SBM 4B Financial Management

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SBM 4BFinancial Management

• Savings Plans and Investments

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Savings Plan Formula (Regular Payments)
( 1 ) - 1
(n y)
APR
n
A PMT X
(
)
APR
n
A accumulated savings plan balance PMT regular
payment (deposit) amount APR annual percentage
rate(as a decimal n number of payment periods
per year Y number of years
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Example 1- savings plan formula (monthly)
Use the savings plan formula to calculate the
balance after 6 months for an APR of 6 and
monthly payments of 100.00.
(12 X 0.5)
APMT X ( 1
)

.06
- 1
12
)
(
.06
12

6.075501879
607.55
100 X
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Example 2(College Savings Plan at 6)
You want to build a 100,000 college fund in 18
years by making regular, end-of-month deposits.
Assuming an APR of 6, calculate how much you
should deposit monthly. How much of the final
value comes from actual deposits and how much
from interest.
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Solution
0.06
100,000 X
12
( 1
)

0.06
(12 X 18)
12
- 1
500





258.16
216
( 1.005)
- 1
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Solution (cont)
258.16 X 12 X 18 55,762.56
100,000 - 55,762.56 44,237.44
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Definitions
Total Return is the relative change in the
investment value total return (A-P)
P
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Definitions continued
Annual Return is the average annual percentage
yield (APY) that would give the same overall
growth
(1/Y)
annual return ( )
A
- 1
p
Y is the investment period in years.
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Example 3- Mutual Fund Gain
You invest 4000 in the Clearwater mutual fund.
Over 4 years, your investment grows in value to
9400. What are your total and annual returns for
the 4-year period?
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Solution
Total return (9400-4000)
4000
1.35 135
Annual Return ( )
9400
(1/4)
- 1
4000
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More Definitions
What is liquid? A investment from which you
can withdraw money easily. What is risk? The
safest investments are federally insured bank
accounts, cant lose.
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Definitions continued...
What is return? What you expect on your
investment. A higher return means you earn
more money and low-risk investment means somewhat
low returns.
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Continued
Capital gain selling stock for more than you
paid for it. Dividends stock company paying you
for its profits.
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Continued
Face value of the bond is the price you pay the
issuer to buy it a t the time it
is issued. Coupon Rate is the simple interest
rate that the issuer promises to pay. Ex. A
coupon rate of 9 on a bond with a face value of
1000 means the issuer will pay you interest rate
of 9 X 1000 90 each year.
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Continued
Maturity date is the date on which the issuer
promises to repay the face value of the
bond. Current yield annual interest payment
Current price of bond
Annual interest current yield X current price.
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Example 4
The closing price of a U.S. Treasury bond with a
face value of 1000 is quoted as 105.98 points,
for a current yield of 6.8. If you buy this
bond, how much annual interest will you receive.
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Solution to Example 4
105.98 X 1000 1059.80 (current price.)
Annual interest payment 6.8 X 1059.80
0.068 X 1059.80 72.07
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Homework

• 4B Part I
• - 2 6, 9, 10, 13 15, 17, 18
• 4B Part II
• - 23 26, 31, 32, 39 42, 45, 46
• - 51 extra credit (separate sheet)