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Applying Financial Formulas Copyright 2014 Scott Storla

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Vocabulary Equation Rate Interest rate Simple interest Compound interest

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A rate is an expression, often in the form of a fraction, which compares one quantity to another quantity. For instance sixty miles per hour,, compares an amount of distance to an amount of time. An interest rate compares the price to borrow money to one year of time. An interest rate is expressed as a percent but we typically work with the rate as a decimal. If you invest in a bond that pays 3% then after one year you’ll earn three cents for every dollar you invested. On the other hand if your credit card has a rate of 18% then every year you’ll pay the credit card company eighteen cents for every dollar you’ve borrowed for one year. Copyright 2014 Scott Storla

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The formula for simple interest, helps find A, the future value of the account, after t years. P is the original amount invested or borrowed (the principal) and r is the annual interest rate written as a decimal. A formula uses an equation to express a fact or rule. Usually the left hand side is a single letter that represents the concept we’re working with. The right hand side includes numbers, variables, operators and grouping symbols. An expression is a meaningful collection of numbers, letters, operations and the idea of grouping. If two expressions are separated by the equality symbol, =, we have an equation. Copyright 2014 Scott Storla

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Find the value after 3 years if $1000 is deposited at a rate of 3% simple interest. Copyright 2014 Scott Storla

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How much is in an account that starts with $10,000 and earns 1.5% simple interest for 30 years? Copyright 2014 Scott Storla

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A common formula for compound interest is, The variables A, P, r and t have the same meaning as for simple interest and e is a constant whose value is approximately 2.718. With compound interest accumulated interest is returned to the account as principal and begins to itself earn interest. Copyright 2014 Scott Storla

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Evaluating with e Copyright 2014 Scott Storla

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Using the Continuous Compounding Formula Copyright 2014 Scott Storla

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Find the amount if $5,000 is compounded continuously for 3 years at 6.5%. Copyright 2014 Scott Storla

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Imagine you were able to transport 200 years into the past and deposit $10 of money from the period into an account paying 6%. If one hour after making the deposit you were transported back to today, how much would be in the account? Copyright 2014 Scott Storla

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A bank pays 0.25% on money deposited and charges 7% to loan the same money to others. How much does the bank make per year for every $100 that it receives and then loans to others? Copyright 2014 Scott Storla

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Present value is the amount we need to invest today to have a certain amount in the future. Copyright 2014 Scott Storla

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In 20 years I would like to have $1,000,000 for my retirement. How much do I need today in an account that earns 6.2% to have $1,000,000 in 20 years? I would need $289,385. Copyright 2014 Scott Storla

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250 years from today you’d like to leave a distant relative a million dollars. If your account earns 5% how much should you set aside today? Set aside $3.73 Copyright 2014 Scott Storla

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What interest rate is needed for $12,000 to become $18,000 in 7 years? I’d want a rate of at least 5.8%? Copyright 2014 Scott Storla

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What interest rate will double your $12,000 in 5 years? I’d like to get at least 13.9% Copyright 2014 Scott Storla

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$5,000 is invested at 5%. When will the account have $8,000? A little under nine and a half years. Copyright 2014 Scott Storla

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Compare the length of time it takes to double $1,000 at 10% interest versus 1% interest? At 10% interest it takes a little under 7 years to double your money. At 1% interest it takes a little over 69 years to double your money. Copyright 2014 Scott Storla

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Applying Financial Formulas Copyright 2014 Scott Storla

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