USING THE COMPOUND INTEREST TABLE How to Use the Table 187 1. If the interest is compounded annually at 6% the amount due at the end of 5 years is found by looking in the 6% column opposite the figure 5 in the period column. This amount ($1.3382) - $1.00 is $.3382, the compound interest on $1 at 6% for 5 years. How would you find the compound interest for $500 at 6% for 5 years? 2. If the interest is compounded semi-annually, take half of the given rate and twice the number of years and proceed as if the interest were compounded annually. Find the compound interest on $1 at 4% for 5 years compounded semi-annually. Look in the 2% column opposite 10 in the period column. The amount is $1.2190. $1.2190-$1.00$.2190, compound interest of $1 for 5 yr. at 4% compounded semi-annually. 3. If the number of periods is greater than 10, the largest shown in the table, find the amount of $1.00 for 10 periods at the given rate; then find the amount for the remaining time at the same rate and multiply these two amounts together. The product is the amount of $1.00 for the entire time. The amount of $1 at 3% for 15 years compounded annually is $1.5580. Prove this result by multiplying 1.3439 (10 period amount) by 1.1593 (5 period amount). 4. If the time contains a fraction of an interest period, add to the amount for the last full period, such a part of the interest for the next full period as is indicated by the fraction of the time period. The compound amount of $1 at 6%, compounded annually, for 2 years is $1.1236 + of ($1.1910-$1.1236), which is $1.1573. Practice in Using the Compound Interest Table 1. A boy saved $100 during 1909. On Jan. 1, 1910, he invested this money at 3%, compounded annually. What was the amount of his investment on Jan. 1, 1920? bought in Jan., 1920, War On Jan. 1, 1925, the United 2. Some 8th grade pupils Savings Stamps at $4.12 each. States Government will pay $5.00 for each of these stamps. Some time later the teacher said to the pupils, "You are receiving on your stamp investment 4% interest, compounded annually for 5 years." Use the interest table to test the accuracy of this statement. 3. In July, 1920, some of the pupils mentioned in the previous problem bought War Savings Stamps at $4.19 each. These stamps are worth $5.00 each on Jan. 1, 1925. Use the table to find out if this investment pays 4% interest, compounded annually. 4. Can you solve the previous problem without using the table? Try it. Compare the two solutions. 5. A teacher in Nov., 1920, bought 5 War Savings Stamps at $4.22 each. These stamps are worth $5.00 each on Jan. 1, 1925. Find out if the buyer made a 4% interest investment, compounded annually. 6. Which will pay more, and how much, $100 at 3% for 20 years at simple interest or $100 at 21% for 20 years, compounded annually? 7. A thrifty young man invested on Jan. 1, 1916, $300 in a business paying 4% interest, compounded annually. At the time of each interest payment except the last he added $300 to his investment. What was due 1/1, 1921? CHAPTER XV INVESTMENTS While a person is accumulating savings, he should be studying the problem of how his savings may be made to earn more money; in other words, he should be learning how to invest money. To do this wisely one must know about investments. It is the purpose of this chapter to give you some knowledge of investments, how to judge them correctly, and how to make them wisely. A perfectly safe investment usually earns a low rate of interest. Do you see why? War Savings Stamps and United States Government bonds belong to this class. A good investment yields a higher rate of interest than the class just mentioned, but the element of risk is somewhat greater. The bonds of cities, counties, and states; district drainage bonds; and promissory notes secured by mortgage, or by deed of trust, are examples of this type of investment. Investments which offer a high rate of interest (say 10% or 12%) are to be regarded with suspicion by the person with small savings. Examples of this type are oil stocks and mining stocks. Transactions in such stocks should more properly be called speculations. In general a high rate of interest usually means a large risk; a low rate of interest means a small risk. A first class investment can also be readily converted into cash in case of emergency. Judging Investments Which of the following investment advertisements do you think offers the safest place for your money? Which the next safest? Which the least safe? Why? 1. "Thrift is Power." "Save and Succeed." Keep on Buying War Savings Stamps. Series of 1920 On January 1, 1925, the United States Government will pay $5.00 for each War Savings Stamp sold in 1920 at the following prices: Jan., $4.12, Feb., $4.13; March, $4.14; April, $4.15; etc. 2. "Nothing Venture, Nothing Gain." Oil has made many fortunes over night, why not yours? Stock now only 10¢ a share. Get in early before the price advances. 3. "Bonds as Safe as Our Cities." Municipal bonds yielding 4% to 5% fulfill these tests for successful investing. These bonds are (1) Safe.-Payment of principal and interest are assured when they are due. (2) Marketable.-They can be readily sold at any time. (3) Productive.-The interest yield is as high as is consistent with safety. 4. Individual loans secured by residences, apartments, and small business properties in Chicago, in amounts from $2000 to $20,000. Interest yield, 5% to 6%. 5. 6 percent $500 and $1000 denomination 1st Mortgage Serial Gold notes. Interest payable semi-annually. Secured by First Mortgage on Cleveland, Ohio, real estate of more than double value. Consult the newspapers and magazines for investment opportunities and bring to class what you think are examples of poor, good, and excellent investments. THE MORTGAGE LOAN Mortgages on Real Estate 191 The oldest investment in the world is the first mortgage loan on land. The Babylonians invented mortgages more than 2500 years ago. Clay tablets unearthed and translated by scholars show that the mortgage in all essentials was the same then that it is now: (1) A definite promise to pay at a designated time and place a certain sum of money bearing a specified rate of interest. (2) A definite pledge of real estate as security to guarantee prompt payment of principal and interest. Much real estate in the United States is pledged as security for mortgage loans. It was recently estimated by a committee of the American Bankers Association that more than $6,000,000,000 in mortgages are held by savings banks and insurance companies in this country, and a total of $10,000,000,000 is held by institutions and individuals as investments. Mortgages are popular investments because as a class they yield a higher rate of interest than other investments with the same element of risk. Also in time of financial panic they are free from wide fluctuation in value. Safety factors to be observed when negotiating a firstmortgage loan. 1. The loan should not exceed 50% of the cash value of the real estate pledged as security. 2. If buildings are part of the security, they should be insured in favor of the owner of the mortgage. 3. All back taxes against the property should be paid. 4. The property should be free from debt. 5. The mortgage should be promptly offered to the proper official for record. |