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Pg. 268 ST-2; ST-4 Pg. 270 6-6; 6-10 Pg. 271 6-12 Pg. 274 6-25
7, 020
8,126
FVn = PV(1+i)n
Option A 7,020 7,020/5,500 1.2764 1.27641/5 1.0500 i = 5,500(1+i)5 = (1+i)5 = (1+i)5 = (1+i) = (1+i) = 5%
Option B 8,126 = 5,500(1+i)8 8,126/5,500 = (1+i)8 1.4775 = FVIFi,8 Table Lookup 1.4775 = FVIF5%,8
8%
01
02
03
04
1,000
00
8%
04
1,000
a.
How much must you deposit on January 1, 2001, to have a balance of $1,000 on January 1, 2004? PV=FV[1/(1+i)n] PV PV PV = 1,000[1/(1+0.08)3] = 1,000[0.7938] = 793.83
00
8%
04
PMT 1,000 b. If you want to make equal payments to each January 1 from 2001 through 2004 to accumulate the $1,000, how large must each of the four payments be?
FVAn = PMT(FVIFAi,n)
00
8%
04
FV
c.
If your father were to offer either to make the payments calculated in part (b) ($221.92) or to give you a lump sum of $750 on January 1, 2001, which would you choose?
Input: Output:
-750
N I/Y PV
0 PMT
FV
944.78
You should take the payments of $221.92 (FV = $1,000) instead of the $750 on 1/1/01 which will only be worth $944.78.
00
?%
04
1,000
d. If you have on $750 on January 1, 2001, what interest rate, compounded annually, would you have to earn to have the necessary $1,000 on January 1, 2004? FV = PV(1+i)n
1,000 1,000/750 1.33331/3 1.1006 i = 750(1+i)3 = (1+i)3 = (1+i) = (1+i) =10.06%
00
?%
04
e.
-186.29 1,000.00 Suppose you can deposit $186.29 on each January 1 from 2001 through 2004, but you still need $1,000 on January 1, 2004. What interest rate, with annual compounding, must you seek out to achieve your goal? Input: 1,000
4
N I/Y Output:
19.99
0 -186.29 PV PMT
FV
00
8%
04 PMT 1,000
f.
To help you reach your $1,000 goal, your father offers to give you $400 on January 1, 2001. You will get a part-time job and make six additional payment of equal amounts each six months thereafter. If all of this money is deposited in a bank that pays eight percent, compounded semiannually, how large must each of the six payments be?
Part 1 Input:
400
0 PMT
FV
506.13 493.87
N I/Y PV
PMT 74.46
FV
00
8%
04
g. What is the effective annual rate being paid by the bank in part f? Effective Annual Rate = EAR = [1+(isimple/m)]m-1
Where: m = # of compounding periods per year EAR EAR = [1+(.08/2)]2-1 = 8.16%
Stream B:
CF
CFo= C01= F01= C02= F02= C03= F03=
CPT NPV
I = NPV CPT
Stream B:
CF
CFo= C01= F01= C02= F02= C03= F03=
CPT NPV
I = NPV CPT
N I/Y PV
-400 PMT
FV
Output:
5,272.32
N I/Y PV
FV
Output:
5,374.07
($32,974.69) ($7,974.69)
In Excel: Payment = PMT(rate,Nper,PV,FV,Type) Interest = IPMT(rate,Per,Nper,PV,FV) Principle = PPMT(rate,Per,Nper,PV,FV,Type) Balance = Loan Amount -Principal
($65,949.37) ($15,949.37)
In Excel: Payment = PMT(rate,Nper,PV,FV,Type) Interest = IPMT(rate,Per,Nper,PV,FV) Principle = PPMT(rate,Per,Nper,PV,FV,Type) Balance = Loan Amount -Principal
Input:
Output:
10
10 50,000 PMT
N I/Y PV
FV
8,137.27
Because the payments are spread out over a longer period of time, more interest must be paid. The total interest paid on the 10-year loan is $31,373, while the total for the 5-year loan is $15,949, however the same principal ($50,000) is repaid over a longer period of time so that the total payment per year is not doubled.
FV