Download compound-interest

Compound Interest
Objectives
• Calculate a periodic rate.
• Determine the number of compounding
periods in a given amount of time.
• Calculate the future value of a
compound interest loan.
• Calculate the annual yield of a loan.
• Calculate the present value of a
compound interest loan given its future
value.
Vocabulary
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compound interest
compounding period
periodic rate
annual yield
nominal rate
Formulas
Compound Interest Future Value Formula
nt
r

FV  P  1  
n

Interest Earned
I  FV  P
Annual Yield Formula
(always 1 year)
n
r

ay   1    1
n

Find the periodic rate that
corresponds to 12% annual interest
compounded
• quarterly
• monthly
• daily
• biweekly
• semi-monthly
Find the future value of $12,350 at
6% annual interest compounded daily
for 10 years.
Find the annual yield corresponding
to
1
5 % compounded quarterly
2
5
12 % compounded daily
8
Find the present value that will generate
$1000 at 8% compounded annually for 7
years.
When Alan Cooper was born, his
grandparents deposited $5,000 into a
special account for Alan’s college
education. The account earned 7¼ %
interest compounded daily.
• How much will be in the account when Alan
is eighteen?
• If, on becoming eighteen, Alan arranged for
the monthly interest to be sent to him, how
much would he receive each 30-day month?
David Murtha wants to have an IRA that
will be worth $150,000 when he retires at
age sixty-five.
• How much must he deposit at age twenty1
six at 6 % compounded daily?
8
• If, at age sixty-five, he arranges for the
monthly interest to be sent to him, how
much will he receive each 30-day month?
Find the future value of $7300 at
7% compounded annually for 13 years.
National Trust Savings offers 5-year CDs
at 8.25% compounded daily, and the Bank
of the Future offers 5-year CDs at 8.28%
compounded annually. Compute the annual
yield for each institution and determine
which is more advantageous for the
consumer.