Compound Interest Tables Five Tables in Chapter 6 Table 1-Future Value of 1 Table 2-Present Value of 1 Table 3-Future Value of an Ordinary Annuity of 1 Table 4-Present Value of an Ordinary Annuity of 1 Table 5-Present Value of an Annuity Due of 1 Number of Periods number of years x the number of compounding periods per year. Compounding Period Interest Rate annual rate divided by the number of compounding periods per year. Chapter 6-11 LO 3 Use appropriate compound interest tables
Chapter 6-11 Table 1 - Future Value of 1 Table 2 - Present Value of 1 Table 3 - Future Value of an Ordinary Annuity of 1 Table 4 - Present Value of an Ordinary Annuity of 1 Table 5 - Present Value of an Annuity Due of 1 Five Tables in Chapter 6 Number of Periods = number of years x the number of compounding periods per year. Compounding Period Interest Rate = annual rate divided by the number of compounding periods per year
Compound Interest Compounding can substantially affect the rate of return.A 9%annual interest compounded daily provides a 9.42%yield. How compounding affects Effective yield for a $10,000 investment. Compounding Periods Illustration 6-5 Interest Rate Annually Semiannually Quarterly Monthly Daily 8% 8.00% 8.16% 8.24% 8.30% 8.33% $800 $816 $824 $830 $833 9% 9.00% 9.20% 9.31% 9.38% 9.42% $900 $920 $931 $938 $942 10% 10.00% 10.25% 10.38% 10.47% 10.52% $1,000 $1,025 $1,038 $1,047 $1,052 Chapter 6-12 LO 3 Use appropriate compound interest tables
Chapter 6-12 Compounding can substantially affect the rate of return. A 9% annual interest compounded daily provides a 9.42% yield. How compounding affects Effective Yield for a $10,000 investment
Compound Interest Variables Fundamental to Compound Interest ●Rate of Interest Number of Time Periods Present Value Future Value Illustration 6-6 Present Future Value Interest Value 0 2 3 4 5 Number of Periods Chapter 6-13 LO 4 Identify variables fundamental to solving interest problems
Chapter 6-13 Rate of Interest Number of Time Periods Present Value Future Value Variables Fundamental to Compound Interest
Single-Sum Problems Generally Classified into Two Categories Unknown Present Value Unknown Future Value Present Future Value Interest Value 0 1 2 3 4 5 Number of Periods Chapter 6-14 LO 5 Solve future and present value of 1 problems
Chapter 6-14 Unknown Future Value Generally Classified into Two Categories Unknown Present Value
Single-Sum Problems Future Value of a Single Sum Multiply the future value factor by its present value (principal) Illustration: BE6-1 Steve Allen invested $10,000 today in a fund that earns 8%compounded annually.To what amount will the investment grow in 3 years? Chapter 6-15 LO 5 Solve future and present value of 1 problems
Chapter 6-15 Future Value of a Single Sum Multiply the future value factor by its present value (principal). Illustration: BE6-1 Steve Allen invested $10,000 today in a fund that earns 8% compounded annually. To what amount will the investment grow in 3 years?