Interest

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Compound

• Interest
• Interest
• Interest
• Interest
• Interest
• Interest
• Interest

Asst. Professor D. Urmston SUNY Orange
Begin
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Learning Objectives

• Understand the concept of compound interest
• Calculate compound interest using a spreadsheet
• Compare the results of simple addition, simple
  interest and compound interest for a given
  situation

Continue
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Learning Objectives- The problem

• We want to see the difference compound interest
  can make when someone saves for the future. So
  imagine you are faced with a choice
• Save your money in a jar (100/month for 20
  years.)(Simple Addition)
• Put your money in the bank but then take it out
  at the end of each year and put it in the jar
  (100/month for 20 years).(Simple Interest)
• Put your savings into the bank as you earn it and
  earn compound interest (100/month for 20 years-
  leaving it in the bank).(Compound Interest)
• We know that you will have more money under
  situation 3, but how much more?

Continue
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Main Menu
How it works You start with the tutorial and
progress through the 3 types of savings. You
must complete the work for each section before
you can move on to the next section. You may
skip the tutorial if you wish. You may return to
the main menu at any time to repeat a section or
to view the learning objectives
1
3
2
Simple Interest
Tutorial- Spreadsheet Basics
Simple Addition
4
5
Compound Interest
Learning Objectives
Quiz
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Tutorial Menu
Basic spreadsheet formulas

• How to navigate a spreadsheet

If the Flash tutorials are not working, click
here for the alternate video viewer
Advanced formulas
Copying Formulas
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Alternate Tutorials
Directions Click on the film reel on the left
and a video viewer will open. (It may take a few
minutes). Once the video viewer is open, choose
Filegtgtgt Quick Open Filegtgtgt from the drop down
menu choose the CD then open the folder Interest
ProjectgtgtgtTutorials
Click Here

• Watch the tutorials in this order
• Navigation
• Basic_formulas
• Advanced formulas
• Copying1
• Copying2

When you are done, return to the main menu and
continue with the next section.
Main Menu
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Tutorial Navigation

• How to navigate a spreadsheet

Click to play tutorial. A new window will open.
When you are finished with the tutorial, close
the window.
Tutorial Menu
Main Menu
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Tutorial Basic formulas
Basic spreadsheet formulas
Click to play tutorial. A new window will open.
When you are finished with the tutorial, close
the window.
Tutorial Menu
Main Menu
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Tutorial Advanced Formulas
Advanced formulas
Click to play tutorial. A new window will open.
When you are finished with the tutorial, close
the window.
Tutorial Menu
Main Menu
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Tutorial Copying formulas
Copying Formulas
Click to play tutorial. A new window will open.
When you are finished with the tutorial, close
the window.
Tutorial Menu
Main Menu
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Simple Addition
Welcome to the first step in your journey. All
you have to do to move on is to answer the
question on the following page. Oh, there is one
catchin order to answer the question, you need
to complete the spreadsheet assignment on simple
addition. Remember, you are saving 100 per
month for 20 years
Continue
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Click me for the spreadsheet
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Simple Addition
Where is a good place to vacation? Click the
location on the map to proceed.
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Go back
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Sorry, that was incorrect
Click on the U-turn to try again
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14
Correct!
Here is your hint to get to the next
section. 76.2 of American households have at
least 1 credit card, bank card, or store card.
Hint youd better write that number down
somewhere, youre going to need it! Now go back
to the main menu and complete the next section.
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Simple Interest

• By now you should have completed the Simple
  Addition spreadsheet. If you did then answer the
  question below. If you didnt, then go back and
  do it.

What percentage of American households have no
credit cards, no bank cards and no store cards?
(Click on the correct answer)
A. 3
B. 23.8
C. 13.5
D. 42.6
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16

• You didnt write down that number did you?

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Simple Interest

• Now were going to see how much money you would
  have if you put that 100 per month into the bank
  and cleaned out the bank account at the end of
  each year and started over.

Click here to begin the next spreadsheet project
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Compound Interest-1

• So you want to learn about compound interest?
  First lets see if you finished the section on
  simple interest

How much more money does a college graduate earn
over a high-school grad?
50 More
4 times as much
2 times as much
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Go Back
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Compound Interest-2

• Some people are afraid to put their money into a
  bank, especially in todays economy. But banks
  pay interest so you can earn more on your
  savings. Also, your savings are insured by the
  Federal Deposit Insurance Company (FDIC) up to
  100,000. So even if your bank goes out of
  business, youll still get your money. So what
  if you left the money in the bank and earned
  interest for 20 years. How much would you have
  then? To find out, well first have to learn
  about compound interest

Continue
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Compound Interest-3

• In the last spreadsheet you completed, you
  simply added up the interest from each year. But
  thats not how it works in reality. Each year
  you earn interest, you add that interest to your
  principle and it becomes part of it. So next
  year, you earn money on the new principle which
  includes last years interest. Lets look at an
  example

Continue
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Compound Interest-4

• Lets say we start with 1,000 which we put in
  the bank at an APR of 4. So at the end of year
  1, you would have 1,000 x .04 40 (thats the
  interest)
• 1,000 40 1,040 (thats your total)

Continue
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Compound Interest-5

• At the end of year 1, you would have 1,000 40
  1,040
• So year 2, you would start with 1040 as your
  principle and earn interest of 4 on that
  1,040 x .04 41.60
• 1,040 41.60 1081.60

Continue
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Compound Interest-6

• At the end of year 2, you would have
• 1,040 41.60 1081.60
• Notice that the interest for year 1 was 40
  while the interest for year 2 was 41.60. Year
  3, the interest will be even more because each
  year the principle increases as you add the
  interest from the previous year.

