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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.
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-- 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.
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= PV(1 + i)n
FV = the future value of the investment at the end of n year i = the annual interest (or discount) rate PV = the present value, in todays dollars, of a sum of money
This
equation is used to determine the value of an investment at some point in the future.
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Compounding Period
Definition
-- is the frequency that interest is applied to the investment Examples -- daily, monthly, or annually
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interest factor (FVIFi,n) is a value used as a multiplier to calculate an amounts future value, and substitutes for the (1 + i)n part of the equation.
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The Rule of 72
Estimates
how many years an investment will take to double in value Number of years to double = 72 / annual compound growth rate Example -- 72 / 8 = 9 therefore, it will take 9 years for an investment to double in value if it earns 8% annually
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N = stores the total number of payments I/Y = stores the interest or discount rate PV = stores the present value FV = stores the future value PMT = stores the dollar amount of each annuity payment CPT = is the compute key
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1 -- input the values of the known variables. Step 2 -- calculate the value of the remaining unknown variable. Note: be sure to set your calculator to end of year and one payment per year modes unless otherwise directed.
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-- The
tables have a discrepancy due to rounding error; therefore, the calculator is more accurate.
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the long run, money saved now is much more valuable than money saved later. Dont ignore the bottom line, but also consider the average annual return.
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$150,000
$1 98
$100,000
$50,000
$0
Selma
Patty
Selma contributed $2,000 per year in years 1 10, or 10 years. Patty contributed $2,000 per year in years 11 35, or 25 years. Both earned 8% average annual return.
,4
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$1
46
,2
12
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1926-1998 the compound growth rate of stocks was approximately 11.2%, whereas long-term corporate bonds only returned 5.8%. The Daily Double -- states that you are earning a 100% return compounded on a daily basis.
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Present Value
Is
also know as the discount rate, or the interest rate used to bring future dollars back to the present. Present-value interest factor (PVIFi,n) is a value used to calculate the present value of a given amount.
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= FVn (PVIFi,n)
PV = the present value, in todays dollars, of a sum of money FVn = the future value of the investment at the end of n years PVIFi,n = the present value interest factor
This
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Annuities
Definition
-- a series of equal dollar payments coming at the end of a certain time period for a specified number of time periods. Examples -- life insurance benefits, lottery payments, retirement payments.
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Compound Annuities
Definition
-- depositing an equal sum of money at the end of each time period for a certain number of periods and allowing the money to grow Example -- saving $50 a month to buy a new stereo two years in the future
By allowing the money to gain interest and compound interest, the first $50, at the end of two years is worth $50 (1 + 0.08)2 = $58.32
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= PMT (FVIFAi,n)
FVn = the future value, in todays dollars, of a sum of money PMT = the payment made at the end of each time period FVIFAi,n = the future-value interest factor for an annuity
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equation is used to determine the future value of a stream of payments invested in the present, such as the value of your 401(k) contributions.
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= PMT (PVIFAi,n)
PVn = the present value, in todays dollars, of a sum of money PMT = the payment to be made at the end of each time period PVIFAi,n = the present-value interest factor for an annuity
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equation is used to determine the present value of a future stream of payments, such as your pension fund or insurance benefits.
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Amortized Loans
Definition
-- loans that are repaid in equal periodic installments With an amortized loan the interest payment declines as your outstanding principal declines; therefore, with each payment you will be paying an increasing amount towards the principal of the loan. Examples -- car loans or home mortgages
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Perpetuities
an annuity that lasts forever PV = PP / i
Definition
PV = the present value of the perpetuity PP = the annual dollar amount provided by the perpetuity i = the annual interest (or discount) rate
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Summary
value the value, in the future, of a current investment Rule of 72 estimates how long your investment will take to double at a given rate of return Present value todays value of an investment received in the future
Future
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Summary (contd)
a periodic series of equal payments for a specific length of time Future value of an annuity the value, in the future, of a current stream of investments Present value of an annuity todays value of a stream of investments received in the future
Annuity
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Summary (contd)
loans loans paid in equal periodic installments for a specific length of time Perpetuities annuities that continue forever
Amortized
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