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9 Compounding & Discounting
9 Compounding & Discounting
Now Year 1
$100 ???
Compounding Interest….
• Formula:
- FV= C0 x (1+r)T
Present Value of Future Cash…
(single cash flow )
You have a savings bond which will pay you
$100, 3 years from now. Using a discount
rate of 5%, what’s it worth today?
2723.25
Compounding Interest….
$952.38
952.38 $1,000 $1,050.00 $1,102.50
907.03
$907.03 $1,000 $1,050.00
863.84
$863.84 $1,000
$2,723.25
2723.25
The value of TIME in compounding
• You need to save for your retirement !
You deposit $6,000 ($500 per month) once at the start of
each year, and you only earn interest on the last day of
the next year.
• Assume you will earn 6% interest on your money each
year.
• How much will you have after 30 years ?
The value of TIME in compounding
• Now assume you don’t start saving for your retirement right away.
15 years have passed, and you’ve saved nothing.
Because you now feel guilty about not having a retirement account;
you start saving DOUBLE the amount ($1000 per month = $12,000 per
year).
You save this amount for 15 years; assume you earn the same 6%.
• How much will you have after 30 years ?
The time value of money….