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Compound
Compound
Interest
Interest
Compound
Chapter 8
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
Learning Objectives
Calculate the
LO-1 Maturity Value(MV), Future Value (FV), and Present
Value(PV) in
8-2
Compound
Compound
Learning Objectives
8-3
Interest
Interest
Calculate the
LO-2 Redemption Value of a compound interest
bearing Canada Savings Bond
And be able to
Adapt the concepts and equations of compound
interest to cases of compound growth
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
LO-1
McGraw-Hill Ryerson
8-4
Compound
Compound
Interest
Interest
8-5
Formula
Formula
I = Prt
new Interest!
McGraw-Hill Ryerson
Compound
Compound
Compound Interest
8-6
- Future Value
Interest
Interest
plus the
$100.00
Compound
Compound
Interest
Interest
Compound Interest
- Future Value
McGraw-Hill Ryerson
8-7
Compound
Compound
Interest
Interest
Compound Interest
8-8
- Future Value
McGraw-Hill Ryerson
Graphically
Compound
Compound
8-9
Compound Interest
- Future Value
Interest
Interest
Interest
Interest
Interest
Interest
Interest
Interest
Interest
Interest
Amount$1000
$1000
Amount
133.1
1331
1210
1100
1000
100
110
100
121
121
11
0
100
11
0
100
0
McGraw-Hill Ryerson
2
Time(Years)
Compoundin
g Period
Compound
Compound
Interest
Interest
Compound Interest
8 - 10
- Future Value
Example
Example
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
Compound Interest
8 - 11
- Future Value
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
Compound Interest
8 - 12
- Future Value
Year 1
Year 2
Year 3
Year 4
$1000
$1040
$1123.20
$1010.88
$1000 *
(1 + .04)
= $1040
McGraw-Hill Ryerson
$1040 *
$1123.20 *
(1 + .08)
(1 - .10)
= $1123.20 = $1010.88
$1010.88 *
(1 +.09)
= $1101.86
Alternative
Alternative
Compound
Compound
Interest
Interest
Compound Interest
8 - 13
- Future Value
You hold an investment for a period of 4 years.
Rates of return for each year are 4%, 8%, -10%
and
9% respectively. If you invested $1000 at
the beginning
of the term, how much will you
have
at the end
of the last year?
1000(1.04)(1.08)(.90)(1.09) = $1101.86
Solving
Solving
Alternative
Alternative
1
-10%
Solve
for
all
Solve for all
years at
at
44 years
It isis rare
rare for
forinterest
interest to
to be
be
It
once!
once!
compounded only once per year!
compounded only once per year!
McGraw-Hill Ryerson
8 - 14
Compound
Compound
Interest
Interest
McGraw-Hill Ryerson
No. per
per Year
Year
No.
Period
Period
Annually
1 year
Semiannually
6 months
Quarterly
3 months
Monthly
12
1 month
Daily
365
1 day
Compound
Compound
Interest
Interest
8 - 15
Development of a Formula
Formula
Total Number of
Periods
Periods
(j)
m
(i)
8 - 16
Compound
Compound
Formulae
Formulae
Interest
Interest
To Determine
Determine
To
Time(Years)
n
n
To Determine
Determine
To
ii
8 - 17
Compound
Compound
Interest
Interest
Formula
Time(Years) *
# of Compounding
Frequencies per year (m)
Annually
3*
Semiannually 3 *
Quarterly 3 *
McGraw-Hill Ryerson
No.
= 3
= 6
= 12
2
4
8 - 18
Compound
Compound
Interest
Interest
Formula
Formula
Annual Interest
Rate (j)
# of Compounding
Frequencies per
year(m)
6% /
Annually
Semiannually 6% /
Quarterly 6% /
McGraw-Hill Ryerson
No.
1
2
4
Rate -- ii
Rate
= 6%
= 3%
= 1.5%
8 - 19
Compound
Compound
Interest
Interest
Development of a Formula
Formula for Future Value
FV = PV(1 + i)n
Where
Compound
Compound
Interest
Interest
Compound Interest
8 - 20
- Future Value
n
FV
=
PV(1
+
i)
Formula
Formula
PV = $1000
n = 4X2=8
i = .08/2 = .04
McGraw-Hill Ryerson
Solve
Compound
Compound
Interest
Interest
Compound Interest
- Future Value
n
FV
=
PV(1
+
i)
Formula
Formula
FV = $1000(1 + .04)8
= $1000(1.368569)
= $1,368.57
Principal
$1,000.00
+ Interest
368.57
Compounded $1,368.57
McGraw-Hill Ryerson
8 - 21
Compound
Compound
Interest
Interest
BOTH
BOTH
wayswill
will
ways
bebe
shown!
shown!
