Compounding Interest

• You are interested in opening a savings account that pays interest at a rate of 6% compounded annually. You deposit $523 as your starting balance. How much will you have in the account at the end of 2 years?

523 x .06 = 31.38

554.38 x .06 = 33.26

$587.64

Compounding Interest

• What if the yearly rate was compounded monthly. What would your ending balance be after 2 months?

6% / 12 = 0.5%

523 x .005 = 2.62

525.62 x .005 = 2.63

528.25

Credit Cards

Your beginning balance on 12/1 is $700

You make the following transactions:

12/5 – Purchase $500

12/13 – Purchase $40

12/28 – Purchase $100

12/31 – Payment $400

What is your new balance on 12/31?

700+500+40+100-400 = $940

Credit CardsWhen you receive your credit card bill, you want to calculate the following:

Minimum monthly payment at a rate of 2%

Interest payment for the month at an APR of 12%

(APR –means it is for the year)

What is the minimum monthly payment?

$940 x 0.02 = $18.80 WILL ASK YOU TO PAY THIS OR

$10 WHICHEVER IS GEATER

What is the interest payment for the month?

12% / 12 = 1% (divide APR by 12 to get montlhy)

$940 x .01 = $9.40

Terms to Remember for Calculations• Annually = Yearly • Quarterly = 4 times per year• Semi-annually = 2 times per year• How many weeks in a year?

– 52 weeks in a year!• What is included in payroll taxes (FICA)?

– Medicare 1.45%– Social Security 6.2%– Principal vs Interest

Taxes Payroll Problem 1

John works for a salary of $2,200 per month. His computed hourly rate of pay is $13.75 per hour. Although John earns a salary, he sometimes qualifies for overtime pay for special situations. For overtime hours, he earns 1-1/2 times his regular computed hourly rate. Last month, he worked for 14 paid overtime hours. He has federal income tax withheld at the rate of 15%, state tax at 5%, payroll taxes (FICA) and health insurance premium of $85 per month. What was his net pay?

Answer payroll problem 1

Salary $2200

hourly rate $13.75

overtime rate 13.75 x 1.5 = 20.63

Worked 14 overtime hours 14 x 20.63 = 288.75

Salary + overtime = 2200+ 288.75=2488.75

Payroll problem 1 continued

• Deductions – multiply each by gross pay of $2488.75– Federal income tax 15% (.15)= $373.31– State income tax 5% (.05)= 124.44– Social Security 6.2%(.062) = 154.30– Medicare 1.45% (.0145)=36.09– Health insurance = 85 given

• Total deductions $773.14

Payroll Problem 1 continued

• Gross pay – deductions = net pay• 2488.75 – 773.14= 1715.61

TaxesPayroll problem 2 (do on own)

Kerry worked 46 hours last week. His hourly rate is $6.60. He has the following deductions taken from his pay: federal income tax at the rate of 10%, state income tax at 5%, payroll taxes (FICA), health insurance premiums of $12.20 and union dues of $9.50. What was his net pay?

Property taxes

When calculating property tax, which home value do you use?

Market value is $400,00

Assessed Value is $350,000

Taxed rate 1.75%

Which do you use? Market or Assessed

ASSESSED VALUE

$350,000 x .0175 = $6125

Rule of 72

• How quickly can we double our money• If you have $5000 in a bank account .

How low will it take to double our money?• 72/9% = 8 years

Net worth

Mrs. K’s checking/savings account balances are $20,000

Her cell phone bill is $400

Mrs. K’s car’s are valued at $20,000

Her car loans and credit card loans are 15,000.

What is her net worth?

Net worth continued

• Savings checking + $20,000• Cell phone bill - 400• Cars + 20,000• Loans/debt - 15,000

Mrs. K’s worth $ 24,600

How is bond interest calculated?You purchased a $10,000 bond with an annual coupon rate of 7.00% for a period of 10 years.

• How do you calculate the coupon payment?

• How much money will you make each year from this investment?

• How much will you receive in total cash payments over the lifetime of the bond?

How is bond interest calculated?You purchased a $10,000 bond with an annual coupon rate of 7.00% for a period of 10 years.

• How do you calculate the coupon payment?

Coupon payment = $10,000 x 3.5% = $350

How is bond interest calculated?You purchased a $10,000 bond with an annual coupon rate of 7.00% for a period of 10 years.

• How much money will you make each year from this investment?

Each year you will make $700 (coupon payment x 2)

How is bond interest calculated?You purchased a $10,000 bond with an annual coupon rate of 7.00% for a period of 10 years.

• How much will you receive in total cash payments over the lifetime of the bond?

10 years x $700 = $7,000 PLUS

Face Amount = $10,000

TOTAL = $17,000