chapter 3 the time value of money © 2005 thomson/south-western
TRANSCRIPT
![Page 1: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/1.jpg)
Chapter 3
The Time Value of Money
© 2005 Thomson/South-Western
![Page 2: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/2.jpg)
2
Time Value of Money
The most important concept in finance
Used in nearly every financial decisionBusiness decisionsPersonal finance decisions
![Page 3: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/3.jpg)
3
Cash Flow Time Lines
CF0 CF1 CF3CF2
0 1 2 3k%
Time 0 is todayTime 1 is the end of Period 1 or the beginning of Period 2.
Graphical representations used to show timing of cash flows
![Page 4: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/4.jpg)
4
100
0 1 2 Year
k%
Time line for a $100 lump sum due at the end of Year 2
![Page 5: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/5.jpg)
5
Time line for an ordinary annuity of $100 for 3 years
100 100100
0 1 2 3k%
![Page 6: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/6.jpg)
6
Time line for uneven CFs - $50 at t = 0 and $100, $75, and $50 at the end of Years 1 through 3
100 50 75
0 1 2 3k%
-50
![Page 7: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/7.jpg)
7
The amount to which a cash flow or series of cash flows will grow over a period of time when compounded at a given interest rate.
Future Value
![Page 8: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/8.jpg)
8
Future Value
Calculating FV is compounding!
Question: How much would you have at the end of one year if you deposited $100 in a bank account that pays 5 percent interest each year?
Translation: What is the FV of an initial $100 after 3 years if k = 10%?
Key Formula: FVn = PV (1 + k)n
![Page 9: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/9.jpg)
9
Three Ways to Solve Time Value of Money Problems
Use EquationsUse Financial CalculatorUse Electronic Spreadsheet
![Page 10: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/10.jpg)
10
Solve this equation by plugging in the appropriate values:
Numerical (Equation) Solution
nn k)PV(1FV
PV = $100, k = 10%, and n =3
$133.100)$100(1.331
$100(1.10)FV 3n
![Page 11: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/11.jpg)
11
Financial calculators solve this equation:
There are 4 variables (FV, PV, k, n).
If 3 are known, the calculator will solve for the 4th.
Financial Calculator Solution
nn k)PV(1FV
![Page 12: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/12.jpg)
12
First: set calculator to show 4 digits to the right of the decimal placeTo enter “Format” register:
Type: 2nd, period See: DEC (decimal) = (varies)Type: 4, enterSee: DEC = 4
Exit Format register: hit CE/CSee 0.0000
Financial Calculator Solution
![Page 13: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/13.jpg)
13
INPUTS
OUTPUT
3 10 -100 0 ? N I/YR PV PMT FV
133.10
Here’s the setup to find FV:
Clearing automatically sets everything to 0, but for safety enter PMT = 0.
Set: P/YR = 1, END
Financial Calculator Solution
![Page 14: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/14.jpg)
14
Spreadsheet SolutionSet up Problem Click on Function Wizard
and choose Financial/FV
![Page 15: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/15.jpg)
15
Spreadsheet SolutionReference cells:
Rate = interest rate, k
Nper = number of periods interest is earned
Pmt = periodic payment
PV = present value of the amount
![Page 16: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/16.jpg)
16
Present Value
Present value is the value today of a future cash flow or series of cash flows.
Discounting is the process of finding the present value of a future cash flow or series of future cash flows; it is the reverse of compounding.
![Page 17: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/17.jpg)
17
100
0 1 2 310%
PV = ?
What is the PV of $100 due in 3 years if k = 10%?
![Page 18: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/18.jpg)
18
INPUTS
OUTPUT
3 10 ? 0100
N I/YR PV PMT FV
-75.13
Financial Calculator Solution
VITAL: Either PV or FV must be negative. Here PV = -75.13. Put in $75.13 today, take out $100 after 3 years.
![Page 19: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/19.jpg)
19
If sales grow at 20% per year, how long before sales double?
