Time Value of Money - Calculator Section

Question 1

What is an annuity?

Answer 1

• simply means a cash flow

Question 2

What is present value?

Answer 2

• refers to taking a future cash flow and comparing it apples to apples by understanding its value today

Question 3

What is Discount Rate?

Answer 3

• They are frequently used in financial calculations. It is basically an assumption about interest rates.

“Discounted to Todays dollars”, which simply means in the absence of an interest rate.

DR are usually more conservative than interest rates

Question 4

Yield or Return

Answer 4

• FOr the purpose of FP these terms are interchangeable. The idea is how much farther ahead is the investor after some period of time from today?

Question 5

Worksheet

Answer 5

-strongly recommended you use to make calcs

Question 6

Calc Functions

Answer 6

N = number of periods, eg 5 years = 5’ N’
- however we will typically use the xP/Y function above it rather than “N”

xP/Y = This button is a short cut for anything other than “annual”
EG: we have a time period of 5 years but the amounts are compounding monthly we would use this button… sooo this button REALLY means “time periods per year” - you would hit 5’ 2ND’ x/PY’

I/Y = interest rate, discount rate, yield or return - the rate in calc is always annual

PV = present value

PMT = Be aware of positive or negative cash flows (+|-) below #3.

CPT = top left, necessary to solve

P/Y = similar to using xP/Y and refers to periods per year - investor investing once per year would have a P/Y of 1.

C/Y = change if an investment compounds daily for example

Question 7

How to switch from BEG to END mode back and forth

Answer 7

2ND’ BGN’ 2ND’ SET

Question 8

What is the Snowball Method?

Answer 8

• Assumption that we only have so much money to spend and it is wise to take the lowest owing debt first (event though it doesn’t have the highest interest rate) , get rid of it fast and then take the money you were paying on that debt and roll it together with the current payment youre making on another higher balance one

Question 9

TMV Annuity Questions - BEG or END mode?

Answer 9

Exam Tip:Read the questions carefully, so you can recognize the “indicator words” used on the exam.

Indicator words give you clues and tell you when you need to adjust your calculator to BEG or END MODE!Indicator words:

Annuity Due, set your calculator to BGN if you read: payments on your birthday, anniversary, at the beginning of the year, on January 1st, starting today, etc.

Ordinary Annuity, set your calculator to END if you read: at the end of the year, starting next month, etc.

Question 10

How do you calculate Net Cash Flows

Answer 10

Take all the income and minus all the expenses.

Hint: interest income counts
Hint: do not include any other savings accounts like an RRSP or LOC value, only the payment