Investors Should Prepare for Rain Too

Item 1
PV
5000
N
15 Beginning of year
Type
% of portfolreturns
PV
FV
Stock
0.8
0.16
4000
37,062.08
Bonds
0.2
0.086
1000
3,447.05
40,509.13
Item 2

N
Type
Stock
Bonds

Item 3

Rr

15
FV
returns
PMT
Check
37062.08
0.128 826.21 37,062.08
3447.048
0.065 133.85
3,447.05
40509.13
0.09

Step 1: FV of 40,000 until

4.33 retirement
Inflation
N
PV
Step 2: Compute savings
I
N
PV
Step 3: PV of future payments

-->

-->

This is an annuity due problem. So

you need to adjust your beginning
year as year 0

Alternatively, you can use the

formula below to calculate the total
PV of the 25 payments.( Need to
denote "type" as 1 to represent
annuity due)
- 751,165.30

5%
10
40000
8%
10
100000
0
1

2
3
4

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

Step 4: Find difference of

savings and retirement pay

535,272.80

Step 5: Find PMT

-36,949.61

65,155.79

215,892.50

65,155.79
65,155.79

-65,155.79
-60,329.43

65155.7850710977
65155.7850710977
65155.7850710977

-55860.5839086914
-51722.762878418
-47891.4471096463

65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977
65155.7850710977

-44343.9325089317
-41059.1967675294
-38017.7747847494
-35201.6433192124
-32594.1141844559
-30179.7353559777
-27944.1994036831
-25874.258707114
-23957.6469510314
-22183.0064361402
-20539.8207742039
-19018.3525687073
-17609.585711766
-16305.1719553389
-15097.3814401286
-13979.056889008
-12943.5711935259
-11984.7881421536
-11097.0260575497
-10275.0241273608
-751,165.30

-->now you can get the

correct answer!!

751,165.30

4-12, 4-13, 4-14, 4-15, 416, 4-17, 4-18, 4-19, 4-20, 4-21, 4-22, 4-23, 4-24, 4-26, 4-28, 4-30, 4-31, 4-32, 433
4.12 FV, ordinary annuities
a. 400 per year for 10 years at 10%
b.200 per year for 5 years at 5%
c. 400 per year for 5 years at 0%
d. Rework a to c as annuities due

PMT

4.13 PV, ordinary annuities

a. 400 per year for 10 years at 10%
b.200 per year for 5 years at 5%
c. 400 per year for 5 years at 0%
d. Rework a to c as annuities due

PMT

-400
-200
-400

-400
-200
-400

4.14 PV for cash flow streams.

I
Year

8%
1
2
3
4
5

NPV
At 0% interest rate?

100
400
400
400
300
1,251.25

300
400
400
400
100
1,300.32

1,600.00

1,600.00

4.15 Find interest rate or rates of return

a. Borrow 700, promise to pay back
749 at the end of year 1
b. Lend 700 and receive a promise to
be paid back at 749, end of 1 year
Borrow 85,000 and promise to pay
back 201229 at end of 10 years
Borrow 9000 and promise to make
payments of 2684.80 at the end of
each of the next years
4.16 FV of 500

Years
M

Compounded annually
Compounded semi-annually
Compounded quarterly
Componded monthly
4.17 PV of 500
Compounded semi-annually
Compounded quarterly
Componded monthly

5
R
1
2
4
12

0.12
0.12
0.12
0.12
R

2
4
12

0.12
0.12
0.12

4.18 FV of following ordinary annuities

PMT

Compounded semi-annually
Compounded quarterly
4.19

400
200
Nominal Rate

Universal Bank
Regional Bank
4.2

2
4

N
7% Compounded Annu
6% Compounded quart

PV

a.
Period

b.
c.

N
25000
5
Beginning BalancePayment
1
25,000.00
6,594.95
2
20,905.05
6,594.95
3
16,400.61
6,594.95
4
11,445.72
6,594.95
5
5,995.34
6,594.95
50000
5
50000
10

4.21 Sales just ended at 12M

6M five years ago

a.

4.22 Expected rate of return?

PV

Rate did sales grow?

PV
6000000
FV
-4000000

4.23

PV

8000000
PMT

85000
4.24

Period

4.26 FV of 10,000, number of years?

Period 0

PMT

Beginning
0
33872.11
1
33872.11
2
26243.1577
3
18080.178739
4 9345.79125073
I
1250

How much would the last deposit be?