![Page 20: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/20.jpg)
20
INPUTS
OUTPUT
? 20 -1 0 2N I/YR PV PMT FV
3.8
GraphicalIllustration:
01 2 3 4
1
2
FV
3.8
Year
Financial Calculator Solution
![Page 21: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/21.jpg)
21
Future Value of an Annuity
Annuity: A series of payments of equal amounts at fixed intervals for a specified number of periods.
Ordinary (deferred) Annuity: An annuity whose payments occur at the end of each period.
Annuity Due: An annuity whose payments occur at the beginning of each period.
![Page 22: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/22.jpg)
22
PMT PMTPMT
0 1 2 3k%
PMT PMT
0 1 2 3k%
PMT
Ordinary Annuity Versus Annuity Due
Ordinary Annuity
Annuity Due
![Page 23: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/23.jpg)
23
100 100100
0 1 2 310%
110
121
FV = 331
What’s the FV of a 3-year Ordinary Annuity of $100 at 10%?
![Page 24: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/24.jpg)
24
Financial Calculator Solution
INPUTS
OUTPUT
3 10 0 -100 ?
331.00
N I/YR PV PMT FV
![Page 25: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/25.jpg)
25
Present Value of an Annuity
PVAn = the present value of an annuity with n payments.
Each payment is discounted, and the sum of the discounted payments is the present value of the annuity.
![Page 26: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/26.jpg)
26248.69 = PV
100 100100
0 1 2 310%
90.91
82.64
75.13
What is the PV of this Ordinary Annuity?
![Page 27: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/27.jpg)
27
We know the payments but no lump sum FV,so enter 0 for future value.
Financial Calculator Solution
INPUTS
OUTPUT
3 10 ? 100 0
-248.69
N I/YR PV PMT FV
![Page 28: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/28.jpg)
28
100 100
0 1 2 310%
100
Find the FV and PV if theAnnuity were an Annuity Due.
![Page 29: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/29.jpg)
29
ANNUITY Due: Switch from “End” to “Begin”Method: (2nd BGN, 2nd Enter)
Then enter variables to find PVA3 = $273.55.
Then enter PV = 0 and press FV to findFV = $364.10.
Financial Calculator Solution
INPUTS
OUTPUT
3 10 ? 100 0
-273.55
N I/YR PV PMT FV
![Page 30: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/30.jpg)
30
What is the PV of a $100 perpetuity if k = 10%?
You MUST know the formula for a perpetuity:
PV = PMT k
So, here: PV = 100/.1 = $1000
![Page 31: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/31.jpg)
31250 250
0 1 2 3k = ?
- 846.80
4
250 250
You pay $846.80 for an investment that promises to pay you $250 per year for the next four years, with payments made at the end of each year. What interest rate will you earn on this investment?
Solving for Interest Rates with Annuities
![Page 32: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/32.jpg)
32
Financial Calculator Solution
INPUTS
OUTPUT
4 ? -846.80 250 0
7.0
N I/YR PV PMT FV
![Page 33: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/33.jpg)
33
What interest rate would cause $100 to grow to $125.97 in 3 years?
![Page 34: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/34.jpg)
34
What interest rate would cause $100 to grow to $125.97 in 3 years?
INPUTS
OUTPUT
3 ? -100 0 125.97
8%
N I/YR PV PMT FV
![Page 35: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/35.jpg)
35
Uneven Cash Flow Streams
A series of cash flows in which the amount varies from one period to the next:Payment (PMT) designates constant
cash flows—that is, an annuity stream.Cash flow (CF) designates cash flows
in general, both constant cash flows and uneven cash flows.
![Page 36: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/36.jpg)
36
0
100
1
300
2
300
310%
-50
4
90.91
247.93
225.39
-34.15530.08 = PV
What is the PV of this Uneven Cash Flow Stream?