McGraw-Hill Ryerson
8 - 22
8 - 23
Compound
Compound
Interest
Interest
Useaacalculator
calculatorand
andalgebraic
algebraicsequencing
sequencing
Use
Solve $1000(1 + .04)8
1368.57
.04
1
$1,368.57
$1,368.57
8
1000
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
8 - 24
Useaacalculator
calculatorand
andalgebraic
algebraicsequencing
sequencing
Use
Find the
the following
following KEYS:
KEYS:
Find
The Power function Key.
Used to calculate the
value of exponents.
Used to access symbols located
above
another key,
i.e. its acts like the
SHIFT key on a
computer keyboard.
Changes the sign of the
data value of the number
being displayed.
McGraw-Hill Ryerson
8 - 25
Compound
Compound
Interest
Interest
Useaacalculator
calculatorand
andalgebraic
algebraicsequencing
sequencing
Use
Find the
the following
following KEYS:
KEYS:
Find
1.368569
Negative (1.04)-8 is1.04
Negative
0.73069
McGraw-Hill Ryerson
8 - 26
Compound
Compound
Interest
Interest
Useaacalculator
calculatorand
andalgebraic
algebraicsequencing
sequencing
Use
Find the
the following
following KEYS:
KEYS:
Find
Used to Store or save
displayed values.
Used to Recall the
saved values.
This calculator can store up to
McGraw-Hill Ryerson
8 - 27
Compound
Compound
Interest
Interest
Useaacalculator
calculatorand
andalgebraic
algebraicsequencing
sequencing
Use
Using the
the
Using
key
key
8 - 28
Compound
Compound
Interest
Interest
Some key
key Keys!
Keys!
Some
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
8 - 29
Find the
the following
following KEYS:
KEYS:
Find
1. Number of compoundings
(for lump
payments)
2. Number of payments
(for
annuities)
The nominal
interest
rate
(Interest/Year)
Present Value or
initial(first) lump sum
Represents the
Periodic Annuity Payment
(used in chapter 10)
Future Value or
terminal(last) lump sum
McGraw-Hill Ryerson
Compound
Compound
8 - 30
Find the
the following
following KEYS:
KEYS:
Find
Interest
Interest
8 - 31
Compound
Compound
Interest
Interest
The12
12
The
isisaa
default
default
setting
setting
Appears
Appears
automatically
automatically
new ones!
more
more
8 - 32
Compound
Compound
Interest
Interest
If
the calculation
does not
involve
more
than
payment
must be
given
theone
same
value as
Illustration
Illustration
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
8 - 33
Illustration
Illustration
will
will
automaticallychange
changethe
theentry
entryfor
forC/Y
C/Y
automatically
tothe
thesame
samevalue
value
to
Wemust
mustkey
keyin
in
this
We
this
as
thedefault,
default,i.e.
i.e.P/Y
P/Y to scroll
as the
sequence
sequence
toclose
closeany
anyworksheet
worksheet
to
youhave
haveopened.
opened.
you
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
McGraw-Hill Ryerson
8 - 34
8 - 35
Compound
Compound
Interest
Interest
Usingthe
theTI
TIBAII
BAIIPlus
Plusfinancial
financialcalculator
calculator
Using
frequency
frequency
of
of
interest
interest
compounding
compounding
Step 22
Step
Input values
values
Input
into the
the
into
financial keys
keys
financial
Using
McGraw-Hill Ryerson
8 - 36
Compound
Compound
Interest
Interest
Usingthe
theTI
TIBAII
BAIIPlus
Plusfinancial
financialcalculator
calculator
Using
Setthe
the
Step 11 Set
Step
frequency
frequency
of
of
interest
interest
compounding
compounding
SteveSmith
Smith
Steve
deposited$1,000
$1,000
deposited
inaasavings
savings
in
accountfor
for
account
yearsat
ataa
44years
rateof
of 8%
8%
rate
compounded
compounded
semiannually.
semiannually.
WhatisisSteves
Steves
What
interestand
and
interest
compounded
compounded
amount?
amount?
