. She has an option of a guaranteed investment certificate earning 8.85%, compounded quarterly, or a savings bond of 9%, compounded semiannually.
Which investment should she choose?
If each investment term is 5 years, what will be the difference in their values at the end of the term?
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