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Compounding Interest You are interested in opening a savings account that pays interest at a rate of 6% compounded annually. You deposit $523 as your starting.

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Presentation on theme: "Compounding Interest You are interested in opening a savings account that pays interest at a rate of 6% compounded annually. You deposit $523 as your starting."— Presentation transcript:

1 Compounding Interest You are interested in opening a savings account that pays interest at a rate of 6% compounded annually. You deposit $523 as your starting balance. How much will you have in the account at the end of 2 years? 523 x.06 = x.06 = $587.64

2 Compounding Interest What if the yearly rate was compounded monthly. What would your ending balance be after 2 months? 6% / 12 = 0.5% 523 x.005 = x.005 =

3 Credit Cards Your beginning balance on 12/1 is $700 You make the following transactions: 12/5 – Purchase $500 12/13 – Purchase $40 12/28 – Purchase $100 12/31 – Payment $400 What is your new balance on 12/31? = $940

4 Credit Cards When you receive your credit card bill, you want to calculate the following: Minimum monthly payment at a rate of 2% Interest payment for the month at an APR of 12% (APR –means it is for the year) What is the minimum monthly payment? $940 x 0.02 = $18.80WILL ASK YOU TO PAY THIS OR $10 WHICHEVER IS GEATER What is the interest payment for the month? 12% / 12 = 1% (divide APR by 12 to get montlhy) $940 x.01 = $9.40

5 Terms to Remember for Calculations Annually = Yearly Quarterly = 4 times per year Semi-annually = 2 times per year How many weeks in a year? –52 weeks in a year! What is included in payroll taxes (FICA)? –Medicare 1.45% –Social Security 6.2% –Principal vs Interest

6 Taxes Payroll Problem 1 John works for a salary of $2,200 per month. His computed hourly rate of pay is $13.75 per hour. Although John earns a salary, he sometimes qualifies for overtime pay for special situations. For overtime hours, he earns 1-1/2 times his regular computed hourly rate. Last month, he worked for 14 paid overtime hours. He has federal income tax withheld at the rate of 15%, state tax at 5%, payroll taxes (FICA) and health insurance premium of $85 per month. What was his net pay?

7 Answer payroll problem 1 Salary $2200 hourly rate $13.75 overtime rate x 1.5 = Worked 14 overtime hours 14 x = Salary + overtime = =

8 Payroll problem 1 continued Deductions – multiply each by gross pay of $ –Federal income tax 15% (.15)= $ –State income tax 5% (.05)= –Social Security 6.2%(.062) = –Medicare 1.45% (.0145)=36.09 –Health insurance = 85 given Total deductions $773.14

9 Payroll Problem 1 continued Gross pay – deductions = net pay – =

10 Taxes Payroll problem 2 (do on own) Kerry worked 46 hours last week. His hourly rate is $6.60. He has the following deductions taken from his pay: federal income tax at the rate of 10%, state income tax at 5%, payroll taxes (FICA), health insurance premiums of $12.20 and union dues of $9.50. What was his net pay?

11 Property taxes When calculating property tax, which home value do you use? Market value is $400,00 Assessed Value is $350,000 Taxed rate 1.75% Which do you use? Market or Assessed ASSESSED VALUE $350,000 x.0175 = $6125

12 Rule of 72 How quickly can we double our money If you have $5000 in a bank account. How low will it take to double our money? 72/9% = 8 years

13 Net worth Mrs. K’s checking/savings account balances are $20,000 Her cell phone bill is $400 Mrs. K’s car’s are valued at $20,000 Her car loans and credit card loans are 15,000. What is her net worth?

14 Net worth continued Savings checking + $20,000 Cell phone bill Cars+ 20,000 Loans/debt- 15,000 Mrs. K’s worth$ 24,600

15 How is bond interest calculated? You purchased a $10,000 bond with an annual coupon rate of 7.00% for a period of 10 years. How do you calculate the coupon payment? How much money will you make each year from this investment? How much will you receive in total cash payments over the lifetime of the bond?

16 How is bond interest calculated? You purchased a $10,000 bond with an annual coupon rate of 7.00% for a period of 10 years. How do you calculate the coupon payment? Coupon payment = $10,000 x 3.5% = $350

17 How is bond interest calculated? You purchased a $10,000 bond with an annual coupon rate of 7.00% for a period of 10 years. How much money will you make each year from this investment? Each year you will make $700 (coupon payment x 2)

18 How is bond interest calculated? You purchased a $10,000 bond with an annual coupon rate of 7.00% for a period of 10 years. How much will you receive in total cash payments over the lifetime of the bond? 10 years x $700 = $7,000 PLUS Face Amount = $10,000 TOTAL = $17,000


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