McGraw-Hill Ryerson
Inputvalues
values
Step 22 Input
Step
intothe
the
into
8.0
financial
FV=
1368.57
1000
financial
keys
keys
4*2
0
$1,368.57
$1,368.57
8 - 37
Compound
Compound
Interest
Interest
each time!
McGraw-Hill Ryerson
8 - 38
Compound
Compound
Interest
Interest
CashFlows
Flows
Cash
..a term
term that
that refers
refers to
to payments
payments
..a
that can
can be
be either
either
that
payments received
e.g. receipts
Positives
Positives
McGraw-Hill Ryerson
++
Treated as:
as:
Treated
payments made
e.g. cheques
Negatives
Negatives
--
Compound
Compound
Interest
Interest
8 - 39
Compound
Compound
Interest
Interest
Compound Interest
8 - 40
- Future Value
Annual
Annual
FVA = 100(1.06)3
SemiSemi-
FVS = 100(1.03)6
$119.10
$119.10
$119.41
$119.41
Semi = 6%/2
Quarterly
Quarterly
FVQ = 100(1.015)12
Quarterly = 6%/4
McGraw-Hill Ryerson
$119.56
$119.56
Compound
Compound
8 - 41
Compound Interest
- Future Value
Interest
Interest
SS or
or FV
FV
Future
FutureValue
Value
250
Interest
on
FV=PV(1+i)n
Interest
200
Interest on
Original
Principal
150
S=P(1+rt)
100
Original Principal
50
0
McGraw-Hill Ryerson
Time(Years)
1
10
11
Compound
Compound
Interest
Interest
Comparisons
McGraw-Hill Ryerson
8 - 42
Compound
Compound
Interest
Interest
Simple Vs Compound
Interest
AlJones
Jonesdeposited
deposited$1,000
$1,000in
inaasavings
savingsaccount
account
Al
for55years
yearsat
at10%
10%p.a..
p.a..
for
AnnualSSimple
impleIInterest
nterest
Annual
Rateof
of10%
10%
Rate
AnnualC
Compound
ompound
Annual
Rateof
of10%
10%
Rate
WhatisisAls
Als
What
impleIInterest
nterestand
and
SSimple
WhatisisAls
Als
What
nterestand
and
IInterest
Maturity
aturityV
Value?
alue?
M
McGraw-Hill Ryerson
Compounded
ompoundedV
Value?
alue?
C
8 - 43
Compound
Compound
Interest
Interest
Simple Vs Compound
Interest
8 - 44
AlJones
Jonesdeposited
deposited$1,000
$1,000in
inaasavings
savingsaccount
accountfor
for55years
yearsat
at10%
10%
Al
Simple
Simple
n = 5 * 1 = 5 i = .10
I = Prt
I = $1,000 * .10 * 5
= $500
FV = $1,000 + $500
= $1,500
McGraw-Hill Ryerson
Formulae
Formulae
Compound
Compound
FV = PV(1 + i)n
I = FV PV
Compare
= $1610.51 - $1000
Compare
FV = $1000(1.1)5
= $1,000 *1.6105
= $610.51
8 - 45
Compound
Compound
Interest
Interest
Future
FutureValue
Value FV
FV
1800
1600
1400
1200
10%
1000
800
8%
600
6%
400
200
100
0
1
McGraw-Hill Ryerson
10
11
12
13
14
15
Years to Maturity,
16
17
18
19
20
21
22
23
24
25
26
Compound
Compound
Interest
Interest
Beginning
Beginning
Balance
Balance
$1,000
$1,000
McGraw-Hill Ryerson
6%
++6%
8 - 46
Compounding
Compounding
Period
Period
Ending
Ending
Balance
Balance
Annual
Semiannual
$1,060.00
$1,060.90
Quarterly
$1,061.36
Daily
$1,061.83
Compound
Compound
8 - 47
Future
FutureValue
Value FV
FV
Interest
Interest
2500
2000
12% Compounded
1500
monthly
1000
d
e
d
n
ou
p
m lly
o
a
C
u
12% Ann
500
100
0
McGraw-Hill Ryerson
10
15
Time (years)
20
25
Compound
Compound
Interest
Interest
8 - 48
n
FV
=
PV(1
+
i)
Formula
Formula
n = 4 * 365 = 1460 i = .045 /365 = 0.0001232
FV = $2000(1+ .045/365)1460
$2,000 ** 1.1972
1.1972 == $2,394.41
$2,394.41
== $2,000
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
8 - 49
2394.41
$2000(1+ .045/365)1460
.045
365
1
1460
2000
McGraw-Hill Ryerson
$2,394.41
== $2,394.41
Compound
Compound
8 - 50
Interest
Interest
Setthe
the
Step 11 Set
Step
frequency
frequency
of
of
interest
interest
compounding
compounding
Calculate
the
Calculate the
FutureValue
Value
Future
of$2,000
$2,000
of
compounded
compounded
dailyfor
for44
daily
yearsat
at4.5%.
