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Unit 2 Review
Slide 2
Investment Growth Over Time
10-1 Reasons for Saving and Investing
Amount Invested
Interest Rate
Investment Term
Maturity Value
$10,000 investment 6% 20 years $32,071
$10,000 investment 6% 30 years $57,435
$1,000 investment 8% 30 years $10,063
$1,000 investment 8% 40 years $21,725
$1,000 per year investment 5% 20 years $33,066
$1,000 per year investment 5% 30 years $66,439
$1,000 per year investment 5% 40 years $120,800
$100 per month investment 7% 25 years $81,007
$100 per month investment 7% 30 years $121,997
$100 per month investment 7% 40 years $262,481
Formulas
• FV = PV (1+i)N
• Amt Invested x Interest Rate x # of days/365 = interest earned
Example 1
You invested $6,000 for one year at 12 percent annual interest compounded quarterly. How much is the investment worth at the end of one year (4 quarters)?
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Answer
• Answer: • N: 4• I: 3• PV: $6,000 • FV: ?
• FV: $6,753.05
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Example 2
Stan Musial LLC is looking to invest some of their retained earnings in low risk bonds. They decide to invest $20,000 in a one year 8% bond that is compound quarterly. At the end of the year, Stan Musial LLC. Wants to take their investment and purchase a Stan Musial truck. The truck costs $25,000. Will Stan Musial LLC have enough money to purchase the truck at the end of the year? How much is their investment worth?
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Answer
• Answer: • N: 4• I: 2• PV: $20,000 • FV: ?
• FV: $21,648.64
• No they will not have enough money to purchase the truck.
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Example 3
Nelson and Miguel both bought investments at the same time. Each investment cost $500. Nelson’s investment yielded $18 in dividends for the year while Miguel’s investment was held from March 1 to October 1 and yielded a $25 return. Which one had the higher rate of return? Which one had the higher ANNUAL return on investment (ROI)? Show the rate of return and annual return on investment for both.
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Return on Investment
10-2 Principles of Saving and Investing
Nelson: Bought an investment for $500; received dividends of $18 for the year
Return: $18Rate of return: $18 ÷ $500 = 3.6% (annual rate of return)
Miguel: Bought an investment for $500 on March 1; sold it on October 1 for $525. Return: $25Rate of return: $25 ÷ $500 = 5%Note: The 5% return was received after only 7 months. The annual return would be higher. Calculate the annual ROI as follows:0.05 ÷ 7 months × 12 months = 8.6% (annual rate of return)
Example 4
• You invested $10,000 in a certificate of deposit (CD). The terms of the CD are that you received 10% annual interest over a term of 10 years. If the money is withdrawn before 10 years, the penalty imposed will equal 365 days’ interest, whether earned or not. You decide to withdraw the money after 100 days. Calculate the interest earned, the early withdrawal penalty, and the amount you receive at the early withdrawal.
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Slide 1111-1 Low-Risk Choices
Early Withdrawal PenaltyEarly Withdrawal Penalty
Certificate of DepositAmount deposited: $10,000Interest rate: 10% yearlyTerm: 10 years
Penalty for Early WithdrawalIf the money is withdrawn before 10 years, the penalty imposed will equal 365 days’ interest, whether earned or not.
Sample ScenarioThe money is withdrawn after 100 days.
$10,000 x 0.1 x 100/365 = $273.97 interest earned$10,000 x 0.1 x 365/365 = $1,000.00 penalty
$10,000.00 amount deposited+ 273.97 interest earned$10,273.97- 1,000.00 early withdrawal penalty$9,273.97 amount received at early withdrawal
Example 5
• You are thinking of investing in Cardinals Baseball LLC. You have only the following information on the firm at year-end 2012: Revenue = $500,000, total expenses = $300,000, current stock price = $10, earnings per share = $1. Calculate the net income, profit margin, and P/E ratio.
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Answer
• Net Income– Revenue – Expenses– $500,000 – $300,000 = $200,000
• Profit Margin– Net Income/Revenue– $200,000/$500,000 = 40%
• P/E Ratio– Stock Price/EPS– 10/1 = 10
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