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Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 4A-3 Interest: The Basic Return to Savers Interest: the “rent” paid by a borrower for use of the lender’s money Simple Interest –Interest is paid only on the initial deposit Compound Interest –Interest is paid on the initial deposit and any interest accumulated from prior periods –Interest is earned on interest –More frequent compounding periods provide higher true rate of interest –Compounding periods range from annually to continuously

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Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 4A-11 Present Value: An Extension of Future Value Present Value: the value today of a sum to be received at some future date Present Value Example: How much would need to be deposited today into an accounting earning 6% compounded annually to grow to \$500 in 7 years?

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Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 4A-16 Present Value of an Annuity Annuity: a stream of equal cash flows that occur at equal intervals over time Present Value of an Annuity Example: What is the present value of \$50 deposited at the end of each year for 5 years in an account earning 9% compounded annually?