06 Understand Time Value of Money

# 06 Understand Time Value of Money - Time Value of Money...

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1 Chapter 3 Understanding The Time Value of Money: Time Value of Money • A dollar received today is worth more than a dollar received in the future. • The sooner your money can earn interest, the faster the interest can earn interest the faster the interest can earn interest. Interest and Compound Interest • _______________________ (i) -- is the return you receive for investing your money. •Compound interest -- is the interest that your investment earns on the interest that your investment previously earned. • ______________________ (r) – is when rising prices reduce the purchase power of money. The effect of 3% interest on a ___________________ of \$100 • Reminders……3% = .03 in decimal form • On your calculator hit the 3 key and then hit the % key (4 th row from the top left hand side hand side) The effect of 3% interest on a one time deposit of \$100 Deposit (\$X) • + Deposit (\$X) times interest rate (i) • = new account balance • For example: \$100 (\$X) • + \$ 3 [100 (.03) = \$X(.03)] \$103 Or in one easy step: • Your deposit (\$X) multiplied by (1 + the interest rate—in decimal form) = new acct. balance •= \$X(1 + i) = new account balance • = \$100(1.03) = \$103

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2 The effect of compounding interest over time (long form) •= \$X 1 + [\$X 1 (i)] = \$X 2 •= \$X 2 + [\$X 2 (i)] = \$X 3 •= \$X 3 + [\$X 3 (i)] = \$X
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06 Understand Time Value of Money - Time Value of Money...

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