Explain whether you would you rather have a savings account that paid interest compounded on a monthly basis or compounded on an annual basis?
I would choose a savings account that pays interest compounded on a monthly basis as opposed to annual basis. The main reason for this decision is that the annual percentage yield relies on the interest rate as well as how often the interest is compounded. This means that a monthly compounded account will yield a higher amount of money because the savings will be compounded twice whereas for the annual, they will be compounded once a year. What one gets on his or her money is therefore determined by the APY, which is used to gauge the payout they will receive on an annual basis based on the number of times that funds are compounded annually (Droms & Wright, 2015).
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Describe what an amortization schedule is and its uses. Explain the purpose of an amortization schedule.
An amortization schedule is a comprehensive record of periodic loan payments by showing the principal amount, scheduled dates for the instalments and the interest mount that encompasses each repayment till the last date of the loan (Gitman & Zutter, 2015). It is imperative to note that the first scheduled payments mainly comprise of the interest whereas the later payments cover the principal of the loan. This is a very important factor to note, considering the fact that the payments are the same over the duration. One of the main uses of the amortization table is that it helps individuals to better understand the terms of their loans whether they are taking out house mortgages or buying property (Copeland, Weston & Shastri, 1983). They become equipped with the knowledge of how the payment has been subdivided in terms of the interest and the principal amount. Based on this functionality, one is able to keep track of their monthly repayments because they have a clearer picture of the total amount owed and the duration it will take to clear a loan.
Interest on a home mortgage is tax deductible. Explain why interest paid in the early years of a home mortgage is more helpful in reducing taxes than interest paid in later years.
During the early years of mortgage, a majority of the payments that are made normally cover the interest of the loan. The taxes are reduced because the interest that is charged on the mortgage is calculated based on the outstanding loan balance. The implication of this is that as one continues to make the payments over time, the principal will increase as the interest reduces (Sherman, 2011). Payments that are made in future dates on the other hand contribute to the principle as opposed to the loan. The reduced taxes therefore occur as a result of deductibles on the interest paid.
Explain the difference between an ordinary annuity and an annuity due.
In an ordinary annuity, payments are normally made at the end of the stipulated term whereas in an annuity due, payments are made at the beginning of the term ( Weaver & Weston, 2001 ).
If interest rates are 8 percent, what is the future value of a $400 annuity payment over six years? Unless otherwise directed, assume annual compounding periods. 5.1 Recalculate the future value at 6 percent interest and 9 percent interest.
@8% Interest
Future value = PV (1+i) n
= $400 (1+0.08) 6
= $400 (1.08) 6
=$634.75
@ 6% interest
Future value = PV (1+i) n
= $400 (1+0.06) 6
= $400 (1.06) 6
=$400 (1.191016)
=$567.41
@ 9% interest
Future value = PV (1+i) n
= $400 (1+0.09) 6
= $400 (1.09) 6
=$400 (1.295029)
=$1341.68
If interest rates are 5 percent, what is the present value of a $900 annuity payment over three years? Unless otherwise directed, assume annual compounding periods. 6.1 Recalculate the present value at 10 percent interest and 13 percent interest.
@ 5%
PV =
=
= $777.45
@10%
PV =
=
= $676.18
@13%
PV =
=
= $623.75
What is the present value of a series of $1150 payments made every year for 14 years when the discount rate is 9 percent? 7.1 Recalculate the present value using discount rate of 11 percent and 12 percent.
@9%
PV = FV
= $1150
= $1150 0.2992
= $344.13
@11%
PV = FV
= $1150 [1 (1.11)14]
= $1150 0.23199
= $266.79
@12%
PV = FV
= $1150 [1 (1.12)14]
= $1150 0.20462
= $235.31
References
Copeland, T. E., Weston, J. F., & Shastri, K. (1983). Financial theory and corporate policy (Vol. 3). Reading, MA: Addison-Wesley.
Droms, W. G., & Wright, J. O. (2015). Finance and accounting for nonfinancial managers: All the basics you need to know . New York: Basic Books.
Gitman, L. J., & Zutter, C. J. (2015). Principles of managerial finance . Harlow: Pearson
Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd Ed.). New York, NY: American Management Association.
Weaver, S. C., & Weston, J. F. (2001). Finance and accounting for nonfinancial managers. New York, NY: McGraw-Hill.
