50 theextra250comesfromtheinterestof0550

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Unformatted text preview: another year. How much will you have two years from now? FV = 1000(1.05)(1.05) = 1000(1.05)2 = 1102.50 Effects of Compounding Effects of Compounding Simple interest vs. Compound interest Consider the previous example FV with simple interest = 1000 + 50 + 50 = 1100 FV with compound interest = 1102.50 The extra 2.50 comes from the interest of .05(50) = 2.50 earned on the first interest payment Understanding Compound Interest Understanding Compound Interest Source: http://www.investopedia.com/video/ Calculator Keys Calculator Keys Texas Instruments BA­II Plus FV = future value PV = present value I/Y = period interest rate P/Y must equal 1 for the I/Y to be the period rate Interest is entered as a percent, not a decimal N = number of periods Remember to clear the registers (CLR TVM) after each problem Remember the sign convention or you will receive an error when solving for r or t Future Values – Example 2 Future Values – Example 2 Suppose you invest the $1000 from the previous example for 5 years. How much would you have? FV = 1000...
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