Ch 6- Class Notes

Question 1

How to do time value of money questions on number line

Answer 1

Draw PRESENT VALUE on left, FUTURE VALUE on right end

Have intervals of 100

and note down the % rate

Question 2

What do you assume ‘n’ to be in financial calculator calculations?

Answer 2

YEARLY!!!

Question 3

You are going to invest $500 at the end of each year for 10 years. Given an interest rate, you can find the future value of this investment by applying the proper future value factor to each cash flow, then adding up these future values.

TRUE OR FALSE?

Answer 3

TRUE

The future value factor is the payment x (1+ interest)

Question 4

You hold a winning ticket from your provincial lottery. It entitles the bearer to receive payments of $50,000 at the end of each of the next 20 years. Given what you know about the time value of money, you should be able to sell this ticket for no less than $1 million in the open market.

true or false1

Answer 4

false

50,000 x 20= 1,000,000 is what you willl get at the end

-the first 50,000 is one year away
-the second 50,000 is end of year 2
-the final 50,000 is in the final year

someone else is holding the money and you will get paid only at the end, you are actually discounting the money

See the Th2 image in fnce folder

Question 5

If you have different cash payments invested yearly, how do you do it?

Answer 5

1. Make a timeline, note that time begins at time 0 (PV)
2. Make a new point on the timeline wether you note the next years payment
3. Multiply first years payment by 1+interest rate, and put the power of how many jumps you gotta do to get to future value
   First year payment x 1.0#^n

where n= number of jumps

4. Do this jumping for multiple payments and there will be a difference in n (# of jumps) and the payment
5. sum up all the values

see 6.6 problem image

Question 6

payment x (1.0)^ n + payment x (1.0)^ n

Answer 6

formula for doing cash payments changing

Question 7

If you are using cash flows formula to calculate future value, and you have negatives, how do you deal with them?

Answer 7

payment x (1.0)^ n + payment x (1.0)^ n

same formula, but use the - sign ahead of the negative cash flows

Question 8

Given a problem where you get paid x amount in year 1, y in year 2, z in year 3, and told to calculate how much investment is worth today?

how to do it?

Answer 8

1. Create a timeline
2. Declare the year and the payments recieved in each year
3. JUMP BACKWARDS !! to ward present value and this is how you count those jumps
4. The formula is DIVISON NOT MULTIPLICATION

payment / (1.0)^ n + payment / (1.0)^ n

5. Sum it all uup and you will get what the present value is
6. Shouls you take this deal? think about what you are asked to pay and IF THIS IS HIGHER THAN THE AMOUNT YOUR MONEY IS ACTUALLY WORTH AT THE PRESENT VALUE (calculated in step 5) then dont do it
   (YOU ARE OVERPAYING)

Question 9

Redo 6.1 final problem

Answer 9

check the fnce image

Question 10

What is an annuity

two types of annuities

Answer 10

finite series of equal payments that occur regularly

ordinary + annuity due

Question 11

Ordinary annuity

Answer 11

first payment occurs at the end of the period

Question 12

annuity due

Answer 12

NOT AN ANNUITY THAT YOU HAVE TO PAY, IT PAYS YOU

first payment occurs at the beginning of the period, you get paid up front AT THE BEGINNING

Question 13

Perpetuity

Answer 13

INFINITE SERIES OF EQUAL PAYMENTS

Question 14

Formuala for perpetuity + meaning

Answer 14

PV= C/r

Cash flow/ return rate %

or

payment we get/ required return

MEANING: HOW MUCH YOU WILL BE WILLING TO PAY TO GET THIS PERPETUTIY PAYMENT

Question 15

Formula for annuity Present value

Answer 15

PV= C[ 1- (1/(1+r)^t)/r]

r= required return
C= paymetn
t= time/or length of payments

GIVEN that this is a regular annuity (paid at end of year)

Question 16

Why is perpetuity payments caveat

Answer 16

you get this back forever but this means that the inflation is not accounted for

Question 17

Annuity Present value formual meaning

Question 18

Annuity future value formula

Question 19

How to use the present and future value of the annuity formulas

Answer 19

YOU GOTTA MAKE SURE TO USE THE CORRECT FORMULA

• DECLARE VBLS
• SOLVE
• Recommend using calculator to solve for annuity and perpetuity formulas!!! its the simple N, I/Y, PMT, and then CPT PV
  NOTEEE: THE FV IS ALWAYS 0 IN THIS CASE

Question 20

An annuity for one person is an annuity asset for another person/company

Answer 20

!!

Question 21

How to do problems where you need to calculate the value of the annuity given payment, n, discount rate, future value?

Answer 21

Use your financial calculator!
1) 2nd + clear TVM
2) N=
3) I/Y=
3) PMT= -
4) FV= 0 (THE FUTURE VALUE OF ANY LOAN IS 0, because there is nothing left you have to pay)
5) CPT + PV

-> Using this, your answer will be the present value that you receive up front
-> Be mindful that the units for n and i/y are the same! If interest is given per month, n has to be counting # of months

Question 22

How to use the financial calculator on the TI-84 Plus CE when solving for the PV

Answer 22

-> Apps + FNCE + tvm solver

-> Type in all your values

-> Go up to the PV row, and click alpha + solve

**NOTE that the PMT should always be - if money is leaving your bank account

Question 23

The PMT value in your calculator needs to be …if money is leaving your bank account

Answer 23

Negative! This matters so you get the right answer

Question 24

How do you find the rate (I/Y) without a calculator

Answer 24

Trial and Error (plug and check if your answer is correct)

PV= P/1+r + P/(1+r)^2 + P/(1+r)^3….

Question 25

When it says ANNUITY DUE, you need to put payment as beginning of the period, for what other problems will you have the calculator set to payments in the beginnig mode

see slide 6-190

Answer 25

When you are paying rent and lease, be mindful! You have to pay upfront just because you pay before you use (THIS WILL BE WRITTEN OUT IN THE QUESTION)