![Page 37: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/37.jpg)
37
Financial Calculator Solution
In “CF” register, input the following: CF0 = 0 C01 = 100 F01 = 1 C02 = 300 F01 = 1 C03 = 300 F01 = 1 C04 = -50 F01 = 1
In “NPV” Register: Enter I = 10% Hit down arrow to see “NPV = 0” Hit CPT for compute See “NPV = 530.09” (Here NPV = PV.)
![Page 38: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/38.jpg)
38
Semiannual and Other Compounding Periods
Annual compounding is the process of determining the future value of a cash flow or series of cash flows when interest is added once a year.
Semiannual compounding is the process of determining the future value of a cash flow or series of cash flows when interest is added twice a year.
![Page 39: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/39.jpg)
39
Will the FV of a lump sum be larger or smaller if we compound more often, holding the stated k constant? Why?
![Page 40: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/40.jpg)
40
If compounding is more frequent than once a year—for example, semi-annually, quarterly, or daily—interest is earned on interest—that is, compounded—more often.
Will the FV of a lump sum be larger or smaller if we compound more often, holding the stated k constant? Why?
LARGER!
![Page 41: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/41.jpg)
41
0 1 2 310%
100133.10
0 1 2 35%
4 5 6
134.01
1 2 30
100
Annually: FV3 = 100(1.10)3 = 133.10.
Semi-annually: FV6/2 = 100(1.05)6 = 134.01.
Compounding Annually vs. Semi-Annually
![Page 42: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/42.jpg)
42
kSIMPLE = Simple (Quoted) RateSimple (Quoted) Rate
kPER = Periodic Rate Periodic Rate
EAR = Effective Annual RateEffective Annual Rate
APR = Annual Percentage RateAnnual Percentage Rate
Distinguishing Between Different Interest Rates
![Page 43: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/43.jpg)
43
kSIMPLE = Simple (Quoted) RateSimple (Quoted) Rate
*used to compute the interest paid per period*stated in contracts, quoted by banks & brokers*number of periods per year must also be given*Not used in calculations or shown on time lines
Examples:8%, compounded quarterly8%, compounded daily (365 days)
kSIMPLE
![Page 44: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/44.jpg)
44
Periodic Rate = kPer
kPER: Used in calculations, shown on time lines.
If kSIMPLE has annual compounding, then kPER = kSIMPLE
kPER = kSIMPLE/m, where m is number of compounding periods per year.
Determining m: m = 4 for quarterly m = 12 for monthly m = 360 or 365 for daily compounding
Examples: 8% quarterly: kPER = 8/4 = 2% 8% daily (365): kPER = 8/365 = 0.021918%
![Page 45: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/45.jpg)
45
APR = Annual Percentage RateAnnual Percentage Rate = kSIMPLE periodic rate X
the number of periods per year
APR = ksimple
![Page 46: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/46.jpg)
46
EAR = Effective Annual RateEffective Annual Rate
* the annual rate of interest actually being earned
* The annual rate that causes PV to grow to the same FV as under multi-period compounding.
* Use to compare returns on investments with different payments per year.
* Use for calculations when dealing with annuities where payments don’t match interest compounding periods .
EAR
![Page 47: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/47.jpg)
47
How to find EAR for a simple rate of 10%, compounded semi-annually
Hit 2nd then 2 to enter “ICONV” register:
NOM = simple interest rateType: 10, enter, down arrow twice
C/Y = compounding periods per yearType: 2, enter, up arrow (or down arrow twice)
EFF = effective annual rate = EARType: CPT (for compute)See: 10.25
POINT: Any PV would grow to same FV at 10.25% annually or 10% semiannually.
![Page 48: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/48.jpg)
48
Continuous Compounding
The formula is FV = PV(e kt) k = the interest rate (expressed as a decimal) t = number of years
Calculator “workaround” Store 9999999999 (as many nines as possible) in
your calculator under STO + 9 Then, for N: N = # of years times “RCL 9” Then, for I: I = simple interest divided by “RCL 9”
![Page 49: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/49.jpg)
49
Continuous Compounding
Question: What is the value of a $1,000 deposit invested for 5 years at an interest rate of 10%, compounded continuously?
