Chapter 3 section 2

Excel Companion Chapter 3 Section 2
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Simple versus Compound Interest	*TVM1.xls*

As we have seen in the formula derivations, the fundamental compound interest formula, is exponential and differs from the simple interest formula which is linear. In the former, interest earned in one period is based on the sum of principal and interest from the previous period rather than just on the principal alone. Click on the sheet Simp vs. Cmpnd in TVM1.xls

QUESTIONS:

1.	Given a principal of $10,000 and a nominal rate of 5% compare the growth under simple interest with the growth under annual compounding over a period of 10 years.
2.	Given a principal of $10,000 and a nominal rate of 5% over a period of 20 years, compare the growth under simple interest with the growth under annual compounding.
3.	For a principal of $1,000 and a nominal rate of 12 % over a period of 10 years, compare the growth under simple interest with the growth under annual compounding.
4.	Assuming an annual rate of 6%, what is the difference, to the nearest dollar, between the future value of $10,000 under annual vs. daily compounding after five years?

Future Value, Doubling Time, and Present Value

For a given nominal rate, doubling time is the number of years required for $1 to grow to $2.

5.	Click on the tab for the FV sheet in the file TVM1.xls. Estimate the doubling time for nominal rates of :
	a) 6%
	b) 9%
	c) 12%
	Repeat the estimates for rates of :
	d) 18%
	e) 24%
	f) 36%
	Try to find a pattern that leads to an easy rule for determining approximate doubling time ( nearest year) by mental arithmetic.
6.	Click on the tab for the PV sheet in the file TVM1.xls.
	a) If your money grows at the rate of 6% compounded annually then what lump sum should you deposit now in order to have $1,000 in ten years?
	b) If your money grows at the rate of 6% compounded annually then how much should you deposit now in order to have $1,000 in five years?
	c) Is your answer to part b) double your answer to part a)? Explain why or why not?
7.	Suppose that you are considering the following three contracts. Which contract is worth the most (assume compounding is annual)? Justify your answer.
	a) $2500 in 8 years under an agreed upon interest rate of 8%.
	b) $2500 in 9 years under an agreed upon interest rate of 7%.
	c) $2500 in 10 years under an agreed upon interest rate of 6%.

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