Chapter 6 Flashcards
What does the I/YR button on the calculator mean?
Interest rate per year
What does the N key on the calculator mean?
Number of periods
What does the PV button on the calculator mean?
Present value
What does the FV button on the calculator mean?
Future value
Calculate FV of a single sum
Ex. 30k lump sum to invest today. Compound annual interest of 6%. What will the FV be in 5 years?
[SHIFT] C ALL
$30000 +/- PV (enters the PV. should be negative)
6 I/YR (interest rate)
5 N (number of years)
FV (shows solution) $40,147
Or
FV = PV * (1 + i)^n
Or
PV * FV factor
How is the effective interest calculated?
Nominal interest rate of 6
12 payments per year
[SHIFT] DISP 4 (4 decimals)
6 [SHIFT] NOM % (enters nominal rate)
12 [SHIFT] P/YR (sets 12 payments)
SHIFT EFF % (determines effective interest rate)
I want to have $15,000 to buy a boat in 5 years. I want to deposit money in a savings account earning 3% compound interest. How much do I have to deposit today?
(Present value)
$15,000 FV
3 I/YR
5 N
PV = $12,939
Phil wants to have $10k in 7 years to buy a jeep. He has $6,000 to deposit today. How much interest is needed?
Clear calculator -$6000 PV $10000 FV 7 N I/YR = 7.57
What is an annuity?
Constant cash flow amount saved or received
Annuity where payments are received at the end of each period?
Ordinary
Future value of annuity calculation:
Phil will deposit $1k, annually, for 4 years. First deposit will be made in one year.
If 5% compound interest, how much will be in account in 4 years?
1) Clear calculator
2) [SHIFT] BEG/END (if BEGIN is displayed)
3) 1000 +/- PMT (-$1k as payment)
4) 5 I/YR (int rate)
5) 4 N (4 years)
6) FV (solves $4310)
Present Value of Annuity
Phil will get a $5k ordinary annuity at end of each year for next 10 years. Assuming an interest rate of 5% what is the annuity worth now.
1) Make sure doesn’t display BEGIN
2) 5000 PMT
3) 5 I/YR
4) 10 N
5) PV ($38608)
Payment required (Phil needs to have $10,000,000 in 4 years to buy a mansion. He will make 4 annual deposits at the end of the year at 8% annual interest. How much do the deposits need to be?
1) Clear
2) make sure not set to BEG
3) 10000000 FV
4) 8 I/YR
5) 4 N
6) PMT (2,219,208)
Annuity in which payments are received at the beginning of each period. (Make sure to set calc to BEGIN mode)
Annuity due
Provide an example of an annuity due.
Amounts payable under life insurance
How can you concert the PV of an ordinary annuity to an annuity due?
Multiply ordinary annuity PV By (1+i)
How can you convert the PV of an annuity due to an ordinary annuity.
Divide by (1+i)
Present value of an annuity. Tom will get $5k at begin of year for 10 yrs. INT 5%. What is PV
Clear Make sure says BEG 5000 PMT 10 N 5 I/YR PV (40539)
A stream of payments that continues indefinitely. Ex. Dividends on preferred stock or real estate income.
Perpetuity
How to calculate perpetuity.
PV = payment / capitalization rate (int rate)
Phil wants to buy a lakefront vacation rental property. It will generate annual income of $12500 per year. Phil wants 14% return. What is current value of property?
89286
How is the present value of unequal cash flows determined?
If using a calculator which button is used to calculate multiple unequal cash flows?
Add the present values of the individual cash flows.
CFj to enter payments and NPV to get the value
What is the name for the present value of unequal payments?
Net present value
What does it mean if the NPV os positive?
The investment’s rate of return exceeds the discount rate.
Discount rate is 8%. What is the NPV of the following cash flow structure?
Initial: $250
End yr 1: $125
End yr 2: $100
End yr 3: $80
0 CFj 125 CFj 100 CFj 80 CFj 8 I/YR NPV = 260,351.57
If compounding occurs annually, the effective interest rate will be higher than/lower than/the same as the effective interest rate?
The same as
