Explain risk vs. reward related to your personal financial goals.

Explain how savings and investing are impacted by the time value of money.

Describe how interest rates impact time value of money calculation (use time value of money concepts and calculation to plan your savings and investing part of your financial planning goals, show examples with calculations).

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Elin HesselLv2

5 Jun 2018

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While in college, Pam Jenkins worked part-time and was never concerned about long-term financial planning. Rather than creating a budget, she used her checkbook and savings account (which usually had a very low balance) to handle her financial needs.

After completing college, Pam began her career as a sales representative for a clothing manufacturer located in California.

After one year, her assets consist of a 2002 automobile, a television set, some electronic entertainment equipment, and clothing and other personal belongs, with a total value of about $8,200.

Questions

Q1. List various personal financial decisions that Pam might be thinking about at this point in her life.

Q2. Realizing the information is limited, discuss possible future events that could impact Pam financially and what additional information is needed before recommending actions?

Q3. What are some specific short-term, intermediate, and long-term financial goals that Pam might want to develop?

Q4. List at least three financial situations and the time value of money calculations that would be helpful to Pam in planning or making decisions?

Scenario 2 Time Value of Money

One hundred dollars today is not necessarily $100 in the future when one invests in an interest-bearing account that grows in value over time. This is because of a very important financial concept called the time value of money. To determine what your investment is worth at a particular time in the future, you can use the future value formula. 1. Your grandmother put $2000 in an account that pays 5% interest rate on the day when you were born. You are now 18 years old. a) How much money do you have in your account now? b) How much money do you have in your account if you have left the money there for 25 years? c) What if you left the money until your 65th birthday? d) What happens if she has put the money into an account that earns 6% interest rate. How much money do you have in your account after 18, 25 and 65 years? Use the information above to explain how even a slight change in the interest rate can make a significant difference in accumulating savings over the long run. (use vocabulary: compound interest, time period)

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You are given the following information on the Consumer Price Index (CPI) in three countries: US Japan UK Dec. 2010 138 1205 442 Dec. 2015 163 1335 557 In December 2010 the Yen/$ spot rate was Â¥83.0025/$, and the $/Â£ ex-rate was $1.5595/Â£. a. Calculate the average, annual compounded inflation rate in each country from Dec. 2010 to Dec. 2015, using a time value of money calculation on your financial calculator, based on the formula: PV (1 + i)n = FV. Round to 2 decimal places, e.g. 3.45%. b. If relative Purchasing Power Parity (PPP) is holding, should the USD have appreciated or depreciated against the Yen and Pound during this period? Why? How much per year for each currency? Explain in an essay with full sentences and use the relative PPP equation (from the lecture notes) in your answer: e = %INFus - %INFF c. If relative PPP holds, the ex-rates as quoted above will change annually according to the difference in inflation rates. In that case, what should the Â¥/$ and $/Â£ ex-rates (do not reverse the ex-rates) have been in December 2015? Assume that the exchange rate changes annually at a rate equal to the difference in inflation rates, and use a time value of money calculation on your financial calculator, based on the formula PV (1 + i)n = FV.

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