Continue
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Compound Interest-7

• Now lets work up a simple spreadsheet that
  shows us how this compound interest works. We
  will take 500 principle and calculate compound
  interest of 6 APR for 5 years.
• Click on Continue to see a sample spreadsheet.

Continue
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Compound Interest-8
By now you should be able to create this
spreadsheet without any trouble. So go ahead and
try. If you get stuck, there is help built-in.
Remember, you have to submit the spreadsheet, so
you cant just type in the numbers, you have to
use formulas.
Continue
Click here to build your spreadsheet
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Compound Interest-9

• By now youve figured out that compound interest
  is all about time. Actually, we refer to
  compound interest at the time value of money.
  The spreadsheet you just built was easy, but not
  very realistic. You see, most banks compute
  interest on a monthly basis, using an annual
  rate. The math to do this is easy in theory
• You simply take the APR and divide by 12 to get
  the monthly interest rate.
• Example APR 10
• .10/12 .0833 So you would multiply the
  principle by .0833 each month. But remember, you
  need to add the interest each month as well. So
  lets look at what our spreadsheet would look
  like for our last example

Continue
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Compound Interest-10
This is getting to be a pretty big spreadsheet
and weve only done 1 years worth! Now imagine
building a spreadsheet to calculate our original
problem of saving 100 per month for 20 years!!
There has to be an easier way
Continue
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Compound Interest-11

• Want a faster way to calculate the future value
  of your investment? Well weve got it. Take a
  look at the right side of the spreadsheet. Excel
  has a formula called FV (future value) and all
  you have to do is plug in the variables and have
  Excel calculate the interest for you.

Continue
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Compound Interest-12The FV Formula

• The formula for future value is
  FV(rate,nper,pmt,pv,type)
• Rate   is the interest rate per period. Remember
  to divide by 12 for monthly interest.
• Nper   is the total number of payment periods in
  an annuity. So 12 x years for monthly interest.
• Pmt   is the payment made each period it cannot
  change over the life of the annuity. If pmt is
  omitted, you must include the pv argument.
• Pv   is the present value, or the lump-sum amount
  that a series of future payments is worth right
  now. (Another way to think of this is the money
  you start with). If pv is omitted, it is assumed
  to be 0 (zero), and you must include the pmt
  argument.
• Type   is the number 0 or 1 and indicates when
  payments are due. If type is omitted, it is
  assumed to be 0.
• Set type equal to 0 if payments are due at the
  end of the period 1 At the beginning of the
  period. (You can skip this for our purposes).

Important note when you enter Pmt or PV you must
enter them as a negative value, i.e. -100 or your
final answer will show as a negative.
Continue
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Compound Interest-13

• Now its time to use the FV formula to figure out
  how much money we will have after 20 years.

Continue
Click here to complete the spreadsheet
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Compound Interest-14

• So what did you get?
• After 20 years of saving 100 per month at 6
  APR, you would have an approximate total of

24,000
25,200
41,100
32,000
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Go Back
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Quiz page-1

• APR stands for

Annual Partial Rate
Actual Percentage Rate
Annual Percentage Rate
Next Question
Adjusted Percentage Ratio
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Quiz page-2

• Bob put 1,000 in the bank for a year. At the
  end of the year, he had 1,050 in his account.
  The 1,000 he started with is called the

Base
Principal
Foundation
Next Question
Principle
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Quiz page-3

• Bob borrowed 5,000 from the bank for a year.
  At the end of the year, he paid back 5,500. The
  500 he paid is called the

Bonus
Interest
Penalty
Next Question
Bribe
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Quiz page-4

• Bob put 5,000 into the bank at an APR of 6.
  The interest was calculated each month at a rate
  of .06/12.0005 This is an example of

Simple Interest
Variable Interest
Reduced Interest
Next Question
Compound Interest
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Quiz page-5

• Bob put 10,000 into the bank at an APR of 7.
  At the end of the year he had 10,700 in his
  account. The bank must be using

Simple Interest
Variable Interest
Reduced Interest
Next Question
Compound Interest
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Quiz page-6

• Bob put 10,000 into the bank at an APR of 8.
  The bank uses simple interest. At the end of the
  year Bob will have

10,080
10,800
10,000
Next Question
It depends on current interest rates.
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Quiz page-7

• The FDIC makes sure your money is safe when you
  put it into a bank. FDIC stands for

Federal Deposit Insurance Capital
First Deposit Is Covered
Federal Deposit Insurance Corporation
Next Question
First Definitive Interest Charge
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Quiz page-8

• In the FV(rate,nper,pmt,pv,type) formula that we
  used in Excel, pmt represents

The payment you make each month into your savings
account.
The payment you get each month from the interest
earned.
The payment you get at a future date.
Next Question
The amount you start with before you begin saving
each month.
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Quiz page-9

• In the FV(rate,nper,pmt,pv,type) formula that we
  used in Excel, if the APR was 12, the rate
  would be

6
12
1
Next Question
3
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Quiz page-10

• In the FV(rate,nper,pmt,pv,type) formula that we
  used in Excel, if you were saving money for 10
  years, the nper would be

10
12
100
Nextgt
120
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Sorry, thats incorrect

• Go back and try again.

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Correct!
Click here, then go on to the next question!
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Youre done!

• So, by simply adding up your 100 per month, you
  would save 24,000 over 20 years. If you put
  that same money in the bank at an APR of 5, you
  would end up with over 41,000 thanks to compound
  interest!
• If you havent completed the quiz, go back to the
  main menu and give it a try!

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45
Youre done!

• So, how did you do on the quiz?

Take quiz again
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