4.5%.
years
365
FV= - 2394.41
Inputvalues
values
Step 22 Input
Step
intothe
the
into
4.5
financialkeys
keys
financial
2000
4 * 365
0
$2,394.41
$2,394.41
McGraw-Hill Ryerson
Compound
Compound
8 - 51
Interest
Interest
McGraw-Hill Ryerson
8 - 52
Compound
Compound
Interest
Interest
0
$6000
2 years
FV1 = PV2
i = .045/4 n = (2*4) = 8
FV1 = 6000(1+.045/4)8
= 6000(1.0936)
= 6561.75
McGraw-Hill Ryerson
4.5 years
FV2
i = .052/12 n = 2.5*12 = 30
FV2 = 6561.75(1+.052/12)30
= 6561.75(1.1385)
= $7470.61
8 - 53
Compound
Compound
Interest
Interest
Usingthe
theTI
TIBAII
BAIIPlus
Plusfinancial
financialcalculator
calculator
Using
Setthe
the
Step 11 Set
Step
frequency
frequency
of
of
interest
interest
compounding
compounding
You invested
$6000 at 4.5%
compounded
quarterly.
After 2 years,
the rate
changed to
4
5.2%
compounded
monthly.
What amount
will you have
41/2 years after
the initial
investment?
McGraw-Hill Ryerson
FV11==PV
PV22
FV
Inputvalues
values
Step 22 Input
Step
intothe
the
into
6000
financial
financial
keys
keys
6,571.75
4*2
4.5
$6,561.75
$6,561.75
FV2
8 - 54
Compound
Compound
Interest
Interest
Usingthe
theTI
TIBAII
BAIIPlus
Plusfinancial
financialcalculator
calculator
Using
Setthe
the
Step 11 Set
Step
frequency
frequency
of
of
interest
interest
compounding
compounding
You invested
$6000 at 4.5%
compounded
quarterly.
After 2 years,
the rate
changed to
12
5.2%
compounded
monthly.
What amount
will you have
41/2 years after
the initial
investment?
McGraw-Hill Ryerson
FV22
FV
Inputvalues
values
Step 22 Input
Step
intothe
the
into
financial
financial
keys
keys
7470.61
2.5*12
5.2
$7,470.61
$7,470.61
8 - 55
Compound
Compound
Interest
Interest
McGraw-Hill Ryerson
Compound
Compound
8 - 56
Interest
Interest
8 - 57
Compound
Compound
Interest
Interest
Usingthe
theTI
TIBAII
BAIIPlus
Plusfinancial
financialcalculator
calculator
Using
FV112500
2500==PV
PV22
FV
Step 11
Step
You borrowed
$5000 at 7%
compounded
monthly.
On the 1st. and 2nd
anniversaries of
the loan, you made
payments of $2500.
What is the
balance
outstanding
immediately after
the 2nd payment?
McGraw-Hill Ryerson
5000
FV= -5361.45
-2861.45
7.0
12
12
2500
$2,861.45
$2,861.45
FV2
8 - 58
Compound
Compound
Interest
Interest
Usingthe
theTI
TIBAII
BAIIPlus
Plusfinancial
financialcalculator
calculator
Using
Step 22
Step
You borrowed
$5000 at 7%
compounded
monthly.
On the 1st. and 2nd
anniversaries of
the loan, you made
payments of $2500.
What is the
balance
outstanding
immediately after
the 2nd payment?
McGraw-Hill Ryerson
FV22
FV
-2861.45
- 2,861.45
3068.30
568.30
2500
$568.30
$568.30
Compound
Compound
Interest
Interest
McGraw-Hill Ryerson
8 - 59
Compound
Compound
Interest
Interest
8 - 60
Keys
1
This is the only
change to the
usual
sequence!
