SMG FE 101 Lecture Notes - Lecture 5: Interest, Cash Flow, Net Present Value
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Assume that you have $1,000 to invest, so insert 1000 as your Present Value in the following table. Assume that you want to invest your money for 5 years (insert 5 for Number of Periods). Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The table will determine the Future Value of your investment. If you input the numbers correctly, your Future Value is computed to be $1.159, which is what your investment will be worth in 5 years. Now revise the input to reflect your actual savings and the prevailing interest rate so that you can see how your savings will grow in 5 years. Even if you have no savings now, you can at least see how the interest rate affects the future value of savings by revising your input in the Interest Rate per Period and then observing the change in the Future Value. Future Value of a Present Amount Present Value $1,500 Number of Periods 5 Interest Rate per Period 3.0% FV = PV*(1+R)^N Future Value $1,739 2. Assume that you have $1,000 to invest at the end of each of the next 5 years, so insert 1000 as your Payment per Period in the following table. Assume that you want to invest your money for 5 years (insert 5 for Number of Periods). Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Future Value of your investment. If you input the numbers correctly, your Future Value is computed to be $5,309, which is what your investments will be worth in 5 years. Now revise the input to reflect your actual expected savings per year over the next 5 years, and existing interest rate quotations so that you can estimate how your savings will grow in 5 years. You can now revise the table to fit your own desired level of saving. Future Value of an Annuity Payment per Period $1,500 Number of Periods 5 Interest Rate per Period 3.0% FV = FV(R, N, PMT, (PV), beginning=1, end=0) Future Value $7,964 3. Assume that you want to deposit savings that will be worth $10,000 in 5 years, so insert 10000 as the Future Amount and 5 as the Number of Periods in the following table. Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Present Value, which represents the amount of savings you need today that would accumulate to be worth $10,000 in 5 years. If you input the numbers correctly, the Present Value is estimated in the table to be $8,606. Now revise the input to reflect your own desired savings amount in 5 years so that you can estimate how much you need now to achieve your savings goal in 5 years. Present Value of a Future Amount Future Amount $20,000 Number of Periods 5 Interest Rate per Period 3.0% PV = FV / (1+R)^N Present Value $17,252 4. Assume that you want to deposit savings at the end of each of the next 5 years so that you will have $10,000 in 5 years. So insert 10000 as the Future Amount and 5 for Number of Periods. Assume an annual interest rate of 3.00% (insert 3 for Interest Rate per Period). The following table will determine the Annual Payment, which represents the annual payments that will accumulate to your future desired investment. If you input the numbers correctly, your Annual Payment is computed to be $1,884. Now revise the input to reflect your own desired savings amount in 5 years so that you can estimate how much you need to save per year to achieve your savings goal in 5 years. Compute Payment Needed to Achieve Future Amount Future Amount $20,000.00 Number of Periods 5.00 Interest Rate per Period 3.00% PMT = FV / [FV(R, N, -1)] Annual Payment $3,767
Decisions 1. Using the above formulas and understanding of the impact of interest rates and time on your savings, report on how much you must save per year and the return you must earn to meet your savings goal for graduation, and your savings goal in your first three years of post-graduation life.
I need a report on how much to save per year and the return to earn to meet savings goal for graduation, and savings goal in the first three years of post graduation. Can you please use the numbers above that are already calculated in the formula. I have had an answer on this below. I don't understand why the periods don't stay the same for 5 years. The annuity is 7964 I took that divided b y 60 = 132.7 per month and multiplied it by 12 for a year and got 1592.4. Is that the savings for the answer to saving for a year. IF not I need help figuring out the calculation for the return to meet after gradutaion and the next three years post graduation.
| Goal 1 | Savings Goal for graduation, FV | $ 20,000 | |||||
| Time till graduation (Number of periods) | 5 | ||||||
| Present value of savings | $ - | ||||||
| Expected interest rates | 3% | ||||||
| Savings needed per year, PMT | $3,767.09 | =PMT(3%,5,0,20000,) | |||||
| Goal 2 | Savings Goal for 1st year of post graduation, FV | $ 15,000 | |||||
| Time till post graduation year 1 (Number of periods) | 6 | ||||||
| Present value of savings | $ - | ||||||
| Expected interest rates | 3% | ||||||
| Savings needed per year, PMT | $2,318.96 | =PMT(3%,6,0,15000,) | |||||
| Goal 3 | Savings Goal for 2nd year of post graduation, FV | $ 15,300 | |||||
| Time till post graduation year 1 (Number of periods) | 7 | ||||||
| Present value of savings | $ - | ||||||
| Expected interest rates | 3% | ||||||
| Savings needed per year, PMT | $1,996.75 | =PMT(3%,7,0,15300,) | |||||
| Goal 4 | Savings Goal for 3rd year of post graduation, FV | $ 15,606 | |||||
| Time till post graduation year 1 (Number of periods) | 8 | ||||||
| Present value of savings | $ - | ||||||
| Expected interest rates | 3% | ||||||
| Savings needed per year, PMT | $1,754.99 | =PMT(3%,8,0,15606,) | |||||
The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.
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2. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.
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3. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.
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4.Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
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5. A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 6%. Which of the following statements is CORRECT?
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6. Which of the following statements is CORRECT?
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7. Your investment account pays 6.8%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?
Select the correct answer.
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8. You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?
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9. Suppose you earned a $135,000 bonus this year and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?
Select the correct answer.
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10.Your older brother turned 35 today, and he is planning to save $30,000 per year for retirement, with the first deposit to be made one year from today. He will invest in a mutual fund that's expected to provide a return of 7.5% per year. He plans to retire 30 years from today, when he turns 65, and he expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can he spend each year after he retires? His first withdrawal will be made at theend of his first retirement year.
Select the correct answer.
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11. Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
Select the correct answer.
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12. Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000 . The going interest rate (rd) is 9.75%, based on semiannual compounding. What is the bond's price?
Select the correct answer.
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