Instructions

Assignment Overview:

In this assignment you will employ the concepts of Time Value of Money including present value, future value, present value of an annuity and future value of an annuity and apply the concepts to real life financial opportunities. Each opportunity you address is unique and separate from the other in reaching a decision although, as in life, often the opportunities come up at the same time. See attachments, including required Excel template.

The Case:

You are facing several financial opportunities, and you need to assess the financial details and results of each of these opportunities, showing calculations and providing solutions in Excel using the template provided. You will then write an APA paper outlining the decisions you make for each opportunity and why, supported by research. You will submit BOH an APA paper in Word and the Excel Template.

Opportunity No. 1

First is an opportunity from Uncle Bud, who has some extra funds and would like to help fund your college education, at least in part. He is willing to give you $5,000, but he prefers you not use the funds until you graduate in 3 years, keeping any interest income to re-invest with the $5,000. Assume interest compounds daily (365 days a year).

You have two options:

1. Invest in a money market account which is currently earning 4.75% interest, but the rate can fluctuate day-to-day, with the average rate, over the prior 3 years, 3.75%. Of course, it could go higher or lower. The funds can be withdrawn at any time during the 3 years if needed. In your financial planning you will need to decide, based on your research of trends, as to what the average interest rate might be over the next 3 years (the interest rate you will use to assess this option).
2. Invest in a 3-year certificate of deposit at 4.5%. You are guaranteed this rate, but you will be unable to access the funds (without a withdrawal penalty) for the full 3 years.

Your Planning:

1. Calculate the total balance (principal and interest) in the account for each option assuming Uncle Bud gives you $5,000 to invest, with no withdrawal for 3 years.
2. For the first option (money market) you need to both decide on what the average interest rate you think will be realized, and support how you came to this average rate (research).
3. Assess which option is the best decision for you and why.

Opportunity No. 2

You just had a baby daughter, Jannae, and the whole family is thrilled. Your Aunt Janet wants to give you a gift for Jannae when she turns 20 years old, something of substance that will allow her to perhaps buy a car or pay for a year of school tuition. Aunt Janet wants the account to have a $20,000 balance in 20 years, but is unsure of two specifics: what the average interest rate might be over the next 20 years and what amount to deposit today to yield the $20,000 in 20 years. You do some research and share with Aunt Janet that an S&P 500 mutual fund has averaged 10% over the last 20 years, and you recommend investing in the mutual fund, but you need to research what you think the interest rate will be based on current return rates in mutual funds invested in the S&P 500 stocks. Assume interest compounds daily (365 days a year).

Your Planning:

1. What is the amount Aunt Janet should give you for the account today to have the $20,000? You know the future amount will be $20,000 and will be invested in a mutual fund for 20 years.
2. You must do the research and determine what you think the average rate of return will be of the S&P 500 over the next 20 years Aunt Janet is fine with this strategy, but wants you to detail how you arrived at an average annual interest rate to use (research). In addition to the interest rate and calculations, discuss what risks this strategy might have and be specific as to the types of risk and the impacts those risks may have on the investment over 20 years.

Opportunity No. 3

You are thinking of purchasing a home for your growing family. You are currently renting and have a very good credit rating. The house you are looking at is a 4 bedroom, 2 bath home with a garage and has a total of 1950 square feet with a cost of $400,000. There is a nice backyard for Janae to someday play in, although not too large, but the local school district is great, and you feel this is the home ideal for the family.

In researching you find that you will need to put down 20% of the purchase price and closing costs will be 3% of the purchase price, with closing costs needing to be paid in cash (not as part of the mortgage).

The loan will be for 30 years, interest compounding monthly (12 times a year) with monthly payments consisting of the principal and interest (mortgage payment) on the loan, plus real estate taxes (annually 1.1% of the mortgage so for monthly divided by 12) and property insurance of $1,200 annually. These elements are known as the monthly PITI payment (Principal, Interest, Taxes and Insurance). From an analysis of your total household income and your monthly family budget you feel you can afford a monthly payment of $2,800, although it will be tight financially.

You have two mortgage options on the mortgage with different interest rates:

1. A fixed rate 30-year mortgage rate of 7.50% which never changes for the life of the loan, or
2. A 30-year adjustable-rate mortgage with a first-year rate of 6.00% that is fixed for 3 years, but the rate can go up a maximum of 2.00% each year thereafter, with that first adjustment year 4, and to a maximum of 10.00% in year 5. Your realtor told you to expect the rate will go up the full amount in Year 4, and then go up or down with interest rates in the future.

Your Planning: Using the Excel home purchase model in the Excel template:

1. calculate the amount of cash you will need upfront to purchase the house, regardless of mortgage option.
2. calculate for each option the first-year monthly mortgage payment (principal and interest)
3. calculate the full monthly PITI payment, with taxes and insurance included, to come up with the total payment for the home.
4. evaluate how each option fits within your monthly budget with a maximum payment of $2,800 monthly.
5. evaluate the benefit and risk of the mortgage rate on the adjustable loan, with the interest rate going up the maximum in year 4 or to the maximum total rate in year 5. Research where interest rates might go over the next 5 years.
6. provide your assessment of the options and provide a decision on which mortgage you will take and why.

Opportunity No. 4

Your employer offers you a 403B savings option (this is for non-profit organizations and like a 401K offered at for-profit organizations). You can put money from your twice a month paycheck into the 403B tax free, meaning the funds are invested into a mutual fund account (earning on average 6% annually) and you are not taxed on this in your paycheck, reducing your federal and state taxes (you will be taxed later when at retirement you start withdrawing the funds). You can make no payment to the 403B, a minimum of $50 per pay period twice a month, up to a maximum $958 per pay period ($23,000 annually for 2024).

Your employer has a match of 4% of your pay, meaning for each dollar you make to the 403B, your employer will match that amount up to a maximum of 4% of your twice a month salary. In essence, your employer is giving you free money towards your retirement but asking you to make a commitment to saving as well. Your annual salary is $65,000 and you have 30 years until your retirement at 65 (you will be employed with this employer or a like employer for the full 30 years). Assume, with twice a month pay, you will have 24 contributions a year to the 403B and interest compounds 2 times a month (24 times a year).

Assume 2 contributions a month, a 6% annual return, a 30-year term and interest compounds twice a month (24 times a year).

You have three options:

1. you make a $50 per pay contribution to the 403B with a matching amount from your employer.
2. you make a 4% contribution to your 403B with the employer matching the 4%.
3. you contribute of $400 per paycheck, with the 4% max from your employer (employer amount is maximum of 4% of the pay).

Your Planning:

1. calculate the amount that will be contributed in each scenario each pay period to include both your contribution and the contribution of your employer; i.e. for Option 1 it would be $100 per pay ($50 from your pay and $50 from your employers match).
2. calculate the amount that will be in the 403B account after 30 years for the 3 scenarios above.
3. assess your options, the monthly amounts and the final total that you might have after 30 years, selecting which option you would take and why. How is it like free money when the employer matches your contribution? What are your take aways on the impact of interest compounding?