Financial Calculations Notes (Chapter 5-6)

Year 0 = 1,000 Year 1 = 1,000 × (1.1) = 1,100 Year 2 = 1,100 × (1.1) = 1,210 = 1,000 × (1.1) 2 = 1,210 Year 3 = 1,210 × (1.1) = 1,331 = 1,000 × (1.1)3 = 1,331... Year 15 = = 1,000 × (1.1)15 = 4,177.25 Using the financial calculator: 1) Clear Memory 2) Set it up to 1 P/Y FV = ? 4,...

Year 0 = 1,000 Year 1 = 1,000 × (1.1) = 1,100 Year 2 = 1,100 × (1.1) = 1,210 = 1,000 × (1.1) 2 = 1,210 Year 3 = 1,210 × (1.1) = 1,331 = 1,000 × (1.1)3 = 1,331... Year 15 = = 1,000 × (1.1)15 = 4,177.25 Using the financial calculator: 1) Clear Memory 2) Set it up to 1 P/Y FV = ? 4,177.25 PV = - 1000 PMT =0 I = 10 N = 15 1- I is entered as an annual percentage 2- N is the number of periods of time and/or the number of Payments (PMT) 3- Cash inflows are entered as positive numbers, Cash outflows are entered as negative numbers 1) Clear Memory 2) Set it up to 1 P/Y FV =0 PV = 4,212.36 PMT = -1000 I =6 N =5 1) Clear Memory 2) Set it up to 1 P/Y 3) Set it up to Begin FV = 5,975.32 PV =0 PMT = -1000 I =6 N =5  Retirement You graduate from college at the age of 25. You land your first job and decide to start saving for your retirement at the end of each month the amount of $417 (417*12=5004 total for the year). You invest your money in an equity index fund and you hope to make an average annual rate of return of 12%. What is the value of your retirement account if you keep the same investment strategy and retire at the age of 65. 1) Clear Memory 2) Set it up to 12 P/Y FV = 4,905,910.14 PV =0 PMT = - 417 I = 12 N = 40*12= 480  Retirement (continued) After you retire at the age of 65, you decide to go with a safer investment strategy and you move your retirement to a balanced equity/bond fund with an average annual rate of return of 9%. You decide to withdraw from your retirement account the sum of $30,000 at the end of each month to pay for your living expenses. If you live till the age of 85, how much you will have left in your retirement account? If any? 1) Clear Memory 2) Set it up to 12 P/Y FV = 9,443,751.30 PV = - 4,905,910.14 PMT = + 30,000 I =9 N = 20*12= 240  Credit Card You have a balance of $6,000 in your credit card. You commit to send a $300 monthly payment and no more charges on the card till it is payed off. If the credit card company is charging you 17.99% annual interest, how many years it will take you to pay it off? Answer: 1) Clear Memory 2) Set it up to 12 P/Y FV =0 PV = 6000 PMT = -300 I = 17.99 N = 23.95 (months) 23.95/12 = 1.996 years  Mortgage You buy a house for $300,000. You pay down 20% and you apply for a 30 year fixed rate mortgage at an annual rate of 3.5%. How much is your monthly mortgage payment? Answer: You borrow from the bank 300,000*0.8 = 240,000 1) Clear Memory 2) Set it up to 12 P/Y FV =0 PV = 240,000 PMT = - 1,077.71 I = 3.5 N = 30*12= 360