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Unformatted text preview: . For 10 years thereafter your income will just cover your expenses. Finally, you expect to retire at age 70 and live until age 85. If you want to guarantee yourself $50,000 per year starting on your 71st birthday, how much should you put away every year, for the next 30 years, starting at the end of this year. Assume that your investments are expected to yield 10%. 13 How Interest Rates Are Quoted
• There are several ways that interest rates are commonly quoted. • SIMPLE INTEREST – With simple interest, one simply applies the interest rate to the initial balance. Thus, no interest is earned on the interest paid. • Example: Suppose you invest $100 for two years, with simple interest of 10% being paid. Compound Interest We usually use compound interest, where we earn interest on interest. This is the kind of interest that we have been using so far. Often, however, an annual rate will be compounded, but with a compounding interval of less than a year. Example: Compounding Intervals
• $1 invested at 6% compounded semi-annually yields at the end of the year • $1 invested at 6% compounded monthly yields at the end of the year • $1 invested at 6% compounded daily yields at the end of the year 14 Compound Interest
i ii Periods Interest per per year period 1 2 4 12 52 365 6% 3 1.5 .5 .1154 .0164 iii APR (i x ii) 6% 6 6 6 6 6 iv Value after...
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- Winter '08