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Exam 1 Review

Exam 1 Review. Things You Should Know. Time Value of Money problems All the readings including WSJ ‘little’ book Stocks: trading, calculating returns Mutual Funds Stock Indexes. TVM. How to work your calculator Setting different compounding periods PV and FV of single cash flow

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Exam 1 Review

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  1. Exam 1 Review

  2. Things You Should Know • Time Value of Money problems • All the readings including WSJ ‘little’ book • Stocks: trading, calculating returns • Mutual Funds • Stock Indexes

  3. TVM • How to work your calculator • Setting different compounding periods • PV and FV of single cash flow • PV and FV of multiple cash flows • Annuities • Annuities due • Perpetuities • Translating word problems into TVM

  4. TVM • Finding the single unknown • PV, FV, N, I/YR, PMT • Different ways of stating interest rates • APR, EAR, Add-on, Points • Combining PV and FV problems • Saving for retirement • Comparing different choices using TVM • e.g. Lease vs. Buy

  5. TVM Problems • Five main keys: • PV • FV • PMT • I/YR • N • Setting Key: P/YR

  6. Before you begin TVM • Read the problem and determine compounding period • Find out what is asked • Check and set P/YR and BEG/END keys • Clear all memory

  7. Example 1 • First Simple Bank pays 6% compounded quarterly whereas First Complex Bank pays 6% compounded continuously. You deposit $15,000 for 3 years in each bank, which account will have more and by how much more? • Answer: $23.98

  8. Example 1 (contd.) • What are the EARs on the two accounts? • Answer: Quarterly: 6.13% • Answer: Continuously: 6.18%

  9. Note: • When you have continuous compounding problem, you must use the formula (unless your calculator has continuous compounding function - e.g. 17B) • When you use any formula, enter interest rate in decimals!

  10. Example 2 • At 9% interest rate compounded monthly, how many years does it take to quardruple your money? • Answer: 15.46 years

  11. Example 3 • You are scheduled to receive $17,000 in two years. When you receive it, you will invest it for six more years at 6 percent per year. How much will you have in eight years? • Answer: $24,114.82

  12. Example 4 • Calculate the interest rate charged by a car dealer when you buy a $14,000 car and are asked to make $349 monthly payments for four years. • Answer: 9.09% per year APR • What is the EAR on the loan? • Answer: 9.48% EAR

  13. Example 5 • You make 12 monthly payments of $500 starting immediately into an account that earns 8.5% APR compounded monthly. How much will you have at the end of the year? • Answer: $6,283.55

  14. Example 6 • Credit card co’ offers 6.9% per year for first 6 months and 22% thereafter, both compounded monthly. You transfer $3,000 balance. How much interest will you owe at the end of the first year? • Answer: $462.59

  15. Example 7 • Calculate the interest, principal of your last payment and balance owed on a 30-year, $325,000 mortgage after you have made monthly payments for 23 years. Interest is 11% APR compounded monthly. • Answers:Interest: $1,670.03Principal: $1,425.02Balance: $180,760.02

  16. Example 8 • Your friend is celebrating 35th birthday and wants to retire at age 65. She wants to withdraw $10,000 on each birthday for 15 years in retirement. A credit union offers 11% per year interest.How much must she deposit every year? • Answer: $361.31

  17. Example 8 continued • If she just inherited money and wants to make one lumpsum deposit today, what amount must she deposit? • Answer: $3,141.17

  18. Example 8 (contd.) • Your friend’s employer will contribute $100 every year. Also, she expects $15,000 from family trust on her 55th birthday which she will put into retirement a/c. What amount must she deposit annually to meet her goals? • Answer: $47.31

  19. Example 9 • A check cashing store makes a 1-year ‘discount’ loan of $12,000 by deducting interest at 13% per year immediately. Interest deducted: 12,000 * .13 = $1,560You get: 12,000 - 1,560 = $10,440 • What is the EAR on the loan? • Answer: 14.94%

  20. Example 10 • What is the APR and EAR on a 10-year, $170,000 monthly payment loan quoted as 9% + 2 points? • Answers: • APR = 9.47% • EAR = 9.89%

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