S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston

Chapter 9 Compound Interest— Future Value and Present Value

Finding Periodic Rate of Interest

i= j/m

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Determining Compounding n Factor (1+i)

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Calculation of Future Value

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Comparison of Simple and Compound Interest

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Future Value of an Investment FV = PV(1+i)n

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Finding FV When n Is a Fraction

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Compound Discount
(continued)

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Long-term Promissory Notes
•  Term of note longer than one year. •  Can be bought and sold at any time before maturity. •  Subject to compound interest. •  No requirement to add the 3 days of grace in determining legal due date.

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Proceeds of Long-term Promissory Note

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Calculating Proceeds of a NonInterest-bearing Note

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Discounting an Interestbearing Note
•  Step 1 -- Find the maturity value of the note. •  Step 2 -- Find the present value at the discount date of the maturity value.

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Finding the Proceeds for an Interest-bearing Note

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Finding Equivalent Values
•  Select a focal date. The focal date is a specific date chosen to compare the time values of one or more dated sums of money. •  If the due date of the payment falls before the focal date, use the FV formula. •  If the due date of the payment falls after the focal date, use the PV formula.

Calculating Equivalent Values

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Summary
•  With compound interest, earned interest is added to the principal and thus “interest is earned on interest” resulting in exponential growth. •  The future value of an investment at compound interest can be expressed by the formula FV = P(1+i)n . (continued)

Summary (continued)
•  The present value of a future amount at compound interest can be expressed by the formula PV = FV(1+i) -n .

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S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston

Chapter 10 Compound Interest— Further Topics

Objectives
After completing chapter ten, the student will be able to : •  •  •  •  •  Determine the number of conversion periods. Find equated dates. Compute periodic and nominal rates of interest. Compute the effective rate of interest. Compute equivalent rates of interest.

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10.1 p392 Finding N
•  In how many years will \$2000 grow to \$2440.38 at 4% compounded quarterly? •  •  •  •  •  •  •  P/Y 4 2nd CLR TVM 2000 – press PV 2440.38 press FV I/Y 4 CPT N But what is N?
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Equated Date
•  The equated date is the date on which a single sum of money is equal to the sum of two or more dated values. •  Use t = 0 as the focal date when setting up the equation of value for finding an equated date.
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Example 10.1F
•  A loan of \$2000 taken out today is to be repaid by a payment of \$1200 in six months and a final payment of \$1000. If interest is 12% compounded monthly, when should the final payment be made? PY 12; 2nd CLR TVM FV 1200; IY 12 N 6; CPT PV – 1130.45 2000=1130.45+final payment of 1000 (N?) •  PV – 869.55; FV 1000 •  IY 12 •  CPT N 14.048 (months) •  •  •  •

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10.2 p400 Finding i and nominal interest rate
•  Example 10.2A •  What is the annual compounding rate if \$200 accumulates to \$318.77 in eight years? •  •  •  •  •  PY 1; 2nd CLR TVM PV – 200; FV 318.77 N8 CPY IY 6 (annual: be careful!!)

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10.3 p404 Effective and Equivalent Interest Rates
•  The effective rate of interest is the rate of interest compounded annually that yields the same amount of interest as a nominal rate of interest compounded a number of times per year other than one •  To go from nominal to effective: •  2nd ICONV •  Enter NOM = •  Arrow down to C/Y = enter number of times interest compounds in a year •  Arrow up to EFF = and press CPT 10-24
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Example 10.3A p406
•  Assume you are given a choice of a term deposit paying 7.2% compounded monthly or an investment certificate paying 7.25% compounded semiannually. Which pays better interest? •  •  •  •  •  •  •  •  •  2nd ICONV NOM 7.2 ENTER C/Y 12 ENTER EFF = CPT (7.44) 2nd CLR TVM (why?) 2nd ICONV NOM 7.25 ENTER C/Y 2 ENTER EFF = CPT (7.38%) 10-25
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Summary
•  Effective and equivalent interest rates can be used to compare different nominal rates with varying compounding intervals.

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S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston

Chapter 11 Ordinary Simple Annuities

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Objectives
After completing Chapter eleven, the student will be able to: •  Distinguish different types of annuities. •  Compute the future value(or accumulated value) FV for ordinary simple annuities. •  Compute the present value (or discounted value) PV for ordinary simple annuities. •  Compute the payment, number of periods, and interest rate for ordinary simple annuities.
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What Is an Annuity?

