Chapter 5 Lecture Notes Flashcards
(27 cards)
The US savings rate is one of the ____est of any industrial nation.
Lowest
The ratio of US workers to retirees was _____ in 1975 compared to ____ in 1995 and bay be _____ by 2035.
- 2:1
- 6:1
- 2:1
Why could Social Security be in trouble?
Too much money coming out for what is going in. Workers have to work longer to get full social security.
47% of workers have less than _____ saved.
$25,000
Retirement security depends on:
- rate of return on investments
- inflation
- diligence of saving money
- existence of social security
- life expectancy
- health
Ordinary Annuity
Assumes that you need time to make some money
What are the rules of Ordinary Annuities?
- n = # of pmts
2. n and i represent the same time period
Solve for the Correction Factor
FV of Annuity Due = (FV of Ordinary Annuity)(1+ i)
Correction Factor
(1+i)
Perpetuity
A perpetual (infinite) annuity Present value is found with a formula rather than a TVM calculation
Perpetuity Formula
PVt = PMTt+1 / k-g
k = required return g = growth rate of payment
Uneven Cash Flows
Net Present Value
NPV equation on the calculator
NPV (i, cash flow concurrent with the NPV position, (pmt, pmt, pmt, …)
Periodic Rate
Rate of return per compounding period
nominal Rate/m
Nominal Rate
APR
(periodic rate)(m)
m = #comp periods per year
Effective Annual Rate
Actual rate of return over a full year
FVn =
PV (1 + iNom/m)^nm
EAR =
((1 + iNom/m)^m) - 1
What happens to EAR as you compound more frequently?
The more compounding, more EAR
Does compounding period or payment period dictate the calculator keystrokes?
PMT period
PITI equation
Principal + Interest + Property Tax + Insurance
What is PITI?
What you actually pay on a house mortgage
Amortization schedule
Period Beginning Balance Payment Interest Principal Repayment Ending Balance
PMT =
Interest + Principal Repayment
