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# FNCE+2P91-Corporate+Finance-Notes-Chapter+Six.docx

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Brock University

Finance

FNCE 2P91

Clarke Melville

Winter

Description

FNCE 2P91 - Section 05
Winter 2011 - Duration 03
25.01.11
FNCE 2P91: Corporate Finance-Notes-Chapter Six: Financial Planning and
Mortgages
Notes
Know the terms/definitions from the lab for the exams
Read that whole chapter
th
Lab 3: due February 6
o On chapter 6 for the material
Quiz 1: January 27 to the 29h
o Chapters 5 and 6
o Should be able to do the quiz after today’s class
o 60 minutes
o One try for the quiz
o Can do it in a group
o 7 or 8 questions long
o Will take up the answers in class after the quiz
Try to do Lab 3 in preparation for the quiz
The first three or four labs are open and you can start on them
Questions:
What is the future value of $5000 saved every year for 20 years, first payment/deposit is one year from
today. Earning 8% APR compounding semi-annually.
Answer:
0 1 2 19 20
5000 5000 5000 5000
FV
Future Value (FV) ?
Time Periods (N) 20 years
Coupon (C) 5000
Find r:
FV of Ordinary Annuity:
[ ]
[ ]
Question:
What is the future value of $500 saved every month for 20 years, first deposit is one month from today.
APR is 8% compounding semi-annually.
Answer:
0 1 2 3 20
i i i I I I I I I I I I FNCE 2P91 - Section 05
Winter 2011 - Duration 03
FV of Ordinary Annuity:
Coupon (C) 500
Number of Periods (N) 20 years x 12 = 240
Find r:
( )
What effective monthly rate (EMR) equals EAR of 8.16%?
[ ]
Question:
Wes just won $1000 a week for life! You are 22 years old and the winnings pay out until Wes is 80 years
old. Current interest rates in the market are at 10% compounding semi-annually. Fist payment will be one
week from today. Offered a buyout of $600 000. Should he take it?
PV of $600 000 today is it greater than or less than $1000 a week for 58 x 52 weeks at 10% interest
Answer:
Present Value (PV) ?
Coupon (C) $1000
Time Periods (N) 58 x 52 = 3016
Find r:
( )
What effective weekly rate equals an effective annual rate of 10.25%
( )
Present Value of Ordinary Annuity:
[ ]
[ ]
Therefore take the buyout because the $600 000 is greater than the present value of the annuity
Question Part Two:
In fact by taking the $600 000 what could Wes pay himself every week?
Answer Part Two:
Present Value (PV) $600 000
Effective Weekly Rate (EWR) 0.00188 FNCE 2P91 - Section 05
Winter 2011 - Duration 03
C ?
Time Periods (N) 3016
[ ]
MORTGAGES
Giant loan secured property; if you do not pay back the loan the bank has the right o seize
your property
Amortization length the length of the loan in years; typically in Canada 25 – 30 years
Term length that you have your rate (APR) locked in; typically in Canada 5 year terms then
going to have to renegotiate the term of the loan
RATE APR
Question:
What will the monthly payments be on mortgage with the following?
Answer:
House Price $325 000
Down Payment $25 000
APR 5.00%
Compounding semi-annually
Monthly payment frequency
Amortization length of 25 years
Loan amount is going to be $300 000
Solve for the “C” in PV of annuity formula
Present Value (PV) $300 000
Time Periods (N) 25 years x 12 months = 300 months
C ?
Find r:
Step 1: Find EAR of 5% semi-annually
( )
Step 2: Find EMR
Step 3: Solve for C in PV formula
[ ]
C = $1 743.995947 $1 839.57 for 0.00457
Question Part Two:
What if we elected

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