ADVANCED APPLICATIONS€¦ · Module 3 Notes FOR EVERYONE FINANCE Application IV: Complicated...

Module 3 Notes FOR EVERYONEFINANCE

FINANCE FOR EVERYONE

ADVANCED APPLICATIONS

© All Rights Reserved Gautam Kaul 2016


Application I: A Loan for College

§ You plan to attend an in-state college and your parents will take out a loan of $100,000 at 6%. What are your yearly payments, given that you will have 5 years to pay back the loan?



Understanding How a Loan Works!

Year Beginning Balance

Yearly Payment

Interest Principal Repayment

1 2 3 4 5



Patterns to Observe

§ How many components of a payment?

§ Which component decreases over time?

§ Which component increases over time?



Power of Finance!

§ How would you figure out the outstanding balance after the second payment?



Power of Finance!

§ How would you figure out interest component of third payment?



A Real World Twist

§ You plan to attend an in-state college and your parents will take out a loan of $100,000 at 6%. What are your monthly payments, given that you will have 5 years to pay back the loan?



Timeline Changed!



Amortization Table



Power of Finance!

§ How much will you owe the bank after the 18th month’s payment?



Power of Finance!

§ What is the interest component of the 37th months payment?



Stated versus Effective Annual Rates



Effective Annual Rates: Formula

where k is the number of compounding intervals in a year.

EAR rk

k

= +1 1



Application II: Saving for College

§ College tuition has been rising at a rate of 2.50% per year. Currently the average tuition of a state college is $10,000 per year. Emilia's daughter Jessica will begin college in 5 years. Julia's portfolio of savings is making 5% annually. How much does Emilia need to have set aside today/now to pay for four years of college for Jessica?



Draw the Timeline!

§ Break problem into bite-size pieces

§ Solve the pieces in logical order

§ Use financial tools to help you!



Solving the Problem!



Confirm Your Calculations!



Application III: Financial Planning

§ Abebi, who has just celebrated her 25th birthday, plans to retire on her 55th birthday. She has just set up a retirement fund to pay her an annual income starting on her retirement day, and to continue paying for 20 more years. Abebi's goal is to receive $50,000 for each of these twenty years. Abebi has committed to set aside equal investments at the end of each year, for the next 29 years starting on her 26th birthday. If the annual interest rate is 5%, how big should Abebi's equal investments be?



Draw the Timeline!


§ Solve the pieces in logical order










Application IV: Complicated Simple

§ You have invested $75,000 in a trust fund at 7.50% for your child's education. Your child will draw $12,000 per year from this fund for four years, starting at the end of year 7. What will be the amount that will be left over in this fund at the end of year 10 (after the child has withdrawn for the fourth time)?



Draw the Timeline!


§ Solve it in easier/smarter ways









Date post:	25-Aug-2020
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ADVANCED APPLICATIONS€¦ · Module 3 Notes FOR EVERYONE FINANCE Application IV: Complicated...

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