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Math 106 (Review of Annuities/loans) : © M J Winter, fs2003

questions on book value

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43 views13 pages

Math 106 (Review of Annuities/loans) : © M J Winter, fs2003

questions on book value

Uploaded by

devi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Math 106

Lecture 13
(review of annuities/loans)

1
© m j winter, fs2003

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3

Lender and Borrower


At the beginning of the month, you loan $1000 at
8% annual interest to a friend.

At the end of the month, she pays you $50. How


much does she still owe?

1 month’s interest = 1000*(.08/12)=$6.67


$50 – $6.67 = $43.33 has been paid back.

Outstanding balance = 1000 – 43.33 = 956.67


Keep this up. At end of month 2, she pays $50.
Balance is now 956.67 – (50 –956.67*(.08/12)) = 913.05
At end of month 3 balance is
913.05–(50–913.05*(.08/12)) = 869.14 4

2
Balances
Deposit $1000 in an account paying 8%
annual interest, compounded monthly.
Find the balance at end of 3 months.
1000*(1 + .08/12)3 = $1020.13
deposit

Deposit $50 monthly, at the end of each month, in


similar account. Find the balance at end of 3 months .

deposit deposit deposit

50*( (1 + .08/12)3 – 1)/(.08/12) = $151.00

Payment Schedule
Borrow $1000 at 8% (compounded monthly). Make
payment of $50 per month.

Payment Interest Principal Balance


#
0 0 0 1000.00 Is there a
1 1000*(.08/12) = 6.67 50 – 6.67 =43.33 1000 – direct
43.33 = formula for
the balance?
956.67

2 956.67*(.08/12) = 50 - 6.38 = 43.62 913.04


6.38

3 6.09 43.91 869.13

3
Calculating Unpaid Balance
Look at difference between what lender
should have after 3 months, and what you
have paid:

1000(1 + .08/12)3 – 50*( (1 + .08/12)3 – 1)/(.08/12)

= 1020.13 – 151.00

= $869.13
7

4
When will balance be 0?
When will balance be $0?
Equivalent to asking for solution to

1000(1 + .08/12)x – 50*( (1 + .08/12)x – 1)/(.08/12) = 0


Graph

y = 1000(1 + .08/12) x and

y = 50*( (1 + .08/12)x – 1)/(.08/12)

Find the intersection at x = 21.53.

Outstanding Balance after k Payments


$75,000 at 8% year (monthly) for 20 years; pymt=627.33
After 10 years, what is the outstanding balance?

If you had not been making payments, the value of the


loan (to the lender) would be $75,000 + interest
= 75000(1+.08/12)10*12=$166,473.02
If you had regularly deposited the $627.33 in an
account at the same rate, you would have:
(1+.08/12)120 -1
627.33 =$114,767.54
.08/12
outstanding balance =
166,473.02 – 114,767.54 =$51,705.48

10

5
Discussion: Mortgage vs Annuity
Mortgage Annuity (common meaning)
• You borrow money from • You ‘buy’ an annuity (bank
bank (you have bank’s has your money)
money)
• you make specific • bank makes specific number
number of monthly of monthly payments to you.
payments to bank
• Payment = interest on • Payment = interest on your
money you owe bank balance in bank plus
plus payment to the bank payment to you of some of
of some of the loan the principal.
These are the same thing - except that the roles 11
of the bank and the borrower are interchanged!

12

6
13

14

7
15

16

8
17

TI83 and TI 83+


On the TI83+
Press Apps; Select Finance, which takes you to the FINANCE menu;
Select TVM Solver
On the TI83
Press 2nd then the x-1 key (getting you to the FINANCE menu).
Select TVM Solver
To calculate the number of periods

Where N is the number of periods


PV, the present value, is negative
FV is 0
Payments & Coupons per year is 12
Select END

Put a 0 in N, then cursor up to the top


line. Press ALPHA ENTER. The
number of periods will be calculated.
18

9
TimeValueMoney
Number of periods
Annual interest as %
Present Value
Payment/Deposit
Future Value
payments/compoundings
per year

Fill in given values; move cursor to missing


value, press Solve. 19

Previous examples
• Slide 4: Unpaid balance (FV) after 3
months

Slide 14: How long (N) take out $200/month?

20

10
Porsche 911 Carrera

• Price is about $75,000. Will depreciate


at rate of 15% per year

• You have $10,000. Can invest so that


your balance grows at 20% per year
(internet stocks?)

• How long until you can buy the car? 21


Ignore taxes. Use continuous interest.

Continuously Compounded Interest


• Depreciation = negative interest rate
• If the rate of r% per year is
compounded continuously
after 1 year $A becomes $Aer*1
after 2 years, $A becomes $Aer*2
after t years, $A becomes $Aer*t

• The value of the car after t years is


75000e(–.15t)
• The value of your portfolio after t years is
10000e(.20t) 22

11
Graphical Solution

23

Using Algebra
75000e(–.15t) = 10000e(.20t)

7.5 = e(.20t + .15t) = e(.35t)

0.35t = ln 7.5
t = 5.7569….
Problem:
Assume your portfolio increases by only
15% a year. In how many years will you
be able to buy the car? 24

12
Solution
7.5 = e(.15t + .15t) = e(.30t)

0.30t = ln 7.5
t = 6.7…. years

25

13

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