FINANCE

Module 3 Notes FOR EVERYONE

FINANCE FOR EVERYONE

ADVANCED APPLICATIONS

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 FINANCE
Module 3 Notes FOR EVERYONE

Application I: A Loan for College

§ You plan to attend an in-state college and your parents will take
out a loan of $100,000 at 6%. What are your yearly payments,
given that you will have 5 years to pay back the loan?

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 FINANCE
Module 3 Notes FOR EVERYONE

Understanding How a Loan Works!

Year Beginning Yearly Interest Principal

Balance Payment Repayment
1
2
3
4
5

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 FINANCE
Module 3 Notes FOR EVERYONE

Patterns to Observe

§ How many components of a payment?

§ Which component decreases over time?

§ Which component increases over time?

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 FINANCE
Module 3 Notes FOR EVERYONE

Power of Finance!

§ How would you figure out the outstanding balance after the
second payment?

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 FINANCE
Module 3 Notes FOR EVERYONE

Power of Finance!

§ How would you figure out interest component of third payment?

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 FINANCE
Module 3 Notes FOR EVERYONE

A Real World Twist

§ You plan to attend an in-state college and your parents will take
out a loan of $100,000 at 6%. What are your monthly payments,
given that you will have 5 years to pay back the loan?

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 FINANCE
Module 3 Notes FOR EVERYONE

Timeline Changed!

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 FINANCE
Module 3 Notes FOR EVERYONE

Amortization Table

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 FINANCE
Module 3 Notes FOR EVERYONE

Power of Finance!

§ How much will you owe the bank after the 18th month’s payment?

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 FINANCE
Module 3 Notes FOR EVERYONE

Power of Finance!

§ What is the interest component of the 37th months payment?

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 FINANCE
Module 3 Notes FOR EVERYONE

Stated versus Effective Annual Rates

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 FINANCE
Module 3 Notes FOR EVERYONE

Effective Annual Rates: Formula

k
r
EAR = 1 + 1
k

where k is the number of compounding intervals in a year.

© All Rights Reserved Gautam Kaul 2016

 FINANCE
Module 3 Notes FOR EVERYONE

Application II: Saving for College

§ College tuition has been rising at a rate of 2.50% per year.

Currently the average tuition of a state college is $10,000 per year.
Emilia's daughter Jessica will begin college in 5 years. Julia's
portfolio of savings is making 5% annually. How much does Emilia
need to have set aside today/now to pay for four years of college
for Jessica?

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 FINANCE
Module 3 Notes FOR EVERYONE

Draw the Timeline!

§ Break problem into bite-size pieces

§ Solve the pieces in logical order

§ Use financial tools to help you!

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 FINANCE
Module 3 Notes FOR EVERYONE

Solving the Problem!

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 FINANCE
Module 3 Notes FOR EVERYONE

Confirm Your Calculations!

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 FINANCE
Module 3 Notes FOR EVERYONE

Application III: Financial Planning

§ Abebi, who has just celebrated her 25th birthday, plans to retire
on her 55th birthday. She has just set up a retirement fund to pay
her an annual income starting on her retirement day, and to
continue paying for 20 more years. Abebi's goal is to receive
$50,000 for each of these twenty years. Abebi has committed to
set aside equal investments at the end of each year, for the next
29 years starting on her 26th birthday. If the annual interest rate
is 5%, how big should Abebi's equal investments be?

© All Rights Reserved Gautam Kaul 2016

 FINANCE
Module 3 Notes FOR EVERYONE

Draw the Timeline!

§ Break problem into bite-size pieces

§ Solve the pieces in logical order

§ Use financial tools to help you!

© All Rights Reserved Gautam Kaul 2016

 FINANCE
Module 3 Notes FOR EVERYONE

Solving the Problem!

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 FINANCE
Module 3 Notes FOR EVERYONE

Confirm Your Calculations!

© All Rights Reserved Gautam Kaul 2016

 FINANCE
Module 3 Notes FOR EVERYONE

Application IV: Complicated Simple

§ You have invested $75,000 in a trust fund at 7.50% for your child's
education. Your child will draw $12,000 per year from this fund for
four years, starting at the end of year 7. What will be the amount
that will be left over in this fund at the end of year 10 (after the
child has withdrawn for the fourth time)?

© All Rights Reserved Gautam Kaul 2016

 FINANCE
Module 3 Notes FOR EVERYONE

Draw the Timeline!

§ Break problem into bite-size pieces

§ Solve it in easier/smarter ways

§ Use financial tools to help you!

© All Rights Reserved Gautam Kaul 2016

 FINANCE
Module 3 Notes FOR EVERYONE

Solving the Problem!

© All Rights Reserved Gautam Kaul 2016

 FINANCE
Module 3 Notes FOR EVERYONE

Confirm Your Calculations!

© All Rights Reserved Gautam Kaul 2016