TODAY at BULLET Chapter 2 TVM Continued
TODAY at BULLET Chapter 2 TVM Continued
TODAY at BULLET Chapter 2 TVM Continued
TODAY:
compounding, EAR)
PROBLEM 8 (Chapter 2)
You want to buy a car, and a local bank will lend you
$20,000. The loan would be fully amortized over 5 years (60
months), and the nominal interest rate would be 12 percent,
with interest paid monthly. What would be the monthly loan
payment? What would be the loan’s EAR?
N = 60
I/Y = 1
PV = 20,000
FV = 0
CPT PMT = -444.89
1
Now, the Effective Annual Rate (EAR) is given by the
following formula:
⎛ ⎞
⎜⎜1 + NOM ⎟⎟
M
I
EAR = ⎝ M ⎠ – 1.0 = (1.01) – 1.0 = 12.68%
12
PROBLEM 22 (Chapter 2)
Jan sold her house on December 31 and took a $10,000
mortgage as part of the payment. The 10-year mortgage has
a 10 percent nominal interest rate, but it calls for semiannual
payments beginning next June 30. Next year, Jan must
report on Schedule B of her IRS form 1040 the amount of
interest that was included in the 2 payments she received
during the year.
N = 10 x 2 = 20
I/Y = 10/2 = 5
PV = -10,000
FV = 0
CPT PMT = 802.43
2
The first payment included the interest payable on the whole
principal ($10,000) for the six month period – i.e. 0.05 x
$10,000 = $500. The second payment included the interest
payable on the outstanding balance ($10,000 – ($802.43-
$500) = $9,697.57) for the six month period – i.e. 0.05 x
$9,697.57= $484.88
PROBLEM 25 (Chapter 2)
Find the future values of the following ordinary annuities:
N = 2 x 5 = 10
I/Y = 12/2 = 6
PV = 0
PMT = -400
CPT FV = 5,272.32
N = 4 x 5 = 20
I/Y = 12/4 = 3
PV = 0
PMT = -200
CPT FV = 5,374.07
4
First, note that the money stays in the account longer in (b)
than in (a). For instance, the first payment gets deposited 3
months sooner in (b) than in (a)
PROBLEM 26 (Chapter 2)
You have saved $4,000 for a down payment on a new car.
The largest monthly payment you can afford is $350. The
loan would have a 12 percent APR based on end of month
payment. What is the most expensive car you could afford if
you finance it for 48 months? For 60 months?
5
Now, assuming a 60-month loan…
N=60
I/Y = 12/1 = 1
PMT = -350
FV = 0
CPT PV = 15,734.26
PROBLEM 29 (Chapter 2)
Your firm sells for cash only, but it is thinking of offering
credit, allowing customers 90 days to pay. Customers
understand the time value of money, so they would wait and
pay on the 90th day. To carry these receivables, you would
have to borrow funds from your bank at a nominal rate of 12
percent, daily compounding based on a 360-day year. You
want to increase your prices by exactly enough to offset your
bank interest cost. To the closest whole percentage point, by
how much should you raise your product prices?
6
PROBLEM 36 (Chapter 2)
a. You plan to make 5 deposits of $1,000 each, once every 6
months, with the first payment being made in 6 months. You
will then make no more deposits. If the bank pays 4 percent
nominal interest, compounded semiannually, how much
would be in your account after 3 years?
Your last deposit will take place 2.5 years from now. The
balance of your account in 2.5 years will be…
N=5
I/Y = 4/2 = 2
PV = 0
PMT = -1000
CPT FV = 5,204.04
7
1. Find the PV of $10,000 one year from today
PV = $10,000/1.014 = $9,609.80
(remember, we assume quarterly compounding)
N=2
I/Y = 1
PV = 9609.80
FV = 0
CPT PMT = -4877.09
PV = $10,000/1.012 = $9,802.96
N=2
I/Y = 1
PV = 0
FV = 9802.96
CPT PMT = -4,877.09