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Recitation 02

Recitation 02

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Recitation 02

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  1. Recitation 02

  2. Announcements • Pre-Course Questionnaire • Extra credit • 20 questions • Blackboard Learn • Due today 5:00 pm

  3. Announcements • Online Quiz 1 • Blackboard Learn • Starts at 8:00 am on Monday, January 27 • Due Friday, Jan 31st 5:00 pm • Covers • Chapter 2 & Chapter 3 • You are given 10 minutes to complete 10 questions for 10 points

  4. TVM • Is $100 received today really the same as $100 received 10 years from now? • From TVM perspective, no • TVM is based on the assumption that you always earn interest on your money • Don’t hide your money under the mattress!

  5. Discounting and Compounding • From TVM if we assume that you always earn interest: • Compounding is shifting the monetary amount to the future based on interest earned • Discounting is shifting monetary amounts to the present considering a discount rate (or interest rate) • We can compare cash flows that occur at different points in time by discounting or compounding them to the same point in time

  6. Simple Interest • It is the most basic form of monetary growth • Interest is generated on the original principal only • Linear growth

  7. Simple Interest Example • Assume you deposit $1000 in an account earning 7% simple interest for 2 years. What is the accumulated interest at the end of the 2nd year? What is the value of the account after two years?

  8. Simple Interest Example Given: Steps:

  9. Compound Interest • Compounding • Discounting • Exponential growth

  10. Simple versus Compound Interest Simple interest Compound interest

  11. Simple versus Compound Interest Simple interest Compound interest

  12. Compound Interest Example • If you invested $2000 today in an account that pays 6% interest, with interest compounded annually, how much will be in the account at the end of two years if there are no withdrawals?

  13. Compound Interest Example Given: Steps:

  14. Compound Interest Example • Joann needs to know how large of a deposit to make today so that the money will grow to $2500 in 5 years. Assume today’s deposit will grow at a compound rate of 4% annually.

  15. Compound Interest Example Given: Steps:

  16. Compound Interest Example • If one invests $2000 today and has accumulated $2676.45 after exactly 5 years, what rate of annual compound interest was earned?

  17. Compound Interest Example Given: Steps:

  18. Compound Interest Example • If I invest $10000 today in a savings account paying me 6% interest (compounded annually), how long will it take for me to have $50000 in my account?

  19. Compound Interest Example Given: Steps: