Copyright © 2011 Pearson, Inc. 3.6 Mathematics of Finance.

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Copyright © 2011 Pearson, Inc. 3.6 Mathematics of Finance

Copyright © 2011 Pearson, Inc. Slide What you’ll learn about Interest Compounded Annually Interest Compounded k Times per Year Interest Compounded Continuously Annual Percentage Yield Annuities – Future Value Loans and Mortgages – Present Value … and why The mathematics of finance is the science of letting your money work for you – valuable information indeed!

Copyright © 2011 Pearson, Inc. Slide Interest Compounded Annually

Copyright © 2011 Pearson, Inc. Slide Interest Compounded k Times per Year

Copyright © 2011 Pearson, Inc. Slide Example Compounding Monthly Suppose Paul invests $400 at 8% annual interest compounded monthly. Find the value of the investment after 5 years.

Copyright © 2011 Pearson, Inc. Slide Example Compounding Monthly Suppose Paul invests $400 at 8% annual interest compounded monthly. Find the value of the investment after 5 years.

Copyright © 2011 Pearson, Inc. Slide Compound Interest – Value of an Investment

Copyright © 2011 Pearson, Inc. Slide Example Compounding Continuously Suppose Paul invests $400 at 8% annual interest compounded continuously. Find the value of his investment after 5 years.

Copyright © 2011 Pearson, Inc. Slide Example Compounding Continuously Suppose Paul invests $400 at 8% annual interest compounded continuously. Find the value of his investment after 5 years.

Copyright © 2011 Pearson, Inc. Slide Annual Percentage Yield A common basis for comparing investments is the annual percentage yield (APY) – the percentage rate that, compounded annually, would yield the same return as the given interest rate with the given compounding period.

Copyright © 2011 Pearson, Inc. Slide Example Computing Annual Percentage Yield Suppose you invest $1500 at 6.25% annual interest compounded monthly. What is the equivalent APY?

Copyright © 2011 Pearson, Inc. Slide Example Computing Annual Percentage Yield Suppose you invest $1500 at 6.25% annual interest compounded monthly. What is the equivalent APY?

Copyright © 2011 Pearson, Inc. Slide Example Computing Annual Percentage Yield Suppose you invest $1500 at 6.25% annual interest compounded monthly. What is the equivalent APY?