PF Exam 1 Chapter 1
How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)?
Decrease the present value.
The variables in a present value of an annuity problem include all of the following, except:
Future Value
The variable that you are solving for in a future value of an annuity problem is:
Future value
The variables in a future value of an annuity problem include all of the following, except:
Includes: Amount of payments, time period, interest rate, future value Does not include: Risk tolerance
SMART approach to financial goals
Specific Measurable Action oriented Realistic Time-based: set time-frame
Present value
The current value of a future amount based on interest rate and time period.
Samantha wants to buy a new watch that costs $100. She decides to wait a year. All factors being equal, if inflation is 4% how much would the watch cost in a year?
$100 * 1.04 = $104
What would be the yearly earnings for a person with $5,600 in savings at an annual interest rate of 6 percent?
$5,600 * .06 = $336
If you deposit $500 per year in an account for six years at 9%, how much will you have in the account?
$500 * 7.523 = $3,762 (7.523 comes from Exhibit 1-B: Future value compounded table)
Which of the following is true regardig global influences of American consumption?
- American consumers provide foreign companies with a market - American business compete against foreign companies for the spending of American consumers
Individuals with poor credit ratings will typically pay...
...higher interest rates.
When consumers, banks, and the government increase the supply of money...
...interest rates will decline.
When consumers, banks, and the government increase their demand for money...
...interest rates will rise.
To find out how fast prices or savings will double...
...use RULE 72 - Divide 72 by the inflation or interest rate.
John has an interest rate of 7.2% on his savings account. Using RULE 72, his money will double in how many years?
72 / 7.2 = 10 years
Annuity
A series of equal regular deposits
Phillip makes a one time investment of $200 at a 10% interest per year. Over 2 years, how much will Phillip have?
After Year 1: $200 * 1.10 = $220 After Year 2: $220 * 1.10 = $242
Variables in a future value of an annuity problem include
Amount of Payments = series of deposits Time Period = Years Interest Rate = % Future Value = Amount today
Variables in a present value of an annuity problem include
Amount of Payments = series of deposits Time Period = Years Interest Rate = % Present Value = Amount today
Bank/Trust receives an interest rate of 5%; inflation is 8%
Bank is losing 3%
How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?
Decrease the future value.
The variable that you are solving for in a future value of a lump sum problem is:
Future Value
5 methods available for calculating time value of money
1. Formula Calculation 2. Time value of money tables 3. Financial Calculator 4. Spreadsheet software 5. Websites and apps
2 main reasons Americans have financial problems...
1. Poor planning, weak management of money habits 2. Advertising efforts and availability of goods
Federal Reserve System
Central Bank of the US that has significant economic responsibility
The variables in a future value of a lump sum problem include all of the following, except:
Includes: Present Value, Time Period, Interest Rate, Future Value Does not include: payments
How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?
Increase the present value.
The variable that you are solving for in a present value of a lump sum problem is:
Present Value
The variable that you are solving for in a present value of an annuity problem is:
Present Value
Future Lump Sum Variables
Present Value = Amount today Time Period = How many Years Interest Rate = Expect to earn Future Value = Amount in the future
Present Lump Sum Variables
Present Value = Amount today Time Period = How many Years Interest Rate = Expect to earn Future Value = Amount in the future
A common error made when solving a future value of an annuity problem is:
Multiplying the annual deposit and the number of years before calculating the problem.
Risk Premium
Represents the "extra" amount that you can expect to receive for investing in an instrument (stock, bond, real estate) due to factors such as inflation and the uncertainty of getting your money back.
Demographic most affected by Inflation
Retired people or people with a fixed income.
Inflation
Rise in prices Buying power of the dollar decreases
If you earn 11 percent on your investments, how long will it take for your money to double?
Rule 72: 72 / 11 = 6.5 years
If the value of land in an area is increasing 11.5 percent a year, how long will it take for property values to double?
Rule 72: 72 / 11.5 = 6.3 years
Consumer Price Index
The key measure of inflation- the change in the cost of buying a fixed basket of goods and services.
Opporuntiy costs
What you give up by making a choice (trade-off). Viewed in terms of personal and financial.
Time Value of Money
the increase of an amount of money due to interest earned