Says Himanshu Kohli, Founder Partner, Client Associates: "Large average account sizes and low client to employee ratios allows a great deal of focus and attention on each family." A multi-family office also helps families avoid the three-generation trap. Without effective planning, as many as 70 per cent of wealthy families actually lose control of their wealth by the end of the second generation, and 90 per cent by the end of the third, according to a study last year by the Williams Group, a US-based family wealth consulting firm. Says Viraj Ghatlia, VP (Strategic Solutions), ASK Family Office: "One of the reasons why clients choose family office services is for the expertise that they provide in protecting wealth from the viewpoint of it being successfully transferred to the next generation."
This wealth transfer to the next generation can be done in many ways, says Ghatlia, the most common route being the creation of trusts that are irrevocable in nature, house sizable amount of assets and are managed actively by the trustees who carry out the objectives as stated in the trust deed.
"The trust may also appoint an investment advisor to provide investment advice on the assets of the trust," notes Ghatlia.
Karpe says families are increasingly paying attention to smooth transfer of wealth from one generation to another. "In India, a lot of younger generations are inheriting family businesses. Let's suppose a family wants to make a will. We, as an external dispassionate party, come into the picture, and get involved with each member. Following our analysis and questioning, we help families drive the process," she says.
Says Himanshu Kohli, Founder Partner, Client Associates: "Large average account sizes and low client to employee ratios allows a great deal of focus and attention on each family." A multi-family office also helps families avoid the three-generation trap. Without effective planning, as many as 70 per cent of wealthy families actually lose control of their wealth by the end of the second generation, and 90 per cent by the end of the third, according to a study last year by the Williams Group, a US-based family wealth consulting firm. Says Viraj Ghatlia, VP (Strategic Solutions), ASK Family Office: "One of the reasons why clients choose family office services is for the expertise that they provide in protecting wealth from the viewpoint of it being successfully transferred to the next generation."
This wealth transfer to the next generation can be done in many ways, says Ghatlia, the most common route being the creation of trusts that are irrevocable in nature, house sizable amount of assets and are managed actively by the trustees who carry out the objectives as stated in the trust deed.
"The trust may also appoint an investment advisor to provide investment advice on the assets of the trust," notes Ghatlia.
Karpe says families are increasingly paying attention to smooth transfer of wealth from one generation to another. "In India, a lot of younger generations are inheriting family businesses. Let's suppose a family wants to make a will. We, as an external dispassionate party, come into the picture, and get involved with each member. Following our analysis and questioning, we help families drive the process," she says.
Says Himanshu Kohli, Founder Partner, Client Associates: "Large average account sizes and low client to employee ratios allows a great deal of focus and attention on each family." A multi-family office also helps families avoid the three-generation trap. Without effective planning, as many as 70 per cent of wealthy families actually lose control of their wealth by the end of the second generation, and 90 per cent by the end of the third, according to a study last year by the Williams Group, a US-based family wealth consulting firm. Says Viraj Ghatlia, VP (Strategic Solutions), ASK Family Office: "One of the reasons why clients choose family office services is for the expertise that they provide in protecting wealth from the viewpoint of it being successfully transferred to the next generation."
This wealth transfer to the next generation can be done in many ways, says Ghatlia, the most common route being the creation of trusts that are irrevocable in nature, house sizable amount of assets and are managed actively by the trustees who carry out the objectives as stated in the trust deed.
"The trust may also appoint an investment advisor to provide investment advice on the assets of the trust," notes Ghatlia.
Karpe says families are increasingly paying attention to smooth transfer of wealth from one generation to another. "In India, a lot of younger generations are inheriting family businesses. Let's suppose a family wants to make a will. We, as an external dispassionate party, come into the picture, and get involved with each member. Following our analysis and questioning, we help families drive the process," she says.