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Annuity Terminology
•  payment interval - length of time between successive payments •  term of an annuity - length of time from the beginning of the first payment interval to the end of the last payment interval •  periodic rent - size of each regular payment •  annual rent - sum of periodic payments in one year
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Types of Annuities
•  Annuities certain -- fixed term •  Contingent annuities -- indefinite or uncertain term •  Perpetuity -- infinite number of payments

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Examples of Annuities Certain
•  •  •  •  •  •  The beginning and ending dates are known. Rental payments for real estate Lease payments on equipment Installment payments on loans Mortgage payments Interest payments on bonds and debentures

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Examples of Contingent Annuities
•  Beginning date or ending date or both are uncertain. •  Life insurance premiums •  Pension payments •  Payments from an RRSP converted into a life annuity •  Payments from a trust fund for the remaining life of a surviving spouse
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Examples of Perpetuities
•  Payments considered to continue forever. •  Size of periodic payment less than or equal to the periodic interest earned by a fund. •  Scholarship fund •  University endowment fund

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Annuities
•  Ordinary annuity -- Payments are made at the end of each payment period. •  Annuity due -- Payments are made at the beginning of each payment period. •  Deferred -- First payment is delayed for a specified time period or for a time period that may have to be calculated.
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Annuities
•  Simple annuity -- Interest conversion period is the same as the payment interval. •  General annuity -- Interest conversion period and payment interval are not the same.

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Ordinary Simple Annuity
•  Payments are made at the end of each payment interval.(i.e. Ordinary) •  Interest conversion period and payment interval are the same.(i.e. Simple)

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Example of Simple Ordinary Annuity
The interest rate is 6% compounded annually

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Future Value of an Annuity
Rate-6% compounded annually Annual payments

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Annuity example
•  You deposit \$1000 a month for five years. Interest is 5% compounded semiannually. How much do you have at the end? •  NOTE: N is number of payments x number of years •  •  •  •  •  •  •  •  CLR TVM PY 12 CY 2 PV 0 PMT -1000 IY 5 N 12*5=60 CPT FV 67,917.14
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11.3 Present Value Application

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Finding Cash Value: a present value application
•  A vacation property is bought for \$3000 down and payments of \$1000 at the end of six months for 12 years. The interest rate is 7% compounded semiannually. Find the cash value (purchase price)

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Example 11.4B p450 Finding the periodic payment PMT
•  Sometimes we want to know how to deposit (the ‘PMT’). Leave PMT to last, and then CPT PMT. •  You want to have \$5000 in 3 years. Size of monthly deposits if interest is 4.5% compounded monthly?

•  •  •  •  •  •  •

PY 12 CLR TVM PV 0 FV 5000 IY 4.5 N 36 CPT PMT -129.98
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11.5 p455 Finding N (the term of the annuity)
•  Example 11.5 B •  In how many payments will your bank account grow to \$3000 if you deposit \$150 at the end of each month and the account earns 9% compounded monthly? •  •  •  •  •  •  •  PY 12 CY 12 PV 0 FV 3000 PMT -150 IY 9 CPT N 18.7 About 19 months to accumulate \$3000
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Summary

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S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston

Chapter 12 Ordinary General Annuities

12-46

Objectives
After completing chapter twelve, the student will be able to: •  Compute the future value (or accumulated value) for ordinary general annuities. •  Compute the present value (or discounted value) for ordinary general annuities. •  Compute the payment, number of periods, and interest rate for ordinary general annuities.
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General Annuity
•  Length of interest conversion period is different from the length of the payment interval. •  In Canada, home mortgages are usually compounded semi-annually and payments are often made on a monthly, semi-monthly, or weekly basis.
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Ordinary General Annuity

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Using a Preprogrammed Calculator to Find PV or FV of an Ordinary General Annuity

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Example 12.1 G p478
•  Find the FV of \$2500 deposited at the end of every six months for ten years if interest is 6% compounded quarterly •  Note: PY 2 but CY 4 •  •  •  •  •  •  •  PY 2 CY 4 2nd CLR TVM PV 0 IY 6 N 2*10 = 20 PMT -2500 CPT FV (67329.89)
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Example 12.2C p481
•  A contract is fulfilled by making payments of \$8500 at the end of every year for fifteen years. If interest is 7% compounded quarterly, what is the purchase price of the contract? •  •  •  •  •  •  •  PY 1 CY 4 2nd CLR TVM FV 0 IY 7 PMT -8500 N 1*15 = 15 CPT PV (76516.38)
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Find PMT Using the Electronic Calculator

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Example 12.3A p484
•  What sum of money must be deposited at the end of every three months into an account paying 6% compounded monthly to accumulate \$25000 in ten years? •  •  •  •  •  •  •  PY 4 CY 12 2nd CLR TVM FV 25000 PV 0 IY 6 N 4*10 = 40 CPT PMT (459.94)
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Example 12.4A p488
•  What period of time is required for \$125 deposited at the end of each month at 11% compounded quarterly to grow to \$15000? •  •  •  •  •  •  •  PY 12 CY 4 2nd CLR TVM PV 0 FV 15000 IY 11 PMT -125 CPT N (81.52) ...what?
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Finding i Example 12.5A p492

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12.5 B8
•  What is the nominal annual rate of interest compounded quarterly if a loan of \$21,500 is repaid in seven years by payments of \$2000 made at the end of every six months?