Chapter 6 Pt 1

Question 1

Annuity

Answer 1

Finite number of payments made at regular intervals.

Question 2

Annuity vs Annuity Due

Answer 2

Annuity due: payment is at the beginning of the period, not the end.

PV: Annuity due > Ordinary annuity

Question 3

If all is the same; which has the higher PV? Ordinary annuity, or annuity due?

Answer 3

Annuity due

Question 4

28/36 rule

Answer 4

Your mortgage payment shouldn’t be more than 28% of your monthly pre-tax income and 36% of your total debt.

Question 5

5 steps to know what house you can afford:

Answer 5

1) how much in my account?
2) monthly income x 28% = max monthly payment
3) use 2 to calculate loan amount (BA II plus)
4) how much would I have in my account after paying the initiation fee?
5) loan amount + step 4 = max house value you can afford

Question 6

Ordinary annuity value * (1+ r) = ?

Answer 6

Annuity due value
- works for PV and FV

Question 7

Steps for differed annuity problems:

Answer 7

1) time travel to the period before the first payment
2) calculate the PV at that period
3) use that value as the FV for calculating the PV(0)