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Unformatted text preview: FIN 363 Class 10 Time Value of Money Dylan has changed today’s hours to What the heck is going on? • The Fed announced ‘Operation Twist.’ Whereby they will sell $400 billion of short maturity securities and buy $400 billion of long maturity securities. Why? • Why have stock markets tanked in response? Steps and hints for your financial calculator 1. Identify the question that you want to answer. N, i%YR, PV, PMT and FV are the candidates. 2. Go to TVM (Main/Fin/TVM) 3. Clear the data from the registers (CLR DATA) 4. Choose ‘Other.’ Set frequency of compounding (1, 2, 4, 12 per year) and timing of cashflows (Beg/End). Press ‘Exit.’ Steps and hints for your financial calculator 5. Enter the 4 values that you know (PMT is zero for single cash flow problems). 6. FOLLOW THE SIGN CONVENTION! Money flowing out of your pocket has a minus sign. If you are investing today, PV is negative. If you are to pay a lump sum at the end, FV is negative. If you are borrowing today, PV is positive and PMT is negative. 7. Press the key for your missing value and record the answer. CONDUCT A SNIFF TEST! TVM Quiz Q10 Your company is considering purchasing a loan. This loan makes annual payments of $259 a year for 10 years. At the end of year 11, the payments rise to $359 for an additional 10 years. If interest rates are 12.70% per year, compounded annually, the present value of the loan is: Notice that this is two differently sized cash flows being joined together. To solve: 1. Find PV as of the year beginning the second set of payments – in this case PV year 10 for payments from years 1120 = $1971.60 2. Make that PV the FV for the first set of payments (follow the sign convention!) – in this case FV = +. 3. Find PV for year zero with payments and FV = $2018.87 25 25 1 2 3 r = ? 864.80 4 25 25 You pay $864.80 for an investment that promises to pay you $250 per year for the next four years, with payments made at the end of each year. What interest rate will you earn on this investment? Solving for Interest Rates with Annuities Use trialanderror by substituting different values of r into the following equation until the right side equals $864.80....
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 Fall '10
 Masoudie
 Time Value Of Money, Interest

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