4.28
4.3

8273.59

0.12

(1,116.07) should be 1106

PV

1000000
5
Begininng BalancePayment
1 1,000,000.00
298,315.55
2
851,684.45
298,315.55
3
681,121.56
298,315.55

4
5
5 deposits of 100 every 6 months,
made today
Bank pays nominal interest of 12%
semi-annual compounding
total N is 10 years

4.31 a

4.31 b

484,974.24
259,404.83

298,315.55
298,315.55

1
2
3
4
5

100.00
106.00
112.36
119.10
126.25

Must make payment of 1432.02 in 10

years
FV
5 equal deposits Step 1: Get PV nee
beginning today for the following 4
quarters Step 1: Get PMT u
nominal interest of 12% with quarterly
compounding

4.33 Step 1: FV of 40,000 until retirement

Inflation
N
PV
Step 2: Compute savings
I
N
PV
Step 3: PV of future payments

1432.02
508.92

65,155.79
5%
10
40000
215,892.50
8%
10
100000
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23

65,155.79
65,155.79
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711
65155.7850711

24
25
Step 4: Find difference of savings and
retirement pay
Step 5: Find PMT

65155.7850711
65155.7850711

484,457.28
-38,516.57

FV: Savings20 year old student wants to start sving for retirement. Save 1,095 per year a
N
45
PMT
-1095
I
0.12
1,487,261.89
11,154.42
PV
I
Year

Years from now

1
2
3
4

Tution Fee

5
6
7
8

19,144.22
20,101.43
21,106.51
22,161.83
82,514.00

Savings
PV
I
N

-7500
6%
5

FV
N
PV

10,036.69

65,463.37
5
6%
10,955.63 PMT the father has to make fo

Option 2
Savings at 23 years old
PV
I
N

-7500
6%
10

Year

13,431.36

Years from now

1
2
3
4

5
6
7
8

Tution Fee

19,144.22
20,101.43
21,106.51
22,161.83
82,514.00

Step 1:
Find EAR on loan of 10% nominal
10.471%
Or directly input the monthly
compounding into the formula
Step 2:
Find total Borrowed at age 21
105,853.57
Step 3:
Find periodic Rp
2.52%
to get monthly rate, divide nominal rate by 12
monthly rate
0.0083333333
then to get qaurterly periodic rate, raise the monthly rate to 3
periodic rate
0.025208912
Step 4:
Get PMT
3,441.04

Retirement Period

PV of Retirement Expenses

When will you retire

How long will you retire?
How much do you need each year?
What is the inflation rate?
(at retirement age)

How do you fund retirement liability?

If not enough existing wealth then you have sav

Retirement Expense

Liability - FV of wealth.
Fund deficit of future savings

I
10
5
5

Ordinary Annuities Annuities Due

0.1
6,374.97
7,012.47
0.05
1,105.13
1,160.38
0
2,000.00
2,000.00

I
10
5
5

0.1
0.05
0

Ordinary Annuities Annuities Due

2,457.83
2,703.61
865.90
909.19
2,000.00
2,000.00

PV
700
-700
85000

9000

Periodic Rate

N
0.12
0.06
0.03
0.01

PR

Total N
5
5
5
5

N
0.06
0.03
0.01

PV
5
10
20
60

Total N
5
5
1

500
500
500
500
FV

10
20
12

500
500
500

Periodic Rate
0.12
0.12

N
0.06
0.03

Total N
5
5

10
20

Effective Annual Rates

7.19%
6.14%
R

PMT
0.1

6,594.94
Interest
Repayment of Princi Ending Balance
2500
4,094.95
20,905.05
2,090.51
4,504.45
16,400.61
1640.0605
4,954.89
11,445.72
1144.57155
5,450.38
5,995.34
599.533705
5,995.42
(0.08)
0.1
13,189.87
0.1
8,137.27
sales grow?
FV

12,000,000

10

7.18%

14.87%

R
30

Added Interest

9%
Payment
0
10000
10000
10000
10000

2371.0477
1837.021039
1265.61251173
654.2053875511
FV

Balance

N
10000

R
33,872.11
26,243.16
18,080.18
9,345.79
(0.00)

N
5.9379888809

3000

7%
-10000

(7,941.06)
(8,893.99)
1,106.01

PMT

15%
298,315.55
Interest Payment
Repayment of Princi Ending Balance
150,000.00
148,315.55
851,684.45
127,752.67
170,562.89
681,121.56
102,168.23
196,147.32
484,974.24

57%

72,746.14
38,910.72

225,569.42
259,404.83

0.06
0.06
0.06
0.06
0.06

259,404.83
0.00

106.00 OR
112.36
119.10
126.25
133.82

Step 1: Get FV of ordinary

Step 2: Get FV for the
remainder of 10 years

Rn

Rr

10

0.12

0.03

0.12

0.03

-65,155.79
-55,860.58
-51722.762878418
-47891.447109646
-44343.932508932
-41059.196767529
-38017.77478475
-35201.643319213
-32594.114184456
-30179.735355978
-27944.199403683
-25874.258707114
-23957.646951032
-22183.00643614
-20539.820774204
-19018.352568707
-17609.585711766
-16305.171955339
-15097.381440129
-13979.056889008
-12943.571193526
-11984.788142154
-11097.02605755

-10275.024127361
-9513.9112290378
-700,349.78

700,349.78

ve 1,095 per year and the stock account has an expected annual return of 12%. How much mone

-15000
5%
Discount it by 6%
19,144.22
18,963.62 1 year from 18
18,784.72 2 years from 18
18,607.50 3 years from 18
75,500.06 total PV at 18

father has to make for 5 equal payments

th then you have save.

