FINE 4050 Chapter 1-12: Personal-Finance-Notes-1 (1)

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olivewombat117

16 Feb 2017

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Interest is the cost of borrowing; where compounding is the number of times in a year interest is calculated and added to the principal of the loan. The higher the frequency of your compounding, the more money you will receive at the end of your investment horizon. If you invest for n years at an interest rate of i% p. a. , compounded m times per year, at the end of n years, you will receive : (1 + Rate of return (valuation rate): the interest rate or return rate on a loan or investment respectively; the valuation rate links the pv and fv together. Present value (pv): the current worth of an amount of money or sequence of cash flows. Future value (fv): the value of an amount of money or sequence of cash flows at some specified time in the future: , = (1 + )8.

Related Questions

Compounding frequency and time value: You plan to invest $2,000 in an individual retirement arrangement (IRA) today at a nominal annual rate of 8%, which is expected to apply to all future years.

a. How much will you have in the account at the end of 10 years if interest is compounded (1) annually, (2) semiannually, (3) daily (assume 365-day year), and (4) continuously?

b. What is the effective annual rate (EAR) for each compoundings period in part a?

c. How much greater will your IRA balance be at the end of 10 years if interest is compounded continuously rather than annually?

d. How does the compounding frequency affect the future value and effective annual rate for a given deposit? Explain in terms of your findings in part a throughc.

ceruleanmosquito93

Use a calculator to solve all quantitative problems, and be sure to show calculator format!!!

(n, I, pmt, pv, fv CFo,I,CF1, CF2â¦.)

8) Three years ago a company had sales of $300,000. Now sales are $1,000,000. At what rate have

sales been growing?

9) Define each of the following:

a) Quoted rate (APR)

b) Periodic rate

c) Effective annual rate (EAR)

10) What are the following Effective Annual Rates (EAR) for 12%:

a) Compounded semiannually?

b) Compounded quarterly?

c) Compounded daily?

11) What would the value of $500 be after 4 years, assuming a return of 8% per year:

a) with semiannual compounding?

b) with quarterly compounding?

12)A. You plan to invest in a preferred stock issue that pays a $60 dividend at the end of each year. Based

on market conditions, you want to get a 5% return. What are you willing to pay for this security?

12)A You want to buy a car today!! The used car you are looking at costs $21,500. The car dealer will

charge you 5% interest on the three year car loan you need. You will be borrowing the whole $21,500. What will your car payment be, if you will make monthly payments?

13. Your company has invested $2500 in a vending machine today. You expect the machine to last 10 years and to produce the following after tax cash flows per year:

Year 1 $100

Year2 $250

Year 3 $250

Year 4 $300

Year 5 $300

Year 6 $300

Year 7 $300

Year 8 $300

Year 9 $350

Year 10 $350

If you have a required return on your investment of 7%, did you pay too much for the vending machine?

31.

You are valuing an investment that will pay you $25,000 per yearfor the first 6 years, $29,000 per year for the next 11 years, and$55,000 per year the following 13 years (all payments are at theend of each year). Another similar risk investment alternative isan account with a quoted annual interest rate of 12.00% withmonthly compounding of interest. What is the value in today'sdollars of the set of cash flows you have been offered?

FINE 4050 Chapter 1-12: Personal-Finance-Notes-1 (1)

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