$PV
$PV
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
8 - 61
Calculating Present
Present Value
Value
Calculating
McGraw-Hill Ryerson
8 - 62
Compound
Compound
Calculating Present
Present Value
Value
Calculating
Interest
Interest
-n
Formula
PV
=
FV(1
+
i)
Formula
i = .04/2 = .02
(a) PV = $1500(1+.02)-6
= $1500 * .8880
1,331.96
0.88797
1.02
6
= $1,331.96
1500
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
8 - 63
Calculating Present
Present Value
Value
Calculating
(b)
PV=
-1,331.96
$1331.96
$1331.96
McGraw-Hill Ryerson
8 - 64
Compound
Compound
Calculating Present
Present Value
Value
Calculating
Interest
Interest
-n
Formula
PV
=
FV(1
+
i)
Formula
PV = $6000(1+.05/365)-365
= $6000 * .9512
i = .05/365
n = 1*365 = 365
FV = $6000
= $5,707.40
5,707.40
0.0001
0.9512
1.001
.05
365
1
365
McGraw-Hill Ryerson
6000
8 - 65
Compound
Compound
Calculating Present
Present Value
Value
Calculating
Interest
Interest
6000
PV= - 5,707.40
0
365
$5707.40
$5707.40
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
8 - 66
Equivalent Payments
Payments
Equivalent
Compound
Compound
8 - 67
Equivalent Payments
Payments
Equivalent
Interest
Interest
Step 11
DrawaaTime-line
Time-line
Draw
Step
Two payments of $2200 each must be made 1 and 4 years
from now. If money can earn 5% compounded
monthly,
what single payment 3 years from now
would
be equivalent
to the two3scheduled
payments?
0
1 year
2 years
years
4 years
PV1 $2200
$2200 FV2
FV
i = .05/12
Step 22
Step
Findthe
theFV
FVof
of
Find
thepayment
payment
the
thatisismoved
moved
that
fromYear
Year11to
to
from
Year33
Year
McGraw-Hill Ryerson
n = 2*12 = 24 PV
2
(a) FV1
= 2200(1+.05/12)24
= 2200(1.1049)
= 2430.87
2430.87
Now
8 - 68
Compound
Compound
(b)
Interest
Interest
1 year
2 years
3 years
PV1 $2200
FV1
i = .05/12 n = 2*12 = 24 PV2
2*12
2200
Step 22
Step
Findthe
theFV
FVof
of
Find
thepayment
payment
the
thatisismoved
moved
that
fromYear
Year11to
to
from
Year33
Year
4 years
$2200 FV2
2430.87
0
12
Now
McGraw-Hill Ryerson
Compound
Compound
Equivalent Payments
Payments
Equivalent
Interest
Interest
8 - 69
1 year
2 years
PV1$2200
3 years
FV1
4 years
$2200
PV2
Step 33
Step
i = .05/12 n =1*12=12
Findthe
thePV
PVof
of
Find
(a) PV2 = 2200(1+.06/12)-12
the
payment
the payment
thatisismoved
moved
that
= 2200(0.9513)
fromYear
Year44to
to
from
Year33
Year
= 2092.92
Finally, this PV amount can be added to that put into memory
$4523.79
0
2430.87
McGraw-Hill Ryerson
8 - 70
Compound
Compound
(b)
Interest
Interest
1 year
2 years
PV1$2200
2,092.92
4,523.79
1*12
2200
McGraw-Hill Ryerson
3 years
FV1
4 years
$2200
PV2
n =1*12=12
Some of
of the
the
Some
values
values
have not
not
have
changed so
so
changed
there isis no
no
there
need to
to
need
enterthem
them
enter
again!
again!
0
2430.87
$4523.79
8 - 71
Compound
Compound
Interest
Interest
i = j/m = .
= 0.0040
themonthly
monthly
PV *048/12
I = $10000 * 0.0040
the
paymentwill
willbe:
be:
payment
= $40.00
Makingaachoice!
choice!
Making
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
8 - 72
Making aa choice!
choice!
Making
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
j = 6.6%
compounded
annually
Supposeaabank
bank
Suppose
quotesnominal
nominal
quotes
annualinterest
interest
annual
ratesofof
rates
6.6%
6.6%
compounded
compounded
annually,
annually,
6.5%compounded
compounded
6.5%
semi-annually,
semi-annually,
and
and
6.4%compounded
compounded
6.4%
monthly
monthly
onfivefiveon
yearGICs.
