Escolar Documentos
Profissional Documentos
Cultura Documentos
I=Prt
FV = P(1 + rt)
FV = (1000)+(1000)(.08)(3) = 1240
Simple Interest/Discount (3)
Note: usually simple interest is used in financial
institutions for interest periods of less than one year. If
the rate is expressed as an annual rate (normal
practice), then the time period (t) must be a fraction of
a year. Example: we invest $10,000 in an 8% , 90-day
certificate of deposit. Our total proceeds at the end of
the CD period are:
FV = (10000)+(10000)(.08)(90/365) = $10,197.26
Simple Interest/ Discount (4):
Often, if a bank or other financial institution loans a
sum for a short term, the lender will prefer to calculate
the interest up front and loan out the discounted
principal, or principal minus interest to be earned. The
interest to be paid up front on a loan is called discount
and the discounted principal, or the actual amount
loaned is called the present value (PV)
FV
PV = (1+rt)
Simple Interest/Discount (5):
Repeating the discount basic formula (simple
interest):
FV
PV = (1+rt)
PV = 10000 / [1 + (.08)(90/365)]
= 10000/ 1.019726
= $9,806.56
Compound Interest (1):
However, if interest is left in the account to accumulate
for a longer period (usually longer than one year)
common practice (and usually state law!) requires that
after interest is earned and credited for a given period,
the new sum of principal + interest must now earn
interest for the next period, etc. This is compound
interest. To distinguish from simple interest, we use
"n" to refer to the number of "periods" in which the
interest is compounded and added to principal.
FV
FV = P(1 + r)n PV = (1+r)n
Compound Interest (2):
Suppose we invest our original $1,000 for three years at
8%, compounded quarterly: (The rate per quarterly
period is 8% / 4 or 2%. The number of periods (n) is 3
x 4 = 12 quarterly periods.)
FV = (1000)(1.02)12 = $1,268.24
Payment = P +I
n
Rate 0.006667 8% / 12
Nper 120 10 yrs x 12
=PMT ($546.61)
=NPER 242.2195
Approx 242 months—just over 20 years! (Assuming 8% is
consistent and there is no risk of loss of principal!)
Amortization (Mortgages) (1):
Finally, if we take out a long term loan, such as a
mortgage, or a car loan based on the true APR, the
interest expense is calculated for each month based on
the unpaid balance of the loan. A fixed monthly
payment is computed from which is first deducted the
monthly interest, and the balance is applied to reduce
principal. The new interest is then recalculated the
next month based on the lower principal. This
generates a schedule of all loan payments, interest and
principal applied, and outstanding balance called an
amortization schedule.
Amortization (Mortgages) (2):
In the early months of an amortization schedule,
much (perhaps most) of the monthly payment goes
toward interest because the unpaid balance is so
large. As the principal is paid down, more and more
of each payment is applied toward principal.
Example: in a 30 year $100,000 home mortgage at 9%, the
required monthly payment is $804.63 (round up 1 cent)
PV -100,000
Nper 360 (30 yrs)
Rate 0.0075 9% / 12
FV 0
=PMT $804.623
Amortization (Mortgages) (3):
Of the $804.63 payment, the first month's interest is
$750.00 (100,000 x .09/12). Therefore only
804.63-750.00 = $54.63 goes toward principal.