write one essay on finance topic about 600 words
stepheny
04TVMinPractice1.pptxTopic 2 Time Value of Money (continued) TVM in Practice
Fundamentals of Finance
Fall 2017
Zhun Liu
Last time…
Perpetuities:
Regular:
0 at the beginning
Same cash flow, C, every period
Same time interval between cash flows
Perpetual, never ending
if compounded with frequency m)
Growing
0 at the beginning
First cash flow , second cash flow , third cash flow , etc
Other than changing cash flows, same as regular perpetuity
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Last time…
Annuities:
Regular
Just like a perpetuity, but has an end date
or
Growing
Just like growing perpetuity, but has end date
Future value
To get the future value of an annuity at time , just do the future value of the present value.
Ie.
For growing annuities:
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Loan Amortization: An Simple Warm-up
You borrowed $10,000
Interest rate at 8% for 5 years
What does your repayment schedule look like?
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| Year | Instalment | Interest | Capital | Amount |
| @ 8% | repayment | outstanding | ||
| 0 | 10000.00 | |||
| 1 | 2504.56 | 800.00 | 1704.56 | 8295.44 |
| 2 | 2504.56 | 663.63 | 1840.93 | 6454.51 |
| 3 | 2504.56 | 516.36 | 1988.20 | 4466.30 |
| 4 | 2504.56 | 357.30 | 2147.26 | 2319.04 |
| 5 | 2504.56 | 185.52 | 2319.04 | 0.00 |
| Interest rate | 8% | |||
| Duration of loan | 5 | |||
| Annuity factor | 3.9927 | |||
| Instalment | 2504.56 |
Loan Amortization
You want to borrow $30,000 to buy a new car
You’re offered an APR of 5.25% for 72 months
How much is your monthly payment going to be?
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Answer
Your monthly rate is 5.25% / 12 = 0.4375%
The present value of your monthly payments should be equal to the loan amount of $30,000
Hence
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Principal and Interest on the Loan
At the end of the first month you owe the original $30,000 plus the interest that accrued during the period which amounts to 30,000 x 0.4375% = $131.25
The first payment of $486.63 will serve to pay the $131.25 in interest plus $355.38 in principal
Your outstanding balance after the first payment is then 30,000 + 131.25 – 486.93 = $29,644.62
This is how you compute the loan amortization schedule (See Excel)
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Mortgages
A loan secured by real estate, for homeowners, the home.
Down payment – percentage of property val.
Principal
Amount borrowed at the beginning
What’s left of the original loan to pay
Interest rate
Payments – determined by rate and principal
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Saving to buy a home
You plan to buy your dream home in 5 years. At that time, you would like to be able to afford a $350,000 home and put 50,000 down, and take out a 30 year mortgage for the rest. You can invest at 5% per annum. Assume this will also be the interest rate on the mortgage.
How much money do you need to save each year for the next 5 years to buy your dream home?
What will your payment be on the mortgage?
How much interest and principal paid with the 11th mortgage payment?
How would your answers change if the interest rate were 8% per annum compounded monthly?
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Solution
Draw down the timeline (have a try)
Decompose the question into two parts
From now (year 0) to year 5
From year 5 to year 35
For the first part:
That what you need to do to start the loan
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Answer
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| N | I/Y | PV | PMT | FV | |
| Given: | 30 | 5 | 300,000 | 0 | |
| Solve for: | −19,515.43 | ||||
| Excel Formula: =PMT(RATE,NPER,PV,FV)=PMT(0.05,30,300000,0) = −19,515.43 |
Using a financial calculator or Excel:
For the second part, imagine we stand at the end of 5th year
