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Unformatted text preview: an Amortization Borrow $1,000 today, how much would the annual
Borrow
payments be if you are required to repay in two
years and the interest rate is 10%?
years PVA = PMT(
1 1,000 = PMT(.1
1,000 1
i 1
i(1+i)n ) 1
.1(1+.1)2 ) –576.19 1,000 = PMT(1.736)
1,000
PMT = 576.19
N 2 I/YR PV PMT FV 10 1,000 ? 13 Present Value of an Annuity Loan Amortization Borrow $1,000 today, how much would the annual
Borrow
payments be if you are required to repay in two
years and the interest rate is 10%?
years 0 1 $1,000
+$100 2 $1,100
$576.19
$523.81 $576.19
+$52.38 $576.19
$0.00 14 Present Value of an Annuity Example #1 Bob borrows $5,000 from his parents to purchase a
Bob
used car. He agrees to make payments at the end of
each year for the next 5 years. If the interest rate on
this loan is 6%, what is the amount of the payments?
this
0 1 2 3 4 $5,000 $? $? $? $? 5,000 =
5,000 5 1
1
PMT(.06 .06(1+.06)5) $?
–1,186.98 5,000 = PMT(4.2124)
5,000
PMT = $1,186.98 N 5 I/YR PV PMT FV 6 5,000 ? 15 Present Value of an Annuity Example #1a Bob borrows $5,000 from his parents to purchase a
Bob
used car. He agrees to make payments at the end of
each month for the next 5 years. If the interest rate
on this loan is 6%, what is the amount of the
payments?
payments?
0 1 $5,000 5 1 5,000 = PMT( 1
)
5,000
60
.005 .005(1+.005)
5,000 = PMT(0.0193)
5,000
PMT = $96.66
Cannot divide the annual payment
Cannot divide the annual payment
by 12 to get monthly payment. Why?
by 12 to get monthly payment. Why? –96.66 N I/YR PV PMT FV 60 0.5 5,000 ? 16 Future Value of an Annuity Two Types of Annuities Ordinary Annuity  Payments (or deposits) occur at
Ordinary
the end of the period
end
0 $0 1 $100 2 FV = $205 $100 Annuity Due  Payments (or deposits) occur at the
Annuity
beginning of the period
beginning
0 1 2 $100
$100
FV = ?
Each payment (or deposit) for an annuity due earns one
Each
additional period interest.
additional 17 Interest Rates:Effective Annual Rate (EAR)
This is the actual rate paid (or received)
This
after account...
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 Spring '08
 Staff
 Managerial Accounting

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