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Unformatted text preview: “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Chapter 18 Real Estate Finance Tools: Present Value and Mortgage Mathematics “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Major Topics ♦ Time value of money calculations ♦ Present value of a single sum or annuity payment ♦ Future value of a single sum or annuity ♦ Mortgage loan constants ♦ Mortgage balance calculations ♦ Point charges and their effects on borrowing costs or yields ♦ Annual Percentage Rate ♦ Effective Cost of Borrowing ♦ Net present value and IRR calculations ♦ Refinancing decisions ♦ Adjustable Rate Mortgage or ARM Calculations ♦ Price Level Adjusted Mortgage ♦ Reverse Annuity Mortgages (Future Value of Annuity) ♦ Supportable mortgage calculations “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Introduction to the Time Value of Money ♦ A dollar today is worth more than a dollar received in future ♦ In most economies we expect a return on money or capital related to the productivity of things capital can buy ♦ This is the fundamental source of the real returns (not just inflationary increases) ♦ The required returns are cumulatively known as the opportunity cost of capital “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner Present & Future Value of a Single Sum ♦ PV = FV / (1+r) ♦ FV = PV (1+r) ♦ PV is the present value ♦ FV is future value ♦ r is the total expected rate of return r includes the risk free and risk premium rates r is called “discount rate” when solving for PV r is called “rate of return” when solving for FV “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner PV & FV over Multiple Periods of Time (Contd.) ♦ General formula for PV and FV across multiple periods: ♦ PV = FV / (1+r) N ♦ FV = PV (1+r) N ♦ N is the number of periods between FV and PV ♦ If FV and PV are known the rate of return can be found by the formula: r = (FV/PV) 1/N – 1 “Real Estate Principles for the New Economy”: Norman G. Miller and David M. Geltner PV of an Annuity ♦ Annuity: stream of regular payments of equal amounts E.g.: monthly rental payments, mortgage payments PV = PMT  ♦ ‘PMT’ is the equal amount of payments occurring at end the of each consecutive equal length period of time ♦ ‘N’ is the number of payments ♦ ‘r’ is the interest rate per period to time, compounded at the end of each period 1 – 1/(1+r) N r “Real Estate Principles for the New...
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This note was uploaded on 11/11/2011 for the course MATH 110 taught by Professor Staff during the Winter '08 term at BYU.
 Winter '08
 Staff
 Math

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