2. 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

3. 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 !!!

4. Schedule 4

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

6. Today 6

7. Homework… Bring your resume and post PDF to course discussion

8. 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

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.

10. Time Value of Money – Extensions Given the basic equations that we have discussed, we can solve for any missing single variable. Some common applications – Solve for the interest rate (yield!!) – Compute payments to accumulate a future sum – Compute payments to amortize a loan

11. Time Value of Money – Extensions Rate of Return or Discount Rate Example 3-5: – Reed & Portland Trucking is financing a new truck with a loan of $10,000, to be repaid in 5 annual end-of-year installments of $2,504.56. What annual interest rate is the company paying?

12. Time Value of Money – Extensions Set P/Y = 1: = $10,000 = 5 = ($2504.56) = $0 = 8% n CPT i FV PV PMT

13. Time Value of Money – Extensions Example 3-6: – A bank makes a $100,000 loan and will receive payments of $805 each month for 30 years as repayment. What is the rate of return to the bank for making this loan? This is also the cost to the borrower.

14. Time Value of Money – Extensions Set P/Y = 12 = $805 = 360 = ($100,000) = $0 = 9% n i CPT PV PMT FV

15. Uneven Payments??? A bit more complicated – use the cashflow option on your calculator: YouTube on using the BA II http://www.youtube.com/watch?v=K1p3x-mT09k

16. Knowledge Check FV of following payments at 9%: End of YearAmount Deposited 1$2,500 2$0 3$750 4$1,300 5$0

17. Solution End of YearAmount DepositedFV(n,i,PV,PMT) Future Value 1$2,500FV(4 yrs, 9%,$2,500, 0) $3,529 2$0FV(3 yrs, 9%,0, 0) $0 3$750FV(2 yrs, 9%, $750, 0) $891 4$1,300FV(1 yr, 9%, $1,300, 0) $1,417 5$0 Total Future Value = $5,837

18. Solution What about NPV What about IRR Another good walk through… http://www.youtube.com/watch?v=Z3xAtg7waEU With the HP12c (10b…) http://www.youtube.com/watch?v=qZ0mSIBv71s

19. Time Value of Money – Extensions Example 3-7: Accumulating a Future Sum – An individual would like to purchase a home in five (5) years. The individual will accumulate enough money for a $20,000 down payment by making equal monthly payments to an account that is expected to earn 12% annual interest compounded monthly. How much are the equal monthly payments?

20. Time Value of Money – Extensions Set P/Y = 12 = $20,000 = 60 = $0 = 12 = $244.89 n i CPT PV PMT FV

21. Time Value of Money – Extensions The Power of Compounding In Example 3-7, our saver deposited $244.89 x 60 = $14,693.40 Interest Earned was $20,000 - $14,693.40 = $5,306.60

22. Time Value of Money – Extensions Example 3-8: Amortizing a Loan – Your company would like to borrow $100,000 to purchase a piece of machinery. Assume that you can make one payment at the end of each year, the term is 15 years, and interest rate is 7%. What is the amount of the annual payment?

23. Time Value of Money – Extensions Set P/Y = 1: = $100,000 = 15 = $0 = 7 = $10979.46 n i CPT FV PMT PV

24. Equivalent Nominal Annual Rate ENAR = Equivalent Nominal Annual Rate EAY = Effective Annual Yield