Annuity
How much is the following Annuity worth?
- $5,000 EACH YEAR DISCOUNTED 3 years at 10%?
- $5,000 EACH YEAR DISCOUNTED 3 years at 7%?
- $10,000 EACH YEAR DISCOUNTED 2 years at 12%?
- $10,000 EACH YEAR DISCOUNTED 2 years at 9%?
- $3,000 EACH YEAR DISCOUNTED 7 years at 12%?
- $3,000 EACH YEAR DISCOUNTED 7 years at 5%?
- $4,000 EACH YEAR DISCOUNTED 20 years at 10%?
- $4,000 EACH YEAR DISCOUNTED 30 years at 12%?
- $2,000 EACH YEAR DISCOUNTED 20 years at 10%?
- $2,000 EACH YEAR DISCOUNTED 30 years at 12%?
- You invest $5,000 in Account A FOR 10 years and earn 10% return. You invest $3,000 in Account B FOR 10 years at 8%. How much do you have in 10 years in total?
- You invest $25,000 for 10 years at 8%. You open a second account and invest $3,000 each year for 10 years at 10%. How much do you have in total?
- You are offered $100,000 in 10 years.
- Using a discount rate of 8% what is it worth today?
- Using a discount rate of 10% what is it worth today?
- What is the value of an annuity that will pay you $5,000 each year for 30 years at a discount rate of 6%? What is the value of the annuity if you use a 12% dis- count rate?
Quiz
- Your Uncle Scooter wants you to invest in his pie shop. He wants only $15,000 and will pay you back in 8 years. Knowing the wheels fell off his last venture you demand 14% return. How much does Scooter need to pay you in 8 years?
- Uncle Scooter says you have a screw loose, but will give you $11,000 in 8 years. What is the present value of the offer? K = 14
- You explain the present value to your Uncle Scooter who is perplexed (not un- common for Scooter). Scooter adds 2 pies a week to the $11,000 deal for 8 years. The pies are worth $10.50 each and you want the pies. What is the new present value? K=14
- Scooter takes on a partner who is a part-time finance instructor, smart, and is good looking. Because of this you reduce your return requirement from 14% to 10%. Use the needed data from question 3 and determine the present value.
In-Class Review
TIME FOR SOME HARD STUFF!
- You have $30,000 in an IRA that will earn 14% into the future. Your 401K has a $35,000 balance and you add $4,500 per year and it will earn 12%. You have two Zero coupon bonds with a current return of 8% maturing in 25 years with a face value of $25,000 for each bond. After maturing, you will invest the balance of the Zero’s at 5% until you retire. How much money do you have in 30 years?
- Using the answer from question 1, answer the following question. You want to retire in 30 years and be retired for 20 years. All investments will earn 10% in retirement. How much will you be able to withdraw each year in retirement?
- How much do you need to deposit each year in a retirement plan if you plan to retire in 30 years, be retired for 25 years and want $125,000 in retirement in- come? K = 12 before retirement and K = 10 after retirement?
In-Class Review # 2
When valuing bonds you need four pieces of information:
- Bonds Face Value
- Maturity Date
- Coupon Rate
- The interest rate in the current market environment
Valuing a Bond takes 2 steps:
- Use PVA to discount the interest payments
- Use PV$ to value the return of principle.
Example:
You have a bond with a face value of $10,000; a coupon rate of 8%; maturity date is 20 years from today and the current rate environment is 10%. Solve as follows:
$10,000 .08 (coupon rate) = $800 interest payment per year
Use the interest rate of the current environment in the present value equations.
$10,000 PV$ K = 10 N = 20 (.1486) = $1,486
$800 PVA K = 10 N = 20 (8.5136) = $6,811
Bond Value = $8,297
Valuing Bonds
A bond with a face value of $25,000;
Coupon rate of 10% maturing in 30 years.
What is the value of the bond in a . . .
1a) 5% rate environment =
1b) 8% rate environment =
1c) 12% rate environment =
A bond with a face value of $100,000;
Coupon rate of 7% maturing in 10 years.
What is the value of the bond in a . . .
2a) 6% rate environment =
2b) 9% rate environment =
2c) 10% rate environment
