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