HS 300 Financial Planning: Process and Environment

1
HS 300 Financial PlanningProcess and Environment

• Chapter 6
• Time Value of Money
• Basic Concepts and Applications

2
Learning Objectives
3
Learning Objectives

• 1. Describe several basic concepts underlying the
  time value of money.
• 2. Calculate future value of single sum, and
  calculate the number of periods or the interest
  rate in future-value-of-a-single-sum problems.

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Learning Objectives

• 3. Calculate the present value of single sum, and
  calculate the number of periods or interest rate
  in present-value-of-a-single-sum problems.
• 4. Calculate future value of an annuity or an
  annuity due, and solve sinking fund problems.

5
Learning Objectives

• 5. Calculate present value of annuity or annuity
  due, and solve debt service/ capital-sum-liquidati
  on problems.
• 6. Create an amortization schedule for a level
  payment loan, and delineate the level payment
  into principal and interest components.

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Learning Objectives

• 7. Solve single sum and annuity problems with
  five values/variables.

7
Discussion Break

• Risk-based pricing has become an important part
  of determining the interest rate on a loan. For
  the following loans, at what interest rate would
  you advise a client to avoid the debt versus take
  out the loan?
• (A) First mortgage (C) Auto loan
• (B) Home equity line of credit (D) Credit card

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Present Value of a Single Sum (PVSS)
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Present Value of a Single Sum (PVSS)

• Problem
• FV 1,000
• I/YR 4
• N 5
• PV ?

• Keystrokes
• 1000,FV
• 4, I/YR
• 5, N
• PV
• 821.93

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PVSS Solving for N

• Problem
• FV 1,000
• I/YR 6
• PV -800
• N ?

• Keystrokes
• 1000, FV
• 6, I/YR
• 800, /-, PV
• N
• 3.83

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PVSS Solving for I/YR

• Problem
• FV 1,000
• PV -800
• N 5
• I/YR ?

• Keystrokes
• 1000, FV
• 800, /-, PV
• 5, N
• I/YR
• 4.56

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Future Value of a Single Sum (FVSS)
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Future Value of a Single Sum (FVSS)

• Problem
• PV 1,000
• I/YR 7
• N 20
• FV ?

• Keystrokes
• 1000,/,PV
• 7, I/YR
• 20, N
• FV
• 3,869.68

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FVSS Solving for N

• Problem
• PV 10,000
• I/YR 5
• FV 20,000
• N ?

• Keystrokes
• 10000, /, PV
• 5, I/YR
• 20000, FV
• N
• 14.21

15
FVSS Solving for I/YR

• Problem
• PV 10,000
• FV 20,000
• N 10
• I/YR ?

• Keystrokes
• 10000, /, PV
• 20000, FV
• 10, N
• I/YR
• 7.18

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Present Value of an Annuity (PVA)
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Present Value of an Annuity (PVA)

• Annuity is periodic cash flow stream
• Dollar amount constant over time
• Set number of periods (not in perpetuity)
• Ordinary annuity has cash flows at end of each
  period
• Annuity due has cash flows at beginning of each
  period
• 4 or 5 variable problem with 1 unknown

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PVA

• Problem
• PMT 1,000
• N 20
• I/YR 5
• PV (?)

• Keystrokes
• 1000, PMT
• 20, N
• 5, I/YR
• PV
• 12,462.21

19
Discussion Break

• Give a real-world example of an annuity due and
  an ordinary annuity.

20
Present Value of an Annuity Due (PVAD)
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Present Value of an Annuity Due (PVAD)

• Problem
• PMT 1,000
• N 20
• I/YR 5
• PV (?)

• Keystrokes
• Set calculator to BEGIN by (orange), (BEG/END)
• 1000, PMT
• 20, N
• 5, I/YR
• PV
• 13,085.32

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Future Values of Annuity and Annuity Due
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Future Value of an Annuity (FVA)

• Problem
• PMT 3,000
• I/YR 6
• N 30
• FV ?

• Keystrokes
• 3,000,/ ,PMT
• 6, I/YR
• 30,N
• FV
• 237,174.56

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FV Annuity Due (FVAD)

• Problem
• PMT 3,000
• I/YR 6
• N 30
• FVAD ?

• Keystrokes
• orange,BEG/END sets the calculator to BEGIN
• 3,000,/ ,PMT
• 6, I/YR
• 30,N
• FV
• 251,405.03

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Amortization
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Amortization Schedule

• Loan payments on self-amortizing loans can be
  broken down into principal and interest
  components
• In early years of loan, more of payment goes
  towards interest than principal in later years,
  opposite is true
• Use financial calculator to determine breakdown
  for any loan payment

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Amortization Breakdown (AMORT)

• Problem
• 12,000, PV
• 5, N
• 6, I/YR
• PMT
• 2,848.76
• Find the interest/principal
• breakdown of the third loan
• payment and the resulting loan
• balance

• Keystrokes (after calc. pmt)
• 3,INPUT,orange, AMORT
• 2,391.87 principal
• 456.89 interest
• 5,222.88 balance

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Chapter Six Review
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Chapter Six Review

• Move money through time either by discounting
  back to today or compounding out to a future date
• Problems will specify all but one of variables,
  and financial calculator will solve for unknown
  variableregardless of what it is