The power of time and compound interest

Introduction to Financial Concepts in Python

Dakota Wixom

Quantitative Finance Analyst

The power of time

Goal: Save $1.0 million over 40 years. Assume an average 7% rate of return per year.

import numpy as np
np.pmt(rate=((1+0.07)**1/12 - 1), nper=12*40, pv=0, fv=1000000)

-404.61

What if your investments only returned 5% on average?

import numpy as np
np.pmt(rate=((1+0.05)**1/12 - 1), nper=12*40, pv=0, fv=1000000)

-674.53

Goal: Save $1.0 million over 25 years. Assume an average 7% rate of return per year.

import numpy as np
np.pmt(rate=((1+0.07)**1/12 - 1), nper=12*25, pv=0, fv=1000000)

-1277.07

What if your investments only returned 5% on average?

import numpy as np
np.pmt(rate=((1+0.05)**1/12 - 1), nper=12*40, pv=0, fv=1000000)

-1707.26

Assume an average rate of inflation of 3% per year

import numpy as np
np.fv(rate=-0.03, nper=25, pv=-1000000, pmt=0)

466974.70

Introduction to Financial Concepts in Python