Due to both interest earnings and the fact that money put to good use should generate additional funds above and beyond the original investment, money tomorrow will be worth less than money today. Simple interest Bolden Co., a company that you regularly do business with, gives you a $16,000 note. The note is due in three years and pays simple interest of 8% annually. How much will Bolden pay you at the end of that term? Note: Enter the interest rate as a decimal. (i.e. 15% would be entered as .15) Principal + ( Principal x Rate x Time ) = Total $_________ + ($_________ x _________ x _________ years ) = $_________ Compound interest With compound interest, the interest is added to principal in the calculation of interest in future periods. This addition of interest to the principal is called compounding. This differs from simple interest, in which interest is computed based upon only the principal. The frequency with which interest is compounded per year will dictate how many interest computations are required (i.e. annually is once, semi-annually is twice, and quarterly is four times). Imagine that Bolden Co., fearing that you wouldn’t take its deal, decides instead to offer you compound interest on the same $16,000 note. How much will Bolden pay you at the end of three years if interest is compounded annually at a rate of 8%? If required, round your answers to the nearest cent. Principal Annual Amount of Accumulated Amount at Amount at Interest (Principal at End of Year (Principal at Beginning of Beginning of Year x Beginning of Year + Annual Year Year 8%) Amount of Interest) 1 $16,000 $1,280 $17,280 2 $17,280 $_______________ $_______________ 3 $_______________ $_______________ $_______________ If you were given the choice to receive more or less compounding periods, which would you choose in order to maximize your monetary situation? ___________ (more, less, same amount)
Time value of money
Due to both interest earnings and the fact that money put to good use should generate additional funds above and beyond the original investment, money tomorrow will be worth less than money today.
Simple interest
Bolden Co., a company that you regularly do business with, gives you a $16,000 note. The note is due in three years and pays simple interest of 8% annually. How much will Bolden pay you at the end of that term? Note: Enter the interest rate as a decimal. (i.e. 15% would be entered as .15)
| Principal | + | ( Principal | x | Rate | x | Time | ) | = | Total | |
| $_________ | + | ($_________ | x | _________ | x | _________ | years | ) | = | $_________ |
With compound interest, the interest is added to principal in the calculation of interest in future periods. This addition of interest to the principal is called compounding. This differs from simple interest, in which interest is computed based upon only the principal. The frequency with which interest is compounded per year will dictate how many interest computations are required (i.e. annually is once, semi-annually is twice, and quarterly is four times).
Imagine that Bolden Co., fearing that you wouldn’t take its deal, decides instead to offer you compound interest on the same $16,000 note. How much will Bolden pay you at the end of three years if interest is compounded annually at a rate of 8%? If required, round your answers to the nearest cent.
If you were given the choice to receive more or less compounding periods, which would you choose in order to maximize your monetary situation? ___________ (more, less, same amount)
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