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Chapter 14 Notes: Money, Money, Money, Money, Moooooo-Ney, MONEY!

The document discusses the time value of money and concepts related to interest, including simple and compound interest. It provides formulas to calculate future value, interest earned, and effective interest rate. Key points covered include: - The increase in value of a deposit or loan over time is called interest. Simple interest uses a fixed interest rate while compound interest earns interest on previous interest amounts. - Formulas are provided to calculate future value using simple or compound interest based on present value, interest rate, and time. - Examples are given to demonstrate calculating interest earned, amounts owed over time, and effective interest rates to compare investment options.

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Farhan Ali Shaikh
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70 views5 pages

Chapter 14 Notes: Money, Money, Money, Money, Moooooo-Ney, MONEY!

The document discusses the time value of money and concepts related to interest, including simple and compound interest. It provides formulas to calculate future value, interest earned, and effective interest rate. Key points covered include: - The increase in value of a deposit or loan over time is called interest. Simple interest uses a fixed interest rate while compound interest earns interest on previous interest amounts. - Formulas are provided to calculate future value using simple or compound interest based on present value, interest rate, and time. - Examples are given to demonstrate calculating interest earned, amounts owed over time, and effective interest rates to compare investment options.

Uploaded by

Farhan Ali Shaikh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 14 Notes: Money, Money, Money, Money, Moooooo-ney, MONEY!

Section 14.1: The Time Value of Money

The increase in value of a deposit or loan is called _________________________________.

We earn interest when we invest our money but we also get interest when we borrow money.

Terms Involving Interest:

• Current Value/Principal: __________________________________________________________

• Interest Rate: __________________________________________________________________

o Interest rates are usually computed __________________ unless stated otherwise.

• Future Value/Amount in the account: _______________________________________________

______________________________________________________________________________

Simple Interest: _________________________________________________________________

o Generally student loans use simple interest

o Some mortgages use simple interest

Calculating Interest

There are two ways to calculate with interest:

• We can determine the total amount by using:

o _________________________________ where

o FV is the future value of the account/loan

o PV is the principal or the present value

o r is the interest rate

o t is the amount of time in years

• We can determine the amount of interest earned on the account

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o ___________________________________________ where

o I = Interest earned in account

o PV = Principal or Present Value

o r = Interest Rate

o t = Time, in years

1.) Joe College borrows $13,000 in student loans each year. Student loan interest rates are 6.8% in
simple interest. How much will he owe at the end of his fourth year in college?

2.) Ellen invests $6,800 in an account earning 3.5% simple interest. How much money will she have
earned in interest after 10 years?

3.) Anna invests $2,500 in an account with simple interest. How many years would she need to invest
this money to have over $2,800 if the interest rate is 4%?

4.) Roger now owes $896 on furniture he bought in 2011. He now must start making payments on it. If
the simple interest rate was 12%, how much did the furniture originally cost? Round your answer to the
nearest dollar.

2
Compound Interest

• Compound interest is ____________________________________________________________

• Used by credit card companies when you owe money $$$

Compare simple interest and compound interest for $1000 deposit at 6% interest for 4 years.

Simple interest:

Compound interest:

Year Beginning Balance Interest Earned Ending Balance

1 $1000

Formula!

Finding Compound Interest

To find the future value of an account with compound interest:

• FV is the future value

• PV is the present value

• 𝑟 is the interest rate

• 𝑛 is the number of times interest is compounded per year

• 𝑡 is the number of years between FV and PV

Compound interest is “compounded” a certain number of times per year. Some more common
periods are:

o Semi-annually: _______________________________

o Quarterly: _______________________________

o Monthly: _______________________________

o Weekly: _______________________________

o Daily: _______________________________

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5.) Find the future value for $1,500 at 4.2% interest compounded monthly for 3 years.

6.) A newborn is given a college bond of $10,000 by her grandparents. The guaranteed rate of return
for a certain type of bond is 4.16% compounded semi-annually. How much money will she have when
she enters college?

7.) Find the present value for account in which the desired future value is $24,000 at 6.5% interest
compounded quarterly for 9 years.

8.) The first credit card Angie receives charges 12.49% interest compounded monthly to its customers.
Within one day of receiving it, Angie maxes it out. If she does not buy anything else on the card since
then, and owes the debt collector $1,938 after 8 months, how much did she spend on that first day?

4
Finding an Effective Interest Rate

• When choosing between two loans or accounts, it might be better to know the Effective Rate or
Annual Yield.

o The Effective Rate is the simple interest rate that would yield the same future value over
1 year as the given compound interest.

o To calculate the Effective Rate:

• E is the effective rate

• 𝑛 is the number of times interest is compounded annually

• 𝑟 is the interest rate per year

9.) Which is a better investment, 3% compounded monthly or 3.25% compounded semi-annually?

10.) Which is a better investment, 4% compounded weekly or 3.5% compounded daily?

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