Warm Up What is wealth and why is it desirable?

Definition of Wealth

What do you need to build wealth

Definitions Assets Liability Equity/Net Worth

Assets - Liability = Equity Car Valued at $15,000 Car Loan of $10,000 - = House Valued at $250,000 - Home Mortgage/loan of $125,000 = Own a business worth $1,500,000 - Total Debt of Business $150,000 = Total value of all your assets $750,000 - Total of all your liabilities $175,000 =

When you deposit money into a savings or investment account, you earn interest from the bank because you are lending them your money. When you borrow money, you must pay interest to the bank since they are lending you their money.

Simple Interest Formula = Principle (P) X Interest Rate (R) X Time (t) I = (P) x (r) x (t) I = interest accumulated P = principal amount r = interest rate ( as a decimal) t = term (length) of the agreement in years Your interest payments stay constant, at a fixed percentage of the original principal. Simple Interest Formula

Simple Interest Principle X Interest Rate = Interest Earned $1000 X X X X X = = = = = $1500 $2000 $2500 $ % (.10) 5% (.05) 15% (.15) 4% (.04) 1% (.01) * all for 1 year time period

Example 1: 4000 dollars is deposited into a bank account and the annual interest rate is 8%. How much is the interest after 4 years? I =I = (P) x (r) x (t) P= r= t=

You Try 1: 3000 dollars is deposited into a bank account and the annual interest rate is 5%. How much is the interest after 3 years? I =I = (P) x (r) x (t) P= r= t=

Compounding Interest

Compounding Interest Example Principle = $1000 Interest Rate = 10% Time = 3 years 1st year P x R Int. $1000 x.1 = $100 new principle = $1100 2nd Year $1100 x.1 = 110 New Principle = $1210 3rd Year $1210 x.1 = 121 New Principle = $1331

Compounding Interest Principle = $1000; Interest Rate = 5%; Time = 4 years Yr/Principlex Interest = Interest earned + Principle $1000 5% m(.05)

Formula for calculating Compound Interest: FV = future value P= present value (principal amount) r= interest rate n= compounding periods during the year t = term/time

Example 2: What would the future value be if you invested $1,000 compounded annually at 10% for 5 Years? PV= r= n= t =

You Try 2: What would the future value be if you invested $1,000 compounded annually at 6% for 5 Years? P = r= n= t =

Periodic Compounding (within the year) But sometimes interest is charged Yearly with several compoundings within the Year. Annually - once a year Quarterly- 4 times per year Semi-annually - 2 times per year Monthly- 12 times per year Weekly- 52 times per year Daily- 365 time per year

Example 3: What would the future value be if you invested $1,000 compounded semiannually at 10% for 2 Years? P = r= n= t =

You Try 3: What would the future value be if you invested $1,500 compounded semiannually at 6% for 3 Years? P = r= n= t =

Please complete the following worksheet on simple and compound interest.