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Coby Harmon
University of California, Santa Barbara
Westmont College
G- 1
Appendix
Learning Objectives
After studying this chapter, you should be able to:
[1] Indicate the benefits of budgeting.
[2] Distinguish between simple and compound interest.
[2] Identify the variables fundamental to solving present value problems.
[3] Solve for present value of a single amount.
[4] Solve for present value of an annuity.
[5] Compute the present value of notes and bonds.
G- 2
Nature of Interest
Interest
Payment for the use of money.
Excess cash received or repaid over the amount borrowed
(principal).
Simple Interest
Interest computed on the principal amount only.
Illustration G-1
Interest = p x i x n
FULL YEAR = $5,000 x .06 x 2
= $600
Advance slide in
presentation mode
G- 4 to reveal answer. LO 1 Distinguish between simple and compound interest.
Nature of Interest
Compound Interest
Computes interest on
the principal and
any interest earned that has not been paid or
withdrawn.
G- 6 LO 1
Present Value Concepts
Illustration G-3
Formula for present value
Illustration G-4
TABLE 1
Present Value of 1
TABLE 1
Present Value of 1
Illustration: Suppose you have a winning lottery ticket and the state
gives you the option of taking $10,000 three years from now or taking
the present value of $10,000 now. The state uses an 8% rate in
discounting. How much will you receive if you accept your winnings
now?
$10,000 x .79383 = $7,938.30
Future Value Factor Present Value
Present Value
.....
0 1 2 3 4 19 20
TABLE 1
Present Value of an Annuity of 1
100,000
.....
0 1 2 3 4 9 10
100,000
.....
0 1 2 3 4 9 10
Year 1
G- 22 LO 5 Compute the present value of notes and bonds.
Present Value of a Long-term Note or Bond
TABLE 1
Present Value of 1 PV of Principal
TABLE 1
Present Value of an Annuity of 1 PV of Interest
G- 25 LO 5
Present Value of a Long-term Note or Bond
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G- 28