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MCR3U - Unit 8: Discrete Functions: Financial Applications Date: 8.3 Compounded Interest: Present Value 8.4 Annuities: Future Value H-mework: hursday: 6.3 Pages 498-499: #4, 7,9, 10, 13, 14 Friday: 8.4 Pages 511-512: #3, 6,8, 10, 12 At the end of this lesson | will be able to: * Calculate present value (PV) and interest rates (i) for compounded interest + Draw timelines and calculate future value (FV) for simple ordinary annuities Compounded Interest: Present value (8.2) versus Future Value (8.3) Euture value is the total amount, 4, of an investment after a certain period and can be determined using the formula for compounded interest (8.2). Presentvalue is the principal that would have to be invested now to geta specific value in a certain amount of time. We can find this value by rearranging the formula in 8.2 to find P and using the variable PV instead. t So if we take A=P(1+z)" and rearrange for P we get: b= 0.05 n= 10 Fy = /S000 Frys? 1. Determine the present value of Alex's investment if it must be worth $15 000 ten years from now assuming an annual compounding period with a rate of 5%/a. Note: These calculations don't include the time value of money. Basically $10 today is worth more than the same $10 twenty years in the future for @ variety of reasons including: «Inflation ~ the rise in the general level of price of goods and services in an economy + Opportunity cost - what you miss out on when you choose to do one thing over another. For example, if you spend $10 on dinner, you miss out on the benefit of being to use that $10 for anything else (depositing it into a savings account and making interest). Ifyou are interested in courses in finance or economics, you will examine these factors in more detail. 8.4 Annuities: Future Value 7 9.6% 7 What happens if you decide to deposit $150 into a savings account that earns 925% /a compounded monthly at the end of each month starting July 31 until December 31° How much is it worth on January 15 We can draw a timeline to illustrate what Is happening one compounding 2 1S) 2/8) BE) BS Ech) z a = a8 payen’ 180 9 SI tim | Lwo , | | L 50( 40-009) ) oL — (50 (1+0.008) 7 ¢ 5> | 39.(149.008) \ _ 150 (1+0.008) y i 5S Azpciti) \S0 (1+0.008) An annuity is a series of payments or investments made at regular intervals (typically monthly, quarterly, semi-annually or annually). Annuities may be equal deposits, equal withdrawals, equal payments, or equal receipts - the key is equal cash flow in or out at regular intervals. ‘There are several different types of annuities based on: ncide and are caled simple annuities. For sample, payments are mace monthly AND the ingerest is compounded moathy. if the payments are made at: the beginning ofthe each compounding period and are called annuity.dives. «the time value of money where f° ‘the future value is the sim ofa regular payments and interest earned. Examples include RRSPs and | RESPS, We will only look at the future value (FV) (8.4) and present value (PV) (8.5) or simple ordinary annuities in this course. if the payment intervals andl interest conversion periods (or compounding periods}: not coincide and are called general annuities For example, payments are made monthly BUT the id semi-annually, ‘or the present value is the value of the annuity atthe Doginniag of the torm and is the sum of all prosent values of the payment. Examples include mortgages, credit card debt with even payments and lines 0 credit Future value: The amount that accumulates is called the future value and is the sum ofa geometric series. Compound ing 4 : 2 na ml on amount thot each paymunt Ingeneral: Peed | mou ch pay mint $1 4 Is wort at ti Pym 2 7R *R 2 2 RR 2nd of Hu fern | } Least) wy | L Resi) i% The sum of the geometric series: Sn = Re RCH) + ROCF + See SET gover le ON yy sum of a ~ Qeomeltic. = Rar"-1] Segunce pt Cs "—AD | c= payment . Jeremy ev compounding period ra bed & common Fan Ist Grade B. He has a paper route and wants to save for his college education. He determines that he can deposit $100 a month into an account that pays 39/2, compounded monthly. How much will he have at the end of five years (when he graduates high school) for his education. a of 5 years. Draw a timeline showing the amount paid each month, and the value of each payment at the end D. Show that the total amount of the annuity after 5 years forms a geometric series. c. Calculate the sum of the series. Ms. Choo wants to save $40 000 for the down payment on a new home. She would like to deposit an equal amount of money at the end of every 3 month period for the next § years into an account that pays 2.75%/a compounded quarterly. Use a timeline to represent this process and calculate what her deposit should be to reach her goal.