Dr. Rush Ch. 5 Financial Management - Time value of money

How many bible verses are there about money or economics?

Upwards of 2,350

Matthew 25

Parable of the talents/ servants. True sin is that the servant was wicked and lazy. The last servant was afraid of their master because they knew he was a hard man, so he hid the talent in the sand instead of investing it.

Pslam 24:1

"The earth is the Lord's and everything in it. The world and all people are His." This tells us that God owns it all, we are simply stewards.

Haggai 2:8

"The silver is mine, and the gold is mine, declares the Lord." God owns everything, we are stewards.

Psalm 50:10

"All the animals of the forest are mine, and I own the cattle on a thousand hills." God owns everything, we are stewards.

How does belief drive all financial behavior?

What we know determines what we believe, and what we believe determines what we do with our finances.

Luke 3:7

Dialogue between John the Baptist and other groups. The crowd asked what to do, John replies "share your tunic with those who have none." Soldiers asked the same, John replied "be content with your wages and do not extort money." Tax collectors asked the same, John replied, "Be fair in your financial dealings."

What happens when we spend less than we earn?

It creates margin in our budgets, margin creates savings, savings help us reach our financial goals.

Proverbs 13:11

"Dishonest money dwindles away, but he who gathers little by little makes it grow."

How will Christ followers be faithful with their finances?

by choosing contentment

Philippians 4:11-13

"Not that I was ever in need, for I have learned how to be content with whatever I have. I know how to live on almost anything or with everything. For I can do everything through Christ who gives me strength."

2 Corinthians 11:24

"5 different times Jewish leaders gave me 40 lashes minus 1 [Paul describes all of the hardships he had gone through: flogging, shipwreck, imprisonment, etc.]. Still I choose to be content."

Why should Christians avoid the use of debt?

Because debt mortgages and collects interest. (this one had really bad handwriting and this is my best guess of what she put.)

1 of 2 analogies to slavery in the Bible

Romans 7:14-23 ~"A slave to sin"

2 of 2 analogies to slavery in the Bible

Romans 22:7 "Rich rules the poor, and the debtor is a slave to their lender" - slaves to debt.

Big concept of TVM

A dollar today is worth more than a dollar tomorrow.

What is the most important element in any TVM calculation?

Time is ALWAYS the most important factor in TVM calculations.

Reading time lines

Time always goes on top, payments on the bottom. Time 0 is today, and Time 1 is the END of the first period.

What are the 5 essentials for TVM calculations?

Present Value (PV), Rate (interest rate), Future Value (FV), Number of periods (nper), and Payment (PMT).

2 types of annuities

Annuity due and ordinary annuity.

What is the difference between an ordinary annuity and an annuity due?

An annuity due is paid at the BEGINNING of each period, and an ordinary annuity is paid at the END of each period.

If we have an uneven cash flow, what function would we use in excel?

=npv function. Don't forget to exclude any deposits made today from the function calculation. add those instead after finding the =npv, as time cannot be added across time zones.

What are the three requirements for an annuity?

Equal time, equal dollars, and equal interest rate.

What is a perpetuity?

A bond (or other security) with no set maturity date - it will go on forever.

How to find the rate of return on a perpetuity?

Take the annual payment amount and divide by the total cost of the perpetuity. Ex - A local bank offers to pay pay you $800 every year forever if you pay $50,000 today, If you planned to live forever, what interest rate would you receive? We would do 800/50,000 to get 0.016, or 1.6%.

What does the annuity due acronym AD->LER mean?

Annuity Dues are (normally) Leases, Education Expenses, and Retirement withdrawals (really ADLEER).

What is a stated rate?

The rate that is expressly stated. It will normally be expressed as APR or simply interest rate. Ex - 6.3% APY

What is a nominal rate?

The rate that is used for each period of the annuity. Ex - 0.525%/month

What is the effective rate?

The actual rate of return that you can expect to receive. It factors in the compounding effect of interest.

How to find the nominal rate of a loan?

Take the stated rate and divide by number of periods per year. Number of periods per year is also called "m" in class, and "npery" in excel.

How to find effective rate of a loan?

Use the '=effect' function in excel. It uses the nominal rate and our npery (also called m) value.

How to find the total amount that will be paid on a loan, including interest? (some cases will also include down payments - read the problems she gives you carefully).

