Applied 40S May 7, 2009

My favorite Credit Card by flickr user .KM.

Credit Cards and Interest Ratescurrent Canadian rates

Solve for FV (the future value) ...

You decide to invest $6500. The bank offers an interest rate of 8.25% compounded annually. What will your money be worth in 7 years if the interest rate remains unchanged?

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HOMEWORK

Watching Money Grow ...

Calculate the final balance if $7500 were invested at 8% per year, compounded semi-annually for 6 years.

How long will it take $12 000 invested at 7.2% per year, compounded quarterly, to grow to $15 000?

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Investing Regularly ...Calculate the final balance if $1500 were invested at 8% per year, compounded semi-annually, with additional investments of $1 000 at the end of every six months for five years.

How long will it take to save $35 000, if $2 500 were invested at 7.2% per year, compounded quarterly, followed by an additional $400 at the end of each 3-month period?

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Investing Frequently ...A financial institution offers an annual interest rate of 6%, compounded monthly.Compare $1200 invested at the end of each year to $100 invested at the end of each month.

Option 1: $1200/year Option 2: $100/month

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Doubling Our Money ...

$1200 is invested at 6% interest compounded annually. How long will it take to double?

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Here's a handy way to figure out how long your investment will take to double in value. It is called the Rule of 72.

(Interest Rate %) x (Years to Double) = 72

To find the number of years given a percentage:

To find the percentage required to double given the years:

The Rule of 72

Years = 72(Interest Rate %)

Rate = 72Years

Numbers 72 by flickr user szczel

Scenario 2: You are shopping for an investment that will double in 6 years. What interest rate are you looking for?

Scenario 1: You have an investment that compounds annually at 7%. How long will it take to double?

Use the Rule of 72 to estimate the doubling time for these interest rates:

(a) 4% per annum, compounded annually

(b) 8% per annum, compounded annually

(c) 24% per annum, compounded annually

Use the TVM solver in your calculator to calculate the the compound amount of a $100 investment for the doubling times estimated above.

How accurate does the Rule of 72 seem to be?

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The Difference Between Nominal and

Effective Interest Rates

Understanding Credit Card Interest Rates

or

Credit Cards by flickr user Andres Rueda

Nominal vrs. Effective Interest Rate

You have money to invest in interest-earning deposits. You have determined that suitable deposits are available at your bank paying 6.5% per annum compounded annually, at a local trust company paying 6.4% per annum compounded monthly and at the Student Credit Union paying 6.45% per annum compounded semiannually. Which institution offers the best rate of interest?

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Nominal Rate of Interest - The stated rate of interest applied to your investment.

Effective Rate of Interest - The interest rate if an annuity is compounded annually.

6.5% per annum compounded semiannually6.4% per annum compounded annually 6.45% per annum compounded monthly

Marge invested $2500 at 6.5% per annum compounded quarterly. Calculate the value of her investment after three years.

Calculate the effective interest rate.

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HOMEWORK

Credit Card InterestCalculate the effective interest rate of $1.00 invested at 18.5% compounded daily for one year.

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HOMEWORK

Shaina wishes to invest $2000 given by her grandfather. She has an option of a guaranteed investment certificate earning 8.85%, compounded quarterly, or a savings bond of 9%, compounded semi-annually.Which investment should she choose?

If each investment term is 5 years, what will be the difference in their values at the end of the term?

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HOMEWORK