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## BUSN380 Week 4 TCO 5 Chap 13 Notes - Calculating Time Value of money &amp; Rate of Return

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# BUSN380 Week 4 TCO 5 Chap 13 Notes - Calculating Time Value of money &amp; Rate of Return

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BUSN380 Week 4 TCO 5 Chap 13 Notes - Calculating Time Value of money &amp; Rate of Return
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Date Created: 11/14/15
BUSN380 Week 4 Notes FINANCIAL PLANNING PROBLEMS CHAPTER 13 1. Calculating the Amount for an Emergency Fund. Beth and Bob Martin have a total take­ home pay of \$3,200 a month. Their monthly expenses total \$2,800. Calculate the amount the  couple needs to establish an emergency fund. How did you calculate this amount? 3.   Determining Profit or Loss from an Investment.  Three years ago, you purchased 150  shares of IBM stock for \$88 a share.  Today, you sold your IBM stock for \$103 a share.  For  this problem, ignore commissions that would be charged to buy and sell your IBM shares.   a.  What is the amount of profit you earned on each share of IBM stock? b.  What is the total amount of profit for your IBM investment? 4.    Determining the Time Value of Money. Using Exhibit 13­1, complete the following  table. Then  answer the questions that follow the table. Hint: To calculate the amount of interest, subtract  the amount of your total investment from the value at the end of the time period.  Investment  Total  Annu Value at  Amoun Total  al  Num the End of  t of  Amoun Depo Rate of ber of Time  Investm t of  sit Return Years Period ent Interest \$2,00 0 4% 10 \$2,00 0 10% 10 \$2,00 0 4% 20 \$2,00 10% 20 0 a. In the above situations, describe the effect that the rate of return has on the investment  value at the end of the selected time period. b. In the above situations, describe the effect that the number of years has on the investment value at the end of the selected time period. 5.   Calculating Rate of Return. Assume that at the beginning of the year, you purchase an  investment  for \$6,000 that pays \$80 annual income. Also assume the investment’s value has increased to \$6,900 by the end of the year. a. What is the rate of return for this investment? Step 1: Subtract the investment’s initial value from the investment’s value at the end of the  year. \$6,900 – \$6,000 = \$900 Step 2: Add the annual income and the amount from Step 1. \$900 + \$80 = \$980 Step 3: Divide the total dollar amount of return (Step 2) by the original investment.  \$980 ÷ \$6,000 = .163 = 16.3% 9.  Determining Interest.  Three years ago you purchased a Heinz corporate bond that pays  6.75 percent annual interest.  The face value of the bond is \$1,000.  What is the total dollar  amount of interest that you received from your bond investment over the three­year period?   (p. 421)

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