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General Hints for problems using the functions on the calculator: - Whenever you compute PV use current interest rate Always hit CLR TVM – it will save you a lot of hassle If it ever says equal payments, you must compute PMT in the calculator and you will not have a FV You will always have an I/Y and N Break down the problems so they are easier to understand if you are having trouble. With bonds you will always have FV, PMT, I/Y, and N. You will always compute PV. o The FV is the face value o PMT is the stated rate on the bond multiplied by the FV o N is the number of payments o I/Y is always the current market rate Unrealistic interest o Interest only loans with balloon payment Only 1 computation for the present value FV is the “lump sum” amount that you pay at the end of the loan term PMT is the rate on the loan multiplied by the loan amount N is the number of payments I/Y is the current market rate CPT PV o Loan with equal payments 2 calculator computations Never have FV! First Computation: PV is the loan amount N is the number of payments I/Y is the interest included in payments CPT PMT Second Computation: PMT is what you computed N is the same number as above I/Y is the bank/current interest rate CPT PV o Leases You will use all the functions on the calculator for leases N is the number of payments PMT is typically given to you FV is the amount you can buy the item for at the end of the year o I/Y is the current market rate CPT PV Add in the down payment for the present value Whenever it says you can buy it for a specific number, even if you borrow the money from the bank, it is already in present value terms and you do not have to do anything with that number Examples of bonds o On January 1, 2012 Lucky Company of Las Vegas issues $100,000 of 8% bonds. The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of each year. o Clarence Co. issues a $100,000 zero on 12/31/12, interest rate 10% per annum, bond is due in three years. Examples of interest only loans with balloon payment o Buddy will sell you some carpet. $20,000. No money down and only 1% interest per year for two years. At the end of the 2nd year, you send him the $20,000 along with the interest. If you borrowed from the bank you would have to pay 12% - a heck of a deal… or is it? o Christine wants to buy a new Lexus. The car she wants has a Manufacturer’s Suggested Retail Price of $45,000. The dealer has offered to sell Christine the car for $44,000. He has also offered her 5 years of financing at 5%!! The complete deal is that she puts down $4,000 then she makes annual interest payments of 5% and at the end of the fifth year also pays the $40,000. Christine called the bank and they told her that a car loan like this would normally have an 8% interest rate. Examples of loan with equal payments o You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal annual payments beginning one year from today. Interest is included in the payments at 10%. How much are the payments? Example of a lease o You are trying to decide whether to buy or lease a new machine. The machine costs $700,000. You can buy it, borrowing money from the bank. If you borrow from the bank, the interest rate will be 10%. You can also lease it for 5 years, $10,000 down and five annual payments of $179,000. At the end of the 5th year you can buy the equipment for $5,000. You can lease it for seven years, $20,000 down and seven payments of $133,000. After making the last payment, you may purchase the equipment for $50,000.