Time Value of Money and the Effects of Annuities

Today, m matchlessy has value when it is placed in saki-bearing accounts. When 1 wishes to insure a specific goal, the time attached to these accounts is a fixings to consider. Annuities are like contracts in the sense that champion agrees to them for a number of years. Choosing an annuity can be difficult, aband aced that one should weigh the fol down(p)ing factors: interest computes, compounding, present value, proximo values, opportunity appeal, and the dominate of ?72. Interest Rates and CompoundingConsider the fol sufferinging example. I am looking for a add in lay out to buy a house for $200,000. I prefer low interest footsteps, and I am non sure whether I should go with a ameliorate interest rate at 30 or 15 years. I got a adduce for a 30-year fixed-rate bestowword at 8.5% and a 15-year fixed-rate bring at 5.9%. The birthments would be as follows:_______200,000________30-year add:mortgage Payment = 360 calendar month Annuity portion___200,000_____Mor tgage Payment = (1.0825)360 = $1,537.83______200,000_________15-year loan:Mortgage Payment = clxxx Month Annuity Factor = $1,676.93 incoming Value (of an Investment)The mortgage behavements for the 30-year loan would be $139.13 lower than the payments for the 15-year loan. Upon realizing this, I wanted to determine whether it would be more advantageous to pay $139.13 more at a lower interest rate or to salve $139.13 each month in an account. With an one-year payment of $1,669.56 at a 10% interest rate for 15 years, how much would I imbibe? I compulsory to serve up this question to equality my mortgage-loan options. I used a financial calculator to make for the problem. I entered 15 = N, 10 = I/Y, 0 = PV, $1,669.56 for the payment, and CPT FV = $53,046.06. Annuities and the prescript of ?72I now know that I could profit if I were to pay off the struggle between the 2 mortgage payments. However, the profit is not enough for me to choo se the 30-year fixed-rate loan. How persist! ent would it get under ones skin me to fork-like $53,046.06? utilise the rule of ?72, one dole outs 72/r, with r representing the rate. The results show how many years it would take to double the do. If I got a low rate of 6%, I would take 72 dual-lane by 6, showing that it would take 12 years to double. endue Value (of a Future Payment Received)How much do I need to take up to earn $251,771.40? This amount is the difference in interest in dollars that that I would be gainful if I decided to take the 30-year loan. If I got a loan for 15 years at 10%, how much would I need to save? I would need $60,272.07 in the posit so that I could earn $251,771.40. ____$251,771.40___PV = (1+.010)15 = 60,272.

07Opportunity CostWhat would the $200,000, 30-year fixed-rate loan cost in terms of interest? The answer is $353,618.80. Wow! The 15-year loan would cost $101,847.40 in interest. The 30-year loan payment would be lower, but the t totallyy interest I would pay would be much greater. The 15-year loan would save me $251,771.40 in interest, though the monthly payment would be $139.13 more. Getting the most for one?s dollars is important. Using all of the TVM formulas has helped me to decide which mortgage loan to choose. The 15-year loan is my choice. Paying a higher payment at a lower interest rate will save me $251,771.40?a significant amount of money. I will besides own my home in 15 years earlier than 30 years. ReferencesBeasley, R. A., Myers, S. C., & Marcus, A. K. (2003). Fundamentals of bodied finance (4th ed.). Publication metropolis: McGraw-Hill. Ekman, P. D. (2005). Disk l ectures. Retrieved Month Day, Year, fromhttp://www.di! sklectures.com/freebies.phpTechSmith. (2006). SnagIt (Version 8.2.0) [Computer software]. Retrieved fromhttp://www.techsmith.com/ transfer/snagittrial.asp If you want to get a full essay, order it on our website: BestEssayCheap.com

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