Exam 1 Review

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

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

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

TVM Problems l Five main keys: n PV n FV n PMT n I/YR n N l Setting Key: P/YR

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

Example 1 l 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? l Answer: $23.98

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

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

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

Example 3 l 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? l Answer: $24,114.82

Example 4 l 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. l Answer: 9.09% per year APR l What is the EAR on the loan? l Answer: 9.48% EAR

Example 5 l 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? l Answer: $6,283.55

Example 6 l 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? l Answer: $462.59

Example 7 l 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. l Answers: Interest: $1, Principal:$1, Balance:$180,760.02

Example 8 l 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? l Answer: $361.31

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

Example 8 (contd.) l 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? l Answer: $47.31

Example 9 l 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 = $1,560 You get: 12, ,560 = $10,440 l What is the EAR on the loan? l Answer: 14.94%

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