Time Value of Money Application Questions

Introduction

• Presenter: Derek
• Topic: Application questions of time value of money

Question 1: Deposits to Accumulate a Future Sum

• Objective: Save $30,000 for a house down payment in 5 years
• Conditions: Earn 6% on deposits
• Financial Calculator Setup:
  • Set annually compounding
  • Set end mode
  • Key in FV = $30,000, N = 5, IY = 6
  • Press PMT to find the annual deposit
• Note: Negative PMT indicates the amount you need to pay annually

Question 2: Loan Amortization

• Objective: Borrow $6,000 at 10% interest, repay over 4 years
• Financial Calculator Setup:
  • Set annually compounding
  • Set end mode
  • Key in PV = $6,000, N = 4, IY = 10
  • Press PMT for annual payment amount
• Amortization Schedule:
  • Loan payment remains the same annually
  • Interest = Beginning of year principal × 10%
  • Principal Payment = Loan Payment - Interest
  • End-of-Year Principal = Beginning of Year Principal - Principal Payment

Question 3: Monthly Housing Loan Payment

• Objective: Borrow $100,000 at 7% fixed interest for 30 years
• Financial Calculator Setup:
  • Set monthly compounding
  • Set end mode
  • Key in PV = $100,000, IY = 7%, N = 360
  • Press PMT for monthly payment amount

Question 4: Growth Rates

• Objective: Determine growth rate of cash flows from 2018 to 2022
• Financial Calculator Setup:
  • Set annually compounding
  • Set end mode
  • Key in PV = $1,250, FV = -$1,520, N = 4
  • Press Rate to find the growth rate (5.01%)

Question 5: Interest Rate

• Objective: Determine interest rate for a loan of $2,000, repaid with equal payments of $514.14 over 5 years
• Financial Calculator Setup:
  • Set annually compounding
  • Set end mode
  • Key in PV = $2,000, PMT = -$514.14, N = 5
  • Press Rate to find loan interest rate (9%)

Question 6: Finding an Unknown Number of Periods

• Objective: Determine years for $1,000 to grow to $2,500 at 8% interest
• Financial Calculator Setup:
  • Set annually compounding
  • Set end mode
  • Key in PV = -$1,000, FV = $2,500, IY = 8%
  • Press Periods to find duration (11.91 years)

Question 7: Retirement Fund

• Objective: Invest $400 monthly at 12% annual interest for 30 years
• Financial Calculator Setup:
  • Set monthly compounding
  • Set end mode
  • Key in PMT = -$400, IY = 12%, N = 360
  • Press FV for total accumulation

Question 8: Retirement Fund for Specific Purpose

• Objective: Save to travel around the world, requires $250,000/year for 5 years
• Financial Calculator Setup:
  • Find PV of spending:
    • Annually compounding, beginning mode
    • Key in PMT = -$250,000, N = 5, IY = 10
    • Press PV = $1.042 million
  • Use PV as FV for savings:
    • Monthly compounding, end mode
    • Key in FV = $1.042 million, N = 360, IY = 10
    • Press PMT for monthly savings

Question 9: Savings for Specific Purpose

• Objective: Save for a master's degree, tuition $3,000 every 3 months
• Financial Calculator Setup:
  • Find PV of spending:
    • Quarterly compounding, beginning mode
    • Key in PMT = -$3,000, IY = 6, N = 10
    • Press PV = $28,000
  • Use PV as FV for monthly savings:
    • Monthly compounding, end mode
    • Key in FV = $28,000, IY = 6, N = 60
    • Press PMT for monthly savings

Conclusion

• Wrap-Up: Thanks for watching, see you in the next video.