www.finstructor.in info@finstructor.in +91 9920222792 Presented by: Aditya Ahluwalia www.finstructor.in Overview Time value of money Interest rates Future Value and Present Value of a single sum Annuities www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Other applications of TVM functions Funding obligations Amortizing a loan Compounding frequencies Time Value of Money 100 dollars today is worth more than 100 dollars to be received one year from now www.finstructor.in info@finstructor.in +91 9920222792 How much more? By the amount of interest that can be earned Interest rates Interest rate can be interpreted as > Required rate of return to make an investor lend funds > Discount rate should adequately account for the risk of the investment www.finstructor.in info@finstructor.in +91 9920222792 > Opportunity cost of current consumption Nominal risk-free rate = real risk-free rate + expected inflation rate Default risk: The risk that a borrower will not make the promised payments in a timely manner. Liquidity risk: The risk of receiving less than fair value if the investment Interest rates www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Liquidity risk: The risk of receiving less than fair value if the investment must be sold for cash quickly. Maturity risk: Longer term investments can be more volatile than shorter term investments and require a maturity risk premium. required interest rate on a security = nominal risk-free rate + default risk premium + liquidity premium + maturity risk premium Example: FV of a single sum Calculate the FV of a $250 investment at the end of five years if it earns an annually compounded rate of return of 9%. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 N = Number of compounding periods I/Y = Interest rate per period PV = Present Value PMT = Payment per period FV = Future Value N = 5; UNDERSTANDING THE FINANCIAL CALCULATOR www.finstructor.in info@finstructor.in +91 9920222792 N = 5; I/Y = 9; PV = 250; PMT = 0; CPT FV = -$384.66 Example: PV of a single sum Given a discount rate of 8.5%, calculate the PV of a $800 cash flow that will be received in seven years. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Example: FV of an ordinary annuity What is the future value of an ordinary annuity that pays $250 per year at the end of each of the next 6 years, given the investment is expected to earn a 9% rate of return? 0 1 2 3 4 5 6 250 250 250 250 250 250 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: N = 6; I/Y = 9; PMT = -250; CPT FV = $1880.83 FV of an Ordinary Annuity 0 1 2 3 4 5 6 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 250 250 250 250 250 250 FV 6 = $1880.83 Example: PV of an ordinary annuity What is the PV of an annuity that pays $100 per year at the end of each of the next 15 years given an 8% discount rate? www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: N = 15; I/Y = 8; PMT = -100; FV = 0; CPT PV = $855.94 Example: PV of an ordinary annuity beginning later than t = 1, What is the present value of four $200 end-of-year payments if the first payment is to be received three years from today and the appropriate rate of return is 7%? www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: The time line for this cash flow stream is shown in the following figure. PV of an Annuity Beginning at t = 3 PV 0 = $591.68 PV 2 = $677.44 0 1 2 3 4 5 6 $200 $200 $200 $200 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Step 1: Find the present value of the annuity as of the end of year 2 (PV 2 ) Input the relevant data and solve for PV 2 N = 4; I/Y = 7; PMT = -200; FV = 0; CPT PV = PV 2 = $677.44 Step 2: Find the present value of PV 2 Input the relevant data and solve for PV 0 N = 2; I/Y = 7; PMT = 0; FV = -677.44; CPT PV = PV 0 = $591.68 Example: PV of a bonds cash flows A bond will make coupon interest payments of 75 euros (7.5% of its face value) at the end of each year and will also pay its face value of 1,000 euros at maturity in five years. If the appropriate discount rate is 9%, what is the present value of the bonds promised cash flows? 75 75 75 75 75 0 1 2 3 4 5 + 1000 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer Cash flows for a 5-year, 9%, 1,000 euro bond N = 5; PMT = 75; I/Y= 9; FV = 1,000; CPT PV = -941.65 75 75 75 75 75 0 1 2 3 4 5 Payment are an ordinary maturity The maturity of the payment is a single future value 1000 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 N = 5; PMT = 75; I/Y= 9; FV = 1,000; CPT PV = -941.65 With a yield to maturity of 9%, the value of the bond is 941.65 euros. Note that the PMT and FV must have the same sign, since both are cash flows paid to the investor (paid by the bond issuer). The calculated PV will have the opposite sign from PMT and FV. Example: FV of an annuity due What is the future value of an annuity that pays $150 per year at the beginning of each of the next three years, commencing today, if the cash flows can be invested at an annual rate of 7.5%? 0 1 2 3 +150 +150 +150 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: To solve this problem, put your calculator in the BGN mode ([2nd] [BGN] [2nd] [SET] [2 nd ] [QUIT] on the TI ), then input the relevant data and compute FV. N = 3; I/Y = 7.5; PMT = -150; CPT FV = $520.93 FV of an Annuity Due 0 1 2 3 +150 +150 +150 FV = $520.93 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Alternatively, we could calculate the FV for an ordinary annuity and multiply it by (1 + I/Y). Leaving your calculator in the END mode, enter the following inputs: N = 3; I/Y = 7.5; PMT = -150; CPT -> FVA O = $484.59 FVA D = FVA O * (1 + I/Y) = 484.59 * 1.075 = $520.93 +150 +150 +150 FV 3 = $520.93 Example: PV of an Annuity Due Given a discount rate of 7%, what is the present value of a 3-year annuity that makes a series of $1200 payments at the beginning of each of the next three years, starting today? 