Slides for BAII Calculator Training Videos

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Slides for BAII Calculator Training Videos
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Slides for Lesson 1
There are no corresponding slides for Lesson 1,
Introduction to the Calculator
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Slides for Lesson 2
The following three (3) slides are used in Lesson
2, Introduction to Time Value of Money and are
referred to in the video as the slides from Ch.
3, 6-8
4
Example Investment Evaluation (referred to as
slide 6)

• Propose to buy an asset costing 350 million.
  Assume the asset will sell for 520 million at
  the end of 4 years.
• You could invest your money elsewhere for 10,
  where risk is similar to the risk of proposed
  asset.
• Should you buy the asset? Why or why not?

It is helpful to draw a timeline
IMPORTANT FINANCE PRINCIPLE Assets with similar
risk should have similar return. Thus the
appropriate rate to use here is the 10 benchmark.
By convention, cash OUTFLOWS are listed as
negatives, while cash INFLOWS are listed as
positives.
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Example Solution (referred to as slide 7)
1. Calculate Present Value of the 520
Should Buy intrinsic value (355.17) greater than
cost (350)
2. Calculate Future Value of the 350
Should Buy Future expected value of not buying
(512.44) less than value of buying (520)
3. Calculate Rate of Return on Asset
Should Buy expected return of buying (10.4)
Greater than investing elsewhere (10)
6
Example Solution Calculator (referred to as
slide 8)
Clear TVM registers
Set P/Y1
Calculate Present Value
N I/Y PV PMT FV

4
10
0
520
-355.17
Calculate Future Value
N I/Y PV PMT FV

512.435
Calculate Interest Rate
N I/Y PV PMT FV

10.403
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Slides for Lesson 3
The following six (6) slides are used in Lesson
3, TVM Annuities and Periods other than
Annual and are referred to in the video as the
slides from Ch. 3, 17-19, 21, and 36
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Example Present Value of an Annuity(referred to
as slide 17)

• You need 25,000 a year for business school.
• 1st 25,000 at the end of 12 months
• 2nd 25,000 at the end of 24 months
• You can earn 8 per year in an investment
  account.
• How much money do you need today?

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Example Solution Annuity Formula (referred to
as slide 18)
10
Example Solution Calculator and Excel
(referred to as slide 19)
On the calculator, input N, I/Y, PMT, and FV
N I/Y PV PMT FV
2 8 -44581.62 25000 0
In Excel, Use the PV Function
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Example Future Value of an Annuity(referred to
as slide 21)

• Suppose you plan to retire ten years from today.
  You plan to invest 2,000 a year at the end of
  each of the next ten years. You can earn 8 per
  year (compounded annually) on your money. How
  much will your investment be worth at the end of
  the tenth year?

12
Example Solution Calculator and Excel
(referred to as slide 21, continued)
On calculator, set P/Y1, set payments to END,
input N, I/Y, PV, PMT and compute FV
N I/Y PV PMT FV
10 8 0 -2,000 28,973.13
In Excel, use the FV function
The zero indicates that the cash flows occur at
the END of the year. If they were at the
beginning, we would enter a 1 here.
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Present Value Example (referred to as slide 36)

• Suppose you need 400 to buy textbooks in 2
  quarters. Current interest rates are 12 per
  year (compounded quarterly). How much money do
  you need to deposit today? (Remember that t and
  r must match)
• Can use quarters
• Is there another way? What if we use 6-month
  periods?

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Slides for Lesson 4
The following six (6) slides are used in Lesson
4, TVM Amortizing Loans and are referred to
in the video as the slides from Ch. 3, 39-44.
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Amortizing Loans Example(referred to as slide
39)

• You have decided to buy a new SUV and finance the
  purchase with a five year loan. The car costs
  36,000 and you are going to put 2,500 down.
  Interest starts accruing when the loan is taken.
  The first loan payment is one month after the
  interest starts accruing. The interest rate on
  the loan is 8.4 (APR) per year for the five year
  period.

16
Amortizing Loans Example (referred to as slide
40)

• You know you will be paying an equal amount each
  month for the next 60 months. What type of
  security is this?
• What is the present value of the loan? What is
  the present value of the annuity?
• What is the effective monthly rate that you are
  paying for your car? What is the EAR?
• How can you determine your monthly payment?

It is an annuity with t60
36,000 2,500 33,500
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Determining Your Payment (referred to as slide
41)

• Recall you are borrowing 33,500 at 8.4 APR for
  60 months. Also recall
• We know the present value, r, and t. Thus, we
  can solve for C which is the payment

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Determining Your Payment Calculator (referred
to as slide 42)

• Recall you are borrowing 33,500 at 8.4 APR for
  60 months.
• On BA II
• Clear TVM
• Set payments per year to 12 (lt2ndgtltI/Ygt12ltENTERgt)

N I/Y PV PMT FV

60
8.4
33,500
-685.69
0
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Amortization Table (referred to as slide 43)
33,500 car loan at 8.4 APR for 60 months
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What if ?(referred to as slide 44)

• What if you wanted to know the balance remaining
  after 2 years of payments?
• What if you wanted to know the total amount you
  paid in principal during the first 2 years?
• What if you wanted to know the total amount paid
  in interest during the first 2 years?
• What if you wanted to know the total amount of
  interest paid during the third year?