Take the value that you found using the =pmt function and multiply by the total # of periods that the loan term includes. Ex - Sally's monthly payment on her car is $268, and the term of the loan is 5 years (60 mos.), so we would multiply $268 by 60. (Some cases will want you to find how much is paid for an ITEM, not on the loan. For these cases, add the down payment to the total amount paid. Be careful with your signs).

How to find the past value of an item when given information in terms of today?

Use the '=pv' function, and place your "today" marker as the future value. Ex - Greg sold his property today for $750,000 and got 5% appreciation every year. Here, "today" is really time 5, so we would use =pv(5%, 5, 0, 750000, 0)

What is the "rate" argument for TVM calculations in Excel? (not '=rate' function)

The nominal rate of return that we can expect to receive. In most cases, especially when asked to find the payment amount for a loan, we have to convert the given rate (usually given as APY) into a nominal rate to be consistent with our monthly payment.

what is the "nper" argument for TVM calculations in Excel? (not '=nper' function).

The number of periods our loan/annuity will have. Just like the rate function, make sure to stay consistent with the answer you want to get. If you want an answer for monthly payments, you must convert years into months.

what is the "pmt" argument for TVM calculations in Excel? (not '=pmt' function)

The amount that is being paid out (or received) each period that the loan exists. For most cases, this value will be negative, as money will be leaving our account (negative value from our perspective), but there can be cases where we receive money each period (usually bonds), making our value for this argument positive.

what is the "pv" argument for TVM calculations in Excel? (not '=pv' function)

The value of our money today (in time 0). This value can often be negative as we normally pay money to invest into something but will receive a positive value in later time zones when we cash out the investment. When entering this argument for loans that we take out, this value will be positive, as the money we receive today would increase our bank accounts today, but have to be paid back (negative) later.

what is the "fv" argument for TVM calculations in Excel? (not '=fv' function)

The value that our money will be worth in future time zones. If we expect to receive money, like from an investment, then this value is positive. If we need to pay money back, as can be if you are the issuer of a bond, then the value is negative. For all loan amounts, the "fv" argument will be zero, as loans get paid off at the end of their term.

what is the "type" argument for TVM calculations in Excel?

It tells Excel whether or not an annuity is an annuity due or ordinary annuity. "Type" 0, the default value if the argument is left blank, is an ordinary annuity. ,"Type" 1 is an annuity due, and will have to be entered every time we find an annuity due. We will know which one to use based on the language in the problem, so read carefully with these.

how to use the '=npv' function in Excel?

The first argument is the Weighted Average Cost of Capital rate (WACC), which will be given in problems as "the rate of the loan is ...". The second argument is the cash flows. For this one, just select all of the given cash flows by clicking and dragging, making sure that the red box covers all of your values. You can hit enter after this to find the net present value of the cash flows.

how to use the '=ppmt' function in Excel?

this function returns the amount of a '=pmt' function that is interest for one specific payment period. It will use the same arguments as the '=pmt' function. '=ppmt' returns the amount of principal paid from one specific payment.

how to use the '=ipmt' function in Excel?

this function returns the amount of a '=pmt' function that is interest for one specific payment period. It will use the same arguments as the '=pmt' function. '=ipmt' returns the amount interest paid from one specific payment.

how to use the '=cumipmt' function in Excel?

this function returns the amount of a '=pmt' function that is interest for one specific payment period. It will use the same arguments as the '=pmt' function. '=cumipmt' returns the total interest paid for a number of periods of payments, and will use the starting and ending period #'s to determine this.

What functions are used to create an amortization table/schedule?

'ipmt', 'cumipmt', and 'ppmt'. 'pmt' could also be used, but can be omitted by adding the amounts for 'ipmt' and 'ppmt' for each individual period.

What is an amortization table/schedule?

An amortization table shows how a loan is repaid over time through equal payments. Each payment is divided into interest payments and principal payments (the amount that reduces the loan balance).

What does an amortization table show?

As time goes on in an amortization table, the principal payment will increase and the interest payment will decrease. Notice that the payment total remains the same for all time periods.

how to find a yearly tax deduction for mortgage payments using an amortization table?

use the '=ipmt' or '=cumipmt' functions to create an amortization table. From there, find the sum of all of the interest payments for the given period. The total amount that is paid in interest for the given period is the amount of tax deduction received for that period.