Prepared by Johnny Howard 2015 South-Western, a part of Cengage Learning

Prepared by Johnny Howard 2015 South-Western, a part of Cengage Learning

? 2015 South-Western, a part of Cengage Learning

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T E R M S

? Simple interest is computed with the formula: I = P ? R ? T

? Compound interest--the computations of the simple interest formula are performed every period during the term of the investment.

? Period--the unit of time of the compounding.

? Effective rate--the true annual yield investors earn when their money is compounded more than once per year.

? 2015 South-Western, a part of Cengage Learning

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E X A M P L E

? 2015 South-Western, a part of Cengage Learning

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to Calculate the Future Value and Compound Interest Using a Future Value Table

1. Find i, the interest rate, and n, the number of times to compound the interest. Locate the future value factor (FVF) in the proper row and column of Table 16-1.

2. Multiply the present value (principal) by the FVF. The product is the future value, or FV = PV ? FVF.

3. Subtract the present value (principal) from the future value. The difference is the total amount of compound interest, or compound interest = FV ? PV.

? 2015 South-Western, a part of Cengage Learning

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