Money Tax,Commission & Investment. g roundwork There exists various types of investment and in this course we will deal with three basic methods of Investment.

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Presentation transcript:

Money Tax,Commission & Investment

g roundwork There exists various types of investment and in this course we will deal with three basic methods of Investment which are Simple Interest Compound Interest Modular Investment. What do we understand by the words “interest” or “yield”? Say you had €10,000 and you deposited them at the bank for 3 years at 4%. After this term of years you will not only expect your €10,000 but more. This is because the bank has used your money to conduct other business from which he has made profit. So you get a share of this profit your “interest”. You do not put your money at the bank just for security!

S imple vs C ompound I nterest Consider the following example ? A man wants to invest a sum of €10,000 for a term of 3 years at 4% per annum {p.a.}. What is the return of investment if the man invests at (a) Simple Interest (b) Compound Interest ? Which method of investment yields the best interest? Which is the best method of Investment?

S imple vs C ompound I nterest after the first year the bank will pay you interest of 4 x €10,000 = €400. Balance in Account €10, *You will receive a cheque for this amount at home but you will not be allowed to invest the €400 with the original €10,000. after the second year the bank will pay you interest of 4 x €10,000 = €400. * Balance in Account €10, after the third year the bank will pay you interest of 4 x €10,000 = €400. * Balance in Account €10, so in the bank will pay you €400+ €400+ €400 = €1200 in total and give you back your €10,000. Total Interest Received €1200. If we use the P for Principal, “ sum of money invested ” T for Time, “ time of investment ” R for Rate p.a. “ rate of investment”

We can use the formula: Simple Interest = PTR 100 S.I. = ( €10,000 )(3) (4) = € Alternatively one can use the formula: Amount = P ( 1 + RT ) 100 A = €10,000 ( 1 + (4)(3) ) = €11, Note that the latter gives the total amount accumulated after the 3 years and to find the Interest one will have to work out Interest = Amount – Principal Interest = €11,200 - €10,000 Interest = €1,200

after the first year the bank will pay you interest of 4 x €10,000 = €400. Balance in Account €10, *This money will be added directly to the original €10,000.. after the second year the bank will pay you interest of 4 x €10,400 = €416. * Balance in account €10, after the third year the bank will pay you interest of 4 x €10,816 = € * Balance in account €11, so the bank will pay you €400+ €416+ € = € in total. If we use the P for Principal, “ sum of money invested ” T for Time, “ time of investment ” R for Rate p.a. “ rate of investment”

We can use the formula: Amount = P ( 1 + R ) T 100 A = €10,000 ( 1 + (4) ) 3 = €11, Note that this formula gives the total amount accumulated over the 3 years and to find the Interest one will have to work out Interest = Amount – Principal Interest = €11, €10,000 Interest = €1,248.64

S imple vs C ompound I nterest So investing at Simple Interest yields €1200 whilst investing at Compound Interest yields € Compound Interest € > Simple Interest €1200 and therefore moneywise its returns more interest on investment if you invest at Compound. However keep in mind that when you Invest at Compound Interest you have no access to your interest unlike Simple Interest were you actually take your interest home! Therefore if you are not a rich person and it takes toll upon you when paying your insurance, electricity and water bills it might be good for you to be able to use this interest to pay off the bills. Therefore you need access to your interest and Simple Interest will allow this. If you wanted to withdraw the money before the end of term when investing at compound, say after 2 years instead of 3 all the interest accumulated will be lost. Its like having left your money in the drawer! You will only get the €10,000 you invested originally.

M odular I nvestment A man invests €10,000 subject to the following conditions for 1 year. 2% on the first €4000 4% on the next €5000 6% on the remainder Find the interest received after 1 year. The 10,000 to be invested needs to be broken down according to the module. 10,000 2% = 80 4% = 200 Remainder = 10,000 – ( ) = 6% = 60 Total Interest = = €340

T ax Tax is a contribution that every person that works should pay towards the economy of a country as an appreciation. Appreciation because the country has provided a work opportunity. Tax is also paid according to modules which can vary depending on the social status of the person. Andrew earns a gross wage of €27,000 per annum. If Andrew pays tax according to the following module First €5000 Tax free Next 10% Next 15% 20% Find i) the Total Tax Payable ii) the Net Pay iii) the Net Pay as a % of the Gross Pay.

Some Basic Definitions Definitions Gross wage is the amount of money the person receives before any deductions are made. Net wage is the amount of money a person receives after deductions are made. Tax Payable is the amount of money a person pays as tax contribution.

GROSS = €27,000 TAX FreeTAXABLE , ,000 10% = % = 1500 Remainder – (10, ) = 20% = 400 i) Total Tax Payable = = €2,900 ii) Net Pay = GROSS Income – Tax Payable = 27,000 – 2,900 = €24,100 iii) Net Pay as a % of Gross Pay = (24100/27000) x 100% = 89.26%