Example Julie wants to know how large her $10,000 deposit will become at a compound interest rate of for 5 years. 1 2 3 4 5 |10% $10,000 FV5 slide 5
slide 5 Julie wants to know how large her $10,000 $10,000 deposit will become at a compound interest rate of for 5 years. 5 years Example Example 0 1 2 3 4 5 $10,000 $10,000 FV 5 10%
Solution Calculation based on general formula: FVn Po(1+i)n FV5=$10,000(1+0.10)5 =$16,105.10 slide 6
slide 6 Solution Solution Calculation based on general formula: FVn = P0 (1+i)n FV5 = $10,000 (1+ 0.10)5 = $16,105.10 $16,105.10
Problem Julie wants to know how large a deposit to make so that the money will grow to $10,000 in 5 years at a discount rate of 10%. 1 2 3 4 5 10% $10,000 slide 7
slide 7 Problem Problem Julie wants to know how large a deposit to make so that the money will grow to $10,000 $10,000 in 5 years at a discount rate of years 10%. 0 1 2 3 4 5 $10,000 $10,000 PV0 10%
Solution Calculation based on general formula: PVo FVn/(1+i)n PV0=$10,000/(1+0.10)5 =$6,209.21 slide 8
slide 8 Solution Solution Calculation based on general formula: PV0 = FVn / (1+i)n PV0 = $10,000 / (1+ 0.10) $10,000 5 = $6,209.21 $6,209.21
The Power of Compounding The US stock market returned as a whole from 1926 through 1996 (annual rate of return is 10.71%) Simple interest: $1*(1+71*10.71%)=$7.6 Compound interest: $1*(1+10.71%)71=$1371.71 slide 9
slide 9 The Power of Compounding The Power of Compounding The US stock market returned as a whole from 1926 through 1996 (annual rate of return is 10.71%) Simple interest: $1* ( 1+71*10.71%)=$7.6 Compound interest: $1* (1+10.71%)71=$1371.71