Chapter 1

CH1Applied1220162017.
notebook October04,2017
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CH1Applied1220162017.notebook October04,2017
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1.2ExploringCompoundInterest
SimpleInterest: Interestrateappliestotheprincipalalone.
CompoundInterest: Interestrateappliestothesumoftheprincipalandany
accumulatedinterest.
Interestisaddedatregularintervalscalledcompounding periods.Thesecanbe
annual(onceperyear),semiannual (twiceperyear),quarterly(4timesperyear),
monthly(12times peryear),daily(365timesperyear).
Seecomparisonexample(spreadsheet)
Practice
p.9#4and5
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1.3TheRuleof72
Toestimatehowlongitwilltakeaninvestmenttodoubleinvalue,
usetheruleof72:
Doublingtime= 72 (notethisistheonlytimeyoucanleavethe
PercentinterestRate interestrateasapercentageinacalculation)
Again,youmustrealizethattheruleof72providesanestimateofthedoubling
time.Inordertocalculatetheactualdoublingtimeyouwouldhavetouseother
financialtools(liketheTVMSolveronyourgraphingcalculator).
Example2p.11
Jacobinvests$540at4.5%compoundedquarterly.Estimatethedoublingtimeof
thisinvestment.Verifyyourestimate.
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TVMSolverTI83GraphingCalculator
toaccesstheTVMsolveryouneedblueAPPbuttononthe
calculator,thenselectfinance,thenselectTVMSolverandyouwill
getascreenthatlookslikethefollowing:
INPUTSlistthesewithyouranswers
numberofcompoundingperiodsortimeperiod
interestrateasapercentage
presentvalue
payment
futurevalue
paymentsperyear
compoundingperiodsperyear
RevisitQuestions4and5onp.9ofworkbook
#4 Principalof$9500
Termof3years
interestrateof2.5%
compoundedannually(onceperyear)
TVMSOLVERINPUTS
N=3
I%=2.5
PV=9500
PMT=0
FV=ALPHA+ENTER
P/Y=1
C/Y=1
TheTVMsolverprovidedtheFutureValueoftheinvestment,westillhaveto
calculatetheinterestearned:
I=AP=$10230.46$9500.00=$730.46
#5 Principalof$12500
Termof4years
InterestRateof1.95%
compoundedannually(onceperyear)
TVMSOLVERINPUTS
N=4
I%=1.95
PV=12500
PMT=0
FV=ALPHA+ENTER
P/Y=1
C/Y=1
Interestearned:I=FVPV=$13503.89$12500.00=$1003.89
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1.3CompoundInterest
Assignment:p.11#1,2,4,5,6,7,8,9
#1,2Usecompoundinterestformula(showwork)
#4,5UsetheRuleof72
#6,7,8,9UsetheTVMSolveronthecalculator
(showTVMsolverinputs)
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UsingtheTVMSolverontheTI83
yougetthis:
Pressthenumber
press besidefinancetoget:
pressthenumberbesideTVMSolvertoget:
numberof
compoundingperiods
percentinterestrate
presentvalue
payment
futurevalue
payments/year
compoundingperiods/year
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Howmuchinterestwasearned?
$1335.89$1200.00=$135.89
Assignment:
p.12
#5useruleof72(estimate)
#7useTVMSolver(calculatingdoublingtime)
#8,#9useboththeCompoundInterestFormulaandTVMSolver(compare)
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1.4CompoundInterest:PresentValue
Wkbkp.16
Example1
N: 5
I%: 6.7
PV: ALPHA+ENTER
PMT: 0
FV: 3000
P/Y: 1
C/Y: 2
PMT: END
Wkbkp.17
Example2
N: 18
I%: ALPHA+ENTER
PV: 12300
PMT: 0
FV: 40000
P/Y: 1
C/Y: 1
PMT: END
Wkbkp.18
Question3
N: 2
I%: 5.5
* PV: 10750.10
PMT: 0
FV: 12000
P/Y: 1
C/Y: 365
PMT: END
Madisonwouldhavetoinvest$10750.10tohaveaFutureValueof
$12000after2years.
AssignWkbkp.18 #1,2,4,5,6,7,12
(UsingtheTVMSolver)Listallinputs
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1.5InvestmentsInvolvingRegularPayments
*** Keepinmindthat,fortheTVMsolver,onceyouarelookingatinvestingusing
regularpaymentsasopposedtoalumpsuminvestmenttheNintheTVMsolver
willrepresentthetotalnumberofpayments(notthenumberofyears).
N totalnumberofpayments(#ofyrstimes#ofpayments/yr)
I% Percentinterestrate
PVPresentvalue(often0whenworkingwithinvestingusingpayments)
PMTtheregularpaymentbeingmade
FV Futurevalueofprincipalandinterest
P/Ynumberofpaymentsperyear
C/Ynumberofcompoundingperiodsperyear
Example1
deposit$750attheendofeach3monthperiod.Earns2.8%compoundedquarterly.
a) Howmuchwillbeintheaccountattheendof3yrs.Howmuchofthiswillbe
interest?
b) Needs$6500foratriptoChina.Willshehaveenoughafter2yrs?
a)
0.00
0.00=$354.71
b)
savedenoughafter2yrs
he'dhavetosaveforan
months.
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Example2
Mikewantsawasheranddryerin2yrs.Heplanstomakeregularmonthlydeposits
inanaccountthatpays1.9%interestcompoundedannually.Whatregularmonthly
paymentmusthemaketosaveupthenecessary$1300?Whatinterestwillheearn?
Hewillhavetomake24regular
paymentsof$53.20.
$53.20x24=$1276.80
Interest:
$1300.00$1276.80=$23.20
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1.5InvestmentsInvolvingRegularPayments
Reminder,whenworkingwithinvestmentsthatinvolveregularpaymentstheNinthe
TVMsolverrepresentsthetotalnumberofpayments(ie.yrstimesP/Y).
RemembertoalwaysshowyourinputswhenusingtheTVMSolver.
Assignment:p.22#214(evennumbers)
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1.6InvestmentPortfolios
Uptothispointwe'vebeenexaminingindividualinvestments.Aninvestmentportfolio
representsacollectionofinvestments(ie.aninvestorusuallyinvestsinmorethan
oneinvestment).Aparticularinvestormayhaveinvestmentsinthestockmarket,
bonds,savingsaccount,realestate,etc...Thevalueoftheportfoliowouldbethe
valueofallofindividualinvestmentstakentogether.
Notes: Usuallythelongerthemoneyisinvested(lockedin),thehighertheinterest
rate.
Usuallythelargerthesumofmoneythatyouinvest(principal)thehigherthe
interestrate.
Investmentswillearnmoreif:
Theterm(lengthoftime)islonger
Therearemorecompoundingperiods(ie.monthlyversusannually)
Theinterestrateishigher
Higherinitialinvestment(principal)
Example
p.26#3
monthlydepositsof$100earning2.5%interestcompoundedmonthly
a15year$6000investmentearning5.7%compoundedannually.
Whatisthecurrentvalueoftheportfolio?
Theportfolio'scurrentvalueis$21812.35+$13780.85=$35593.20
Assignment:p.25#2,3,4,6,7,8
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