TVM Study Guide

This is not meant to be an all-inclusive guide, but please make sure that you have a solid working knowledge of the following. • Relationships between variables o Such as “If I increases what happens to PV?” • Be able to set-up timelines based on either word problem or from an equation • Be able to isolate and solve for any unknown variable • APR/EAR/EPR (pages 96-98 or so depending on edition, and pages 232-234 in Jaffe chapter 4) o Know how to change from one form of the interest rate to another o Be able to explain why this is necessary o Continuous compounding is NOT covered • Aligning cash flows (Big, ugly nasty problems like Jordan Ch 6, Q 57 “Bilbo” or Jaffe Ch 4, Q 52) o For example, a generic set-up might look like: ▪ FV(A) + FVA(B) = PVA (C) + PV(D) when the equals sign “occurs” at the time when the cash flows change direction (i.e. at the time of retirement, or the start of college). o Examples 4.22 – 4.25 (pages 242-244) are quite good • Loans o Amortization tables ▪ Balance = PV of REMAINING payments ▪ interest for a single payment = Beg Bal x EPR ▪ Principal = PMT – Interest o I really like Example 6.13 for determining the balance in the middle of an amortization. o Total interest paid over multiple periods = total of payments – change in balance over that time period. o Dealing with both growing and fixed loan payments • Solving for mixed sums using cash flow table on calculator o NPV = PV of delayed benefits – PV of costs o IRR
Suggested end of-chapter problems: • Jordan 5: 2 – 5, 8 – 12 • Jordan 6: 1 – 5, 12, 13, 20, 27, 32, 36, 38, 42, 55, 57, 59 (really challenging, but interesting and no answer provided) and 66. • Jaffe 4: 10, 11, 12, 15, 16, 17, 31, 34, 38, 52, 65