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Time Value of Money & Compounding: A Tutorial for Finance Students, Study notes of Finance

University of WaterlooFinance

This tutorial explores the concept of time value of money and compounding of interest rates, providing practical examples and exercises for students in financial management. It covers topics such as present value, future value, and the impact of different discount rates on investment decisions. The tutorial is designed to help students understand the importance of considering the time value of money in financial planning and decision-making.

Typology: Study notes

2022/2023

Uploaded on 02/20/2025

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Tutorial #4
Time Value of Money; Compounding of Interest Rates
Note: Show all work and timelines to the right side of each question
Question #1
What are your expected yearly payments to be for AFM?
Assume a discount rate = 5%
PV of money borrowed from parents
ww
Assume that you can invest the lump sum loan from your parents at yearly return =
Assume the same AFM yearly payments as in 1a above
What is the loan that you take from your parents?
Revised loan from parents
You are about to enter the University of Waterloo as a first-year student in September 2024 in the Accounting &
Financial Management program. Currently, you’re faced with the difficult decision of how to finance your education,
in light of OSAP cuts that threaten your funding. The options you are currently exploring are as follows:
1. Asking for a loan from your parents for your tuition.
a. Ask for payments at the beginning of each school year.
What is the present value of the money that you will borrow from your parents over the 4
years of school. Set up a time line that discounts your yearly school expenses
What is the loan if you think that you can make a killing in the stock market and achieve a
yearly return over the course of your 4 years at school =
What is the downside of assuming that you can achieve the higher rate of return and, thus, lessor loan
from parents?
pf3
pf4
pf5

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Tutorial

Time Value of Money; Compounding of Interest Rates

Note: Show all work and timelines to the right side of each question

Question # What are your expected yearly payments to be for AFM? Assume a discount rate = 5% PV of money borrowed from parents ww Assume that you can invest the lump sum loan from your parents at yearly return = Assume the same AFM yearly payments as in 1a above What is the loan that you take from your parents? Revised loan from parents You are about to enter the University of Waterloo as a first-year student in September 2024 in the Accounting & Financial Management program. Currently, you’re faced with the difficult decision of how to finance your educat in light of OSAP cuts that threaten your funding. The options you are currently exploring are as follows:

1. Asking for a loan from your parents for your tuition. a. Ask for payments at the beginning of each school year. What is the present value of the money that you will borrow from your parents over the 4 years of school. Set up a time line that discounts your yearly school expenses What is the loan if you think that you can make a killing in the stock market and achieve a yearly return over the course of your 4 years at school = What is the downside of assuming that you can achieve the higher rate of return and, thus, lessor loan from parents?

Question # Total amount saved at age 60 What is that total amount saved at age 60 if you decide to hire a financial advisor and pay that person 1.5% each y Total amount saved at age 60 What is that total amount saved at age 60 if you decide to invest in government bonds paying 3.5% instead of equ Total amount saved at age 60

  1. Consider this (unlikely) scenario: your parents take pity on you and wipe out your loan on graduation. You b working at age 22 (that would be year 0). You make $100,000 in your first year (assume that you are paid at the e the year and that this is the year that you are 23 which would make that year 1). Your salary grows 6% each year a you save 15% of your salary each year. Your investment returns = 8% each year. You stop saving / investing after
  2. How much will you have at age 60 assuming that you keep all of the money investing until age 60?

and pay that person 1.5% each year to manage your assets (hint: your investment return will go down each year by that %)? onds paying 3.5% instead of equities (assume that you don't hire a financial advisor for this)? your loan on graduation. You begin ssume that you are paid at the end of our salary grows 6% each year and You stop saving / investing after age nvesting until age 60?

wn each year by that %)?