Submitted By Khokha

Words 810

Pages 4

Words 810

Pages 4

Prof: Beverley Belgrove

Unit 2: The Value of Money

Name: Khazma Alsayed

Date: 29-10-2012

SOLVING FOR r

Suppose you can buy a security at a price of $78.35 that will pay you $100 after fi ve years. What annual rate of return will you earn if you purchase the security? Here you know PV, FV, and n, but you do not know r, the interest rate that you will earn on your investment. Using your financial calculator, enter the known values into the appropriate locations—that is, N _ 5, PV _ _78.35, PMT _ 0, and FV _ 100— and then solve for the unknown value.

SOLVING FOR n

Suppose you know that a security will provide a return of 10 percent per year, it will cost $68.30 to purchase, and you want to keep the investment until it grows to a value of $100. How long will it take the investment to grow to $100? In this case, we know PV, FV, and r, but we do not know n, the number of periods. Using your financial calculator, enter I/Y _ 10, PV _

–68.30, PMT _ 0, and FV _ 100; then solve for n _ 4.

Compounding: To compute the future value of an amount invested today (a current amount), we “push forward” the current amount by adding interest for each period in which the money can earn interest in the future. This process is called compounding

Amortization schedule: A schedule showing precisely how a loan will be repaid. It gives the payment required on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment of principal

One of the most important applications of compound interest involves loans that are paid off in installments over time. Included in this category are automobile loans, home mortgages, student loans, and some business debt. If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.

To illustrate, suppose that you…...

...John buys a house and pays it back in 5 years. The house is worth $150,000. The current rate is 6% and he expects rates to go up 1% every year. What does his amortization table look like? Year 1 payment Year 2 payment Year 3 payment Year 4 payment Year 5 payment N 5 N 4 N 3 N 2 N I 6.0% I 7.0% I 8.0% I 9.0% I PV -$150,000 PV -$123,391 PV -$95,600 PV -$66,152 PV FV $0 FV $0 FV $0 FV $0 FV PMT $35,609.46 PMT $36,428.36 PMT $37,095.82 PMT $37,605.16 PMT Loan Amortization Schedule, $100,000 with variable rates Amount borrowed: $150,000 The calculations for payment were done through excel calculations Beginning Amount (1) Payment (2) Interest (3) Repayment of Principal (4) Ending Balance (5) 150000 * 6% = 9000 interest on year 1 payment Year 35609.46 - 9000 = 26609.46 Repayment of principal for year 1 0 $150,000.00 150000 - 26609.46 = 123390.54 Ending balance for year 1 1 $150,000.00 $35,609.46 $9,000.00 $26,609.46 $123,390.54 123390.54 * 7% = 8637.34 interest on year 2 payment 2 $123,390.54 $36,428.36 $8,637.34 $27,791.02 $95,599.52 36428.36 - 8637.34 = 27791.02 Repayment of principal for year 2 3 $95,599.52 $37,095.82 $7,647.96 $29,447.86 $66,151.66 123390.54 - 27791.02 = 95599.52 Ending balance for year 2 4 $66,151.66 $37,605.16 $5,953.65 $31,651.51 $34,500.15 95599.52 * 8% = 7647.96 interest......

Words: 405 - Pages: 2