Page 43 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Illustration 32
Mr. A expected to receive ` 1,00,000 at the end of 4 years. His required rate of return is 12 per cent
and he wants to know PV of ` 1,00,000 with quarterly discounting.

Solution:
×
⎛ 1 ⎞ 44
PV = 1,00,000 ⎜ ⎟
10.12/4 ⎠
⎝ +
= 1,00,000 × PVIF
3per cent 4y
= 1,00,000 × 0.623 = ` 62,300

Task Calculate the following:
1. Mr. A deposits at the end of each year ` 2000, ` 3000, ` 4000, ` 5000 and ` 6000 for the
consequent 5 years respectively. He wants to know his series of deposits value at the
end of 5 years with 6 per cent rate of compound interest.
2. A borrower offers 16 per cent rate of interest with quarterly compounding. Determine
the effective rate of income.

3. What is the present value of ` 1,00,000, which is receivable after 60 years. If the
investor required rate of interest is 10 per cent.

Case Study Time Value of Money

he application of the time value of money principles can help you make decisions
on loan alternatives. This exercise requires you to compare three mortgage
Talternatives using various combinations and points. Points on a mortgage refer to
a payment that is made upfront to secure the loan. A single point is a payment of one per
cent of the amount of the total mortgage loan. If you were borrowing ` 200,000 a single
point would require an upfront payment of ` 2,000.
When you are evaluating alternative mortgages, you may be able to obtain a lower rate
by making an upfront payment. This comparison will not include an after-tax comparison.
When taxes are considered, the effective costs are affected by interest paid and the
amortization of points on the loan. This analysis will require you to compare only before-
tax costs.
Zeal.com allows you to compare the effective costs on alternative mortgages. You are
considering three alternatives for a ` 250,000 mortgage. Assume that the mortgage will
start in December, 2006. The mortgage company is offering you a 6% rate on a 30-year
mortgage with no points. If you pay 1.25 points, they are willing to offer you the mortgage
at 5.875%. If you pay 2 points, they are willing to offer you the mortgage at 5.75%.

Questions
1. What are the mortgage payments under the three alternatives?
2. Which alternative has the lowest effective cost?
3. Can you explain how the effective rate is being calculated?

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