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Financial Mathematics Pre-Course Quiz: Time Value of Money and Compound Interest

Get ready for your financial math course with this quiz covering Time Value of Money and Compound Interest. Learn how interest rates affect the value of money over time with practical examples and calculations. Score extra credit points!

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Financial Mathematics Pre-Course Quiz: Time Value of Money and Compound Interest

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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:

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