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Chapter 4 Activity Assignment 2

The document presents calculations comparing different mortgage payment strategies for two families, the Thomas family and the Jefferson family. It shows the future value of making extra monthly payments over 30 years versus investing the extra amount elsewhere earning various rates of return. In general, making extra payments is better if returns on other investments will be lower than the mortgage rate, while investing is better if higher returns can be earned elsewhere. However, factors like changes in employment, market performance, and tax benefits need to be considered for each family's individual situation.

Uploaded by

Amir Shahzad
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© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
146 views

Chapter 4 Activity Assignment 2

The document presents calculations comparing different mortgage payment strategies for two families, the Thomas family and the Jefferson family. It shows the future value of making extra monthly payments over 30 years versus investing the extra amount elsewhere earning various rates of return. In general, making extra payments is better if returns on other investments will be lower than the mortgage rate, while investing is better if higher returns can be earned elsewhere. However, factors like changes in employment, market performance, and tax benefits need to be considered for each family's individual situation.

Uploaded by

Amir Shahzad
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Mini Financial Calculators

(Shaded boxes are the outputs based on the given inputs above the box. Do not type in the shaded boxes.)

APR 8.00% APR 6.00% APR 6.00%


Compounds 12 Compounds 12 Compounds
Present Value 0.00 Present Value 175000.00 Payment
Payment -87.43 Payment ($1,049.21) Present Value
Years 30 Future Value $0.00 Years
Future Value: $130,302.13 Years: 30.0 Investment Interest: #DIV/0!

APR 6.00% APR 6.00% Compounds


Compounds 12 Compounds 12 Payment
Present Value 175000 Future Value 0.00 Present Value
Future Value 0 Payment -1049.21 Years
Years 30 Years 30 Debt Interest: $0.00
Payment: ($1,049.21) Present Value: $175,000.00

APR 6.00% APY


Compounds 12 Compounds
Effective Yield: 6.17% Nominal Yield: #DIV/0!

The formulas in the gray boxes are not cell-protected. Should you accidentally lose their information, refer to the items below.
You can copy and paste any of the formulas back into the gray boxes. Don't forget to drop the quote mark in front of the = sign.

Future Value: =FV(C5/C6,C6*C9,C8,C7)


Years: =(NPER(F5/F6,F8,F7,F9))/12
Debt Interest: =I6*I5*I8+I7
Payment: =PMT(C13/C14,C17*C14,C15,C16)
Present Value: =PV(F13/F14,F17*F14,F16,F15)
Investment Interest: =FV(I13/I14,I17*I14,I15,I16)+I15*I14*I17+I16
Effective Yield: =F22*((1+F21)^(1/F22)-1)
Nominal Yield: =F22*((1+F21)^(1/F22)-1)
Mini Financial Calculators
(Shaded boxes are the outputs based on the given inputs above the box. Do not type in the shaded boxes.)

APR 8.00% APR 6.00% APR Extra payment: ($87.43)


Compounds 12 Compounds 12 Compounds New Monthly Payment: ($1,136.65)
Present Value 0.00 Present Value 175000.00 Payment
Payment -1136.65 Payment ($1,136.65) Present Value
Years 5.5 Future Value $0.00 Years
Future Value: $93,848.92 Years: 24.5 Investment Interest: #DIV/0!

APR 6.00% APR 5.00% Compounds


Compounds 12 Compounds 12 Payment
Present Value 175000 Future Value 0.00 Present Value
Future Value 0 Payment -1136.65 Years
Years 30 Years 30 Debt Interest: $0.00
Payment: ($1,049.21) Present Value: $211,736.60

APR APY
Compounds Compounds
Effective Yield: Nominal Yield: #DIV/0!

The formulas in the gray boxes are not cell-protected. Should you accidentally lose their information, refer to the items below.
You can copy and paste any of the formulas back into the gray boxes. Don't forget to drop the quote mark in front of the = sign.

