Chapter_16_Time_Value_of_Money - SIMPLE INTEREST Assume...

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SIMPLE INTEREST: Ann has to pay the $1,000 principal at the end of the fifth year. She has to also ($20) ($20) ($20) ($20 +1,000 year 1 year 2 year 3 year 4 NOW (the Present) Annual Interest = $1,000 * 0.02/yr * 1 yr = $20 Ann. Intr. = Principal * Annual int. rate * Time Ann needs to pay a total of $1,100 at the end of year 5 ($1,000 principal and $1 Simple interest is calculated only on the principal, not on the p Assume that on January 1, 2008 Ann borrowed 1,000 for 5 years with a 2% ann
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pay interest at the end of each year. 0) ($20) (1,000) year 5 means PAYMENT of interest. Total interest = 5 * $20 = $100 100 interest). principal and the previous interest. nual simple interest rate.
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COMPOUND INTEREST: She has to pay the interest at the end of the fifth year. She also has to pay ba principal Interest: At the end of year 1: $1,000.00 * 0.02/yr * 1 yr = $20.00 At the end of year 2: 1,020.00 * 0.02/yr * 1 yr = 20.40 At the end of year 3: 1,040.40 * 0.02/yr * 1 yr = 20.81 At the end of year 4: 1,061.21 * 0.02/yr * 1 yr = 21.22 At the end of year 5: 1,082.43 * 0.02/yr * 1 yr = 21.65 Total: $104.08 In the previous example (the simple interest one), she only paid $100 in interest. Here, wit Ann needs to pay a total of $1,104.08 at the end of year 5 ($1,000 in interest
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