Financial Math
chapter Compound Interest: Future Value and Present Value
LEARNING OBJECTIVES
After completing this chapter, you will be able to:
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CHAPTER OUTLINE
8.1 8.2 8.3 8.4 8.5
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Basic Concepts Future Value (or Maturity Value) Present Value Using Financial Calculators Other Applications of Compounding Equivalent Payment Streams Models of Financial Calculators
Calculate maturity value, future value, and present value in compound interest applications, by both the algebraic method and the preprogrammed financial calculator method Calculate the maturity value of compound interest Guaranteed Investment Certificates (GICs) Calculate the price of strip bonds Calculate the redemption value of a compound interest Canada Savings Bond Adapt the concepts and equations of compound interest to cases of compound growth Calculate the payment on any date that is equivalent to one or more payments on other dates Calculate the economic value of a payment stream
8.6
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Appendix 8A: Instructions for Specific
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EXAMPLES OF COMPOUND INTEREST are easy to find. If you obtain a loan to purchase a car, interest will be compounded monthly. The advertised interest rates on mortgage loans are semiannually compounded rates. Interest is always compounded in long-term financial planning. So if you wish to take control of your personal financial affairs or to be involved in the financial side of a business, you must thoroughly understand compound interest and its applications. The remainder of this textbook is devoted to the mathematics and applications of compound interest. You will be able to hit the ground running! In Chapters 6 and 7, you learned the concepts of maturity value, time value of money, future value, and present value for the case of simple interest. These ideas transfer to compound interest. Now we just need to develop new mathematics for calculating future value and present value when interest is compounded. And there is good news in this
LEARNING OBJECTIVES
After completing this chapter, you will be able to:
●
CHAPTER OUTLINE
8.1 8.2 8.3 8.4 8.5
* *
Basic Concepts Future Value (or Maturity Value) Present Value Using Financial Calculators Other Applications of Compounding Equivalent Payment Streams Models of Financial Calculators
Calculate maturity value, future value, and present value in compound interest applications, by both the algebraic method and the preprogrammed financial calculator method Calculate the maturity value of compound interest Guaranteed Investment Certificates (GICs) Calculate the price of strip bonds Calculate the redemption value of a compound interest Canada Savings Bond Adapt the concepts and equations of compound interest to cases of compound growth Calculate the payment on any date that is equivalent to one or more payments on other dates Calculate the economic value of a payment stream
8.6
●
Appendix 8A: Instructions for Specific
●
●
●
●
●
EXAMPLES OF COMPOUND INTEREST are easy to find. If you obtain a loan to purchase a car, interest will be compounded monthly. The advertised interest rates on mortgage loans are semiannually compounded rates. Interest is always compounded in long-term financial planning. So if you wish to take control of your personal financial affairs or to be involved in the financial side of a business, you must thoroughly understand compound interest and its applications. The remainder of this textbook is devoted to the mathematics and applications of compound interest. You will be able to hit the ground running! In Chapters 6 and 7, you learned the concepts of maturity value, time value of money, future value, and present value for the case of simple interest. These ideas transfer to compound interest. Now we just need to develop new mathematics for calculating future value and present value when interest is compounded. And there is good news in this