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• Work on stage 3 of final project this week.– Paper copy is due next week (include all
stages, including before and after revisions).– Presentation is due next week.
Three Review Questions
1. Successive PercentsIf your portfolio performed well one year and had a 5% increase, and the following year performed poorly and had a 7% decrease, and then did well again the year after that and had a 6% increase, how did the portfolio perform altogether for the three years?
(1+0.05)(1-0.07)(1+0.06)=1.05 * 0.93 * 1.06 = 1.035 This means 3.5% increase.
2. Savings Account
How much do you need to deposit into a savings account that compounds monthly at 3.5% annual interest if you want to save up $5,000 in 10 years?
12*10.035
5000 112
P 1205000 1.002917P
5000 1.418345P
$3525.24P
3. What is the annual percentage yield for a savings account that compounds quarterly at an annual interest rate of 4.7%?
Let’s use $1,000 as the principal.
After one year, we’ll have
Percent change for one year (APY) is
4*1.047
1000 1 1047.834
A
1047.83 1000.047834 4.78%
1000APY
Loans
• Our goals for this lesson:– To work with fixed rate, fixed duration loans.– To calculate monthly payments. – To be able to calculate how much total
interest is paid for a loan.
• Excel skills needed:– Create amortization tables using the PMT
function
Loans
You should notice:– Payments are the same from month to month.– Your initial payments mainly go into paying off
the interest. Towards the end, your monthly payments mainly go into paying off the principal.
– The longer you choose to pay off your loans, the more you end up paying. Sometimes even 2 or 3 times what you initially borrowed.
Creating an amortization table
Example 1
Our scenario:$140,000 to pay off in ten years
5.5% annual interest
Creating an amortization table
1. Fill in headings across in the first row.
2. Fill in the months column. Start at 0.
3. Type in loan amount ($140,000) as the end balance of month 0.
Creating an amortization table
4. Fill in formulas for month 1. Beg balance = end balance of month
(Don’t just type it in)
For payments, use the PMT function. You can access the PMT function by pressing
Creating an amortization table
• Fill in as follows:
10 years * 12 months/year
annual interest / 12 monthsmonthly interest
negative sign necessary!
Creating an amortization table
For the interest for month one, we want the formula:
beginning balance * interest rate / 12
Creating an amortization table
Finally, the end balance for the first month uses the following formula:
month 1 beg balance – principal paid
Creating an amortization table
5. Drag down the entire row until the end balance is zero. In this case, 120 months.
Creating an amortization table
• Notice the difference between the first payments and the last payments
Creating an amortization table
Let’s look at what we’ve paid in interest and what we’ve paid in total after the ten years.
press the auto sum button
Creating an amortization table
what you paid altogether
what you paid in interest
what you originally borrowed
Creating an amortization table
What is the percent of the original amount borrowed is the total interest paid?
So 5.5% interest does not mean you pay 5.5% of the total as interest.
42324.15.3023 30.23%
140000
Creating an amortization table
Example 2
Our scenario:$350,000 house.
$50,000 down payment.
5.8% annual interest.
Pay off in 30 years.
Credit Card Debts
Credit card debts are scary because they accrue interests at much higher rates.
The average interest rate is15%, but it can go as high as 30%.
Credit Card Scenarios
1. If someone has a $5,000 credit card debt, how much interest would have to be paid on the debt the first month? Assume 30% interest.
Credit Card Scenarios
2a. John has $50,000 in credit card debt. If he’s planning to pay $1,200 every month, what would be his balance in five years? Assume an interest rate of 20%.
2b. How much interest in total does he pay after 5 years?
Credit Card Scenarios
3a. Suppose you’ve accumulated $4,000 on your credit card at an interest rate of 18%. Minimum payment option is 2% per month (not less than $25). When will you pay it all off?
3b. How much would you have paid by the end? How much in interest?
Credit Card Scenarios
4. Jane wants to pay off her $8,000 credit card debt in 9 years. Using the PMT function, determine her monthly payment assuming she’ll make equal payments for 9 years. Assume 11% APR.