Chapter 4

Question 1

How do you calculate compound interest?

Answer 1

Future value = present value x (1 + interest rate)^time

IE. Press equals the number of times for the time if calculator doesn’t do “to the power of”.

Question 2

How do you calculate net return from gross interest rate?

Answer 2

Gross - (tax percentage) = net

EG for basic rate: gross - 20% = net

Question 3

How do you calculate effective annual rate?

Answer 3

EAR = (1 + interest rate / time)^time - 1

IE: on a basic calculator, x by 100, press = the number of times for time and then minus 100 off at the end

Question 4

How do you calculate accumulation and discounting of regular savings?

Answer 4

Future value = 100 x (1 + interest rate)^time - 1 / interest rate

Question 5

What is the difference between real returns and nominal returns?

Answer 5

Nominal returns ignore inflation.

Real returns take inflation into to account - (nominal return - inflation)

Question 6

How do you calculate present value?

Answer 6

Future value / (1 + interest rate)^time