Time Value of Money Phoenix University Online

Topics: Compound interest, Interest, Money Pages: 2 (432 words) Published: May 21, 2013
Time value of money
Find a Time Value of Money calculator on the Internet and calculate your own personal figures, changing the interest rate and the compounding of the interest rate (annually, semiannually, and quarterly) as delineated below:

1. You place \$5,000 in a savings account earning 2.50% interest compounded annually. How much will you have at the end of four years? How much would you have at the end of four years if interest is compounded semiannually?

With an annual compound you will have \$5,519.06 at the end of 4 years. With a semiannual compound you will have \$ 5,522.43 at the end of 4 years.

2. Change the interest rate to a higher rate. How much will you have at the end of four years if interest is compounded annually at a rate of 3%? How much would you have at the end of four years if interest is compounded semiannually?

With an annual compound you will have \$ 5,627.54 at the end of 4 years. With a semiannual compound you will have \$ 5,632.46 at the end of 4 years.

3. Now change the interest rate to a lower rate. How much will you have at the end of four years if interest is compounded annually at a rate of 2%? How much would you have at the end of four years if interest is compounded semiannually?

With an annual compound you will have \$ 5,412.16 at the end of 4 years. With a semiannual compound you will have \$ 5,414.28 at the end of 4 years.

4. You have \$10,000 in credit card debt, at a 14% interest rate. When is it beneficial to pay off the debt vs. putting money in a savings account? Explain the pros and cons of either option.

It depends how much your interest is for your savings. There can be a balance so you meet in the middle. It is important to pay off as much debt as possible so the interest can stop being charged. The pros of saving is that you can more than likely borrow from your bank and show that you have money to pay it back. A pro for paying off debt is that you now show you are responsible...