Would you rather have a savings account that paid interest compounded on a monthly basis, or one that compounded interest on an annual basis? Why?
Compound interest arises when interest is added to the principal. Therefore, the interest that has been added also earns interest. This addition of interest to the principal is called compounding. If the savings account has $1,000 initial principal and 20% interest per year, the account will have a balance of $1200 at the end of the first year, $1440 at the end of the second year. Frequent or monthly compounding increases the future value (Cornett, Adair, & Nofsinger, 2014, page 109-110).
What is an amortization schedule and what are some of its uses?
It is the schedule of payments for paying off a loan. An amortization schedule breaks down the payments into interest and principal, which is helpful because with an amortized loan amounts vary with each payment. An amortization schedule will also include additional information such as the amount of interest and principal paid, as well as the remaining principal balance. Amortization schedules are most frequently used with mortgages (Cornett, Adair, & Nofsinger, 2014, page 114).
The interest on your home mortgage is tax deductible. Why are the early years of mortgage more helpful in reducing taxes than in the later years?
Mortgage payments at the beginning of the amortization schedule are predominantly interest with little principal. In later years, interest payments decline and principal payments make up an ever increasing part of the payments. Thus, the tax deductible part, which is the interest payment, is larger in the beginning years (Cornett, Adair, & Nofsinger, 2014, page 114-116).
What is the difference between an ordinary annuity and an annuity due?
Annuities can be divided into two types based
