Compound Interest

1
Compound Interest
2
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.

3
Vocabulary

• compound interest
• compounding period
• periodic rate
• annual yield
• nominal rate

4
Formulas
Compound Interest Future Value Formula
Interest Earned
Annual Yield Formula (always 1 year)
5
Find the periodic rate that corresponds to 12
annual interest compounded

• quarterly
• monthly
• daily
• biweekly
• semi-monthly

6
Find the future value of 12,350 at 6 annual
interest compounded daily for 10 years.
7
Find the annual yield corresponding to
8
Find the present value that will generate 1000
at 8 compounded annually for 7 years.
9
When Alan Cooper was born, his grandparents
deposited 5,000 into a special account for
Alans 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?

10
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 twenty-
• six at compounded daily?
• 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?

11
Find the future value of 7300 at 7 compounded
annually for 13 years.
12
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.
13
Find the number of periods that corresponds to 9¾
years if a period is

• quarter of a year
• month
• day