So if cash flow starts in year 4 PV of that will fall on year 3 Put that PV

So if cash flow starts in year 4 pv of that will fall

  • Ryerson University
  • FIN 300
  • Test Prep
  • MehZar
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So, if cash flow starts in year 4, PV of that will fall on year 3. Put that PV into FV, N=3, enter I%, then solve for PV again for the final answer. Mortgages - mortgages… C/Y always = 2 , FV =0 -ignore the “ term” of the mortgage… amortization is what you look at N = 1) # of payments remaining OR 2) amortization period*# of payments per year -if there’s a down payment , PV = price of house*(1-down payment %)….remember PV is always NEGATIVE Mortgages and finding balance and interest after X years -first, need N, I%, PV, and PMT filled in ( FV =0) -Press F6 for AMT. The rule is to always add ONE to PM1. -if asked for mortgage balance after, say, 5 years and monthly payments made and mortgage is for 20 years  F6 for AMT, in PM1 = 5 years*12 monthly payments + 1 = 60+1= 61 , PM2 = 20 years*12 = 240. Then press sum of PRN. -if asked for mortgage balance with five years LEFT (remaining) and monthly payments made and mortgage is for 20 years, then that means 15 years have passed (20 years – 15 years = 5 years left)  F6 for AMT, in PM1 = 15 years*12 monthly payments + 1 = 180+1= 181 , PM2 = 20 years*12 = 240. Then press sum of PRN. - if asked for interest paid for FIRST 5 years and monthly payments made and mortgage is for 20 years  F6 for AMT, PM1 = 0 year + 1, PM2 = 5 years*12 monthly payments = 60. Then press sum of INT. - if asked for interest paid over the last five years LEFT and monthly payments made and mortgage is for 20 years, then that means 15 years have passed (20 years – 15 years = 5 years )  F6 for AMT, PM1 = 15 years*12 monthly payments + 1 = 180+1 =181, PM2 = 20 years*12 monthly payments = 240. Then press sum of INT. Bonds N= # of payments REMAINING (NOT # of years , so if it’s a 10- year, semi-annual bond that was issued 2 years ago , N = 8 years remaining*2 payments per year = 16). I% (I/Y) = y ield to maturity ( YTM ) = rate of return = current interest rate = market interest rate; all these are NOMINAL rates PV= current market price of bond ( enter as NEGATIVE) PMT = coupon rate * face (par) value / 2 (if semi-annual, divide by 2; assume face value is $1000) FV= face value (assume $1000) IF annual, P/Y = 1, C/Y=1 ; If semi-annual,P/Y = 2, C/Y=2 If the questions asks for the “effective yield,” then make C/Y = 1. If it’s a zero-coupon bond ( PMT=0), the calculation is like an ANNUAL bond (also P/Y =1, C/Y=1 ) Interest Rate Risk (how sensitive a bond’s price is to interest rate changes ) - #1 the longer the time to maturity, the greater the interest rate risk (ie the more its price will change when rates change) #2 lower the coupon rate, the greater the interest rate risk - bond prices and interest rates (YTM) are inversely related; if rates go down, bond prices go up and vice versa -if YTM = coupon rate, bond sells at par -if YTM greater than coupon, bond sells below par (discount) -if YTM is less than coupon, bond sells above par (premium) Fisher Equation = (1+R) = (1+r)(1+inflation), R = nominal rate, r = real rate. Some bond questions will give you a real rate and inflation, you’ll need to use Fisher to find the nominal rate, which will represent your yield-to-maturity (YTM). Then put the nominal rate as a % into I% Holding Period Return N= # of payments received during HOLDING period (not # of

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