Future Value: =FV(C5/C6,C6*C9,C8,C7)


Years: =(NPER(F5/F6,F8,F7,F9))/12
Debt Interest: =I6*I5*I8+I7
Payment: =PMT(C13/C14,C17*C14,C15,C16)
Present Value: =PV(F13/F14,F17*F14,F16,F15)
Investment Interest: =FV(I13/I14,I17*I14,I15,I16)+I15*I14*I17+I16
Effective Yield: =F22*((1+F21)^(1/F22)-1)
Nominal Yield: =F22*((1+F21)^(1/F22)-1)
Thomas Family Jefferson Family
1/12th of monthly
payment + monthly
1/12th of monthly payment annuity
payment annuity amount amount AFTER
Rates in 360 months Rates mortgage is paid
0% $ 31,474.80 0% $ 75,018.90
1% $ 36,688.09 1% $ 77,087.26
2% $ 43,078.98 2% $ 79,230.78
3% $ 50,948.69 3% $ 81,452.47
4% $ 60,680.74 4% $ 87,755.51
5% $ 72,764.37 5% $ 86,143.17
6% $ 87,824.75 6% $ 88,618.89
7% $ 106,662.06 7% $ 91,186.23
8% $ 130,302.13 8% $ 93,848.92
SCROLL DOWN TO SEE ALL QUESTIONS
Question 1: What generalizations can you make from the annuity amounts reflected in the analysis table above with
regards to the different strategies taken by the families? That is, from a purely financial aspect of the calculations in your
table what generalizations could you make regarding the two different strategies?
Answer: In the analysis table, it can be seen that making early payments will be beneficial if there is no opportnity to
invest the at a return rate lower than the rate on mortagage. If there is a chance to invest at return more than the
mortagage rate, then the investment should be made and the payment should be made in whole 30 years.

Question 2: What assumptions may not necessarily be valid for a typical family regarding both the loan rate and savings
plan rate?
The rate of Interest on the saving plan may not necessarily increase in future. For a typical family it who don't have
better saving plan, may assume the case and they will prefer paying earlier than later.

Question 3: Discuss some basic pros and cons to these two very different approaches the Thomas and Jefferson families
made with their extra monthly payment. Consider various ideas such as possible changes in the family’s employment
situation, market performance, tax deductions, etc.
Thamos Approach:
Pros: It will also be good in case of market performance is increased. It will be better if employment position gets better
becuase it will allow to get more investment opportunities.
Cons: It will allow a tax benefit as it will be allowed interest paid expense.
Jefferson Approach:
Pros: It will be better if the future market performance gets worse.
Cons:It will secrify the tax rebate.

Question 4: Now that you have completed your analysis, comment on the merits of the advice you read from the two
financial columnists. Note the dates of the advice columns. How might market performance figure in to their advice the
gave at that time? Why do you think Sharon Epperson’s advice at the end specifically calls attention to an assumption o
whether you are “debt-free and maxing out your 401(k) and IRAs?”
Answer: Both columists have strong views in different situations. The view of paying late is supported with the idea tha
we can invest in better opportunties where we can earn more and have benefit. But on other hand, the “debt-free and
maxing out your 401(k) and IRAs?” idea is good for those people who dont want to find the opportunities and don't wa
to take the risk of decreasing rates.
financial columnists. Note the dates of the advice columns. How might market performance figure in to their advice the
gave at that time? Why do you think Sharon Epperson’s advice at the end specifically calls attention to an assumption o
whether you are “debt-free and maxing out your 401(k) and IRAs?”
Answer: Both columists have strong views in different situations. The view of paying late is supported with the idea tha
we can invest in better opportunties where we can earn more and have benefit. But on other hand, the “debt-free and
maxing out your 401(k) and IRAs?” idea is good for those people who dont want to find the opportunities and don't wa
to take the risk of decreasing rates.

Question 5: If you were to pay extra principal on a mortgage, when is the best time to do it (early or later in the loan
process) and why?
I would pay it late becuase 30 years is a long time and it is possible that the interest rate may increase and i would
make more on my savings if the the interest rate is increased . It can be seen in the analysis that if the rate is 7% or 8
the savigings will be higher than the in case of late payment of extra amounts.
sis table above with
the calculations in your

e is no opportnity to
rn more than the
30 years.

e loan rate and savings

y it who don't have

as and Jefferson families


family’s employment

ment position gets better

you read from the two


ure in to their advice they
ntion to an assumption of

ported with the idea that


and, the “debt-free and
portunities and don't want
ure in to their advice they
ntion to an assumption of

ported with the idea that


and, the “debt-free and
portunities and don't want

early or later in the loan

y increase and i would


hat if the rate is 7% or 8%,
Rules of Thumb:
1. Notice that present value and future value are typically opposite
2. Use the "Inflow-Outflow" way of thinking: Inflow is money com
3. If all else fails, try changing the sign of any of the inputs to see
4. Don't get "burned" by the negative or lack of a negative in the f
ypically opposite in sign.
w is money coming in and outflow is money "out-the-door".
e inputs to see how it affects the result and act accordingly.
egative in the financial formulas. Always consider its role.

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