Time Value of Money: Annuity Cash FlowsIntroduction

In the previous assignment, you learned about the TVM concept as applied to single cash flow. However, in real life you come across financial applications that require multiple or annuity cash flows. In this assignment, you will apply the TVM concept to annuity cash flows; for example, how to amortize a mortgage or car loan.

Instructions

Answer the following questions and complete the following problems, as applicable. Unless otherwise directed, assume annual compounding periods in computational problems.

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

Note:In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

• Question 1:
  • Proficient-level: Would you rather have a savings account that paid interest compounded on a monthly basis, or one that compounded interest on an annual basis? Why?
  • Distinguished-level: State why a borrower would prefer more, or less, frequent compounding periods.
• Question 2:
  • Proficient-level: What is an amortization schedule, and what are some of its uses?
  • Distinguished-level: Explain why more interest is incurred at the beginning of the amortization period than at the end of the amortization period.
• Question 3:
  • Proficient-level: "The interest on your home mortgage is tax deductible. Why are the early years of the mortgage more helpful in reducing taxes than in the later years?" (Cornett, Adair, & Nofsinger, 2016, p. 123).
  • Distinguished-level: Explain why the tax benefit of interest is even larger for longer-term loans?
• Question 4:
  • Proficient-level: What is the difference between an ordinary annuity and an annuity due?
  • Distinguished-level: Explain why the future value of an annuity due is greater than the future value of an ordinary annuity.
• Question 5:
  • Proficient-level: "What is the future value of a $900 annuity payment over five years if interest rates are 9 percent?" (Cornett, Adair, & Nofsinger, 2016).
    • Recalculate the future value at 8 percent interest, and again, at 10 percent interest.
  • Distinguished-level: Describe the relationship between changes in interest rates and the ensuing changes in future values.
• Question 6:
  • Proficient-level: "What is the present value of a $700 annuity payment over six years if interest rates are 10 percent?" (Cornett, Adair, & Nofsinger, 2016, p. 123).
    • Recalculate the present value at 9 percent interest, and again, at 11 percent interest.
  • Distinguished-level: Describe the relationship between changes in interest rates and the ensuing changes in present values.

Submit your completed assignment as an attachment in the assignment area. You may use either a Word document or an Excel spreadsheet for your work, but not both. Prior to submitting your assignment, review the Time Value of Money: Annuity Cash Flows Scoring Guide to ensure you have met all of the requirements and as a self-assessment of your work.

Reference

Cornett, M. M., Adair, T. A., & Nofsinger J. (2016).M: Finance(3rd ed.). New York, NY: McGraw-Hill.