Compound Interest. Objectives Calculate a periodic rate. Determine the number of compounding periods in a given amount of time. Calculate the future value.

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Presentation transcript:

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 compound interest compounding period periodic rate annual yield nominal rate

Formulas Compound Interest Future Value Formula Interest Earned Annual Yield Formula (always 1 year)

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

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 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?

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.

Find the number of periods that corresponds to 9¾ years if a period is quarter of a year month day