Your Financial Statements and Plans: Compound Periods

1
Chapter 2

• Your Financial Statements and Plans Compound
  Periods

2
Future Value

• Adjusting the compounding period

3
Compounding Period

• Frequency interest is applied to the investment
• Daily, monthly, quarterly, annually

4
Example

• Semi-annual compounding
• PV 500
• years 4, n 2 4 8 compound periods
• i 8 annually, 8/2 4 semiannually

5
TI BA II Plus Calculator Overview

• First steps
• Turn on
• Set decimal places
• Fix P/Y
• Clear register

6
FV -- Semiannual compounding

• Input
• PV -500
• n 8
• i 4 (not .04)
• Compute FV
• 684.50

7
Comparing Future Values

• Future Value of 500 for 4 years at 8 interest
  is 680.00
• Future Value of 500 for 4 years at 8
  semi-annually is 684.50
• Why is semi-annual compounding larger? Will that
  always be true?

8
Compound Interest Practice

• What is the future value of 1000 deposited at 8
  compounded quarterly for 2 and 4 years?

Answers? 2 years? n 2 x 4 8 i 8 / 4
2 4 years? n 4 x 4 16 i 8 / 4 2 FV
1,172 FV 1,373
9
The Magic of Compounding

• The shorter the compounding period, the quicker
  the investment grows.
• In the long run, money saved now is much more
  valuable than money saved later.

10
Historical Returns1926 through 1996

• Growth rate of stocks about 10.71
• 1,000 grows to 1,119,161! (n69)
• Growth rate of bonds only 5.64
• 1,000 grows to 44,072!

11
Questions on Compound Period?
? ? ? ? ? ?
12
More Practice
Future Value Problems