48
36
24
12

28,512.53
27,100.39
25,758.19
24,482.47
105,853.57

2.41%

FV

PMT

-749

7.00%

749

7.00%

-201229

10

9.00%

FV

Check
881.17
895.42
903.06
908.35

PV

881.17
895.42
903.06
908.35
Check

279.20
276.84
443.72

279.20
276.84
443.72

-2684.8

15.00%

FV

Check
5,272.32
2,636.16

a.
b.

paid at the end of 5 years

add the interest

5,272.32
5,374.07

33,872.11

N
597.53
1,432.02

PV

M
5
15

PMT
508.92
93.06

Rn
2
2

Rr
0.12
0.12

PMT
0.06
0.06

-100

2%. How much money will she have when she is 65 years old?

0.00

PV

(597.53)

ST-1
a.

b.

Assume 50/50 portfolio

rate of
rate of
Period
return A return B Average Return of 50/50
2006
-0.18
-0.24
-0.21
2007
0.44
0.24
0.34
2008
-0.22
-0.04
-0.13
2009
0.22
0.08
0.15
2010
0.34
0.56
0.45
Average rat
0.12
0.12
0.12
STD

ST-2
EE
CC
RE
IP

0.302655 0.301993 0.287054

% of
Business Beta
0.6
0.25
0.1
0.05

Item C Weighte changes in %

d Beta
of business Beta
0.7
0.42
0.5
0.9
0.225
0.25
1.3
0.13
0.1
1.5
0.075
0.15

a. holding company's beta?

0.85
b. required rate of return?
rrf
0.06
0.1025
market ris
0.05
risk free rate + market risk premium*beta of stock
Problems
6.3 rrf
market ris

0.7
0.9
1.3
1.5

New Weighted Bet

0.35
0.225
0.13
0.225
0.93
0.1065

5%
6%

b
1
11.00%
b
1.2
12.20%
6.4 Demand ProbabilitReturn
Weighted Rate of Return
W
0.1
-0.5
-0.05
BA
0.2
-0.05
-0.01
A
0.4
0.16
0.064
AA
0.2
0.25
0.05
S
0.1
0.6
0.06
Expected r 11.40%
STD
26.69%
coefficient 2.341366
6.8 7,500 in each 20 common stocks
beta
1.12
sell stock with beta of 1.0, and replace with 1.75
Weighted ABeta
7500
0.05
1
0.05
Eq
0.05+(19*x)=1.12
150000
0.056316
Solve for x 0.056316
Portfolio Be
1.12
Check
1.12

0.05
0.05

6.9 Stock
A
B
C
D

Inv

0.056 0.053200
1.75 0.087500
1.0983
Beta

400000
600000
1000000
2000000
4000000

1.5
-0.5
1.25
0.75

Weighted I Weighted Beta

0.1
0.15
0.15
-0.075
0.25
0.3125
0.5
0.375
0.7625

rrf
6%
market's re
14%
Required rate of return
6.12

Year

ra
6
7
8
9
10

mean
std
item c
coefficient item d

rf+(rm-rff)*b
12.100000%

rb

-0.18
0.33
0.15
-0.005
0.27
0.113
0.207894
1.839772

item b
-0.145
-0.1625
0.218
0.274
0.305
0.2275
-0.076
-0.0405
0.263
0.2665
0.113
0.113
0.20777 0.201280898
1.838675 1.781246887

a. average return of each stock

b. if 50/50?
average return per yeasee
average return of portf
c. Compute for std
see
d. compute for coefficient..
see
e. prefer portfolio
6.13
Year
X
Y
6
0.14
7
0.19
8
-0.16
9
0.03
10
0.2
rrf
0.06
market ris
0.05
a.
b.
c.

0.05
0.05

beta of stock x and y? x

0.113

0.113

item b column
0.113
item c row
item d row
Market
0.13
0.07
-0.05
0.01
0.11

0.12
0.1
-0.12
0.01
0.15

y
1.347118 0.650793651
required rates of returx
y
0.127356 0.092539683
.8 X, .2 Y, required rate of return?

.8 X, .2 Y
0.138
0.166
-0.138
0.026
0.182

1.12
1.75

solve for b 1.207852966

required rat0.120392648
d.

overvalued

-0.11

0.14

0.03

ew Weighted Beta

.05+(19*x)=1.12

0.056
0.0875
1.1515