INPUTS
OUTPUT
5* 10/ RCL9 RCL9 -1000 0 ?
1648.72
N I/YR PV PMT FV
![Page 50: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/50.jpg)
50
Fractional Time Periods
0 0.25 0.50 0.7510%
- 100
1.00
FV = ?
What is the value of $100 deposited in a bank at EAR = 10% for 0.75 of the year?
![Page 51: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/51.jpg)
51
Fractional Time Periods
0 0.25 0.50 0.7510%
- 100
1.00
FV = ?
What is the value of $100 deposited in a bank at EAR = 10% for 0.75 of the year?
INPUTS
OUTPUT
0.75 10 -100 0 ?
107.41
N I/YR PV PMT FV
![Page 52: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/52.jpg)
52
Amortized Loans Amortized Loan: A loan that is repaid in equal
payments over its life. Amortization tables are widely used for home
mortgages, auto loans, business loans, retirement plans, and so forth to determine how much of each payment represents principal repayment and how much represents interest. They are very important, especially to homeowners!
Financial calculators (and spreadsheets) are great for setting up amortization tables.
![Page 53: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/53.jpg)
53
Task: Construct an amortization schedule for a $1,000, 10 percent loan that requires three equal annual payments.
PMT PMTPMT
0 1 2 310%
-1,000
![Page 54: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/54.jpg)
54
PMT PMTPMT
0 1 2 310%
-1000
INPUTS
OUTPUT
3 10 -1000 ? 0
402.11
N I/YR PV PMT FV
Step 1: Determine the required payments
![Page 55: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/55.jpg)
55
Hit 2nd, PV to enter “Amort Register”
For 1st principal payment, 1st interest payment, and 1st year remaining balance, enter:
P1 = 1P2 = 1Down arrow
See: Bal = -697.88, down arrowPRN = 302.11INT = 100
Enter “Amort” Register
![Page 56: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/56.jpg)
56Interest declines, which has tax implications.
Step 2: Create Loan Amortization Table
YR Beg Bal PMT INT Prin PMT End Bal
1 $1000.00 $402.11 $100.00 $302.11 $697.88
2 697.88 402.11
* Rounding difference
![Page 57: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/57.jpg)
57
Hit 2nd, PV to enter “Amort Register”
For 2nd principal payment, 2nd interest payment, and 2nd year remaining balance, enter:
P1 = 2P2 = 2Down arrow
See: Bal = -365.56, down arrowPRN = 332.32INT = 69.79
Enter “Amort” Register
![Page 58: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/58.jpg)
58Interest declines, which has tax implications.
Step 2: Create Loan Amortization Table
YR Beg Bal PMT INT Prin PMT End Bal
1 $1000.00 $402.11 $100.00 $302.11 $697.89
2 697.89 402.11 69.79 332.32 365.57
3 365.57 402.11
Total
* Rounding difference
![Page 59: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/59.jpg)
59
Hit 2nd, PV to enter “Amort Register”
For 3rd principal payment, 3rd interest payment, and 3rd year remaining balance, enter:
P1 = 3P2 = 3Down arrow
See: Bal = 0, down arrowPRN = 365.56INT = 36.65
Enter “Amort” Register
![Page 60: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/60.jpg)
60Interest declines, which has tax implications.
Step 2: Create Loan Amortization Table
YR Beg Bal PMT INT Prin PMT End Bal
1 $1000.00 $402.11 $100.00 $302.11 $697.89
2 697.89 402.11 69.79 332.32 365.57
3 365.57 402.11 36.55 365.56 .01*
Total 1206.33 206.34 1000.00
* Rounding difference
![Page 61: Chapter 3 The Time Value of Money © 2005 Thomson/South-Western](https://reader036.vdocuments.us/reader036/viewer/2022062421/56649ca45503460f949658ac/html5/thumbnails/61.jpg)
61
1. Review Chapter 3 materials
2. Do Chapter 3 homework3. Prepare for Chapter 3 quiz3. Read Chapter 4
Before Next Class