Lecture3.TVMappl

# Lecture3.TVMappl - 63.0 112,100 2,080 7.4 26,020 92.6 0 25...

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TVM: Applications

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3/1/11 Amortizing a Mortgage: GIVEN: Length of the mortgage's life: 25 years Payments made once a year Interest rate: 8% Amount financed: \$300,000 What will be the required annual payments?
3/1/11 Analysis: Let the annual payments be \$X. Clearly, the above problem is identical to an annuity of \$X a year for 25 years with r = 8% and PV(A25)= 300,000.

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Total Interest Payments Principal Returned Amt. of Loan Year Payment Amount % of Total Amount % of Total Outstanding 1 28,100 24,000 85.4 4,100 14.6 295,900 2 28,100 23,670 84.2 4,430 15.8 291,470 5 28,100 22,520 80.1 5,580 19.9 275,890 10 28,100 19,900 70.8 8,200 29.2 240,520 15 28,100 16,050 57.1 12,050 42.9 188,550 20 28,100 10,390 37.0 17,710

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Unformatted text preview: 63.0 112,200 25 28,100 2,080 7.4 26,020 92.6 0 25 year 8% mortgage on a \$300,000 house : distribution of payments VALUE OF A TAX DEFERRED SAVINGS PLAN FOR RETIREMENT (an IRA). Starting at age 29, if you invest \$2000 in an IRA yielding 10%, what cash flow can you expect at retirement ? 3/1/11 Alternatively… § Suppose you invested in an ordinary savings account and your tax rate during your working years is 50%. How would the above analysis change? What annuity can you expect to fund at retirement? Analysis Analysis continued The advantage to tax free compounding SUMMARY IRA Savings Account Balance at Retirement \$542,049 \$90,320 After-Tax Annuity \$44,568 \$8,526...
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Lecture3.TVMappl - 63.0 112,100 2,080 7.4 26,020 92.6 0 25...

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