1. Interest

2. What is Interest?
The rate a financial institution charges for the money it lends
The rate rises and falls (fluctuates)
The “prime” interest rate
Describes the standard interest rate set by The Bank of Canada

3. Changes in Interest Rate
There are many reasons that the interest rates go up and down
The Economy
When the economy is doing well – people want to buy large items – they need to borrow money – the demand for money goes up and so does the interest rate
When the economy is doing poorly (recession) – less borrowing leads to a lower interest rate

4. Interest Rates effect on Saving
In a period of inflation - prices are increasing
As such banks need to pay a higher interest rate to make up for the rising prices
Example: In 2000 you put $1.00 in the bank. During the next couple of years inflation occurs and now that $1.00 can only buy $0.90 worth of goods/services.
In a period of deflation – The cost of goods fall.
As such banks do not need to pay a high interest rate and it falls
Example: In 2000 you give the same investment. A couple years later you can now buy $1.10 worth of goods/servies

5. Interest Rates effect on Spending
When interest rates are high – people are spending more money paying off their debts (mortgages)
When interest rates are low – people don’t see a point in saving and can easily pay off their debts – so they will spend, spend, spend
This is one of the reasons interest rates go down in a recession – as we learned the best way to get out of a recession is to spend

6. Interest Rates effect on Investing
Bonds – will pay you interest on a principle that you invest for a said period of time
The institution that issues the bond must pay a higher interest rate than the banks (otherwise people would just put their money in a bank)
Bonds are transferable usually
However, if the bank interest rate rises above the interest rate of the bond – the price you can sell it for now decreases

7. Interest Rate effect on Investing
Example
You put away $1000 into a bond for 6 years at 6% interest will pay you $ at the bond maturity date. So, that is the market value
If the interest rate goes up to 7% you would have to sell it for a cheaper price to entice a buyer
If the interest rate goes down you can charge a higher price

8. Interest Rates effect on Investing
Stocks are risky and don’t offer a guaranteed return on your money
As we have all found out in the stock market game
So, when interest rates are high – people would rather play it safe and invest in things like bonds
Stock prices then tend to fall
When interest rates are low – more people look for a risky pay out
Stock prices then tend to rise

9. Calculating Simple Interest
Here comes the math!!!
The formula for calculating interest is a simple one:
I = Prt
I = Interest P = Principle r= annual interest rate t = time

10. Calculating Simple Interest
Example 1:
If You were to invest $530 in a savings account that paid 1.5% interest for two years, how much interest would you make?

11. Calculating Simple Interest
Example 2:
If You were to invest $1000 in a GIC that paid you 5% interest for 5 years, how much money would you receive on the date the GIC matured?

12. Compounding Simple Interest
If I invest $300 at an interest rate of 3.5% for 9 months and You invested $400 at an interest rate of 2.25% for 1 year – who would earn more interest?

13. Compound Interest
Compound interest is interest that is paid on both the principal and also on any interest from past years. It’s often used when someone reinvests any interest they gained back into the original investment.

14. Compound Interest and Formula
Formula for Compound Interest
FV = P( 1 + i )t
FV is the final amount including the principal.
P is the principal amount.
i is the rate of interest per year.
t is the number of years invested.
Example
If I got 2% interest on my $1000 investment, the first year and I reinvested the money back into the original investment, then in the second year, I would get 2% interest on $1000 and the $20 I reinvested. Over time, compound interest will make much more money than simple interest.

15. Compound Interest Examples Initial money being invested = $1000/month @2%
Interest Rate
Calculation
Interest Earned
Total Value
Year 1
2.00%
Year 2
Year 3
Year 4
Formula = M = P( 1 + i )n

16. Compound Interest Examples Initial money being invested = $1000/month @2%
Interest Rate
Calculation
Interest Earned
Total Value
Year 1
2.00%
1000x0.02 20
1020
Year 2
1020x0.02
20.40
Year 3
x0.02
20.81
Year 4
x0.02
21.22
Formula = M = P( 1 + i )n

17. Compound Interest Examples Initial money being invested = $1000/month @ 2%
FV = P(1+r)t

18. Compound Interest Examples Initial money being invested = $1000/month @ 2%
FV = P(1+r)t
FV = 1000 (1.02)4
FV = 1000( )
FV =

19. Interest Assignment