Page 63 - CalcBus_Flipbook

CH 8] Calculating Business 8-1

CHAPTER 8 NOTE TO INSTRUCTOR: Solutions
to Homework are in that section.

Avg. time for Students to read &
complete homework: 2.75 hrs.

Compound Interest

Objectives

Mastering the material in this chapter and you will be able to:
 Calculate compound interest by using the compound interest equation.

 Compute the effective rate of interest.
 Calculate present value at compound interest.
 Determine the amount of an ordinary annuity and of an annuity due.

 Compute present value of ordinary annuities and annuities due.
 Use compound interest, present value, and annuity tables.

Compound Interest advantages savings accounts, lenders, and people setting up their
own retirement accounts. Compound Interest advantages owners in that their money when
invested in savings accounts, stocks and bonds, or through insurance policies add the
interest earned to the principal and this begins money working for the owner; an advantage
of capitalism.
Most people are planning on using their Social Security benefit as their retirement plan.
These same people would like to also have a retirement plan separate from the Social
Security tax plan because they realize that Social Security benefits are not the best
retirement plan. The Social Security payout can, and probably will, vary as more people
retire. Even as congress takes more money from those working, it can re-work the numbers
on the Social Security tax so the fund lasts longer. This means those working today will
probably have to work more years to be able to collect the full benefit of the Social Security
taxes they pay and as a consequence pay more into the Social Security tax fund. Congress
has already increased the Social Security age of retirement from age sixty (1942) to 67 (1983) 8
for full benefits and will raise the benefit age to 68, and is looking at age seventy for full
benefits.
Congress reduced and limited the interest rate the Social Security fund earns to 1%,
while stock market investments, using the advantage of compound interest have an average
annual return, since 1927, of 9.8%.
The individual may take advantage of compound interest when establishing a personal
retirement fund by depositing 10% of their pay each time they are paid into their savings and
investments fund. Think about the individual with a monthly income of $3,000, then with
each paycheck ($3,000 x 0.10 =) $300 is set aside for their savings and investments

Copyrighted Material