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has a negative sign on it. Also notice that rate is entered as a decimal, not a percentage. |

U.S. EE Savings Bonds are a familiar investment for many. AU.S. EE Savings Bond is much like the GMAC Security we described at the start of the chapter. You purchase them for half of their \$100 face value. In other words, you pay \$50 today and get \$100 at some point in the future when the bond "matures." You receive no interest in between. For EE bonds sold after May 1, 1997, the interest rate is adjusted every six months, so the length of time until your \$50 grows to \$100 depends on future interest rates. However, at worst, the bonds are guaranteed to be worth \$100 at the end of 17 years, so this is the longest you would ever have to wait. If you do have to wait the full 17 years, what rate do you earn?

Because this investment is doubling in value in 17 years, the Rule of 72 tells you the answer right away: 72/17 = 4.24%. Remember, this is the minimum guaranteed return. You might do better, and we will return to EE bonds in a later chapter. For now, this

Work the Web

How important is the time value of money? A recent search on one web engine returned over 31,000 hits! It is important to understand the calculations behind the time value of money, but the advent of financial calculators and spreadsheets has eliminated the need for tedious calculations. If fact, many web sites offer time value of money calculators. The following is one example from Cigna's web site, www.cigna.com. You have \$10,000 today and will invest it at 10.5 percent for 30 years. How much will it be worth at that time? With the Cigna calculator, you simply enter the values and hit Calculate:

The results look like this:
 Results Present Value Amount \$10,000 Number of Years Invested 30 years Growth Rate 10.5% Future Value Amount \$199,926

Who said time value of money calculations are hard?

Who said time value of money calculations are hard?

example finishes our introduction to basic time value concepts. Table 5.4 summarizes present and future value calculations for future reference. As our nearby Work the Web box shows, online calculators are widely available to handle these calculations, but it is still important to know what is really going on.

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