0 1 2 3 +1200 +1200 +1200 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: First, lets solve this problem using the calculators BGN mode. Set your calculator to the BGN mode ([2nd] [BGN] [2nd] [SET] [2nd] [QUIT] on the TI or [g] [BEG] on the HP), enter the relevant data, and compute PV. N = 3; I/Y = 7; PMT = -1200; CPT PVA D = $3369.62 PV for an Annuity Due 0 1 2 3 +1200 +1200 +1200 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 PV=$4127.93 Alternatively, this problem can be solved by leaving your calculator in the END mode. First, compute the PV of an ordinary 3-year annuity. Then multiply this PV by (1 + I/Y). To use this approach, enter the relevant inputs and compute PV. N = 3; I/Y =- 7; PMT = -1200; CPT PVA O = $3149.17 PVA D = PVA O * (1 + I/Y) = $3149.17 * 1.07 = $3369.62 +1200 +1200 +1200 Example: PV of a perpetuity Assume the preferred stock of Alstom Corporation pays $8.5 per year in annual dividends and plans to follow this dividend policy forever. Given an 7.5%rate of return, what is the value of Alstoms preferred stock? www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 8.50 $113.33 0.075 perpetuity PV = = Answer: Example: Rate of return for a perpetuity Using the Alstom preferred stock described in the preceding example, determine the rate of return that an investor would realize if she paid $85.00 per share for the stock. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 8.50 / 0.10 10.00% 85.00 perpetuity PMT I Y PV = = = = Answer: Example: Computing an annuity payment needed to achieve a given FV At an expected rate of return of 15%, how much must be deposited at the end of each year for the next 10 years to accumulate $10,000? www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: N = 10; I/Y = 15; FV = +$10,000; CPT PMT = -$492.52(ignore sign) Example: Computing the number of years in an ordinary annuity Suppose you have a $3,000 sum earning a 6% return. How many annual end-of-year $500 withdrawals can be made? www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: I/Y = 6; PMT = 500; PV = -3,000; CPT N = 7.66 years Example: Funding a retirement plan Assume an investor wants to retire in 10 years at the age of 60. She expects to earn 12% on her investments prior to her retirement and 8% thereafter. How much must she deposit at the end of each year for the next 10 years in order to be able to withdraw $15,000 per year at the beginning of each year for 20 years after retirement? www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Example: Calculating the rate of compound growth Sales at Acme, Inc., for the last five years (in millions) have been 3.2, 4.7, 5.8, 7.2, 8.6. What is the compound annual growth rate of sales over the period? www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: The five years of sales represent four years of growth. Mathematically, the compound annual growth rate of sales is (8.6/3.2) 1/4 -1 = 28.04%. OR FV = 8.6, PV = - 3.2, N = 4, CPTI/Y = 28.04% Note that if sales were 3.2 and grew for four years at an annual compound rate of 28.04%, they would grow to 3.2 (1.2804) 4 = 8.6. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Example: Constructing an amortization schedule Construct an amortization schedule to show the interest and principal components of the end-of-year payments for a 10%, 5-year, $35,000 loan. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Amortization Table Period Beginning Balance Payment Interest Component (1) Principal Component (2) Ending Balance (3) 1 $35,000.00 $9,232.91 $3,500.00 $5,732.91 $29,267.09 2 $29,267.09 $9,232.91 $2,926.71 $6,306.20 $22,960.89 3 $22,960.89 $9,232.91 $2,296.09 $6,936.82 $16,024.07 4 $16,024.07 $9,232.91 $1,602.41 $7,630.50 $8,393.56 www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 5 $8,393.56 $9,232.91 $839.36 $8,393.55 $0.00 Example: Computing EARs for a range of compounding frequencies Using a stated rate of 8%, compute EARs for semiannual, quarterly, monthly, daily and continuous compounding. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Example: Computing EARs for a range of compounding frequencies Using a stated rate of 8%, compute EARs for semiannual, quarterly, monthly, daily and continuous compounding. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: EAR with: semiannual compounding = (1 + 0.04) 2 - 1 quarterly compounding = (1 + 0.02) 4 - 1 monthly compounding = (1 + 0.00667) 12 - 1 daily compounding = (1 + 0.0002192) 365 - 1 1.08160 -1 = 0.08160 = 8.160% 1.08243 -1 = 0.08243 = 8.243% 1.08304 -1 = 0.08304 = 8.304% 1.08328 -1 = 0.08328 = 8.328% Notice here that the EAR increases as the compounding frequency increases. The limit of shorter and shorter compounding periods is called continuous compounding. To convert an annual stated rate to the EAR with continuous compounding, we use the formula e r - 1 = EAR. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 For 8%, we have e 0.08 - 1 = 8.3287%. The keystrokes are 0.08 [2nd] [e x ] [-] 1 [=] 0.0832871. Example: FV of a single sum using monthly compounding Compute the FV of $7,000 today, five years from today using an interest rate of 10%, compounded monthly. www.finstructor.in info@finstructor.in +91 9920222792 www.finstructor.in info@finstructor.in +91 9920222792 Answer: N = 5 * 12 = 60; I/Y = 10 / 12 = 0.83333; PV = -$7,000; CPT FV = $11,516.93 N = Number of compounding periods I/Y = Interest rate per period PV = Present Value PMT = Payment per period FV = Future Value www.finstructor.in info@finstructor.in +91 9920222792