10.0: Introduction

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Everywhere you look, financial advertisements appeal for a share of your hard-earned money. It is hard to go a day without seeing at least one of the following:

Television ads about GICs that earn you the maximum money
Bank billboards and signage indicating maximum interest rates
Magazine ads for high-interest bonds
Internet banner ads and unsolicited emails promising safe investments and high interest rates

Headlines on news websites blare that costs are rising from inflation and how your purchasing power is dropping. Revealing articles tell how underfunding of the Canada Pension Plan (CPP) and Old Age Security (OAS) will leave you without sufficient retirement income in your golden years. The CPP in 2012 offered a maximum benefit of $986.67 per month to a limited few, with the average CPP collector earning only $529.09 per month. OAS pays a maximum $544.98 per month, with the average pensioner receiving $514.74. If you retired today your monthly income for life (to be indexed for inflation) is $1,043.83 with a $1,531.65 maximum. Very few people receive the maximum. To make matters worse, OAS and CPP income is taxable by the government! If you don't start investing your money into your tax-sheltered RRSP or TFSA (Tax-Free Savings Account) soon and provide your own source of retirement funds, you will be cash poor in retirement. It is no wonder that many mid-size to large companies help their loyal workers save for retirement by offering employee benefit plans from company-sponsored GIC plans to high-interest savings.

In retail, endless sources of credit and no-payment plans are available on a wide range of merchandise. These highly successful plans allow consumers to buy merchandise they probably couldn't otherwise get. The Brick offers no payments for at least 15 months, while Leon's hosts the "Don't pay a cent" event. Canadian consumers increasingly purchase merchandise through such plans. Meanwhile, behind the scenes, retailers are buying and selling these plans to finance companies to liquidate their outstanding accounts receivables.

This whole chapter uses compound interest involving single payments to deal with real-life applications. For all of them your knowledge of future values, present values, interest rates, and terms is vital. This chapter introduces a range of investment options such as long-term GICs, Canada Savings Bonds, and strip bonds. You will see how businesses buy and sell promissory notes. You will also learn how to extend time value of money concepts to applications involving rates of inflation, purchasing power, and rates of change.

Your knowledge of compound interest concepts is about to become very practical. So buckle up your seatbelt as this chapter takes you on an exciting ride!

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