Chapter_16_Time_Value_of_Money

# Chapter_16_Time_Value_of_Money - SIMPLE INTEREST Assume...

This preview shows pages 1–4. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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.
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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern