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Compound and Simple Interest, PV Annuities, and FV Sinking Funds

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Congratulations! You have been hired by XYZ Advertising. You have been placed on an advertising team with your first big client, a local financial institution; however, you are somewhat nervous to join the advertising team as your financial knowledge and background are somewhat limited. Thus, before putting together an ad campaign with your fellow team members, you need to brush up on the particular terms and calculations that you are unfamiliar with that are listed in the advertising layout guide.

There are many terms used in the world of financial mathematics. It is important that these terms and their calculations are understood before working with the financial institution and the advertising team.

For this Discussion Board, use the library, Internet, and other resources to discuss the following financial terms, and give an actual calculated example of each:

Compound Interest and Simple Interest
1) Present Value, Annuities, and Amortization
2) Future Value and Sinking Funds
3) Give examples of specific organizations or individuals that may wish to utilize these concepts. Explain how and why they may want to use these concepts.

Objective: Illustrate compound interest formulas, using them to find future values and present values of a dollar; explain annuities and find the future value or present value of an annuity; illustrate amortization of certain types of installment loans and sinking funds.

Solution Preview

Definition:

Present value is the value in today's dollars of a future payment discounted back to present at the required rate of return.
Future value is the amount of money that will grow to at some point of the future.
Simple interest is interest that is calculated on the principal for the entire period that it is borrowed.
Compound interest is interest that is calculated on both the principal and the accrued interest.
Annuities are series of equal cash flows, spaced evenly over time.
Amortization is the reduction of the value of an asset by prorating its cost over a period of years.
Sinking funds is an account in which you will set aside money on regular basis to accrue interest in order to pay off a debt in full after a specific amount of time.

Discussion:

An individual should always pay attention to these concepts when it comes to borrow or save money. Money loses value over time because of inflation. Thus, assuming that the inflation rate stays the same over a period, he can ...

Solution Summary

Compounds and simple interest, PV, annuities, FV, and sinking funds are discussed.

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