FIN302: Week 4 - 9.14-9.18
FIN302: Week 4 - 9.14-9.18 FIN302
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This 7 page Class Notes was uploaded by Giulia Dias Roncoletta on Monday September 21, 2015. The Class Notes belongs to FIN302 at University of Miami taught by Frank Peterson in Summer 2015. Since its upload, it has received 129 views. For similar materials see FIN 302 - Fundamentals of Finance in Finance at University of Miami.
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Date Created: 09/21/15
Date Monday September 14th 2015 Chapter Chapter 6 PV FV Calculator Instructions IN r periodic rate On calc press 2nd format change number of decimals PY periods per year make sure this is set to 1 Always CPT Compute TVM keys N Y PV PMT FV they all store numbers 1 1000 is deposited in an account 6 compounded annually End of five years how much money N5 Y6 PV1000 PMT0 CPTFV FV 1 338225 Wally if the money goes out of wally your wallet or purse into an account the number is negative But if it goes into wally then it is positive What is compounded monthly or weekly or daily or quarterly r 0612 if monthly m12 always must correspond ALWAYS ask yourself the compounding period before starting a problem 2 1000 is deposited in an account 6 compounded monthly End of five years how much money PV 1000 r 0612 0005 monthly n 5x12 60 months FV PV1rn FV 100010056O Practice Problem 6 compounded daily Flagship Bank 65 compounded quarterly Barnett Bank Deposit 1000 which has a higher amount after five years FLAGSHIP BARNNET 5x365 N 5X4 N 6365 Y 64 IN 1000 PV 1000 PV 0 PMT 0 PMT CPT FV CPT FV FV 1 3498 FV 138042 Present Value amp Discounting Present Value amount of money you need today to represent another amount in specified time Required Return if your money was invested at 9 and if you want to invest with someone else the lowest you ll go is 9 since that is your opportunity cost PVFV are equal to each other base on opportunity cost Discounting a Lump Sum PV FVn 1rn E ln 5 years pay off 133823 loan 6 compounded annually how much money today n 5 IN 6 FV 133823 PMT O CPT PV Date Wednesday September 16th 2015 Chapter Ending of Chapter 6 PV FV Beginning of Chapter 7 Solving For time Give the compounding formula FV PV1rn Solving for n we get lnFVPV ln1r There has to be internal consistency in everything that we compute n the of days N any amount of periods You can store 9 formulas in the calculator lE How long will it take for 1 000 to grow to 2668 at 15 APR compounded monthly ln26681000 79 months ln1O1512 Rates of Return Solving for r Given the compounding formula Solving for r we get r FVPV1n 1 where r annual rate Compounded annually is equivalent to compounded semiannually They produce the same future value E What APR equates 1 000 today to 1605 five years from now given monthly compounding 079212 95 APR The answer can be interpreted as 0792 interest per month Future Value Formula 10001095quot157424 does not equal 1605 Note that if we compound using the APR we get the wrong FV Chapter 7 Effective Annual Interest Rate EAR True annualized rate of return Takes all compounding into account takes compounding into account knowing a period rate EAR1rm 1 where M is the of compounding periods in a year E What is the Ear of a 12 APR loan compounded monthly FV PV1rn r 01212 001 and lets make PV and compound for one year n12 FV1100112 1 126825 Interest 126825 Coverting APR to EAR EAR1rm 1 APR r m EAR 1 tm 1 m APR is not a compounded rate but EAR is a compounded effective rate EAR is always higher than APR IF WE KNOWN EAR APR OR R WE CAN CONVERT IT TO ANY OF THE OTHER TWO JUST BY USING A FORMULA le your client just started making montth deposits of 1000 into a retirement account that earns 6 aPR compounded daily How much will be in the account in the years we can t answer without being able to convert interest rates r r APRm r 1 EAR 1 APR rm 54931 l39r391 APR 4 EAR APR m1 EARquotquot 1 EAR 1 APRm 1 Calculator Instructions 2nd ICONV stands for I convert 2nd CLR Work NOM 9 Enter arrow up CY12 Enter arrow up EFF CPT gt EFF93807 39 u a 39 I l h D Q 0 U u 5 6 J 1 I n I l I 939 U 0 398 g R I v I 39 D I If you need to solve this in reverse meaning that you are trying to find out what NOM You can scroll up and plug in EFF and ON values first NOM APR EFF EAR you can never divide this number by anything since its a compounded rate Both are annual rates NEVER PUT APR in IN TVM keys can be used to do the same thing as shown above Golden Rules of TVM 1 Never input an APR in here lYon calc APR is not a real rate 2 EARm total garbage you physically can t do it 3 Never change the facts Check out the golden rules on blackboard Date Friday September 18th 2015 Chapter Chapter 7 Annuities Multiple cashflow and discounted cash flow valuation 1 Annuity stream of cash flows consecutive equal payments 2 Ordinary Annuity begin at the end of each period payments pv 1 2 3 4 5 100100 100 100 100 PV one period before first payment FV last payment 3 Annuity Due payments are in the beginning of each period pay in advance pv12345 100 100 100 100 100 100 PV first payment FV last payment 4 Deferred Annuity postponeddeferred payments for some length PV for Annuity PV0PMT1X11 r 1rn n number of annuity payments PV period before first payment Practical Value PV how much you have to invest today to replicate future cash flows payment button on calc Golden Goose 9 golden eggs monthly one once of gold each egg 1250 life expectancy of 7 years and you already earn 9 apr compounded monthly N 7X12 IN 912 PV OPT PMT 1250 FVO You39re not going to pay more than 69923110 for that goose What you owe in any loan is the PV of your FV payments 1245950 Answer You owe 12459 Future Value of Annuity calc formula sheet le Jack and Jill sibilings trying to make a retirement investment 500 monthly payments 9 apr compounded monthly jack 40 years jill 45 years 3702439 conclusion start early