GICs.
year
McGraw-Hill Ryerson
Which
Which
5*1
6.6
j = 6.5%
j = 6.4%
compounded
semi-annually
5*2
compounded
monthly
5 * 12
6.5
6.4
12
1376.89
1375.96
1000
8 - 73
1376.53
Comparisons
8 - 74
Compound
Compound
Comparisons
Interest
Interest
Results
Results
j = 6.6%
compounded
annually
j = 6.5%
1376.53
1376.53
compounded
semi-annually
j = 6.4%
1376.89
1376.89
compounded
monthly
1375.96
1375.96
the 6.5%
6.5% compounded
compounded semi-annually
semi-annually
the
provides for
forthe
the best
best
provides
rate of
of return
return on
on investment!
investment!
rate
McGraw-Hill Ryerson
8 - 75
Compound
Compound
Interest
Interest
of Interest Rates
McGraw-Hill Ryerson
8 - 76
Compound
Compound
Interest
Interest
of Interest Rates
An investment in a GIC might have a
FixedRate
Rate
Fixed
Step-upRate
Rate
Step-up
Variable Rate
Rate
Variable
theinterest
interest
the
ratedoes
doesnot
not
rate
changeover
overthe
the
change
termof
ofthe
theGIC.
GIC.
term
theinterest
interestrate
rateisis
the
increasedevery
every66
increased
monthsor
orevery
everyyear
year
months
accordingto
toaaprepreaccording
determinedschedule.
schedule.
determined
... is
is adjusted
adjusted every
every
...
year or
or every
every 66
year
months to
to reflect
reflect
months
market rates
rates
market
may be
be aa minimum
minimum
may
floor
floor
below which
which rates
rates
below
cannot drop
drop
cannot
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
Payment of
of
Payment
Interest
Interest
RegularInterest
Interest
Regular
version
version
Interest
Interestisispaid
paid
totothe
theinvestor
investor
every
everyyear
yearor
orevery
every66
months
months
McGraw-Hill Ryerson
8 - 77
Compound Interest
Interest
Compound
version
version
Interest
Interestisisperiodically
periodically
converted
convertedtotoprincipal
principal
and
and
paid
paidatatmaturity
maturity
8 - 78
Compound
Compound
Interest
Interest
Canadian
Savings
Bonds
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
Canadian
Savings
Bonds
Go to http://www.cis-pec.gc.ca/
McGraw-Hill Ryerson
8 - 79
Compound
Compound
Interest
Interest
McGraw-Hill Ryerson
8 - 80
Compound
Compound
Interest
Interest
Canadian
Savings
Bonds
All CSBs
CSBsissued
issuedup
upto
to 1988
1988 (Series
(Series 11to
to 43)
43)have
have matured
maturedand
andare
areno
no
All
longerearning
earninginterest.
interest.
longer
The rates
ratesof
of interest
interestfor
forSeries
Series45
45 to
to70
70 for
forsubsequent
subsequent years
yearsto
to maturity
maturity
The
will be
be announced
announcedat
at future
futuredates.
dates.
will
McGraw-Hill Ryerson
8 - 81
Compound
Compound
Interest
Interest
McGraw-Hill Ryerson
8 - 82
8 - 83
Compound
Compound
Interest
Interest
Concepts
The fair market value of
an investment
is the
sum of the Present
Values of the
expected cash flows.
McGraw-Hill Ryerson
Compound
Compound
Interest
Interest
McGraw-Hill Ryerson
8 - 84
Compound
Compound
8 - 85
Interest
Interest
owner
ownerwill
willreceive
receiveaasingle
single
payment(called
(calledthe
theface
facevalue
value
payment
thebond)
bond)on
onthe
the
ofofthe
bondsmaturity
maturitydate
date
bonds
McGraw-Hill Ryerson
the
thematurity
maturitydate
date
couldbe
beas
asmuch
muchas
as30
30
could
yearsin
inthe
thefuture.
future.
years
Nointerest
interestwill
willbe
bereceived
received
No
inthe
theinterim!
interim!
in
8 - 86
Compound
Compound
Interest
Interest
FV = $10000
= .0575/2
n = 18 * 2 = 36
McGraw-Hill Ryerson
PV = 10000(1+.0575/2)-36
= 10000(0.3605)
= $3604.50
8 - 87
Compound
Compound
Interest
Interest
j = 5.75%
m=2
n = 18*2 = 36
FV = $10000
PV = -3,604.50
0
2
$3604.50
$3604.50
McGraw-Hill Ryerson
8 - 88
Compound
Compound
Interest
Interest
McGraw-Hill Ryerson