Key Questions… What? – Identify key terms and concepts that are important to real estate finance decisions Why? – Explain why those terms are important How? – Illustrate how those terms and concepts are applied in practice

The Basics Mortgages Traditional Finance Methods Alternative Finance Vehicles Fixed rates, variable, CPM, reverse annuity, price level, risks, yields, incremental costs, LTV, refinancing, prepayment Residential, underwriting, closing, settlement, corporate real estate, project and land development financing Course Map Notes, mortgages, default, foreclosure, bankruptcy, time value of money, compounding, yield, IRR Ventures, syndicates, secondary market, pass through securities, CMOs, MBS, CMBS You Are Here !!!

Schedule 4

Today Articles / News News and Updates Time Value Basics For Next Session Dynamic Terminals 5

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Homework… Bring your resume and post PDF to course discussion

Real Estate Club The BEST club at MTSU Open to ALL majors Learn things that apply to the rest of your life Make some awesome friends Hang out with creative, entrepreneurial dudes Limited space, act now, while supplies last! 8

Introductions Index Cards – Name and nickname – Major / Minor – When you graduate – Interests and what you do for fun – Home town – Your interest and/or background in real estate Speak up!!! 9

Chapter 03: Mortgage Loan Foundations: The Time Value of Money McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Annuity Level Cash Flow Stream Terminates Ordinary Annuity – Cash flows begin one period from today Annuity Due – Cash flows begin immediately

Annuity: Future Value General Equation:

Example 3-3: – What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15% interest rate? = 200( ) = $ Annuity: Future Value

Using the Financial Calculator: = $200 = 5 = 15 = $0 = $1, n i CPT FV PMT PV

Annuity: Future Value For Example 3-3, if payments were to be received monthly Mathematically:

Annuity: Future Value = 200( ) = $17,714.90

Annuity: Future Value Using the Financial Calculator, if P/Y = 12 = $200 = 60 = 15 = $0 = $17, n i CPT FV PMT PV

Knowledge Check Find the future value of 24 deposits of $5,000 made at the end of each 6 months. Deposits will earn an annual rate of 8.0%, compounded semi-annually. Work individually for a few minutes, then groups of 3

Solution Future Value=FV(n,i,PV,PMT) FV (24 periods, 8%  2, 0, $5,000) $195,413 Note: Total cash deposits are $5,000 x 24 = $120,000. Total interest equals $75,413 or ($195,413 - $120,000). The $120,000 represents the return of capital (initial principal) while the $75,413 represents the interest earned on the capital contributions.

Knowledge Check Find the future value of 24 beginning-of- period payments of $5,000 at an annual rate of 8.0%, compounded semi-annually based on an annuity due. Work individually for a few minutes, then groups of 3

Solution Future Value=FV(n,i,PV,PMT) FV (25 periods, 8%  2, 0, $5,000) $208,230 Note: n is changed to 25 because the deposits are made at the beginning of each period. Therefore, the first deposit will be compounded 25 times whereas if the 1 st deposit was made at the end of the period it would be compounded only 24 times. This pattern holds true for each deposit made. The second deposit would be compounded 24 times and the last deposit would be compounded once. This example illustrates the difference between and annuity due (beginning of period deposits) and an ordinary annuity (end of period deposits).

Are we sure??? Would there really be 25 payments of $5000? Or still 24? Really only 24 payments, the solution is $5000 less. $203,230

General Equation: Annuity: Present Value

Example 3-4: – If you had the opportunity to purchase a $500 per year, ten-year annuity, what is the most you would pay for it? The interest rate is 8%. = 500(6.7100) = $ Annuity: Present Value

Using the Financial Calculator: = $500 = 10 = 8 = $0 = $3, n i CPT PV PMT FV

For Example 3-4, if Payments were to be Received Monthly Mathematically: Annuity: Present Value

= $500( ) = $41,210.74

Annuity: Present Value Using the Financial Calculator, if P/Y = 12 = $500 = 120 = 8 = $0 = $41, n i CPT PV PMT FV

Knowledge Check Find the present value of 96 monthly payments, of $750 (end-of-month) discounted at an interest rate of 15 percent compounded monthly Work individually for a few minutes, then groups of 3

Solution Present Value=PV (n,i,PMT,FV) PV(96 periods, 15%  12, $750, 0) $41,793 should be paid today The total sum of cash received over the next 8 years will be: 8 years x 12 payments per year x $750 per month = $72,000 Total cash received by the investor$72,000 Initial price paid by the investor$41,793 Difference: Interest Earned$30,207 The difference represents the total interest earned by the investor on the initial investment of $41,793 if each $750 payment is discounted at 15 percent compounded monthly.