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Slides for Lesson 5
The following six (6) slides are used in Lesson
4, Bonds and are referred to in the video as
the slides from Ch. 5, 11-15.
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Bond Pricing, Example(Referred to as slide 11)

• Suppose IPC Co. Issues 1,000 bonds with 5 years
  to maturity. The semi-annual coupon is 50.
  Suppose the market quoted yield-to-maturity for
  similar bonds is 10 (APR, compounded
  semiannually). What is the present value (i.e.
  current market price) of the bond? What if the
  YTM was 8? What if the YTM was 12?
• Steps to calculate bond price
• Calculate the present value of the Face amount
• Calculate the present value of the coupon
  payments
• Add the two components to get the price

IMPORTANT FINANCE PRINCIPLE REMEMBER Assets
with similar risk should have similar return.
Thus the appropriate rate to use here is 10
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IPC Example(Referred to as slide 13)
1. Price if similar bonds have a 10
yield-to-maturity
Remember that payment, time, and rate ALL must
match. Since we have a semiannual payment we
NEED a semiannual rate. What is the effective
semiannual rate?
Notice that 5 years means 10 semiannual periods.
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IPC Example(Referred to as slide 13 and slide 14)
2. Price if similar bonds have an 8
yield-to-maturity
3. Price if similar bonds have a 12
yield-to-maturity
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Easy Bond Pricing on your Calculator(Referred to
as slide 15)
Clear TVM registers
Set P/Y2 (2 payments per year)
Price if YTM 10
N I/Y PV PMT FV
10 10 -1,000 50 1,000
Price if YTM 8
N I/Y PV PMT FV
10 8 -1,081.11 50 1,000
What is YTM if Price1,200?
N I/Y PV PMT FV
10 5.384 -1,200 50 1,000
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Par, Discount, and Premium Bonds
Recall IPC Bond Example

• Par Bonds
• Price Face Value
• YTM Coupon Rate
• Current yield Coupon rate
• Discount Bonds
• Price lt Face Value
• YTM gt Coupon Rate
• Current yield gt Coupon rate
• Premium Bonds
• Price gt Face Value
• YTM lt Coupon Rate
• Current yield lt Coupon rate

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Slides for Lesson 6
The following six (6) slides are used in Lesson
6, Cash Flow Worksheet NPV and IRR and are
referred to in the video as the slides from Ch.
6, and Ch 5, slides 12-15.
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NPV Example(referred to as slide 6)

• Decide whether to open a new production plant.
  The initial cost of the plant is 600 million.
  Over the next four years, the plant is expected
  to generate cash flows from assets of 200 mm,
  220 mm, 225 mm, and 210 mm. The risk of the
  cashflows requires that the appropriate discount
  rate is 20.
• How do you compute cash flows from assets?
• Should we proceed with the project?

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NPV Example
NPV -600 166.67 152.78 130.21 101.27
-49.07
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Internal Rate of Return (IRR)

• Thus, for our example

The rate that makes this equation true is 15.67.
Thus, IRR 15.67
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Bond Pricing, Example(Referred to as slide 12 in
Ch. 5)

• Suppose IPC Co. Issues 1,000 bonds with 5 years
  to maturity. The semi-annual coupon is 50.
  Suppose the market quoted yield-to-maturity for
  similar bonds is 10 (APR, compounded
  semiannually). What is the present value (i.e.
  current market price) of the bond? What if the
  YTM was 8? What if the YTM was 12?
• Steps to calculate bond price
• Calculate the present value of the Face amount
• Calculate the present value of the coupon
  payments
• Add the two components to get the price

IMPORTANT FINANCE PRINCIPLE REMEMBER Assets
with similar risk should have similar return.
Thus the appropriate rate to use here is 10
32
IPC Example(Referred to as slide 13 in Ch. 5)
1. Price if similar bonds have a 10
yield-to-maturity
Remember that payment, time, and rate ALL must
match. Since we have a semiannual payment we
NEED a semiannual rate. What is the effective
semiannual rate?
Notice that 5 years means 10 semiannual periods.
33
IPC Example(Referred to as slide 13 and slide
14, in Ch. 5)
2. Price if similar bonds have an 8
yield-to-maturity
3. Price if similar bonds have a 12
yield-to-maturity
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Easy Bond Pricing on your Calculator(Referred to
as slide 15, in Ch. 5)
Clear TVM registers
Set P/Y2 (2 payments per year)
Price if YTM 10
N I/Y PV PMT FV
10 10 -1,000 50 1,000
Price if YTM 8
N I/Y PV PMT FV
10 8 -1,081.11 50 1,000
What is YTM if Price1,200?
N I/Y PV PMT FV
10 5.384 -1,200 50 1,000