1. Compound Interest Section 5

2. Objectives Determine the future value of a lump sum of money Calculate effective rates of return Determine the present value of a lump sum of money Determine the time required to double or triple a lump sum of money

3. Simple Interest Formula I = Prt I: interest P: principal r: rate t: time (yearly/per annum)

4. Payment Periods Annually: once per year Semiannually: twice per year Quarterly: four times per year Monthly: 12 times per year Daily: 365 per year* *Most banks use a 360-day year.

5. When large sums are involved, the 360-day method (known as ordinary interest or banker's rule) yields significantly more interest to the lender. It is used by banks and commercial organizations.

6. Compound Interest Interest paid on principal and previously earned interest

7. A credit union pays interest of 8% per annum compounded quarterly on a certain savings plan. If $500 is deposited in such a plan and the interest is left to accumulate, how much is in the account after 1 year?

9. Compound Interest Formula A: Future value P: Present value n: Number of times compounded per year

10. Page 541 #3

11. Continuous Compounding The number of times the interest is compounded is increased without bound. A = Pe rt

12. Page 541 #11

13. Effective Rate of Interest The equivalent annual simple interest rate that would yield the same amount as compounding after one year. See pages 537 and 538

14. Page 541 #23

15. Present Value Formulas P = Ae rt

16. Page 541 #13

17. Page 541 #25

18. Page 542 #29

19. Pages 541-542 (5, 7, 9, 15, 17, 19, 21, 27, 33, 35, 49)